FormSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
Annual Report Pursuant to SectionFOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 or 15(d) of
the Securities Exchange Act ofOR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 19951999
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _________ to _________
Commission File Numberfile number 1-7516
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Keane, Inc.
-----------KEANE, INC
----------
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
Massachusetts 04-24371604-2437166
- ------------ ---------------------- ----------
(State or other jurisdictionOther Jurisdiction (I.R.S. Employer
of incorporationIncorporation or organization)Organization) Identification Number)
Ten City Square, Boston, Massachusetts 02129
- -------------------------------------- -----
(Address of principal executive offices)Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-9200
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, $.10 par value Registered on the American Stock Exchange
- --------------------------- -----------------------------------------
(Title of Class) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by checkmarkcheck mark whether the registrantregistrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ---- ----___
Indicate by checkmarkcheck mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)(_)
The aggregate market value determined by the closing prices reported by AMEX of the voting stockCommon Stock held by nonaffiliates of the
registrant, asbased on the last sale price of the Common Stock on the AMEX on
March 10, 2000, was $1,508,163,647. As of March 15, 1996:10, 2000, 69,862,446 shares of
Common Stock, $.10 par value - $379,213,889
------------------------------------------per share, and 284,987 shares of Class B Common
Stock, $.10 par value - No Public Trading Market
--------------------------------------------------------------
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 15, 1996:
Common Stock $.10 Par Value - 15,957,760 shares
Class B Common Stock $.10 Par Value - 288,258 shares
----------------------------------------------------
Index to Exhibits is on Page 37
Page 1 of 46 Pages
DOCUMENTS INCORPORATED BY REFERENCEper share, were issued and outstanding.
Documents Incorporated by Reference. The CompanyRegistrant 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 Company'sRegistrant's
Annual Meeting of Stockholders to be held on May 29, 1996.31, 2000. 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.
PART I
- ------
ITEM 1. BUSINESS
GENERAL
Keane, Inc., a Massachusetts corporation (together with its subsidiaries, "Keane" or "the Company," unless
the context otherwise requires "Keane" or the "Company")otherwise) is a leading provider of e-business, Information
Technology (IT), provides software
design, development, integration and management services for corporations and
healthcare facilities. Keane's services and methodologies enable companies to
leverage their existing information systems ("IS") capability and more rapidly
and cost-effectively developconsulting services. The Company helps clients plan, build,
and manage mission-critical software applications.
The Company serves itsbusiness systems and implement business processes, organizational
change, and change management programs to realize value from their IT and
e-business initiatives.
In business since 1965, Keane has steadily focused on helping clients through two operating divisions:leverage
technology to improve business performance. Today, this focus is the Information
Services Division ("ISD") and the Healthcare Services Division ("HSD"). ISD,
which accounted for approximately 93%thread
tying together all of the Company's revenues in 1995,
provides software design,service offerings. Keane's clients are
increasingly looking to harness the power of the Internet and newer
technologies, and integrate these technologies with existing systems to
transition to a business-to-business (B2B) e-commerce environment. At the same
time, effectively managing and improving existing systems has become more
critical than ever, given the importance of these systems to e-commerce
initiatives.
As a result, Keane sees its e-business and applications development and
management services as key drivers of growth. To meet this market need, the
Company expanded its e-Solutions capability in 1999 to corporationsoffer clients a full
life-cycle solution from strategy development through design, implementation,
integration, and management of e-business solutions. Keane also continues to
invest in its Applications Development and Management Outsourcing solution,
which it considers among the best in the industry. This conclusion is based on
consultations with industry analyst firms, audits of Keane's projects by the
Center for Systems Management (against the Capability Maturity Model--the CMM),
and benchmarking Keane's productivity against the Quantitative Software
Management's (QSM) metrics repository of 20,000 completed IT projects within the
industry.
Keane's clients consist primarily of Fortune 1000 organizations across every
major industry, healthcare organizations, and government agenciesagencies. The Company
services clients on a local level through branch offices in major markets of the
United States, Canada, and the United Kingdom. These offices are supported by
centralized practices representing Keane's core services and key competencies.
Keane is a Massachusetts corporation headquartered in Boston. Its stock is
traded on the American Stock Exchange under the symbol KEA. Information on Keane
can be accessed on the Company's web site at www.keane.com or through its
Investor Relations line at 1-800-75-KEANE.
SERVICES
Keane offers an integrated mix of end-to-end business and IT solutions. The
Company divides its business into three main lines: Business and IT Consulting,
e-Solutions (including its Applications Development and Integration services),
and Applications Development and Management Outsourcing. For each business line,
Keane offers a full life cycle solution. Keane believes its comprehensive range
of service positions the Company as a strategic partner to clients because these
services enable Keane to identify and implement complete solutions that meet
clients' specific business requirements.
The paragraphs below outline Keane's core business lines and some of the key
competencies it draws on to deliver its solutions.
Business and IT Consulting (plan services)
Keane's consulting services represent a critical component in the Company's
ability to help clients achieve business value from IT investments. These
consulting services focus on assisting companies in transforming their strategy,
processes, organization, and IT infrastructure for competitive advantage.
Findings and recommendations oftentimes become the foundation for successful
transitions to e-business as well as key IT decisions, such as implementation of
new technologies, overhauls of existing systems, and integration of
customer-facing business systems with largeback-office platforms and recurring softwareapplications.
The Keane Consulting
2
Group offers the following services: e-Strategy (e-business strategy
development), Operations Improvement, e-Transformation (services that focus on
updating a client's business model and processes in alignment with e-business
requirements), and Customer Relationship Management Strategy services. Clients
undergoing organizational change associated with transforming their business to
leverage the Internet, integrating mergers and acquisitions, or adapting to
governmental deregulation may benefit from these services.
e-Solutions (e-Architecture, Online Branding, Applications Development and
Integration) (build services)
Keane's e-business services (marketed under the e-Solutions name) help clients
exploit new technology to meet their business objectives. Offerings and
capabilities range from e-architecture planning and implementation, to creative
web design and development, needs. HSD
develops, marketsapplication development and supportsintegration,
architecture planning, data warehousing, implementation of customer relationship
management (CRM) technologies, and enterprise application integration. This
range of services responds to clients, which are increasingly concentrating on
ways they can leverage Internet technologies in their organizations. Many of
Keane's clients are focused on supply chain optimization, e-markets, exchanges,
and e-procurement initiatives due to their tremendous return on investment.
Keane believes it is well positioned to manage such large-scale projects,
because of the strength of its program management competencies, delivery
methodologies, and quality assurance processes.
This business line also includes Keane's Healthcare Solutions practice, which
offers a suite of Healthcare Information Systems (HIS) and related consulting
and IT services. Keane's HIS products provide the architecture to streamline and
link financial, patient care, and clinical application
software foroperations across hospitals, and long-term care facilities. 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: ISD provides custom application software design,
development and management services for corporations with large and recurring
software development needs. Keane delivers (i) Information Systems Planning
services, including business process redesign and IS planning and assessment
services, (ii) Application Development Projects, which include client-server
planning and development and systems migration services, (iii) Outsourcing
services, which include application outsourcing, year 2000 compliance services
and help desk outsourcing, and (iv) Project Management Training, through which
Keane delivers professional training on the Company's project management,
estimating and risk management processes. In all of its assignments, Keane
strives to use its proprietary bestgroup
practices, and methodologies to reduce
development time, improve system reliability and quality, and reduce costs.
Keane believes these methodologies, which include Application Maintenance
Management, Productivity Management and Frameworks for Software Development,
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
software services business served by ISD:
. Competitive Environment. Globalization, deregulation and the rapid pace
of change in today's business environment have increased the importance
of timely access to information. These conditions have led to a
strategic focus on information systems.
. 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 and meeting staffing requirements in a market with a shrinking
pool of qualified IS professionals.
. Organizational Focus on Core Competencies Resulting in Increased
Outsourcing of Software Services. 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.
PAGE 2
As a result of these and other factors, the Company believes that there are
significant opportunities for growth in the software services industry. As IS
organizations seek to address these and other challenges, they are increasingly
finding that outsourcing to software services providers can assist them in
effectively meeting their strategic information technology objectives. Dataquest
Incorporated, a market research firm, estimated that in 1995, companies in the
U.S. would spend approximately $47 billion on software services with independent
software services firms. Moreover, according to Dataquest Incorporated, the rate
of IS professional services spending is projected to grow at approximately 15%
per year to reach nearly $62 billion in 1997.
HEALTHCARE SERVICES DIVISION: HSD develops, markets and supports patient care
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 products
are used by more than 380 hospitals and 600 long-term care facilities.
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 are essential for achieving these goals and that
the need for implementing improved information technology is intensifying.
Keane believes that its vertical expertise in the healthcare industry represents
significant opportunity in the years ahead as healthcare reform issues are
resolved, creating new markets and opportunities. HSD's strategic objectives are
to continue to grow rapidly in order to obtain critical mass and to provide a
full range of integrated, open information systems to hospitals and long-term
care facilities. The acquisition by HSD of Community Health Computing in April
1995 and Source Data Systems in November 1995 increased Keane's hospital client
base by 100% and expanded HSD's product line to include Infinet, a clinical and
financial data repository, to suit its UNIX applications. Its UNIX-based
software packages also include Threshold, Leadership Plus and Patcom Plus. HSD
targets hospitals, long-term care facilities, and other sectorsHMOs. The systems are compatible with
the operating systems used by healthcare institutions nationwide, including an
open UNIX platform as well as IBM's AS/400 and RS/6000 environments. In
addition, Keane's broad range of services can help healthcare clients address
ongoing HIPAA requirements, a legislative act which is expected to have
far-reaching implications on the industry's IT infrastructure and business
operations.
Applications Development and Management (ADM) Outsourcing (manage services)
Keane's ADM Outsourcing services help clients effectively manage and enhance
existing business systems to improve performance while better controlling costs.
Under this service offering, Keane manages clients' business applications with
commitments to improving software quality, processes, and costs. Outsourcing
engagements may also encompass development of new applications, as directed by
clients. Since 1997, Keane has used the Software Engineering Institute's
Capability Maturity Model (CMM) as a standard for objectively measuring its
success in improving its client's application management. This move has given
Keane a strategic advantage in the application outsourcing area, as Keane is one
of the healthcare field,only leading ADM outsourcing providers to actively gauge its delivery
against this industry standard. To date, Keane has earned CMM Level 3 or greater
distinction on 27 engagements. In addition, Keane is expanding its metrics
strategy to incorporate QSM Productivity Index.
SERVICE DELIVERY MODEL
Throughout the 1990s as Keane refined its end-to-end solutions, the Company
transformed its service delivery model to accommodate profitable growth and
seeks to increaseoptimal customer service. The transition combines service delivery via local
branch offices with expertise provided by centralized practice groups. These
practices represent core service offerings (e.g., Consulting, e-Solutions, and
ADM Outsourcing) and critical competencies, such as vertical specialization and
Keane's application development center.
Keane considers this client-centric delivery model an important means for
achieving the following:
1. increasing sales and revenue growth,
2. providing higher value services and thereby enhancing margins,
3. strengthening client relationships and recurring revenues,
4. cross-selling the full breadth of its healthcare
applicationsservices,
5. lowering the costs of doing business, and
3
6. maintaining employee satisfaction and thus retention.
This delivery model presents advantages to clients as well, among them
responsive and proactive service, cost efficiencies, and a greater level of
staffing continuity. Keane client's benefit from the convenience and
attentiveness of being served locally by its branch offices while also
benefiting from Keane's company-wide knowledge and experience through ongoing product development effortsits
centralized practice groups. Each of these factors contributes to client
satisfaction levels. Keane's intent is to maximize synergies between its strong
field organization and strategic
alliances.
BUSINESS STRATEGY:its enterprise practices to fuel sales and support
world-class delivery across the organization.
STRATEGIC DIFFERENTIATORS AND STRENGTHS
Keane believes thatconsiders the pressure companies are experiencing
to reduce costs, decrease cycle times and adapt quickly to changing market
dynamics is changing the basis of competition in the software services industry.
In order to achieve profitable growth in this environment, Keane is increasing
market share with bothfollowing competitive strengths vis-a-vis new entrants and
existing competitors.
1. End-to-end solutions. Keane's integrated line of services equip it with the
capabilities to partner with clients while deriving an increasing
portionin their mission to leverage
Information Technology to improve business performance. Specifically, Keane
can design, develop, integrate, and manage business-critical software
applications and advise clients on process and organizational improvements
to take advantage of these applications. This range of competencies enables
Keane to help clients overcome the challenge of "enterprise integration"
which is essential to success in such areas as business to business
("B2B"), e-commerce, and customer relationship management. Enterprise
integration encompasses the integration of new technologies across multiple
platforms, with existing systems, and with core business processes. The
Company's comprehensive offerings and enterprise integration expertise,
together with its businesshigh customer intimacy, is a significant combination
distinguishing Keane from large-scale, multiyear projects with large
organizations.existing competitors and establishing barriers to
entry for new competitors.
2. Strong customer relationships. Keane believes that its (i) long-termhas more than 1,400 client
relationships, which create greater opportunitiesprovides a strong channel for recurring revenues; (ii)developing a deep
understanding of client business and IT requirements, marketing the full
range of value-
added services, which differentiates the Company from manyscope of its competitors;
(iii) strong branch office network, which enables it to deliver services cost-
effectively;integrated service offerings, and (iv) disciplined methodologies and best practices, which are
designed to ensure replicationenabling a high percentage
of organizational experience, allow the Company
to compete effectively against both national and local competitors. The key
elements of the Company's strategy are to:
Build Long-Term Strategic Partnerships with Clients-The Companyrecurring revenues. Keane seeks to build
long-term strategic partnerships with its clients. Sales representatives are
assigned to a limited number of target accounts in order to develop an in-depth
understanding of each client's particular needs. This approach enables the
Company to build long-term relationships with
its clients
based3. Strong distribution. The demand for e-business application development and
management services, in particular, are mass market opportunities. Keane's
extensive branch office distribution (across North America and the United
Kingdom) allows it to capture and deliver business in each of the
geographic markets where it operates. This allows Keane to cost-effectively
deliver solutions with a minimum of sales, general, and administrative
(SG&A) expense. It also enables the development of high-level customer
intimacy and satisfaction.
4. Expertise integrating new and old technology. Keane's technical
competencies cut across newer Internet technologies and older legacy
platforms, and in integrating the two. This range of expertise enables
Keane to develop customer-facing e-business applications that are
integrated with the back office and data warehouses--a fundamental
technological challenge that virtually all companies face as they try to
implement e-business initiatives. Keane has extensive experience with
enterprise application integration gained from its efforts in extending the
value of clients' existing business systems.
5. Project management competencies. Unlike newer entrants to the market, Keane
has extensive competencies in project management along with a comprehensive
set of mature delivery methodologies. Keane also has a strong quality
assurance and program management system. The Company continues to invest in
these disciplines and assets to add value to its individual service
offerings and to strengthen its capabilities in assuming a "prime
contractor" role on knowledgeable, highly responsivelarge e-business initiatives involving a series of
complex and cost-effective service. During 1995,concurrent projects.
CLIENTS AND MARKETPLACE DRIVERS
Keane's clients consist primarily of the Fortune 1,000 organizations, but also
include government agencies, healthcare organizations, and "dot com" or Internet
start-ups. These organizations generally have significant IT budgets and/or
depend on service providers to help them fulfill their business optimization and
software design, development, implementation, and management needs.
4
In 1999, the Company derived more than 85%its revenue from the following industry groups:
Industry Percentage of its revenues fromRevenue
-------- ---------------------
Manufacturing 21.3%
Financial Services 17.5%
Government 16.6%
Energy/Utilities 7.1%
Healthcare 11.7%
High Technology/Software 10.7%
Telecommunications 5.7%
Retail/Consumer Goods 5.6%
Other 3.8%
The following table is a representative list of clients tofor which it hadKeane provided
services in the prior year (excluding revenues generated from
businesses acquired during the year).
Another critical element to building long-term client relationships is Keane's
use of its local branch office network to fulfill customer needs. Recognizing
that providing software services is predominantly a local business, ISD provides
its services through a network of 40 branch and satellite offices across the
United States and in Canada. Branch offices operate as strategic business units
responsible for developing long-term
PAGE 3
partnerships with targeted clients and delivering cost-effective software
solutions. Keane's extensive network of branch offices allows the Company to
stay close to its clients and be responsive to their needs. A strong corporate
infrastructure supports the branches, gathers and replicates best practices and
assures uniform quality and a consistent business approach.
Provide Full Range of Value-Added Services-The Company actively markets its
ability to solve its clients' business problems through the application of
information systems technology. The Company seeks engagements such as large
software development, application maintenance outsourcing, year 2000 compliance
and help desk outsourcing projects. The Company also provides consulting
professionals to supplement its clients' internal IS on a short-term basis. The
Company believes its comprehensive, high level capabilities, supported by its
delivery methodologies, differentiate it from many of its competitors and
provide the Company with a more stable source of revenues.
Achieve Critical Mass through a Strong Branch Office Network-Growing market
share and achieving critical mass in each market it serves are fundamental to
the Company's strategy. Keane defines critical mass in a particular location as
being one of the two largest software services firms in that market and having
the depth and breadth of managerial, sales and technical capability to deliver
complex solutions locally. Critical mass and increased market share enable the
Company to spread indirect costs over a larger revenue base and achieve
important economies of scale, thereby enabling it to be more cost-effective.
Keane believes that it is increasingly important to be cost-effective in order
to compete effectively for large scale projects as its clients seek to drive
down their costs. In addition, as clients continue to outsource their IS
operations and buy larger and more complex solutions, it is critical that Keane
invest in the development of standardized delivery methodologies, best practices
and tool sets. Keane believes that critical mass in its branches will enable it
to make necessary investments in capabilities and methodologies while remaining
cost competitive.
The Company believes that, given its present size and organizational structure,
the most effective plan for achieving and maintaining critical mass is to use
its resources to service large accounts and sell strategic business. In 1995, 76
of the 2,200 accounts Keane serviced during the year each represented over $1
million in revenues. Keane plans to continue to focus on targeting accounts with
large and recurring software development and management needs. As part of this
strategy, Keane seeks to position itself as a provider of large application
development projects and IS application outsourcing. Examples of such contracts
in 1995 include a $12 million outsourcing engagement with AT&T1999.
3M Corporation and a
$4.3 million outsourcing engagement with Elf Atochem North America. The Company
seeks to improve its ability to manage large projects and increase the value of
its outsourcing solutions by continuously improving its methodologies and best
practices.
Keane has also found that acquisitions are a valuable and important means of
achieving critical mass, enhancing market share, increasing capabilities to
deliver large, complex solutions and supplementing internal growth and will
continue to evaluate acquisition opportunities where appropriate. 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. Since July 1986,
Keane has completed 17 acquisitions 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 attractive
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 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
PAGE 4
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.
Replicate Organizational Experience through Disciplined Methodologies-Keane has
internally developed and continuously refines numerous best practices as part of
its efforts to consistently provide high quality software solutions, excellent
service to its customers and orderly management of internal activities. To guide
the development and management of systems projects, Keane relies on its project
management approach, Productivity Management, as well as its Frameworks
Application Development methodologies and Project Estimating and Risk Management
processes. The Company's outsourcing solutions are also methodology driven. For
example, application outsourcing engagements are typically managed following the
Company's Application Maintenance Management methodology, which incorporates
Productivity Management and continuous improvement processes; year 2000 projects
are based on Keane's Resolve 2000 methodology; and help desk services are
delivered according to the Company's Help Desk methodology.
Keane also uses numerous management processes to govern and guide its sales,
recruiting, training, financial and operational activities. 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 development services
and software products through its direct sales force based in each branch
office. Keane's sales representatives are assigned to a limited number of
accounts, generally no more than six to eight, 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 as well as state
and federal governments, most of the Company's revenue is derived from
organizations within three industry groups serviced by ISD: manufacturing,
financial services and insurance. 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.
PAGE 5
The following table sets forth a list of selected clients for which the Company
provided services in 1995:
3M CompanyGMAC
Aldus Corp. GTE Data Service Incorporated
Aldus Corp. Guardian Life Insurance
American Express Co., Inc. Guardian Life Insurance
Ameritech Hoffmann-La Roche, Inc
AmeritechAT&T Corporation International Business Machines Corporation
AT&TBose Corporation J.D. Edwards
BankBoston Corporation J.P. Morgan
Baxter Healthcare Corporation Jewel Food Stores, Inc.
Bose CorporationBaylor Health Care System Johns Hopkins Hospital
Bell Atlantic Liberty Mutual Insurance Co.
BankBMW Life Care Centers of Boston CorporationAmerica
British Airways McDonald's Corporation
Baxter Healthcare Corporationb-there.com McKesson Corporation
Bell AtlanticCargill Microsoft Corporation
CargillCarrier Miller Brewing
CarrierCIGNA Corporation National Assn. of Security Dealers
CIGNA CorporationCincinnati Bell Telephone Northern Mutual Life Insurance
Cincinnati Bell TelephoneDepartment of Justice Northern Telecom, Inc.
Department of JusticeDiscover Card The Pillsbury Company
Discover CardEastman Kodak Company Princess Cruise Lines
Elf Atochem North America Procter & Gamble Company
Eastman Kodak CompanyEMC Corporation The Putnam Companies, Inc.
Elf Atochem North AmericaEnergizer Battery Co. Reader's Digest Association, Inc.
Exxon Corporation Robert Wood Johnson Hospital
Fidelity SD Warren
Fidelity Transquest
Farmers Insurance Group U.S. CustomsSony
First Bank Whirlpool CorporationTransquest
Ford U.S. Customs
General Electric Company Whirlpool Corporation
The markets Keane services are experiencing major changes in business climate.
Increased competition, globalization, and deregulation are forcing companies to
devise new ways to differentiate their products and services and more
effectively acquire and retain customers. For most companies, this will require
a major transformation of the organizational structure and business processes,
and significant investments in information technology.
In this environment, Internet technologies are becoming a channel for continuous
and real-time business transactions, including interaction with customers,
distribution of product and materials, and exchange of information with
suppliers, trading partners, and employees. In addition, companies must optimize
and integrate their back-office and legacy systems with newer technologies to
realize the potential of new technology implementations.
5
Keane's executive management, recognizing the implications of these forces,
expects the Company's primary revenue drivers will be its business consulting,
e-Solutions, and applications outsourcing services through 2002. E-business
includes B2B initiative as well as business-to-customer (B2C) projects. Industry
research firm Gartner Group forecasts the B2B market worldwide to grow from $145
billion in 1999 to $7.29 trillion in 2004. Moreover, by 2004, B2B e-commerce
will represent 7% of the forecasted $105 trillion total global sales
transactions, according to Gartner.
The Company has historically derived, and may in the future derive, a
significant percentage of its total revenue from a relatively small number of
clients. Keane's five largest clients accounted for approximately 36% and 33%19% of the
Company's total revenues during each of the years ended December 31, 19941998 and
1995,
respectively.1999. The Company's two largest clients during these periods have been
IBM1998 and General Electric. During1999 were various
organizations within the 12 months ended December 31, 1995, IBMFederal Government and General ElectricIBM. Federal Government
contracts accounted for approximately 13.2%5% and 8.8%, respectively,6% of the Company's total revenues. The Company provides services to multiple General
Electric (GE)revenues
in 1998 and International Business Machines (IBM) locations. The Company
believes that each GE1999, respectively. IBM accounted for approximately 6% of the
Company's total revenues for 1998 and IBM location served by the Company is essentially
autonomous. Each location contracts separately for its services and each
contract involves different projects.1999. A significant decline in revenues
from IBM or General Electricthe Federal Government could have a material adverse effect upon the
Company's total revenues. With the exception of IBM and General Electric,the Federal Government,
no single client accounted for more than 5% of the Company's revenues during the
three years ended December 31, 1995.1999.
In accordance with industry practice,practices, 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, 19951999 of approximately $131.0$786 million, in comparison to orders of
approximately $106.0$900 million at December 31, 1994.
BRANCH OFFICES:1998.
GROWTH STRATEGY
Keane's growth strategy unites a series of complementary initiatives all focused
on increasing revenue, enhancing margins, cross-selling services to existing
accounts, and developing new customers. The core elements of this strategy, as
described below, build on Keane's strengths and strategic programs that have
been under way throughout much of the 1990s:
o Build an operating model capable of generating 25% CAGR. Keane provides custom software developmenthas made
significant strides over the past three years in developing and enhancing a
complete line of services through(its end-to-end solutions) to help clients derive
business value from IT. These efforts have enabled Keane to evolve its
headquartersrevenue mix into higher margin solutions business. Through its operating
model, the Company is focused on positioning itself as a premier provider
of end-to-end solutions. Senior management attention is focused on the
following areas:
o seamlessly integrating its strategic practices and branch operations
to augment sale and delivery of the Company's full range of services,
o leveraging its vast geographic presence in Boston, Massachusetts,the U.S., as well as its
presence in Canada and the U.K.,
o leveraging its relationships and reputation with its large customer
base,
o developing repeatable solutions to accelerate growth, and
o building scalable systems and processes to accommodate growth.
o Leverage strategic practices to accelerate revenue and margin growth.
Keane's strategic practices are an important means for targeting
mass-market opportunities (e.g., e-business and application outsourcing)
and expanding capabilities at the local level. These practices gather,
refine, and disseminate Keane's best practices, including repeatable
solutions that can be used across multiple client engagements throughout
Keane's branches. Keane will continue to expand the value of these
practices with vertical and domain expertise. The Company has a networksenior
management team in place to direct integration of ISDthese practices with
branch operations to enable Keane to sell and deliver its full
"Plan-Build-Manage" capabilities across local markets.
o Leverage branch structure to drive sales growth. Keane has made significant
strides in developing "critical mass" in its branch organization and
expanding its geographic reach. Today, the Company has branch offices located in
major metropolitan areas throughoutmarkets across the United States, and in Canada and the provincesUnited
Kingdom. Through these branches, the Company has cultivated relationships
with more than 1,400 clients. Keane incentivizes its local sales and
management teams to proactively manage their client relationships, by
maintaining a deep understanding of Ontarioclients' business and Quebec. Branchoperational needs
and marketing the full range of Keane's services to respond to their
requirements. The Company believes its end-to-end solutions are synergistic
in that delivery from one service line (for instance, e-Strategy, a "plan"
service) positions Keane to deliver services in another business line (for
instance, development of web-based applications, a "build" service).
6
o Build a world-class organization. Keane recognizes that a world-class
organization embodying top people, processes, and IT infrastructure assets
is necessary for the Company's continued success. To enhance its
organization, Keane is focusing on the following:
o attracting, developing, and retaining top business, technical and
managerial talent,
o continuously upgrading corporate support functions, including finance,
marketing, IT, HR and knowledge management, toward a customer
(internal and external) orientation,
o investing in its strategic practices to continually improve its
services, and
o institutionalizing key operational and delivery processes and best
practices.
o Build awareness and strength of the Keane brand. Keane has established
world-class capabilities and key strengths in business, operational, and IT
consulting, e-business, applications development and integration, and
applications management. The Company plans to devote resources to branding
to make its capabilities and its value proposition better known in the
marketplace. Initiatives in 2000 are focused on:
o communicating a unified brand that supports Keane's
"plan-build-manage" services,
o increasing awareness of Keane's presence and competitive advantages in
the e-business space, and
o building on its current brand which embodies reliable,
results-oriented delivery of IT services.
SALES, MARKETING AND ACCOUNT MANAGEMENT
Keane markets its services and software products through its direct sales force,
which is based in its branch offices, and through its centralized practices.
Keane's account executives (AEs) are assigned to a limited number of accounts so
they can develop an in-depth understanding of each client's individual needs and
form strong client relationships. These AEs are responsible for providing
marketing,ensuring that
clients receive responsive service and that Keane's software planning, analysis, design, implementationsolutions achieve
client objectives. AEs collaborate with Keane's Practice Groups 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, consulting managers and personnel
recruiters. Nearly 50% of the Company'sother branch
offices excluding satellite
offices, generated more than $10.0 million in annual revenuesas needed to address specialized client requirements.
Keane focuses its marketing efforts on organizations with significant IT budgets
and are staffed by
approximately 140 employees. Keane believes this local presence and capability
PAGE 6
enable it to provide its clients with highly responsive and cost-effective
service, as well as dependable results. Keane also maintains five HSD offices
located in California, Iowa, Maryland, New York and Texas.
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 therecurring software development and maintenance process.outsourcing needs. In 1998, the Company
launched a corporate branding campaign focused on communicating Keane's branch officesvalue
proposition of reliably delivering application solutions with quantifiable
business results. These branding efforts are affordedactively executed through multiple
channels. In 2000, 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
sharedCompany plans to develop and continuous process improvements can be realized.
EMPLOYEES:extend its branding program
to reflect Keane's strategic intent.
EMPLOYEES
On December 31, 1995,1999, Keane had 5,3388,981 employees, including 4,7746,902 business and
technical professionals' staff whose services are billable to clients. At such date, 4,915The
Company sometimes supplements its technical staff by utilizing sub contractors.
Management believes Keane's growth and success are attributable to the caliber
of its people and will continue to dedicate significant resources to hiring,
training and development, and career advancement programs. Keane's efforts in
these areas are grounded in the Company's core values, namely respect for the
individual, commitment to client success, achievement through teamwork,
integrity, and the drive for continuous improvement. Keane strives to hire,
promote, and recognize individuals were employed by ISD and 318 individuals were employed by HSD,teams who embody these values.
Keane recognizes that there is significant competition for employees with the
remaining 105 individuals providing Company-wide services at the Company's
corporate headquarters.skills and competencies required for its continued success. The Company believes
thatit has been successful in efforts to hire and retain the managerial, technical,
sales, and support personnel required to deliver its future success will depend in part uponservices and manage its
continuedgrowth. One significant factor advancing Keane's ability to attract and retain
highly skilled managerial, technical,
salesprofessionals is its branch office network, which allows its staff to minimize
travel time on client projects. At the same time, this network of branch offices
provides employees with broader career growth options through transfers across
the organization or into its corporate practice groups.
Keane also recognizes that it's growing share of multimillion-dollar outsourcing
engagements and support personnel. Accordingly, Keane devotesits mergers and acquisitions (M&A) strategy are two significant
factors in its growth. As a result, Keane's corporate human resources
organization is directly involved in major outsourcing engagements and M&A
activities in addition to its Human Resources Department, including a staff of 74 recruiters. The
Company's current employees are also a valuable recruiting tool. During 1995,
approximately 27% of the Company's new employees were referred to the Company by
existing personnel.and career development functions.
The Company generally 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:7
COMPETITION
The custom softwareIT services market is highly competitive and characterizeddriven by continual change in
clients' business requirements and improvementadvances in technology. The market is
fragmented, and no company holds a dominant position. Consequently, the
Company's
competition varies significantly from city to city. The Company
believes it is among the ten largest custom software development firms serving
the commercial market in the United States.
The Company's competition also varies by the type of service provided. Forprovided and by geographic markets.
Competitors typically include traditional players in the IT services industry,
including large application development and outsourcing projects, the Company competes with
consulting divisions of large public accounting firms, such asintegrators (e.g., Andersen Consulting, as well asEDS, CSC, and IBM Global
Services); IT solutions providers (e.g., Sapient, Cambridge Technology Partners,
AMS, and Whittman-Hart); pure-play Internet solutions providers (e.g.,
Razorfish, Scient, and Viant); niche players (e.g., companies such as Electronic Data Systems Corporationfocused on
specific domain or vertical expertise); and ISSC, themanagement consulting division of IBM. For systems implementationfirms (e.g.,
McKinsey 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.Booz Allen). Some of these competitors are larger and have greater
financial resources than the Company. In addition, clients may electseek to increase
their internal ISIT resources to satisfy their customcustomer software development needs.development.
The Company believes that the bases for competition in the softwareIT services industry
include the ability to compete cost-effectively, develop strong client
relationships, generate recurring revenues, utilizerevenue, use comprehensive delivery
methodologies, and achieve organizational learning by implementing standardized
operational processes. The Company believes that it competes favorably with
respect to thesethose factors. InThere can be no assurance that the healthcare software systems market, Keane competesCompany will
continue to compete successfully with such companies as
SMS Corp., HBO and Company, and MEDITECH, Inc. Some of theseits existing 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 abilityor will be able
to provide
service to targeted healthcare markets.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 approximateapproximately 34,000 square foot office
building which is owned by City Square Limited Partnership. SeveralThe limited
partnership is comprised of an officer of the Company's officers,Company, some directors and
shareholders are limited partners of this
partnership.shareholders. See Item 13 -- "Certain
PAGE 7
Relationships and Related Transactions."
At December 31, 19951999, the Company leased and maintained sales and support
offices in 52more than 50 locations in the United States.States and five locations in the
United Kingdom. The aggregate annual rental expense for the Company's sales and
servicesupport offices was approximately $6,778,000$19.4 million in 1995.1999. The aggregate annual
rental expense for all of the Company's facilities was approximately $8,880,000$21.8
million in 1995.1999. For additional information regarding the Company's lease
obligations, see Note KJ 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 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.
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 alleges 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 has alleged damages in excess of
$50,000,000 and has claimed punitive damages in an amount more than double the
compensatory claim.
The Company has 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 are barred by the terms of the underlying contract. Management
of the Company intends to continue to defend the matter vigorously. The Company
was granted summary judgment on certain of MAMI'S claims. The remaining claims
as they apply to the Company concern only allegations pertaining to the failure
to refund $25,000 under contract and misrepresentation pertaining to stated
delivery dates. Trial on this matter commenced before a judge sitting without a
jury in late February 1996. The Company expects the court to render its decision
within 60 to 90 days of the end of the trial.
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.
However, an unfavorable outcome in any of these
matters, which are expected to be resolved within one year, could result in a
material loss.
During 1995, the Company and IBM agreed in principle to a transfer of certain
customer relationships and certain proprietary products to IBM. Subsequently,
the Company has provided resources, primarily personnel, to IBM which assumed
the management of certain customer projects pending execution of formal
documents among all the parties. Subsequent to year end, the Company has
determined that it will be unable to obtain the necessary agreements to effect
the transfer and customer assignments. The accompanying financial statements
reflect receivables for project revenues and certain other costs aggregating
approximately $2,000,000 which management anticipates will be recovered from its
PAGE 8
customers and/or IBM. It is reasonably possible that the Company will have to
litigate in order to recover this amount. In addition, it is reasonably possible
that a customer may assert claims against the Company in connection with
performance on one of the projects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a voteA special meeting of Stockholders of the Company was held on December 2, 1999.
The Stockholders approved an amendment to the Company's security holders during1998 Stock Incentive
Plan increasing the fourth quarternumber of shares of Common Stock which the year ended December 31, 1995.Company is
authorized to issue under the 1998 Stock Incentive Plan from 2,000,000 to
7,000,000. Set forth below is the number of votes cast for, against or
abstained.
For Against Abstained
40,658,329 9,670,367 2,421,151
8
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY: The executive officers and
directors of the Company are as follows:
NAME AGE POSITION
---- --- --------
John F. Keane(1) 65Keane 68 Chairman President, and Chief Executive Officer
Brian T. Keane 39 Executive Vice President, Office of the President,
and Director
Edward H. Longo 52 Senior Vice President - Information
Services Division
Raymond W. Paris 58 Vice President and General Manager -
Healthcare Services DivisionDirector*
John F. Keane Jr. 3640 Executive Vice President, - Area Manager
Wallace A. Cataldo 46Office of the President,
and Director*
John J. Leahy 42 Senior Vice President - Finance and
Administration Brian T. Keane 35and Chief Financial Officer
Raymond W. Paris 62 Senior Vice President - Area ManagerHealthcare Solutions Practice
Renee Southard 45 Senior Vice President - Human Resources
Philip J. Harkins(1) 52 Director
Winston R. Hindle, Jr.(1)(2) 6569 Director
John F. Rockart (1)Rockart(1)(2) 6468 Director
Robert A. Shafto(1)(2) 6064 Director
____________________________* The Company has previously announced its plan to appoint Mr. Brian T. Keane as
the Company's Chief Executive Officer and Mr. John F. Keane, Jr., as the
Company's President. The Company's Board of Directors intends to effect these
appointments immediately following the Company's 2000 Annual Meeting of
Stockholders, subject to approval of a proposed amendment and restatement of the
Company's by-laws at that meeting.
- ----------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
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. LongoKeane is also a
director or Firstwave Technologies, Inc. and EG&G, Inc.
Mr. Brian Keane joined the Company in March 19801986 and haswas appointed Executive Vice
President and a member of the Office of the President in September 1997. From
December 1996 to September 1997, Mr. Keane had been Senior Vice President --
Information Services Division sincePresident. From
December 1994. From January 19931994 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 1987,1996, he was an Area Vice President. From July 1992 to
December 1994, Mr. Keane served as a Business Area Manager and from January 1990
to July 1992, he served as a Branch Manager. Mr. Keane has been a director of
the Information Services Division.
PAGE 9
Mr. Paris joinedCompany since May 1998. Brian Keane is a son of John Keane, the founder,
Chairman of the Company, in November 1976. Mr. Paris became Area Managerand a brother 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 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.John Keane, Jr.
Mr. John Keane, Jr. joined the Company in 1987 and was promotedappointed Executive Vice
President and a member of the Office of the President in September 1997. From
December 1996 to September 1997, Mr. Keane had been Senior Vice President. From
December 1994 to December 1996, he was an Area Vice President in the Information Services Division in December 1994.President. From January 1994
to December 1994, Mr. Keane served as an ISDa 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. Mr. Keane has
been a director of the Company since May 1998. John Keane, Jr. is a son of John
Keane, the founder, Chief Executive Officer and a directorChairman of the Company, and a brother of Brian Keane, Area Vice President of
the Company.Keane.
9
Mr. Brian KeaneLeahy joined the Company in 1986August 1999 and was promotedappointed to Areathe position of
Senior Vice President and Chief Financial Officer. Prior to these roles, Mr.
Leahy was Vice President of Business Planning and Development for Pepsi-Cola
International.
Mr. Paris joined the Company in November 1976. Mr. Paris became Area Manager of
the Information Services DivisionHealthcare Solutions Practice in 1981 and has served as Vice President and
General Manager of the Healthcare Solutions Practice since August 1986.
Ms. Southard joined the Company in July 1983 and has been Vice President - Human
Resources since December 1994. From July 19921995. 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. Keane served as an ISD Business Area ManagerHarkins has been a director since February 1997. Mr. Harkins is currently
the President and from
January 1990 to July 1992, he served as an ISD Branch Manager. Brian Keane is a
son of John Keane, the founder, Chief Executive Officer and a director of the
Company and a brother of John Keane, Jr.Linkage, Inc., Areaan organizational
development company founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins
was Vice President of Human Resources of the Company.
Mr. Hindle has been a director since February 1995. Mr. Hindle is currently
retired. From September 1962 to July 1994, Mr. Hindle served as a Vice President
and, subsequently, Senior Vice President of Digital Equipment Corporation. Mr.
Hindle is also a director of CP Clare Corporation, Mestek, Inc. and Mestech,Simione
Central Holdings, Inc.
Dr. Rockart has been a director since the Company's incorporation in March 1967.
From September 1972 to July 1994,
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 Thethe 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 currently retired.
From January 1998 to April 1998, Mr. Shafto was Chairman of New England
Financial. Through December 31, 1997, he was Chairman, Chief Executive Officer
and President of The 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 The 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 The 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 nonemployeenon-employee directors currently consists of an annual
director's fee of $4,000 plus $1,000 and expenses for each meeting of the Board
of Directors attended. Directors who are officers or employees of the Company do
not receive any additional compensation for their services as directors.
10
PART II
- -------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's authorized capital stock consists of 50,000,000200,000,000 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 15, 1996,10, 2000, there were no shares of Preferred Stock
outstanding; 15,957,76069,862,446 shares of Common Stock
outstanding and held of record by approximately 1,67260,000 stockholders; and 288,258284,987
shares of Class B Common Stock outstanding and held of record by approximately
174 stockholders.
PAGE 10
120 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 issuancesissuance of Class B
Common Stock and certain charter amendments. Voting for directors is
noncumulative.non-cumulative.
As of March 15, 1996,10, 1999, the Class B Common Stock represented 1.8%less than 1% of the
Company's outstanding equity, but had 15.3%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.
DividendDividends 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 IssuancesIssuance of Class B Common Stock; Retirement of Class B Common Stock Upon
Conversion into Common Stock. The Company may not issue any additional shares of
Class B Common Stock without the approval of a majority of the votes of the
outstanding shares of Common Stock and Class B Common Stock voting as separate
classes. The Board of Directors may issue shares of authorized but unissued
Common Stock 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.
PAGE 11
PREFERRED STOCK: The Company's Articles of Organization authorize the issuance
of up to 2,000,000 shares of Preferred Stock, $.01 par value per share.
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.
IssuanceIssuances 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.
Stock Price
High Low
-------------------
1995
First Quarter $25.50 $20.75
Second Quarter 25.75 22.63
Third Quarter 30.63 22.75
Fourth Quarter 29.50 22.13
1994
First Quarter $23.83 $18.42
Second Quarter 27.17 22.17
Third Quarter 24.00 21.08
Fourth Quarter 23.75 18.75
Stock Price
High Low
---- ---
1999
First Quarter $42.50 $21.31
Second Quarter 31.69 18.00
Third Quarter 28.75 20.50
Fourth Quarter 32.75 20.06
1998
First Quarter $56.50 $35.25
Second Quarter 59.00 42.75
Third Quarter 60.94 36.00
Fourth Quarter 39.94 28.12
The closing price of the Common Stock on the American Stock Exchange on March
15, 199610, 2000 was $29.00.$25.625.
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 dividendsdividend 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.
PAGE 12
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(ALL DOLLAR FIGURES IN(IN THOUSANDS EXCEPT PER SHARE DATA)AMOUNTS)
First Quarter Second Quarter Third Quarter Fourth Quarter Quarter Quarter Quarter
------- ------- ------- --------
Year Ended December 31, 19951999
Total revenues $90,452 $94,647 $96,516 $101,124
Pretax$285,004 $280,465 $255,601 $220,022
Income (Loss) before income 9,037 9,429 8,171 5,948taxes 51,147 44,761 32,649 (5,744)
Net income 5,151 5,375 4,943 3,788(Loss) 30,178 26,633 19,426 (3,163)
Net income per share .32 .33 .30 .23
(basic) .42 .37 .27 (.04)
Net income per share (diluted) .42 .37 .27 (.04)
Year Ended December 31, 1994
1998
Total revenues $86,165 $85,560 $86,641 $ 86,217
Pretax$230,056 $266,904 $285,465 $293,773
Income before income 7,213 6,834 7,406 7,027taxes 38,300 42,402 48,314 45,140
Net income 3,967 4,039 4,051 4,17822,784 22,700 27,249 23,616
Net income per share .29 .29 .29 .28(basic) .32 .32 .38 .33
Net income per share (diluted) .32 .31 .38 .33
PAGE
13
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
Income Statement Data:--------------------------------------------------------------------------------------------------------
Income Statement Data:
Total Revenues $95,562 $99,279 $175,808 $344,583 $382,739revenues $394,619 $505,982 $706,801 $1,076,198 $1,041,092
Operating Income 8,789 9,649 16,430 31,180 31,611income 33,659 47,403 85,163 170,187 116,466
Net income 5,891 6,278 9,058 16,235 19,25720,148 28,173 51,371 96,349 73,074
Net income per share .54 .57 .76 1.15 1.18
Shares used in(basic) .30 .40 .73 1.36 1.02
Net income per share calculation 10,875 11,034 11,898 14,161 16,348(diluted) .30 .40 .72 1.33 1.01
*Weighted average common 67,036 69,780 70,096 71,053 71,571
shares outstanding (basic)
*Weighted average common 67,728 70,540 71,603 72,284 72,395
shares and common share
equivalents outstanding
(diluted)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets $41,079 $49,316 $ 99,615 $179,002 $194,398$198,191 $251,771 $329,176 $458,959 $514,825
Total debt 154 206 4,323 12,317 9,146 16,502 9,493 3,930 11,403
Stockholders' equity 36,234 43,408 83,114 144,387 167,221169,526 201,768 257,037 363,784 422,799
Book value per share 3.39 3.97 6.21 9.04 10.33
Number2.53 2.89 3.65 5.10 5.95
*Number of shares 67,114 69,792 70,342 71,336 71,051
outstanding
10,683 10,921 13,387 15,977 16,194
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Financial Performance:
Total revenue growth 2.7% 3.9% 77.1% 96.0% 11.1%growth(decline) 12.3% 28.2% 39.7% 52.3% (3.3)%
Net margin 6.2% 6.3% 5.2% 4.7% 5.0%5.1% 5.6% 7.3% 9.0% 7.0%
Return on average equity 17.9% 15.8% 16.7% 16.1% 12.3%12.8% 15.2% 22.4% 31.0% 18.6%
PAGE*Adjusted to reflect the 2-for-1 stock split that was distributed on August 29,
1997 to shareholders of record as of August 14, 1997.
All amounts prior to 1999, have been restated to reflect the acquisitions of
Bricker & Associates, Inc., Icom Systems Limited and Fourth Tier, Inc., which
were accounted for as poolings-of-interests.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects" and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS, 19951999 VS. 1994:1998: The Company's revenuesrevenue for 1995 were
$382.7 million, up 11.1%1999 was $1.04
billion, a 3.3% decrease from $344.6 million$1.08 billion in 1994. Revenues from the
Company's Information Services Division ("ISD") amounted to $356.8 million for
1995, up 11.2% from 1994. This increase1998. The decrease in ISD revenues isrevenue was
primarily
attributable to a strong economy in which companies invested in their
information systems. In addition, the Company generated new revenues as a result of its Microsoft Help Desk contractthe rapid and anticipated decline in Year 2000 compliance
revenue. Year 2000 compliance revenue decreased 44.2% to $206.1 million for Windows 95 and the opening of a new
office1999
from $369.5 million in Grand Rapids, Michigan. Revenues for1998. However, the Company's Healthcare Services
Division ("HSD") were $25.91999 revenue in its core
Plan, Build and Manage services, excluding Year 2000 compliance, was $835.0
million, up 9.3%18.2% from 1994. The increase$706.7 million in HSD
revenues is primarily attributable1998. Plan, Build, and Manage revenue
refer to the acquisitionCompany's three core business lines, Business and IT Consulting,
e-Solutions, Applications Development and Management Outsourcing. The growth in
non-Y2K revenue was a result of Community Health
Computing Corporationthe Company's strategic repositioning executed
during the year. This repositioning has yielded growth in April 1995important areas such
as e-Solutions, which totaled $108 million in revenue during 1999. Growth in
Keane's core Plan, Build, and Manage revenue was negatively impacted during the
second half of Source Data Systems, Inc. in November
1995.1999 due to a cross-industry Y2K-related freeze among many of
Keane's clients, which deferred the start of new development projects to lower
their Y2K-related risk. Despite the Y2K freeze, Keane's 1999 Plan, Build, and
Manage revenue was up 34.0%, 21.0%, and 11.1% to $110.9 million, $331.1 million,
and $370.9 million, respectively, from 1998.
Salaries, wages, and other direct costs for 19951999 were $256.5$702.8 million, or 67.0%67.5%
of revenues,revenue, compared to $225.6$696.8 million, or 65.5%64.7% of revenues, in 1994, a 1.5%revenue for 1998, an
increase of 2.8%. This increase as a percentage of revenues. The increase in direct cost(s), as a
percentagerevenue is due primarily to
lower utilization of revenues, is primarily attributableCompany billable headcount, caused by the rapid decline of
Y2K revenue and the Y2K-related deferral of new projects. Due to the
fact that large clients
are negotiatingextraordinary nature of expenses related to Keane's transition from Y2K and obtaining competitive bids for high quality services at
lower costs. This resultsto
bring costs in closer alignment with revenues, in the Company agreeing to lower rates to win new
business, large clients negotiating for volume discounts and limitations on the
Company's ability to pass on salary increases for technical personnel to
existing accounts. IBM, Keane's largest account, accounted for approximately
one-thirdFourth Quarter of the Company's direct cost increase, as a percentage of revenues, as
a result of its new National Vendor Agreement that1999,
the Company signedincurred a onetime restructuring charge of $13.7 million or 1.3% of
revenue. These charges are related to employee severance costs, costs associated
with asset impairments, payments to certain employees and consolidation of less
profitable business units and the closing of certain facilities. It is expected
that approximately $4.1 million, associated with severance costs and payments to
certain employees, will be paid in July
1995. This Agreement, in effect, is intended to eventually reduce the over 200
IBM professional services vendors to eight, of which the Company is one. In
exchange for expected increases in IBM business, the Company agreed to IBM's new
national rates which at the time were approximately 15% lower than the rates the
Company had been charging.2000. The Company's strategy to partially reduce the impact
of higher payroll costs on margins is to target project and strategic business,
which, because of limited competition, typically commands higher rates. In
addition, the Company has focused on the marketing of application outsourcing
and help desk support business which may result in larger and longer duration
engagements with higher productivity and lower selling expenses.remaining $2.9 million will be paid
out as branch office closures occur.
Selling, General, & Administrative ("SG&A") expenses for 19951999 were $82.5$199.0
million or 21.5%19.1% of revenues,revenue, compared to $76.4$193.4 million or 22.2%18.0% of revenues,revenue in
1994,
a 0.7% decrease1998, an increase of 1.1%. This increase as a percentage of revenues.revenue was
primarily attributable to the decrease in the Company's revenue and investments
the Company continued to make in the development and marketing of its core
service offerings. The Company's objective is to continue to attempt to reduceaggressively manage SG&A, at the same or greater rate than increases in
direct costs. The Company seeks to achieve this objectiveas a
percentage of revenue, by realizing the economies of scale associated with
increasing revenue through a combination of
aggressive internal growth and strategic acquisitions without proportionately increasing SG&A.
Amortization of goodwill and other intangible assets for 19951999 was $12.2$9.2 million,
or 3.2%0.9% of revenues,revenue, compared to $11.5$7.7 million, or 3.3%0.7% of revenues,revenue, in 1994.1998. The
increase is primarily attributable to the acquisitions executed during the
current and prior year.
Interest and other related expenses for 19951999 totaled $0.7$1.5 million, compared to $3.1$1.2
million in 1994. This1998. Interest and dividend income for 1999 totaled $7.8 million,
compared to $5.2 million in 1998. The increase in interest and other related
income can be attributed to the increase in investments, which grew to $89.7
million at year-end 1999 from $77.5 million at year-end 1998.
Pretax income for 1999 was $122.8 million, or 11.8% of revenue, down 29.5% from
pretax income of $174.2 million, or 16.2% of revenue in 1998.
The Company's effective tax rate for 1999 was 40.5% compared to 44.7% in 1998.
The decrease is primarily attributable to the Company's
secondary stock offeringhigh tax rate incurred in 1998
which was impacted by non-deductible merger costs of 2.3$8.1 million shares of Common Stock in November of
1994,and $1.7
million as a portionresult of the proceedsconversion of which were used by the CompanyFourth Tier, Inc from cash to repay all
of its outstanding bank indebtedness. Interest and other related incomeaccrual
basis for 1995
totalled $1.6 million, compared to $0.5 million in
PAGE 15
1994. This increase is due to the Company investing the net proceeds of the
stock offering after paying down the bank indebtedness.
Pretax income for 1995 was $32.6 million, or 8.5% of revenues, up 14.4% from
pretax income of $28.5 million, or 8.3% of revenues, in 1994.
The Company's effective tax rate for 1995 was 40.9% compared to 43.0% in 1994.
This decline is primarily attributable to a reduction in state income taxes and
the recognition of a research and development tax credit.reporting.
Net income and earnings per share for 19951999 were $19.3$73.1 million and $1.18$1.01 per
share diluted, respectively, up 18.6%down 24.2% from $16.2$96.3 million and $1.15$1.33 per share
diluted, respectively, in 1994.1998.
15
RESULTS OF OPERATIONS, 19941998 VS. 1993:1997: The Company's revenuesrevenue for 1994 were
$344.61998 was $1.08
billion, a 52.3% increase from $706.8 million a 96.0% increase over the same period last year. Revenues from
ISD amounted to $320.9 million for 1994, up 99.4% from 1993.in 1997. The increase isin revenue
was a result of strong growth generated by the Company's service offerings, and
by five strategic acquisitions made during the year. The Company experienced the
largest revenue growth in Year 2000 Compliance Services and Application
Outsourcing. Year 2000 Compliance revenue increased 146.4% to $369.4 million,
Application Outsourcing revenue increased 48.8% to $155.3 million and
Application Development increased 32.8% to $130.1 million. IT Consulting
increased 48.4% to $54.0 million, primarily attributable toas a result of the acquisition of
AGS on January 5, 1994. Revenues in
1994 for HSD were $23.7Bricker & Associates, Inc. Help Desk revenue increased 25.5% to $49.2 million,
up 59.1% from 1993. The increase is primarily
attributableHealth Care Services and Sales increased 22.4% to the acquisition of Professional Healthcare Systems in August
1993.$37.1 million, Supplemental
Staffing revenue increased 13.5% to $263.9 million, and all other services
increased 6.8% to $17.2 million.
Salaries, wages, and other direct costs for 19941998 were $225.6$696.8 million, or 65.5%64.7%
of revenues,revenue, compared to $113.0$469.4 million, or 64.2%66.4% of revenues, in 1993.revenue for 1997, a decrease
of 1.7%. This increase in direct costs for 1994,decrease as a percentage of revenues, is primarilyrevenue was due to the inabilityCompany's
ability to pass on cost increasesincrease average billing rates by more than the increase in related
technical salary costs, as a result of the increase in strategic services work
being performed by the Company.
Selling, General, & Administrative ("SG&A") expenses for 1998 were $193.4
million or 18.0% of revenue, compared to existing accounts, pressure by
large clients$138.2 million or 19.5% of revenue in
1997, a decrease of 1.5% as a percentage of revenue. The Company's objective is
to provide volume discounts, and the need to charge lower rates to
win new business and gain market share. The Company attemptscontinue to reduce the
impact of this trend by seeking out project and strategic support business which
typically results in larger and longer duration business and higher billing
rates.
SG&A, expenses for 1994 were $76.4 million, or 22.2%as a percentage of revenues, compared to
$39.7 million, or 22.6%revenue, by realizing the
economies of revenues,scale associated with increasing revenue without proportionately
increasing SG&A, investing in 1993. Part of the Company's strategyMIS to increase contribution, despite the increase of direct costs, isproductivity, and continuing to
aggressively
grow both internallyimplement cost saving programs such as national purchasing for volume purchase
discounts in such areas as travel, office supplies, and through acquisitions so that SG&A expenses are spread
over a broader base of revenues.computer equipment.
Amortization of goodwill and other intangible assets for 19941998 was $11.5$7.7 million,
or 3.3%0.7% of revenues,revenue, compared to $6.8$14.0 million, or 3.8%2.0% of revenues,revenue, in 1993.1997. The
increase was primarily due to the acquisition of AGS on January 5, 1994.
Interest and other related expenses for 1994 were $3.1 million, compared to $1.0
million in 1993. This increasedecrease is primarily attributable to certain assets becoming fully amortized at
the debt incurredend of 1997.
Merger costs for 1998 were $8.1 million as compared to finance$0 for 1997. This
increase was the acquisitionresult of AGS. In November 1994,investment banking, legal, accounting and other
professional fees associated with the Company completed a
public offeringacquisitions of 2.3Bricker & Associates,
Inc., Icom Systems Ltd and Fourth Tier, Inc., which were all accounted for as
poolings-of-interests.
Interest and other expenses for 1998 totaled $1.2 million, shares of Common Stock resultingcompared to $1.3
million in net proceeds1997. Interest and dividend income for 1998 totaled $5.2 million,
compared to $4.2 million in 1997. The increase in interest and other related
income was attributed to the Company of approximately $42.3 million. The Company used approximately
$23.0increase in investments, which grew to $77.5
million of the proceeds to repay the outstanding balance of its bank
indebtedness.at year-end 1998 from $50.7 million at year-end 1997.
Pretax income for 19941998 was $28.5$174.2 million, or 8.3%16.2% of revenue, compared to $15.6up 97.7% from
pretax income of $88.1 million, or 8.9%12.5% of revenues,revenue in 1993.1997.
The Company's effective tax rate for 19941998 was 43.0%44.7% compared to 41.9%41.7% in 1993.
The1997.
This increase in the Company's effective tax rate is principally due to nondeductible goodwill associated with$8.1 million of merger costs that are not deductible for
state and federal taxes and a one-time tax expense of $1.7 million as the acquisitionresult
of AGS.the requirement to convert Fourth Tier, Inc. from cash to accrual basis for
tax reporting.
Net income and earnings per share for 19941998 were $16.2$96.3 million and $1.15$1.33 per
share diluted, respectively, compared to $9.1up 87.6% and 84.7%, respectively from $51.4 million
and $.76$.72 per share diluted, respectively, for 1993.in 1997.
LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and short-term investments at December
31, 19951999 increased to $33.2$142.8 million from $26.3$129.2 million at December 31, 1994. In addition,1998.
This increase was primarily attributable to net income, decrease in accounts
receivable of approximately $37.6 million, offset by decreases in accounts
payable and accrued expenses of approximately $37.6 million and payments for
acquisitions of $61.0 million. On May 26, 1999, the Company's Board of Directors
authorized the repurchase of up to 1,000,000 shares of Common Stock lasting
until May 25, 2000. This repurchase program was completed during the fourth
quarter of 1999, totaling approximately $23.9 million. On February 10, 2000, the
Company announced an additional repurchase program of up to 2,000,000 shares of
Common Stock lasting until February 9, 2001.The buyback program is expected to
cost approximately $53 million. The Company maintains and has available a $20
million unsecured demand line of credit split equally between twowith a major Boston banksbank for
PAGE 16
operations
and acquisition opportunities.
The Company's debt, including
accrued interest, as of December 31, 1995 was $9.1 million, which consisted
primarily of a $7.4 million non-interest bearing note discounted at 7% payable
to NYNEX in three installments in January 1996, January 1997 and January 1998.16
Based on its current operating plan, the Company believes that its cash, and 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 during [at
least]for at least the next twelve months.
IMPACT OF INFLATION AND CHANGING PRICES: Inflationary increases in costs have
not been material in recent years and, to the extent permitted by competitive
pressures, are passed on to 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 continuedwas able to experience client pressures to
deliver high quality services at lower costs.increase its billing rates over its
increases in direct labor in 1999. This is due primarily to our increase in
client strategic services in which competition is less and the quality of
services commands higher rates.
YEAR 2000 ISSUES
The "Year 2000" issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Keane's computer
equipment and software and devices with embedded technology that are time
sensitive may recognize "00" as the year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
Keane's operations, including, among other things, a temporary inability to
perform mission critical functions like billing and time reporting. Although the
transition from 1999 to 2000 has passed and Keane is not aware of any unresolved
Year 2000 problems relating to the services provided by Keane, its internal
systems, the products developed by Keane's Healthcare Solutions Practice or
third party products used by Keane in its Healthcare Solutions Practice, it is
possible that Year 2000 problems could be discerned in the future.
Keane generally delivers services and not products to its customers. The Company
believes that the services provided by its professionals to its customers are
provided in a Year 2000 compliant manner.
Keane's Healthcare Solutions Practice develops, markets, and sells software
products. In 1999, Keane notified its customers that it did not intend to offer
Year 2000 compliant versions or patches for certain of its products that were
known to be Year 2000 non-compliant. Instead, Keane encouraged its clients to
migrate to new products offered by Keane. Keane believes that it may have had an
immaterial loss of customers in the Healthcare Solution Practice due to clients
who failed to migrate to its newer products.
In addition to its own products, Keane markets certain third party software
products through its Healthcare Solutions Practice. During 1999, the Company
received assurances from substantially all of the vendors of these products that
they are Year 2000 compliant. Customer claims regarding Year 2000 issues related
to these products were immaterial.
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $1,635,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that may arise are
addresses promptly.
Among the services that Keane provided in some cases,1999 was the assessment, planning,
migration/remediation, and testing for Year 2000 compliance. Keane has devoted
significant resources to, and earned significant revenue from, providing
services to address the Year 2000 problem. The market for these services
declined significantly during 1999 and is expected to further diminish and
disappear after the first quarter of 2000. Further, Keane's services addressing
the Year 2000 problem involve key aspects of its client's computer systems. A
failure in lower ratesa client's system could result in a claim for newsubstantial damages
against Keane, regardless of Keane's responsibility for the failure. Keane could
incur substantial costs in connection with any resulting litigation, regardless
of the outcome.
The total cost of Keane's Year 2000 compliance activities was not material to
its business, results of operations and at times, limits the Company's ability to
increase rates at existing accounts.financial condition. While Keane
believes that it has completed its Year 2000 readiness process, Keane cannot
assure you that it has identified and remedied all significant Year 2000
problems, that Keane will not incur significant additional time and expense or
that such problems will not harm Keane's business.
17
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 CompanyFluctuations in Operating Results. Keane has experienced and expects to continue
to experience fluctuations in its quarterly results. Keane's gross margins vary
based on a variety of factors including employee utilization rates and the
number and type of services performed by Keane during a particular period. A
variety of factors influence the level of the
Company's revenuesKeane's revenue in a particular quarter, includingincluding:
o general economic conditions which may influence its clients and potential clients to invest in
their information systemsinvestment decisions or
to downsize their businesses,cause downsizing;
o the number and requirements of client engagements,engagements;
o employee utilization rates,rates;
o changes in the rates the Company is able toKeane can charge clients for its services, acquisitions by
the Companyservices;
o acquisitions; and
o other factors, many of which are beyond the Company'sKeane's control.
Since aA significant portion of theKeane's expenses of the Company dodoes not vary relative to the Company's level of revenues,revenue. As
a result, if revenuesrevenue in a particular quarter dodoes not meet expectations, Keane's
operating results willcould be materially adversely affected, which in turn may have
ana material adverse impact on the market price of the Company's Common Stock.Keane common stock. In
addition, many of the Company'sKeane'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 revenuesrevenue and profits.
Finally, 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.Risks Relating to Acquisitions. In the past five years, the CompanyKeane has grown
significantly through acquisitions. Since January 1, 1999, Keane has completed
the acquisitions of Emergent Corporation in San Mateo, California, Amherst
Consulting Group, Inc, in Boston, Massachusetts, Advanced Solutions Inc. in New
York, New York, Anstec, Inc. of Maclean, Virginia, First Coast Systems, Inc. of
Jacksonville, Florida, Jamison/Gold, LLC, of Marina Del Ray, California and
the Company'sParallax Solutions Limited, of Birmingham, England. Keane's future growth may be
based in part on selected acquisitions. The Company's abilityAt any given time, Keane may be in
various stages of considering such opportunities. Keane can provide no
assurances that it will be able to expand successfully by acquisitions
depends on many factors, including thefind and identify desirable acquisition
targets or that it will be successful identification andin entering into a definitive agreement
with any one target. Also, even if a definitive agreement is reached, there is
no assurance that any future acquisition of businesses and management's abilitywill be completed.
Keane typically anticipates that each acquisition will bring certain benefits,
such as an increase in revenue. Prior to integrate and operate the new
businesses effectively. The anticipatedcompleting an acquisition, however, it
is difficult to determine if such benefits from anycan actually be realized.
Accordingly, there is a risk that an acquired company may not achieve an
increase in revenue or other benefits for Keane. In addition, an acquisition may
not
be achieved unless the operationsresult in unexpected costs and expenses. Any 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,these events could have ana
material adverse impacteffect on Keane's revenuesbusiness, financial condition and operating results. In addition, theresults of
operations.
The process of integrating acquired companies into Keane's existing business may
also result in unforeseen difficulties. Unforeseen operating difficulties may
absorb significant management attention which Keane might otherwise devote to
its existing business. Also, the various
businessesprocess may require significant financial
resources that Keane might otherwise allocate to other activities, including the
ongoing development or expansion of Keane's existing operations. Finally, future
acquisition could cause the interruption of, result in Keane having to incur additional debt and/or
a loss of momentum in, the
activities of some or allcontingent liabilities. All of these businesses, which couldpossibilities might have ana material adverse
effect on Keane's business, financial condition and result of operations.
Dependence on Personnel. Keane believes that its future success will depend in
large part on its ability to continue to attract and retain highly skilled
technical and management personnel. The competition for such personnel is
intense. Keane may not succeed in attracting and retaining the Company'spersonnel
necessary to develop its business. If Keane does not, its business, financial
condition and result of operations and financial results.could be materially adversely affected.
Highly Competitive Market. The market for Keane's services is highly
competitive. The technology for custom software services market is highly competitive and characterized by
continualcan change and improvement in technology.rapidly. The
market is fragmented, and no company holds a dominant position. Consequently,
Keane's
18
competition for client assignments and experienced personnel varies
significantly from city to city and by the type of service provided. Some of
Keane's competitors are larger and have greater technical, financial and
marketing resources and greater name recognition in the markets they serve than
does the Company.Keane. In addition, clients may elect to increase their internal
information systems resources to satisfy their custom software development
needs.
The CompanyKeane believes that the
bases for competitionin order to compete successfully in the software services
PAGE 17
industry include the ability toit must be able to:
o compete cost-effectively,cost-effectively;
o develop strong client relationships,relationships;
o generate recurring revenues,revenues;
o utilize comprehensive delivery methodologiesmethodologies; and
o achieve organizational learning by implementing standard operational
processes.
In the healthcare software systems market, Keane competes with some companies
that are larger in the healthcare market and have greater financial resources
than Keane. The CompanyKeane 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 willKeane may not be able to compete successfully against current or future
competitors. In addition, competitive pressures faced by Keane may materially
adversely affect its business, financial condition and results of operations.
Risks Associated with Provision of Year 2000 Services. The Company's business
may suffer as a result of defects to Year 2000 compliance issues that have not
yet been detected. We have not had any independent verification of our year 2000
compliance efforts. We have not procured any Year 2000 specific insurance or
made any contingency plans to address any undetected year 2000 risks.
Among the services that Keane provided in 1999 was the assessment, planning,
migration/remediation, and testing for Year 2000 compliance. Keane has devoted
significant resources to, and earned significant revenue from, providing
services to address the Year 2000 problem. The market for these services
declined significantly during 1999 and is expected to further diminish and
disappear after the first quarter of 2000. Further, Keane's services addressing
the Year 2000 problem involve key aspects of its client's computer systems. A
failure in a client's system could result in a claim for substantial damages
against Keane, regardless of Keane's responsibility for the failure. Keane could
incur substantial costs in connection with any new
competitors.resulting litigation, regardless
of the outcome.
International Operations. In August 1998, Keane commenced operations in the
United Kingdom with its acquisition of Icom Systems Ltd, now known as Keane
Limited. Keane's international operations will be subject to political and
economic uncertainties, currency exchange rate fluctuations, foreign exchange
restrictions, changes in taxation and other difficulties in managing operations
overseas. Keane may not be successful in its international operations.
As a result of these and other factors, the Company's past financial performance
should not be relied on as an indication of future performance. Keane believes
that period-to-periodperiod 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.
PAGE 18ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in trading market risk sensitive instruments or
purchasing hedging instruments or "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, and commodity price or equity price risk. The Company has not
purchased options or entered into swaps or forward or futures contracts. The
Company's primary market risk exposure is that of interest rate risk on its
investments, which would affect the carrying value of those investments.
19
ITEM 8. FINANCIAL HIGHLIGHTS:STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
ReportPage(s)
Reports of Independent Accountants......................................... 20Auditors............................................21-22
Consolidated Balance Sheets as of December 31, 19941998 and 1995.............. 211999..................23
Consolidated Statements of Income
forFor the Years Ended December 31, 1993, 19941997, 1998 and 1995...................... 221999..........................24
Consolidated Statements of Stockholders' Equity for the
For the Years Ended December 31, 1993, 19941997, 1998 and 1995.............................. 231999..........................25
Consolidated Statements of Cash Flows for the Years
EndedFor the Years ended December 31, 1993, 19941997, 1998 and 1995.................................... 241999..........................26
Notes to Consolidated Financial Statements................................25-36
PAGE 19Statements.................................27-38
20
REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:
We have audited the accompanying consolidated financial statements and the financial
statement schedulebalance sheet of Keane, Inc. as of
December 31, 1999 and subsidiaries listed in Items 14a(1)the related consolidated statements of income,
stockholders' equity, and (2) of this Form 10-K.cash flows for the year then ended. These financial
statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the financial
statement schedule based on
our audits.audit.
We conducted our auditsaudit in accordance with auditing standards generally accepted
auditing
standards.in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provideaudit provides 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 ofat
December 31, 1994 and 1995,1999, and the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst and Young LLP
Boston, Massachusetts
March 13, 2000
21
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Keane, Inc.
and its subsidiaries at December 31, 1998, and the results of their operations
and their cash flows for each of the threetwo years in the period ended December 31,
19951998, in conformity with accounting principles generally accepted accounting principles. In addition, in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement schedule referred to above, when consideredstatements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in relation to the basic financial statements, taken asassessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
whole, presents fairly,
in all material respects,reasonable basis for the information required to be included therein.opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
Coopers & Lybrand L.L.P.
March 21, 1996
PAGE 20February 26, 1999
22
KEANE INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1994 19951998 1999
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Assets
Current:
Cash and cash equivalents $ 26,287,72651,696 $ 21,913,322
Investments (Note B) -- 11,331,22853,018
Short term investments 6,165 8,582
Accounts receivable, net (Note C):net:
Trade 69,045,912 81,022,024230,856 213,767
Other 993,898 1,090,6881,573 2,248
Prepaid expenses and other current assets (Note L) 3,975,377 4,847,649
-------------- --------------23,376 19,845
--------- ---------
Total current assets 100,302,913 120,204,911313,666 297,460
Long term investments 71,368 81,163
Property and equipment,net (Note D) 11,600,214 12,425,542
Intangible29,973 27,330
Goodwill, net 15,446 81,110
Other intangible assets, net (Note E) 65,599,870 58,767,00020,268 12,775
Other assets, net (Note L) 1,499,216 3,000,659
-------------- --------------8,238 14,987
--------- ---------
$ 179,002,213458,959 $ 194,398,112
============== ==============514,825
========= =========
Liabilities
Current:
Accounts payable $ 3,490,416 $ 4,696,30020,222 18,500
Accrued expenses and other liabilities (Note F) 9,250,153 5,360,01330,647 35,466
Accrued compensation 6,852,305 7,925,78625,429 18,288
Notes payable (Note H) 4,400,011 3,177,922
Capital1,000 7,564
Accrued income taxes 13,548 --
Unearned income 1,399 8,369
Current capital lease obligations (Note G) 434,523 433,963
-------------- --------------954 1,080
--------- ---------
Total current liabilities 24,427,408 21,593,984
Notes payable (Note H) 6,941,000 5,427,00093,199 89,267
Long-term portion of capital lease obligations (Note G) 541,686 107,448
Deferred income taxes (Note L) 2,705,000 49,0001,976 2,610
Notes payable 149
Commitments and contingencies (Note K)J)
Stockholders' Equity (Notes I and J)
Preferred stock, par value $.01, authorized
2,000,000 shares, none issued -- --none
Common stock, par value $.10, authorized
50,000,000200,000,000 shares, issued and outstanding
15,991,41271,363,272 in 19941998 and 16,210,38972,085,356 in 1995 1,599,141 1,621,0391999 7,136 7,208
Class B common stock, par value $.10, authorized
503,797 shares, issued and outstanding
288,965285,303 in 19941998 and 288,258285,112 in 1995 28,896 28,8251999 29 29
Additional paid-in capital 90,019,442 93,542,841
Cumulative translation adjustment (74,114) (42,542)109,606 120,810
Accumulated other comprehensive income (764) (2,027)
Retained earnings 55,226,080 74,482,933250,546 323,620
Less treasury stock at cost, 303,414313,064 shares of Common
Stock in 19941998 and 304,3141,319,396 shares of Common Stock in 1995 (2,412,326) (2,412,416)
-------------- --------------1999 (2,769) (26,841)
--------- ---------
Total stockholders' equity 144,387,119 167,220,680
-------------- --------------363,784 422,799
--------- ---------
$ 179,002,213458,959 $ 194,398,112
============== ==============
- ------------------------------------------------------------------------------------------------514,825
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 2123
KEANE, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1993 1994 19951997 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total revenues $ 175,808,454 $ 344,582,663 $ 382,739,492706,801 $1,076,198 $1,041,092
Salaries, wages and other direct costs 112,953,112 225,550,990 256,474,275469,433 696,752 702,795
Selling, general and administrative expenses 39,661,278 76,361,573 82,470,444138,168 193,438 199,009
Amortization of goodwill and other intangible assets 6,764,199 11,490,247 12,184,014
-------------- -------------- --------------14,037 7,701 9,169
Restructuring charge -- -- 13,653
Merger costs -- 8,120 --
---------- ---------- ----------
Operating income 16,429,865 31,179,853 31,610,759
Investment85,163 170,187 116,466
Interest and dividend income 153,741 451,110 1,635,9534,212 5,189 7,827
Interest expense 828,589 2,757,628 486,027244 163 --
Other expenses, net 176,766 392,843 175,832
-------------- -------------- --------------1,048 1,057 1,480
---------- ---------- ----------
Income before income taxes 15,578,251 28,480,492 32,584,85388,083 174,156 122,813
Provision for income taxes (Note L) 6,520,000 12,245,000 13,328,000
-------------- -------------- --------------36,712 77,807 49,739
---------- ---------- ----------
Net income $ 9,058,25151,371 $ 16,235,49296,349 $ 19,256,853
============== ============== ==============73,074
========== ========== ==========
Net income per share $0.76 $1.15 $1.18
============== ============== ==============(basic) $ 0.73 $ 1.36 $ 1.02
========== ========== ==========
Net income per share (diluted) $ 0.72 1.33 $ 1.01
========== ========== ==========
Weighted average common shares outstanding (basic) 70,096 71,053 71,571
========== ========== ==========
Weighted average common shares and common share
equivalents outstanding 11,897,817 14,161,500 16,347,753
============== ============== ==============(diluted) 71,603 72,284 72,395
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 2224
KEANE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended
December 31, 1993, 19941997, 1998 and 19951999
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Class B
Common Stock Common Stock
Additional
---------------------- ---------------------- Paid-in------------ ------------
Shares Amount Shares Amount
Capital
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1993 10,929,541 $1,092,954 294,548 $29,455 $ 14,765,6771997 69,810,652 $6,981 287,613 $29
Common Stock issued under:
1982under 549,704 55
stock option and employee
purchase plans
Conversions of Class B Common 998 (998)
Stock Option Plan 141,938 14,193 578,763
1982 Nonstatutoryinto Common Stock
Option Plan 26,625 2,662 62,288
1992 EmployeeIncome tax benefit from stock
option plans
Dividends paid to shareholders
Foreign translation adjustment
Net income
Comprehensive income
----------------------------------------
Balance December 31, 1997 70,361,354 7,036 286,615 29
Pooling of interests with Omega
(Note L)
Common Stock Purchase Plan 47,617 4,763 501,356issued under 769,795 77
stock option and employee
purchase plans
Issuance of common stock for 230,811 23
business acquisitions
Merger expenses paid by
Shareholders
Conversions of Class B Common
Stock into Common Stock 3,945 395 (3,945) (395)
Proceeds from issuance of
Common Stock 2,250,000 225,000 28,947,0261,312 (1,312)
Income tax benefit from stock
option plans
312,000Dividends paid to shareholders
Foreign translation adjustment
Net income
------------------------------------------------------------------------Comprehensive income
----------------------------------------
Balance December 31, 1993 13,399,666 1,339,967 290,603 29,060 45,167,1101998 71,363,272 7,136 285,303 29
========================================
Common Stock issued under:
1982 Stock Option Plan 217,913 21,791 1,154,335
1992 Employee Stock Purchase
Plan 72,195 7,219 1,305,832under 721,893 72
stock option and employee
purchase plans
Conversions of Class B Common 191 (191)
Stock into Common Stock 1,638 164 (1,638) (164)
Proceeds from issuance of
Common Stock 2,300,000 230,000 42,049,165
Income tax benefit from stock
option plans
343,000
Foreign currency translation
adjustmentRepurchase of Common Stock
Unrealized loss on securities
Net income
------------------------------------------------------------------------Comprehensive income
----------------------------------------
Balance December 31, 1994 15,991,412 1,599,141 288,965 28,896 90,019,442
Common Stock issued under:
1982 Stock Option Plan 85,750 8,575 687,115
1992 Stock Option Plan 44,225 4,423 495,360
1992 Employee Stock Purchase
Plan 79,045 7,904 1,664,911
1983 Restricted Stock Purchase
Plan 9,250 925 191,013
Conversions of Class B Common
Stock into Common Stock 707 71 (707) (71)
Income tax benefit from stock
option plans 485,000
Foreign currency translation
adjustment1999 72,085,356 $7,208 285,112 $29
========================================
========================================
Accum.
Other Treasury Stock purchase
Net income
------------------------------------------------------------------------
Balance December 31, 1995 16,210,389 $1,621,039 288,258 $28,825 $ 93,542,841
Cumulative Treasury StockTotal
Additional Compre- at Cost TranslationStock-
Paid-in hensive Retained --------------------------
Adjustment------- holders'
Capital Income Earnings Shares Amount TotalEquity
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1993 $29,932,337 (303,414) $(2,412,326) $ 43,408,0971997 $92,646 ($45) $104,570 (305,615) ($2,413) $201,768
Common Stock issued under:
1982 Stock Option Plan 592,956
1982 Nonstatutory Stock
Option Plan 64,950
1992 Employee Stock
Purchase Plan 506,119under 4,006 4,061
stock option and employee
purchase plans
Conversions of Class B Common --
Stock into Common Stock --
Proceeds from issuance of
Common Stock 29,172,026
Income tax benefit from stock 1,028 1,028
option plans
312,000Dividends paid to shareholders (864) (864)
Foreign translation adjustment (327) (327)
Net income 9,058,251 9,058,251
------------------------------------------------------------------------51,371 51,371
------
Comprehensive income 51,044
---------------------------------------------------------------------
Balance December 31, 1993 38,990,588 (303,414) (2,412,326) 83,114,3991997 97,680 (372) 155,077 (305,615) (2,413) 257,037
Pooling of interests with Omega 589 589
(Note N)
Common Stock issued under:
1982 Stock Option Plan 1,176,126
1992 Employee Stock Purchase
Plan 1,313,051under 6,191 (7,449) (356) 5,912
stock option and employee
purchase plans
Issuance of common stock for (23) --
business acquisitions
Merger expenses paid by 1,571 1,571
Shareholders
Conversions of Class B Common --
Stock into Common Stock --
Proceeds from issuance of
Common Stock 42,279,165
Income tax benefit from stock 4,187 4,187
option plans
343,000Dividends paid to shareholders (1,469) (1,469)
Foreign currency translation adjustment $ (74,114) (74,114)(392) (392)
Net income 16,235,492 16,235,492
------------------------------------------------------------------------96,349 96,349
------
Comprehensive income 95,957
---------------------------------------------------------------------
Balance December 31, 1994 (74,114) 55,226,080 (303,414) (2,412,326) 144,387,1191998 109,606 (764) 250,546 (313,064) (2,769) 363,784
=====================================================================
Common Stock issued under:
1982 Stock Option Plan 695,690
1992 Stock Option Plan 499,783
1992 Employee Stock Purchase
Plan 1,672,815
1983 Restricted Stock Purchase
Plan 191,938under 10,689 (6,332) (162) 10,599
stock option and employee
purchase plans
Conversions of Class B Common --
Stock into Common Stock --
Income tax benefit from stock 515 515
option plans
485,000
Foreign currency translation
adjustment 31,572
TreasuryRepurchase of Common Stock purchase (900) (90) (90)(1,000,000) (23,910) (23,910)
Unrealized loss on securities (1,263) (1,263)
Net income 19,256,853 19,256,853
------------------------------------------------------------------------73,074 73,074
------
Comprehensive income 71,811
---------------------------------------------------------------------
Balance December 31, 1995 $ (42,542) $74,482,933 (304,314) $(2,412,416) $167,220,6801999 $120,810 ($2,027) $323,620 (1,319,396) ($26,841) $422,799
=====================================================================
=====================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 2325
KEANE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1993 1994 19951997 1998 1999
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income $ 9,058,25151,371 $ 16,235,49296,349 $ 19,256,85373,074
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,024,500 16,321,231 17,767,55322,659 21,018 31,519
Deferred income taxes (2,160,000) 1,660,000 (1,023,000)(6,896) (10,553) 4,996
Provision for doubtful accounts 1,164,000 619,491 850,7713,391 5,332 (625)
Loss on sale of property and equipment 5,045 74,565 72,657
Accrued14 25 14
Non-cash interest on long-term debt net 200,007 656,005 134,740197 -- --
Non-cash restructuring charge -- -- 5,572
Tax Benefitbenefit from stock options 312,000 343,000 485,0001,028 4,187 --
Changes in operating assets and liabilities,
net of acquisitions:
(Increase) decrease in accounts receivable (7,486,728) (14,073,680) (11,285,320)
(Increase)(59,993) (75,253) 37,580
Increase in prepaid expenses and other assets (540,102) (870,013) (3,255,602)
(Decrease)(451) (1,995) (6,395)
Increase (decrease) in accounts payable, and accrued
expenses, unearned income and other liabilities (3,503,708) (9,720,942) (4,011,861)29,098 16,627 (24,064)
Increase (decrease) in income taxes payable 1,927,253 (2,779,966) --
------------- ------------- -------------(3,990) 10,493 (13,548)
---------- ---------- ----------
Net cash provided by operating activities 8,000,518 8,465,183 18,991,791
------------- ------------- -------------36,428 66,230 108,123
---------- ---------- ----------
Cash Flows From Investing Activities:
Purchase of investments (4,869,389) -- (13,343,294)(60,080) (97,592) (110,915)
Sale of investments 538,103 4,869,389 2,012,06639,577 70,805 96,542
Purchase of property and equipment (1,751,120) (3,581,214) (5,675,206)(17,502) (16,740) (16,418)
Proceeds from the sale of property and equipment 23,245 156,400 111,056519 385 77
Payments for acquisitions (38,094,000) (47,122,012) (8,909,564)
------------- ------------- --------------- (9,150) (60,996)
---------- ---------- ----------
Net cash used for investing activities (44,153,161) (45,677,437) (25,804,942)(37,486) (52,292) (91,710)
---------- ---------- ----------
Cash Flows From Financing Activities:
Borrowings under long-term debt 58,000,000 122,000,000 --
Payments under long-term debt, (58,000,000) (122,000,000) --net (4,161) (7,292) (563)
Principal payments under capital lease obligations (82,712) (511,994) (430,377)(921) (1,240) (1,217)
Proceeds from issuance of common stock 30,336,051 44,768,342 2,869,123
------------- ------------- -------------4,061 7,483 10,761
Repurchase of common stock -- -- (24,072)
Dividends paid (864) (1,469) --
---------- ---------- ----------
Net cash provided byused for financing activities 30,253,339 44,256,348 2,438,746
------------- ------------- -------------(1,885) (2,518) (15,091)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (5,899,304) 7,044,094 (4,374,405)(2,943) 11,420 1,322
Cash and cash equivalents at beginning of year 25,142,936 19,243,632 26,287,726
------------- ------------- -------------43,219 40,276 51,696
---------- ---------- ----------
Cash and cash equivalents at end of year $ 19,243,63240,276 $ 26,287,72651,696 $ 21,913,321
============= ============= =============53,018
========== ========== ==========
Supplemental information:
Interest paid $ 629,000 $ 2,102,000 $ --
Income taxes paid 6,595,000 14,042,000 14,463,000
- -------------------------------------------------------------------------------------------------------------------------------$ 45,922 $ 68,540 $ 62,140
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 2426
KEANE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997
(All amounts in thousands unless stated otherwise and except for share and per
share amounts)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Keane, Inc. (the Company)"Company") and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated.
As described in Note L, during 1998 the Company completed five acquisitions.
Four of the acquisitions were accounted for as poolings-of-interests and one was
accounted for as a purchase. The accompanying financial statements and notes
have been restated for all periods presented for the three material
pooling-of-interests acquisitions.
Certain prior year amounts have been reclassified to conform withto the current year
presentation.
NATURE OF OPERATIONS: Keane is a leading provider of e-business, Information
Technology (IT), and consulting services. The Company provides software design,divides its business into
three main lines: Business and IT Consulting, e-Solutions (including its
e-architecture, applications development and integration services), and
management services for corporationsApplications Development and Management Outsourcing.
Keane's clients consist primarily of Fortune 1000 organizations across every
major industry, healthcare facilities.organizations, and government agencies. The Company
serves itsservices clients through two operating divisions and a networkbranch office operations in major markets of
40 branch offices and satellite offices located across the United
States, Canada, and in
Canada. The Information Services Division ("ISD"), which accounted for
approximately 93%the United Kingdom. These offices are supported by
centralized practices representing Keane's core services and key competencies.
This delivery structure allows the Company to provide clients with world-class
capabilities of the Company's revenues in 1995, provides software design,
developmententire Company on a responsive 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.cost-effective local
level.
REVENUE RECOGNITION: The Company provides system design, implementation and
support services under fixed price and time and materials contracts. RevenuesFor 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 determinedagreed upon rates based on hours incurred or, inas the case ofcosts are
incurred. Revenues for software application sales are recognized on the basis of
customer acceptance over the period of software implementation.
Software application sales, including related implementation
fees, amounted to approximately $1,489,000, $3,203,000 and $2,444,000 in 1993,
1994 and 1995, respectively.
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 $47,000,000,
$37,000,000 and $33,000,000 in 1993, 1994 and 1995, respectively. Aggregate
revenues for IBM totaled approximately $21,000,000, $57,000,000 and $51,000,000
in 1993, 1994 and 1995, respectively.
FOREIGN CURRENCY TRANSLATION: For the Company's subsidiaries in Canada and
England, the Canadian dollar and British pound, respectively, are the functional
currencies. All assets and liabilities of the Company's Canadian subsidiaryand English
subsidiaries are translated at exchange rates in effect at the end of the
period. Income and expenses are translated at rates that approximate those in
effect on transaction dates. The translation differences are charged or credited
directly to the translation adjustment account included as part of stockholders'
equity. ForeignRealized foreign exchange gains and losses are included in other income
(expense).
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid
investments with a maturity of three months or less at the time of purchase.
Cash equivalents are currently designated as available-for-sale. Cash
equivalents at December 31, 1995 include1999 included investments in commercial paper ($15.024.9
million), municipal bonds ($.9 million) and money market funds ($3.54.8 million).
Cash equivalents at December 31, 1998 included investments in commercial paper
($41.2 million), municipal bonds ($1.0 million) and money market funds ($1.1
million).
FINANCIAL INSTRUMENTS: The carrying amounts ofreflected in the consolidated balance sheets
for cash and cash equivalents, accounts receivable and investmentsaccounts payable
approximate their fair values.value due to their short maturities. Based on the
borrowing rates currently available to the Company for bank loans with similar
terms and maturities, the fair value of the Company'scompany's debt obligations
approximates their carrying value. Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
investments and trade receivables. The Company's cash, cash equivalents and
investments are held with financial institutions with high credit standings. The
27
Company's customer base consists of geographically disperse customers in several
different industries, therefore concentration of credit risk with respect to
trade receivables is not considered significant.
INVESTMENTS: Investments with maturities between three and twelve months at time
of purchase are considered short-term investments. Investments are stated at
fair value as reported by the investment custodian. The amortized cost of debt securities is adjusted for the
amortization of premiums and the accretion of discounts to maturity. 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, in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and as such, unrealized gains
and losses are reported in a separate component of stockholders' equity. As of
December 31, 1999, the Company's investments experienced decline in market value
of $2.2 million, which has been reflected in the statement of stockholder's
equity. At December 31, 1995,1998, the market value of thesethe investments approximated
cost. PAGE 25
Realized gains and losses, as well as interest, dividends and capital
gain/loss distributions on all securities, are included in earnings.
PROPERTY AND EQUIPMENT: Property and equipment areis stated at cost. Repair and
maintenance costs are charged to expense. Depreciation is computed on a
straight-line basis over estimated useful lives of 25 to 40 years for buildings
and improvements, and 32 to 5 years for office equipment, computer equipment and
software. Leasehold improvements are amortized over the shorter of the estimated
useful life of the improvement or the term of the lease. Upon disposition, the
cost and related accumulated depreciation are removed from the accounts, and any
gain or loss is included in income.
GOODWILL AND INTANGIBLE ASSETS: Intangible assets consist principally of
goodwill the excess
of the purchase price over the appraised fair value of assets acquired in
acquisitions, and acquired customer-based intangibles, noncompetition agreements, and
software initially recorded at 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 balance sheetreporting date, management assesses whether there has been
a permanent impairment in the value of goodwillits 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 $500,000Accumulated amortization at
December 31, 1998 and $1,300,000 of computer
software development costs during 19941999 was $40.6 million and 1995,$44.7 million, respectively. These costs will
be amortized over the expected life of the product beginning in 1996 when the
product is released.
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.
NET INCOME PER SHARE: Net income per share is based upon the weighted number of
shares of Common Stock, Class B Common Stock, and common share equivalents
outstanding during the year. The number of shares used in the per share
calculation, as adjusted for the 3 for 2 stock splits described in Note I, was
11,897,817 in 1993, 14,161,500 in 1994 and 16,347,753 in 1995.
RECENT PRONOUNCEMENTS: In April 1995,COMPREHENSIVE INCOME: Statement of Financial Accounting Standards No. 121, "Accounting130,"
Reporting Comprehensive Income", establishes rules for the Impairmentreporting and display
of Long-Lived Assetscomprehensive income and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121")its components. Components of comprehensive income
include net income and certain transactions that have generally been reported in
the consolidated statement of stockholders' equity. Other comprehensive income
is comprised of net income, currency translation adjustments and
available-for-sale securities valuation adjustments. At December 31, 1998, the
only component of accumulated other comprehensive income was issued. The Company
intends to adopt SFAS 121 in 1996foreign currency
translation adjustment of $.8 million. At December 31, 1999, accumulated other
comprehensive income was comprised of foreign currency translation adjustment of
$.8 million and does not expect it to have a material
impact on the Company's financial condition, resultssecurities valuation adjustment of operations or$1.3 million, net cash
flows.of tax.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INDUSTRY SEGMENT INFORMATION: The Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information". The Company offers an integrated mix of end-to-end
business solutions, such as Business and IT consulting (Plan), e-Solutions
including e-architecture, online branding, development and integration (Build),
and Application Development and Management Outsourcing (Manage). Approximately
96% of the Company's revenue was derived from these offerings, with the balance
from the healthcare industry. Effectively, the Company operates in one
reportable segment.
28
B. INVESTMENTS
The Company determinesAt December 31, 1999, the appropriate classification of debt and equity
securities at the time of purchase and re-evaluates such designations as of each
balance sheet date. The Company's investments includeincluded obligations of the U.S.
Government ($6,295,185)32.9 million), municipal bonds ($7.3 million), corporate pass
through ($16.9 million), corporate bonds ($29.2 million) and commercial paper
($5,036,043)3.5 million). Contractual
maturities atAt December 31, 1995 were $2,605,798 due within one year1998, the Company's investments included
obligations of the U.S. government ($33.6 million), municipal bonds ($10.9),
corporate pass through ($12.8 million) and $8,725,430 due after one through three years. Actual maturities may differ from
contractual maturities because the issuers of these securities may have the
right to prepay obligations without penalty.corporate bonds ($20.2 million).
There was no gain or loss, based on a specific identification basis, realized on
the sale of available for sale securities during the yearyears ended December 31,
1995.
PAGE 26
1997, 1998 and 1999.
C. ACCOUNTS RECEIVABLE
Accounts receivable areis presented net of an allowance for doubtful accounts of
approximately $2,483,000$8.1 million and $1,916,000$7.9 million at December 31, 19941998 and 1995,1999, respectively. The
provisions charged to the statement of operations were $3.3 million, $5.3
million and $7.8 million in 1997, 1998, and 1999, respectively, and write-offs
against the allowances were $2.1 million, $2.1 million and $8.0 million in 1997,
1998, and 1999, respectively.
D. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
1994 1995
----------- -----------1998 1999
--------- ---------
Buildings and improvements $ 707,063772 $ 893,065772
Office equipment 17,384,308 21,268,33050,191 64,448
Computer equipment and software 2,721,917 4,121,6488,946 13,678
Leasehold improvements 1,848,723 2,352,386
----------- -----------
22,662,011 28,635,4297,387 8,691
--------- ---------
67,296 87,589
Less accumulated depreciation and amortization 11,061,797 16,209,887
----------- -----------
$11,600,214 $12,425,542
=========== ===========37,323 60,259
--------- ---------
$ 29,973 $ 27,330
========= =========
Depreciation expense totaled $2,228,152, $4,801,424$8,622, $13,317 and $5,583,539$22,350 in 1993, 19941997, 1998 and 1995,1999,
respectively. Computer equipment and software includes assets arising from
capital lease obligations at a cost of $1,636,448$1,510 and $1,773,276$5,672, with accumulated
amortization totaling $693,525$1,030 and $1,116,436$2,496, at December 31, 19941998 and 1995,1999,
respectively.
PAGE 27
E. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
1994 1995
-----------------------------
Goodwill $ 19,302,21 $20,213,814
Noncompetition agreements 21,985,000 22,135,000
Customer-based intangibles 37,463,963 37,855,336
Software 5,169,450 8,088,789
Other 294,000 --
----------- -----------
84,214,631 88,292,939
Less accumulated amortization 18,614,761 29,525,939
----------- -----------
$65,599,870 $58,767,000
=========== ===========
F. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
December 31,
1994 1995
----------- -----------1998 1999
--------- ---------
Deferred savings and profit sharing plan $ 1,681,2455,250 $ 1,664,738
Health insurance costs 1,895,062 301,510620
Accrued employee benefits 3,412 1,776
Employee stock withholdings 4,265 3,803
Accrued payroll taxes 817,335 443,8936,164 876
Accrued rent obligations 1,350,015 622,9512,130 2,905
Y2K warranties -- 4,637
Accrued restructuring -- 7,081
Other 3,506,496 2,326,921
----------- -----------9,426 13,768
--------- ---------
$ 9,250,15330,647 $ 5,360,013
=========== ===========35,466
========= =========
G.29
F. CAPITAL LEASE OBLIGATIONS
The Company finances certain equipment through capital leases. At December 31,
1995,1999, future minimum lease payments under noncancelablenon-cancelable capital leases,
together with the present value of minimum lease payments, are summarized below:
Years ended December 31:
Year ending December 31, 1996 $464,633
Year ending December 31, 1997 109,494
--------2000 $ 1,430
2001 1,257
2002 1,132
2003 556
-------
Total minimum payments 574,1274,375
Less amount representing future interest 32,716
--------685
Present value of net minimum payments 541,4113,690
Less current portion 433,963
--------1,080
Long-term portion of capital lease payments $107,448
========$ 2,610
=======
Equipment acquired under capital lease obligations in 1995 totaled approximately
$162,000.
PAGE 28
H.G. NOTES PAYABLE
In conjunction with the Company's acquisition of General Electric Consulting
(see Note N),GSE Erudite Software, Inc. on
April 20, 1998, the Company issued a $4$1.0 million non-interest bearing note
with interest of 5% was payable to General
Electric on December 29, 1995. Thedue one-year from the purchase date. This note wasis subject to reduction
to the extent thatrequired by the Company's average annual revenue from business with General Electricpurchase agreement 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.during 1999.
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 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
$6,941,000 at December 31, 1994 and $7,427,000 (of which $5,427,000 was
classified as long term) at December 31, 1995.
In conjunctionconnection with the Company's acquisition of Source Data Systems, Inc. on
November 1, 1995, an $800,000Parallax Solutions Ltd., the
Company issued a $6.6 million note bearingpayable to the former owners. This note is
payable in May of 2001 and bears interest at 5%, is payable one year
from the purchase date.
I.7.05 %.
At December 31, 1997, Icom Systems Ltd, a company acquired by Keane in 1998 and
was accounted for as a pooling-of-interests, had $3.9 million of outstanding
debt and was paid during 1998.
H. CAPITAL STOCK
In August 1993, the Company distributed a stock split effected in the form of a
stock dividend of one share of Common Stock for every two shares of Common Stock
and one share of Common Stock for every two shares of Class B Common Stock then
outstanding. All share and per share data has been adjusted to reflect this
stock split. In October 1993, the Company had a secondary public offering
resulting in the issuance of 2,250,000 shares of Common Stock at $13.83 per
share, the proceeds of which totaled $29,172,026, net of related commissions and
other expenses.
In May 1994,1998, the stockholders approved an amendment to the Company's Articles of
Organization increasing the number of shares of Common Stock authorized for
issuance to 50,000,000200,000,000 shares. In September 1994, the Company distributed a
stock split effected in the form of a stock dividend of one share of Common
Stock for every two shares of Common Stock and one share of Common Stock for
every two shares of Class B Common Stock then outstanding. All share and per
share data has been adjusted to reflect this stock split. In November 1994, the
Company completed a secondary public offering resulting in the issuance of
2,300,000 shares of Common Stock at $19.50 per share, the proceeds of which
totaled $42,279,165, net of related commissions and other expenses. The Company has three classes of share capital:stock:
Preferred Stock, Common Stock and Class B Common Stock. Holders of Common Stock
are entitled to one vote for each share held. Holders of Class B Common Stock
generally vote as a single 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 3,945, 1,638998,
1,312 and 707191 shares in 1993, 19941997, 1998 and 1995,1999, respectively. Shares of common
stock reserved for conversions totaled 288,258285,112 at December 31, 1995.
PAGE 291999.
30
J. STOCK OPTION, STOCK PURCHASE, COMPENSATION AND RETIREMENTI. BENEFIT PLANS
STOCK OPTION PLANS: The 1982 IncentiveCompany has three stock-based compensation plans, which
are described below. The Company adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation," and has continued to apply APB
Opinion 25 and related Interpretations in accounting for its plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 31, 1997, 1998 and 1999 would have been reduced to the
pro forma amounts indicated below:
Years Ended December 31,
1997 1998 1999
---------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net income - as reported $ 51,371 $ 96,349 $ 73,074
Net income - pro forma 49,386 91,020 61,811
Net income per share - as reported (diluted) .72 1.33 1.01
Net income per share - pro forma (diluted) .69 1.26 .85
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of effects on reported net income for future years
The fair market value of each stock option is estimated, assuming no expected
dividends with the following weighted-average assumptions:
Years Ended December 31,
1997 1998 1999
----------------------------------
Expected life (years) 4.0 4.0 4.0
Expected stock price volatility 41% 47% 96%
Risk-free interest rate 6.24% 4.83% 5.27%
The 1992 Stock Option Plan provides for grants of stock options offor up to
900,0003,600,000 shares of the Company's Common Stock to be made
toemployees, officers and
key employees.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. Transactions under the
plan for the three years ended December 31, 1995 are as follows:
Common Option
Stock Price Range
------------------------------
Outstanding at December 31, 1992 555,248
Exercised (141,937) $1.26 -- $8.11
Canceled/Expired (27,397)
---------
Outstanding at December 31, 1993 385,914 2.96 -- 8.11
Exercised (217,914) 2.96 -- 8.11
---------
Outstanding at December 31, 1994 168,000 8.11
Exercised (85,750) 8.11
---------
Outstanding at December 31, 1995 82,250 $8.11
=========
Exercisable stock options at December 31, 1994 and 1995 totaled 69,750 and
82,250, respectively. Shares of common stock reserved for future options totaled
244,469 at December 31, 1995.
The 1992 Stock Option Plan provides for grants of stock options of up to 900,000
shares of the Company's Common Stock to employees, officers and directors of,
and consultants and advisors to, the Company. The Company may grant options that are intended to qualify as
incentive stock options under Section 442422 of the Internal Revenue Code
("incentive stock options") or nonstatutory options not intended to qualify as
incentive stock options.
AtThe 1998 Stock Incentive Plan, amended in December 1999, provides for grants of
stock options for up to 7,000,000 shares of the Company's Common Stock to
employees, officers and directors of, and consultants and advisors to, the
Company. Generally, options expire five years from the date of grant, require a
purchase price of not less than 100% of the fair market value of the stock as of
the date of grant, and are exercisable at such time or times as the Board of
Directors in each case determines. The Company may grant options that are
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code ("incentive stock options") or nonstatutory options, restricted
stock awards and other stock-based awards, including the grant of shares based
upon certain conditions not intended to qualify as incentive stock options.
The weighted-average fair value of options granted under both Plans during the
years ended December 31, 1995, there were
37,775 shares currently exercisable1997, 1998 and 420,250 shares remained available for
future grant.
Transactions1999 was $8.40, $14.73 and $14.39,
respectively.
31
Information with respect to activity under the plan since the inception are as follows:Company's stock option plans is
set forth below:
Weighted
Common OptionAverage
Stock Exercise Price Range
---------------------------------
Outstanding at December 31, 1992 --1996 2,118,665 $ 4.84
Granted 332,625 $11.11 -- $15.33575,432 19.91
Exercised (413,004) 3.73
Canceled/Expired (18,000)(93,998) 6.83
---------
Outstanding at December 31, 1993 314,6251997 2,187,095 8.93
Granted 106,000 18.42 -- 24.67953,789 34.15
Exercised (782,577) 4.21
Canceled/Expired (47,625)(120,247) 18.80
---------
Outstanding at December 31, 1994 373,000 11.11 -- 24.671998 2,238,060 20.80
Granted 186,500 20.75 -- 29.001,582,300 20.60
Exercised (44,225)(409,112) 6.69
Canceled/Expired (79,750)(517,389) 25.91
---------
Outstanding at December 31, 1995 435,525 $11.111999 2,893,859 $ 21.76
Shares available for future issuance under the Company's stock option plans at
December 31, 1999 is 5,718,978.
The following table summarizes information about stock options that were
outstanding at December 31, 1999:
Weighted Average Weighted Average Weighted Average
Remaining Exercise Price Exercise Price
Range of Number Contractual Of Options Number Of Exercisable
Exercise Prices Outstanding Life Outstanding Exercisable Options
--------------- ----------- ----- ----------- ----------- -------
$0.04 -- $29.00
=========$5.19 147,876 0.5 years $4.61 147,876 $4.61
5.42 -- 7.25 245,988 1.1 years 6.02 100,672 6.04
7.35 -- 15.06 262,780 2.0 years 14.35 68,800 13.93
15.32 -- 28.19 1,439,400 4.3 years 20.07 37,523 28.13
28.56 -- 38.38 669,000 3.5 years 33.82 180,978 34.03
39.50 -- 53.00 128,815 3.6 years 42.81 23,000 44.14
--------
$0.04 -- $53.00 2,893,859 3.4 years $21.76 558,849 $18.75
STOCK PURCHASE PLANS: The Company's 1983 Restricted Stock Purchase Plan provides
for grants of 506,2502,025,000 shares of Common Stock to be made to key employees at
the discretion of the compensation committee of the Board of Page 30
Directors. No
grants were issued during 1993 and 1994 with 9,250 shares issued
during 1995.1996 through 1999. At December 31, 1995, 344,4401999, 1,377,760
shares remained available for future grants. Restrictions on the sale or
transfer of shares lapse three years after the date of grant. As grants are
issued, deferred compensation equivalent to the market value at the date of
grant, less the $.10 per share of the purchase price, is amortized to
compensation expense over the three-year vesting period. The amount of
amortization for 19951997 was $53,000.$47. There was no amortization in 1998 and 1999.
The Company's 1992 Employee Stock Purchase Plan provides for the purchase of
337,5002,550,000 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 1993, 19941997, 1998 and
1995,1999, participants in this plan purchased 47,618, 72,195136,700, 72,832 and 79,045310,051 shares,
respectively. Shares available for future purchases totaled 125,335923,981 at December
31, 1995.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) was issued. The Company
intends to adopt the disclosure provisions of SFAS 123 in 1996 using the
intrinsic value based method of accounting, and has yet to determine the impact
of the required pro forma disclosures.1999.
32
INCENTIVE COMPENSATION PLANS: During 1983, the Company established a deferred compensation
plan to provide retirement income for key employees. No amounts have been
allocated to this plan since 1984. 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 1993, 19941997, 1998 and 19951999 approximated $1,824,000, $4,887,000$6,661,
$9,505 and $5,075,000,$8,336, respectively.
DEFERRED SAVINGS AND PROFIT SHARING PLAN: During 1984, the Company established a
deferred Savingssavings 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
1993, 19941997, 1998 and 19951999 amounted to approximately $1,004,000, $1,682,000$3,156, $4,818 and $1,664,000,$5,065,
respectively.
K.J. COMMITMENTS AND CONTINGENCIES
The Company's corporate offices are located in Boston, Massachusetts. The
building is leased from a partnership in which certain officers,an officer, some directors, and
shareholders of the Company are limited partners. The lease is for a term of
twenty years at annual rentals of $682,000 through February 1996 andconsidered to be at prevailing market rates in subsequent yearsand
lasting through 2006. The Company is also required to pay specified percentages
of annual increases in real estate taxes and operating expenses.
The Company leases additional office space and apartments under operating
leases, 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 $3,763,000$13.0 million in 1993, $8,100,0001997, $16.1 million in 19941998 and $8,880,000$21.8 million
in 1995.1999. The Company is committed to minimum annual rental payments under all
leases of approximately $9,389,000$18.9 million in 1996, $6,640,0002000, $18.1 million in 1997, $4,899,0002001, $15.5
million in 1998,
$3,147,0002002, $11.1 million in 1999, $1,726,000 in 20002003 and an aggregate of $3,989,000$14.2 million from
20012004 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.
PAGE 31
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 alleges 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 has alleged damages in excess of
$50,000,000 and has claimed punitive damages in an amount more than double the
compensatory claim.
The Company has 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 are barred by the terms of the underlying contract. The Company
was granted summary judgment on certain of MAMI'S claims. The remaining claims
as they apply to the Company concern only allegations pertaining to the failure
to refund $25,000 under contract and misrepresentation pertaining to stated
delivery dates. Trial on this matter commenced before a judge sitting without a
jury in late February 1996. The Company expects the court to render its decision
within 60 to 90 days of the end of the trial.
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.
However, an unfavorable outcome in any of these
matters, which are expected to be resolved within one year, could result in a
material loss.
During 1995, the Company and IBM agreed in principle to a transfer of certain
customer relationships and certain proprietary products to IBM. Subsequently,
the Company has provided resources, primarily personnel, to IBM which assumed
the management of certain customer projects pending execution of formal
documents among all the parties. Subsequent to year end, the Company has
determined that it will be unable to obtain the necessary agreements to effect
the transfer and customer assignments. The accompanying financial statements
reflect receivables for project revenues and certain other costs aggregating
approximately $2,000,000 which management anticipates will be recovered from its
customers and/or IBM. It is reasonably possible that the Company will have to
litigate in order to recover this amount. In addition, it is reasonably possible
that a customer may assert claims against the Company in connection with
performance on one of the projects.
L.K. 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 foreign tax
benefit recognized in 1994 represents the carryback of 1994 foreign losses to
recover foreign income taxes paid in previous years.
PAGE 32
The provision for income taxes consists of the following:
Years Ended December 31,
1993 1994 1995
-----------------------------------------------1997 1998 1999
---------- ---------- ----------
Current:
Federal $ 6,545,00035,236 $ 8,315,000 $11,097,00067,740 $ 34,230
State 2,135,000 2,617,000 3,185,0008,161 15,499 9,283
Foreign (347,000) 69,000
----------- ----------- -----------211 5,121 1,230
---------- ---------- ----------
Total 8,680,000 10,585,000 14,351,000
----------- ----------- -----------43,608 88,360 44,743
Deferred:
Federal (1,634,000) 1,260,000 (847,000)(7,073) (7,626) 3,570
State (526,000) 400,000 (176,000)
----------- ----------- -----------251 (2,717) 626
Foreign (74) (210) 800
---------- ---------- ----------
Total (2,160,000) 1,660,000 (1,023,000)
----------- ----------- -----------(6,896) (10,553) 4,996
---------- ---------- ----------
$ 6,520,000 $12,245,000 $13,328,000
=========== =========== ===========36,712 $ 77,807 $ 49,739
========== ========== ==========
PAGE
33
A reconciliation of the statutory income tax provision with the effective income
tax provision is as follows:
Years Ended December 31,
1993 1994 1995
---------------------------------------------1997 1998 1999
---------- ---------- ----------
Federal income taxes at 35% $5,452,000 $ 9,968,000 $11,405,00030,829 $ 60,955 $ 42,985
State income taxes, 1,046,000 1,961,000 2,127,0005,164 8,307 6,530
net of federal tax benefit
Merger related costs -- 2,916 --
Tax credits (35) -- --
(241,000)
Other, net 22,000 316,000 37,000754 5,629 224
---------- ----------- -----------
$6,520,000 $12,245,000 $13,328,000---------- ----------
$ 36,712 $ 77,807 $ 49,739
========== =========== ===================== ==========
The components of the net deferred tax assets and liabilities are as follows:
1/1/94 12/31/94 12/31/95
---------------------------------------------Years Ended December 31,
1998 1999
--------- ---------
Current:
Allowance for doubtful accounts and other reserves $ 609,00014,206 $ 1,030,000 $ 754,0003,687
Employee medical benefits 465,000 785,000 (352,000)(367) (1,079)
Accrued expenses -- 437,000 217,000
---------- ----------- -----------946 3,741
--------- ---------
Total current assets $1,074,000 $ 2,252,00014,785 $ 619,000
========== =========== ===========6,349
========= =========
Long-term:
Customer based intangibles $ -- $(7,152,000) $(6,654,000)(4,980) $ (4,482)
Amortization of intangible assets 1,416,000 3,759,000 6,495,000
Accrued rents -- 750,000 177,00011,913 12,438
Depreciation and other (275,000) (62,000) (67,000)
---------- ----------- -----------117 3,449
--------- ---------
Long-term assets (liabilities) $1,141,000 $(2,705,000) $ (49,000)
========== =========== ===========7,050 $ 11,405
========= =========
The current component is included in prepaid expenses and other current assets
on the balance sheet. M. RESEARCH AND DEVELOPMENT
Research and development expenses were approximately $1,566,000, $2,842,000 and
$3,997,000The long-term component is included in 1993, 1994 and 1995, respectively.
N.the other assets on
the balance sheet.
L. BUSINESS ACQUISITIONS
Effective January 1, 1993,Fiscal 1999
The operations of the companies and businesses acquired during fiscal 1999 have
been included in the accompanying consolidated financial statements from their
respective dates of acquisition.
Amherst Consulting Group
In May 1999, the Company acquiredpurchased substantially all of the business and selected assets
and liabilities of General Electric Consulting Services Corporation ("GE
Consulting"), a wholly owned subsidiary of General Electric Company ("General
Electric"), primarily engaged in the business of providing software services.
The Company and General Electric also, as provided in the agreement, executed a
separately funded noncompetition agreement. The total cash and notes (Note H)
paid in connection with the acquisition and the noncompetition agreement was
PAGE 34
$37,700,000, after adjustments, as provided in the agreement. During 1993, the
Company also acquired the software and selected assets of Professional
Healthcare Systems,Amherst
Consulting Group, Inc. (PHS)("Amherst") for cashapproximately $8 million, including $2
million payable to the former owner in equal installments at the second and
third anniversary of $4,400,000 and assumed liabilities
totaling $2,404,000.
These acquisitions werethe purchase. Amherst is a privately held management
consulting firm specializing in change management. The acquisition was accounted
for by the purchase method of accounting. Accordingly, the assets acquired including primarily customer-based
intangibles, noncompetition agreements, software, and property and equipment,
have been recorded at their estimated fair values at the date of acquisition.
The excess of the purchase price over the estimated fair value of the assets
acquired has been recorded as goodwill.
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 covering
a four-year period in exchange for the Company's $12.0 million noninterest-
bearing subordinated note. (Note H)
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
asallocated
to identifiable intangibles and goodwill and is being amortized on a
straight-line basis over a 3 to 15-year period.
Parallax Solutions Ltd.
In May 1999, the Company purchased the stock of Parallax Solutions Ltd.
("Parallax") for approximately $18.7 million. Parallax provides software
services and is based in Conventry England. The unaudited proforma resultsacquisition of operationsParallax has been
accounted for by the purchase method of accounting. Accordingly, the assets
acquired have been recorded at their fair values at the date of acquisition. The
excess of the Company and AGS, as if the
acquisition had occurred on January 1, 1993, based on the final allocation of
purchase price over the fair value of the net assets acquired has
34
been allocated to identifiable intangibles and goodwill and is as follows: 1993 total revenues, $342,699,000, net income,
$12,840,000,being amortized
on a straight-line basis over a 3 to 20-year period.
Anstec, Inc.
In December 1999, the Company purchased the outstanding stock of Anstec, Inc.
("Anstec") for approximately $4.6 million, including approximately $2.8 million
issuable at the end of the contingency period defined in the purchase agreement.
Anstec is a privately held information technology company that provides
solutions to both the Federal Government and net income per share, $1.08.commercial enterprises. The
unaudited proforma resultsacquisition of Anstec has been accounted for by the purchase method of
accounting. Accordingly, the assets acquired have been prepared for comparative purposes onlyrecorded at their fair
values at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired has been allocated to identifiable
intangibles and do not purportgoodwill and is being amortized on a straight-line basis over a
3 to be
indicative of what would have occurred had the acquisition been made as of
January 1, 1993.
Effective April 1, 1994,15-year period.
First Coast Systems, Inc.
In December 1999, the Company acquired specificpurchased substantially all of the assets and assumed
certain liabilities of The Geary CorporationFirst
Coast Systems, Inc. ("First Coast") for approximately $29.5 million, including
approximately $2.7 million held in escrow issuable at an estimated purchase pricethe end of $3.2 million. The Geary Corporation was basedthe contingency
period defined in Pittsfield, Massachusetts and
had been engaged in the business of providing software consulting services to
customers located primarily in western Massachusetts and the upper New York
state market. The acquisition was financed through the Company's line of credit.
During 1995, the Company paid the final balance due under the purchase agreement and $3 million that may be issued based
upon future earnings. First Coast is a privately held information technology
company that provides software solutions for the healthcare industry. The
acquisition of approximately $1.0 million.First Coast has been accounted for by the purchase method of
accounting. Accordingly, the assets acquired have been recorded at their fair
values at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired has been allocated to identifiable
intangibles and goodwill and is being amortized on a straight-line basis over a
3 to 15-year period.
Other Acquisitions
During 1995,1999, the Company completed three acquisitions.other acquisitions for approximately
$9.9 million, including approximately $2 million and approximately 102,000
shares of Keane common stock that may be issued based upon future earnings. The
acquisitions were accounted for by the purchase method accounting. Accordingly,
the assets acquired have been recorded at their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired have allocated to identifiable intangibles and goodwill and is
being amortized on a straight-line basis over a 3 to 15-year period.
Fiscal 1998
Omega Systems, Inc.
In February 1998, the Company acquired all outstanding shares of Omega Systems,
a privately held IT services company in exchange for approximately 190,000
shares of Keane common stock. The transaction was accounted for as a
pooling-of-interests. Acquired net assets of approximately $800,000 have been
recorded at historical amounts. Prior periods were not restated due to
immateriality, and accordingly, results of operations have been included since
the date of acquisition.
GSE Erudite Software, Inc.
On April 30, 1998, the Company purchased substantially all of the assets of GSE
Erudite Software, Inc. The aggregate purchase price of these acquisitions totaled $7.9this acquisition was
approximately $9.8 million. These acquisitions wereThe acquisition was accounted for by the purchase
method of accounting. Accordingly, the assets acquired, including primarily
customer-based intangibles noncompetitionand non-competition agreements and software, have been recorded at
their fair values at the date of acquisitions.acquisition. The customer-based intangibles noncompetitionand
non-competition agreements and
software are being amortized on a straight-line basis over
periods ranging from three to five years.
The excessBricker & Associates, Inc.
On June 1, 1998, the Company completed its acquisition of purchase price overBricker & Associates,
Inc. ("Bricker"), an operations improvement consulting firm, under an Agreement
and Plan of Merger by and among the fair valueCompany, Beta Acquisition Corp. and Bricker,
whereby the Company agreed to acquire all of the net
assets acquiredoutstanding capital stock and
options of Bricker in exchange for approximately 2,336,196 million shares of
Keane, Inc. common stock (the "merger"). The merger has been recordedaccounted for as
goodwill and is being amortized on a
straight-line basis over a 15-year period.
O. BANK DEBT
In January 1994,pooling-of-interests.
35
During the quarter ended June 30, 1998, the Company entered intoincurred a new $45,000,000 revolving credit
agreement replacing its existing line of credit. The outstanding balance was
repaid$4.1 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the proceedsBricker transaction. Revenue and net
income of the 1994 offering describedcombined entities for the three-month period prior to the merger
and the corresponding period in Note I. Borrowings
under the lineprior year are presented in the following
table. Prior to the merger, there were no inter-company transactions between the
two companies.
Three months ended
March 31, 1998 March 31, 1997
Revenue
Keane, Inc. $ 209,162 $ 141,110
Bricker & Associates, Inc. 5,800 3,191
--------- ---------
Combined revenue $ 214,962 $ 144,301
========= =========
Net income
Keane, Inc. $ 19,080 $ 9,848
Bricker & Associates, Inc. 1,846 168
--------- ---------
Combined net income $ 20,926 $ 10,016
========= =========
On August 4, 1998, the Company acquired the issued and outstanding capital stock
of Icom Systems Ltd ("Icom"), parent company of Icom Solutions Limited, a
privately-held provider of information technology business solutions in
Birmingham, England, and issued or reserved for issuance approximately 894,500
shares of Keane common stock in connection with the acquisition, 835,545 of
which were issued in exchange for shares of Icom capital stock which Keane
acquired at the bank's corporate rate.closing of the transaction, and up to approximately 58,955 of
which will be issuable upon the exercise of options to acquire shares of Keane
common stock that Keane issued in exchange for certain options to acquire shares
of Icom capital stock held by the Icom option holders. The merger has been
accounted for as a pooling-of-interest.
During the quarter ended September 30, 1998, the Company incurred a $1.9 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Icom transaction. Revenue and net income
of the combined entities for the six-month period prior to the merger and the
corresponding period in the prior year are presented in the following table.
Prior to the acquisition, there were no inter-company transactions between the
two companies.
Six months ended
June 30, 1998 June 30, 1997
Revenue
Keane, Inc. $ 465,655 $ 299,795
Icom Systems Ltd. 25,861 12,746
--------- ---------
Combined revenue $ 491,516 $ 312,541
========= =========
Net income
Keane, Inc. $ 41,594 $ 21,450
Icom Systems Ltd. 1,697 425
--------- ---------
Combined net income $ 43,291 $ 21,875
========= =========
On October 9, 1998 the Company acquired all of the outstanding capital stock of
Fourth Tier, Inc. ("Fourth Tier"), a privately-held provider of enterprise
relationship management consulting services based in Los Angeles, California, in
exchange for 915,571 shares of Keane, Inc. common stock. The merger has been
accounted for as a pooling-of-interest.
During the quarter ended December 30, 1998, the Company incurred a $2.1 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Fourth Tier transaction. In addition, an
additional charge for $1.7 million was incurred as a result of the requirement
to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting.
36
Revenue and net income of the combined entities for the nine-month period prior
to the merger and the corresponding period in the prior year are presented in
the following table. Prior to the acquisition, there were no inter-company
transactions between the two companies.
Nine Months Ended
September 30, 1998 September 30, 1997
Revenue
Keane, Inc. $ 772,056 $ 492,895
Fourth Tier, Inc. 10,369 4,322
--------- ---------
Combined revenue $ 782,425 $ 497,217
========= =========
Net income
Keane, Inc. $ 68,568 $ 34,637
Fourth Tier, Inc. 4,205 2,179
--------- ---------
Combined net income $ 72,773 $ 36,816
========= =========
M. BANK DEBT
In July 1995, the Company canceled the revolving credit agreement and replaced it withsecured a new $20,000,000$20 million demand line of credit from two banks.a
major Boston bank, and expires in May of 2000. Borrowings will bear interest at
the bank's base rate (the prime rate). There were no borrowings under eitherthis line
during 1995.
PAGE 351998 or 1999.
N. EARNINGS PER SHARE
A summary of the Company's calculation of earnings per share is as follows:
Years Ended December 31,
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net income $ 51,371 $ 96,349 $ 73,074
Weighted average number of common shares
Outstanding used in calculation of basic earnings per
Share 70,096 71,053 71,571
Incremental shares from the assumed exercise of
Dilutive stock options 1,507 1,231 824
---------- ---------- ----------
Weighted average number of common shares
Outstanding used in calculation of diluted earnings
Per share 71,603 72,284 72,395
========== ========== ==========
Earnings per share
Basic $ .73 $ 1.36 $ 1.02
========== ========== ==========
Diluted $ .72 $ 1.33 $ 1.01
========== ========== ==========
For the period ending December 31, 1999, there were 950,315 options for common
stock, which were excluded because they were anti-dilutive.
O. RESTRUCTURING CHARGE
In the fourth quarter of 1999, the Company recorded a restructuring charge of
$13.7 million. Of this charge $3.8 million related to a workforce reduction of
approximately 600 employees, primarily consultants. In addition, the Company
performed a review of its business strategy and concluded that consolidating
some of its branch offices was key to its success. As a result of this review,
the Company wrote off $4.8 million of impaired assets, which included the
carrying value of specific assets associated with these branch offices, and
incurred charges of $3.8 million for branch closings and $1.3 million for
payments to certain employees.
37
A summary of the restructuring charge is as follows:
Branch
Workforce Impaired Office Payments to
Reduction Assets Closures Certain Employees Total
Special charge $ 3,800 $ 4,753 $ 3,800 $ 1,300 $ 13,653
Cash expenditures (1,000) -- -- -- (1,000)
Non cash charges -- (4,753) (819) -- (5,572)
-------- -------- -------- -------- --------
Balance 12/31/99 $ 2,800 $ -- $ 2,981 $ 1,300 $ 7,081
======== ======== ======== ======== ========
P. SUBSEQUENT EVENT
The Company announced on February 10, 2000 that it intends to repurchase up to
two million shares of its Common Stock lasting until February 9, 2001. The
Company will use the shares for its stock plans and other general corporate
purposes.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.applicable.
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is contained in part under the caption "Executive"Directors and
Executive Officers of the Company" in Part I hereof, and the remainder is
incorporated herein by reference to the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held May 29, 199631, 2000 (the "1996"2000 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
19962000 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
19962000 Proxy Statement under the caption "Stock Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is incorporated herein by reference to the Company's
19962000 Proxy Statement under the caption "Certain Related Party Transactions."
PAGE 3639
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
--------------------
The following consolidated financial statements are included in Part II, Item 8:
Page
Report of Independent Accountants................................... 20
Consolidated Balance Sheets as of December 31, 1994 and 1995........ 21
Consolidated Statements of Income
For the Years Ended December 31, 1993, 1994 and 1995................ 22
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1993, 1994 and 1995................ 23
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1993, 1994 and 1995................ 24Page(s)
Reports of Independent Auditors...........................................21-22
Consolidated Balance Sheets as of December 31, 1998 and 1999.................23
Consolidated Statements of Income
For the Years Ended December 31, 1997, 1998 and 1999.........................24
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1998 and 1999.........................25
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1998 and 1999.........................26
Notes to Consolidated Financial Statements.......................... 25-36
(2) Financial Statement Schedules
-----------------------------
The following consolidated financial statement schedule of Keane, Inc.
and subsidiaries is filed as part of this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts............ 46
All other schedules are omitted as they are either not required, not
applicable, or are otherwise included in this Form 10-K.Statements................................27-38
(b) Exhibits
--------
The Exhibits listed belowset forth in the Exhibit Index are filed as part of this Annual
Report.
(c) Reports on Form 8-K
None
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KEANE, INC.
(Registrant)
s/s John F Keane
----------------
By: John F. Keane
Chairman, President, and
Chief Executive Officer
Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
s/s John F. Keane March 23, 2000 s/s John J. Leahy March 23, 2000
- ---------------------------- ----------------------------------
John F. Keane John J. Leahy
Chairman, President, and Senior Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
s/s Brian T. Keane March 23, 2000 s/s John F. Keane, Jr. March 23, 2000
- ---------------------------- ----------------------------------
Brian T. Keane John F. Keane, Jr.
Executive Vice President, Executive Vice President,
Office of the President, Office of the President,
and Director and Director
s/s John F. Rockart March 23, 2000 s/s Robert A. Shafto March 23, 2000
- ---------------------------- ----------------------------------
John F. Rockart Robert A. Shafto
Director Director
s/s Philip J. Harkins March 23, 2000 s/s Winston R. Hindle, Jr. March 23, 2000
- ---------------------------- ----------------------------------
Philip J. Harkins Winston R. Hindle, Jr.
Director Director
41
Exhibit Index
3.1 -- Articles of Organization of the Registrant, as amended, are incorporated
herein by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-3 (File No. 33-85206).
3.2 --Articles of Amendment to Registrant's Articles of Organization, effective
as of May 29, 1998.
3.3 By-Laws of the Registrant, as amended, are incorporated herein by
reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1994.
*10.1 -- Key Employees Deferred Compensation Plan is incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (File No. 33-33557), as filed with the Securities and Exchange
Commission (the "Commission") on February 21, 1990 and declared effective
by the Commission on March 8, 1990 (as amended, the "Registration
Statement").
PAGE 37
*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*10.9 1998 Equity Incentive Plan is incorporated herein by reference to Exhibit
10.910 to the 1992Company's Registration Statement on Form 10-K.
10.10 --S-8 (File No.
333-56119), as filed with and declared effective by the Commission on
June 5, 1998.
*10.10 Amendment to 1998 Equity Incentive Plan.
*10.11 1992 Employee Stock Purchase Plan is incorporated herein by reference to
Exhibit 10.10 to the 1992 Form 10-K.
10.11 --10.12 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 38
10.12 --10.13 First Amendment of Lease dated March 19, 1985, between the Registrant and
the Trust, is incorporated herein by reference to Exhibit 10.7 to the
Registration Statement.
10.13 --42
10.14 Second Amendment of Lease dated November 1985, between the Registrant and
the Trust, is incorporated herein by reference to Exhibit 10.8 to the
Registration Statement.
10.14 -- Documents relating to the Lease for the property at 420
Bedford Street, Lexington, Massachusetts, are incorporated herein by
reference to Exhibit 10.9 to the Registration Statement.
(a) Lease dated December 15, 1982, between the Registrant
and Elandzee Trust.
(b) First Amendment of Lease dated May 6, 1983, between the
Registrant and Elandzee Trust.
(c) Second Amendment of Lease dated March 20, 1974, between
the Registrant and Elandzee Trust.
(d) Letter dated August 14, 1985 amending Lease, between
Registrant and Elandzee Trust.
(e) Letter dated September 2, 1987 amending Lease, between
the Registrant and Elandzee Trust.
(f) Third Amendment of Lease dated January 27, 1988,
between the Registrant and Elandzee Trust.
(g) Fourth Amendment of Lease dated April 18, 1989, between
the Registrant and Elandzee Trust.
10.15 -- Documents relating to the acquisition of General Electric
Consulting Services Corporation ("GECON") are incorporated herein by
reference to Exhibit 10.26 to the 1992 Form 10-K:
(a) Asset Purchase Agreement dated as of December 18, 1992,
among the Registrant, GECON and General Electric Company
("General Electric").
(b) Bill of Sale dated January 4, 1993, delivered by GECON
to the Registrant.
(c) Instrument of Assumption of Liabilities dated January
4, 1993, executed by the Registrant in favor of GECON.
(d) Agreement Not to Compete dated January 4, 1993, between
the Registrant and General Electric.
(e) Purchase Money Promissory Note of the Registrant dated
January 4, 1993, in the original principal amount of $5,000,000
in favor of GECON.
(f) Purchase Money Promissory Note of the Registrant dated
January 4, 1993, in the original principal amount of $4,000,000
(subject to adjustment) in favor of GECON.
PAGE 39
(g) Subordination Agreement dated as of January 4, 1993, among
the Registrant, the Banks and GECON.
10.16 -- Documents relating to the acquisition of certain assets of
Professional Healthcare Systems, Inc. ("PHS") are incorporated herein
by reference to Exhibit 10.28 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993:
(a) Foreclosure Sale Agreement dated as of August 20, 1993,
between the Registrant and Chemical Bank ("Chemical").
(b) Agreement to Assume Liabilities dated as of August 20,
1993, between the Registrant and PHS.
(c) Foreclosure Bill of Sale dated August 27, 1993, delivered
by Chemical to the Registrant.
(d) Instrument of Assumption of Liabilities dated August 27,
1993, between the Registrant and PHS.
10.17 -- Documents relating to the acquisition of AGS Computers,
Inc. ("AGS") and Lamarian Systems, Inc. ("Lamarian"):
(a) Stock Purchase Agreement dated as of December 16, 1993 (the
"Agreement"), with Exhibits, among the Registrant, NYNEX
Worldwide Services Group, Inc. ("NWSG"), NYNEX Network Systems
Company, AGS and Lamarian is incorporated herein by reference
to Exhibit 2(A) to the Registrant's Current Report on Form 8-K
dated January 19, 1994.
(b) Noncompetition Agreement dated as of January 5, 1994,
between the Registrant and NWSG is incorporated herein by
reference to Exhibit 27(A) to the Registrant's Current Report
on Form 8-K dated January 19, 1994.
(c) Tax Matters Agreement, dated December 16, 1993, between
NWSG, AGS and the Registrant is incorporated herein by
reference to Exhibit 27(B) to the Registrant's Current Report
on Form 8-K dated January 19, 1994.
(d) Promissory Note of the Registrant dated January 5, 1994, in
the original principal amount of up to $12,000,000 in favor of
NWSG is incorporated herein by reference to Exhibit 27(C) to
the Registrant's Current Report on Form 8-K dated January 19,
1994.
(e) Settlement Agreement with NYNEX for the purchase of AGS is
incorporated herein by reference to Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994.
10.18 -- 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.
PAGE 40
11. Statement of Computation of Earnings Per Share............ 42
21. Schedule of Subsidiaries of the Registrant................ 43
23. Consent of Coopers & Lybrand L.L.P........................ 44
(c) Report on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period covered by this Annual Report on Form 10-K.
PAGE 41
SIGNATURES
Pursuant toRegistrant.......................Ex 21-1
23.1 Consent of Ernst & Young LLP.....................................Ex 23-1
23.2 Consent of PriceWaterhouseCoopers LLP............................Ex 23-2
27.10 Financial Data Schedule for the 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
(Principal Executive Officer)
Date: March 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ John F. Keane 3/27/96 /s/ Wallace A. Cataldo 3/27/96
- ----------------------------- ------- ----------------------------- -------
John F. Keane Date Wallace A. Cataldo Date
President, Vice President, Finance and
Principal Executive Officer Principal Accounting Officer
and Director
/s/ John F. Rockart 3/27/96 /s/ Robert A. Shafto 3/27/96
- ----------------------------- ------- ----------------------------- -------
John F. Rockart Date Robert A. Shafto Date
Director Director
/s/ Winston R. Hindle, Jr. 3/27/96
----------------------------- -------
Winston R. Hindle, Jr. Date
Director
PAGE 45
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
KEANE, INC.
FOR THE YEARS ENDED DECEMBERyear ended December 31,
1993, 1994 AND 1995
Additions
Balance at charged to
beginning of costs and Additions charged Deductions- Balance at
Description period expenses to other accounts write-offs end of period
- --------------------------------------------------------------------------------------------
Allowance For Doubtful Accounts
1995 $2,483,000 -- $1,051,000(1) $1,618,000 $1,916,000
1994 1,468,000 -- 2,258,000(2) 1,243,000 2,483,000
1993 163,000 -- 1,499,000(3) 194,000 1,468,000
(1) Includes $851,000 of additions charged against revenue and $200,000 of
additions to the allowance related to 1995 acquisitions.
(2) Includes $620,000 of additions charged against revenue and $1,638,000 of
additions to the allowance related to 1994 acquisitions.
(3) Includes $1,164,000 of additions charged against revenue and $335,000 of
additions to the allowance related to 1993 acquisitions.
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