SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ________________
                                        
                                   Form 10-K

                       Annual Report Pursuant to SectionFOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 orOR 15(d) of
                      the Securities Exchange Act ofOF 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, 19951998
                          -----------------
                                      
                                      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
                                                -----------------                               ------
                                  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[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 12, 1999, was $1,621,812,462. As of March 15, 1996:12, 1999, 60,200,908 shares of
Common Stock, $.10 par value - $379,213,889
                  ------------------------------------------per share, and 285,213 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, 1996.26, 1999.  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

Keane, Inc., a Massachusetts corporation (together with its subsidiaries, unless
the context otherwise requires, "Keane" or the "Company"), provides management
and information technology (IT) consulting, application software design, development and
integration, application management, and call center management services forto
corporations, government agencies, and healthcare facilities.  Keane's services
and methodologies enable companiesclients to leverageoperationalize their existing information systems ("IS") capability and more rapidly
andbusiness strategy, cost-effectively
develop new software applications to enable their strategy, and manage mission-criticalmission-
critical software applications.applications to better support business requirements.  The
Company serves its clients through two operating divisions:a series of corporate practices that support
Keane's network of branch offices in the Information
Services Division ("ISD")major markets of the U.S., Canada, and
the Healthcare Services Division ("HSD"). ISD,
which accounted for approximately 93%U.K.  Keane's practices accumulate, develop, and disseminate the Company's
organizational experience along core service and industry lines.  This delivery
structure allows Keane to provide clients with the 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. HSD
develops, markets and supports financial, patient care and clinical application
software for hospitals and long-term care facilities. The Companycost-effective local level.  Keane
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.

INFORMATIONKEANE'S SERVICES DIVISION: ISD provides customMODEL: Underlying Keane's strategic focus and efforts is a
three-tiered service model. This model structures the Company's services into
three core disciplines--planning, building and managing IT. Across these
disciplines is a consistent focus on helping clients achieve quantifiable
business benefit.  Keane achieves this objective through the application software design,
developmentof
rigorous processes and management disciplines and a culture of accountability
for successful results.

Keane's "plan, build and manage" capabilities encompass a broad range of
services for corporationsdesigned to help clients align IT with largebusiness strategy and recurring
software development needs.build and
manage the optimal infrastructure of people, process, and technology to enable
that strategy. This full spectrum of capabilities not only responds to clients'
most critical IT and business needs, but enables them to take advantage of the
synergies associated with linking their IT planning, implementation and
outsourcing investments.

Planning Services: Keane's planning services are delivered primarily through
Bricker & Associates, Inc. ("Bricker"), the Company's operations improvement
consulting subsidiary. Keane delivers (i) Information Systems Planning
services, including business process redesignalso provides project management training 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 trainingconsulting based on the Company's project management, estimating and risk management, and
related processes.  In allBricker helps companies plan and implement operations
improvements aligned with their business strategy to achieve targeted increases
in revenue, profits, and shareholder value.  Bricker does this by taking an
integrated approach to organizational design, workflow improvements, and
technology strategy.

Bricker's planning services frequently identify opportunities for IT initiatives
to enable clients' business strategies. These recommendations are complemented
by Keane's extensive range of IT solutions. Keane's investment in this
consulting practice positions the Company at the front end of many of its
assignments,clients' application development and outsourcing initiatives.

Build Services: Keane's Application Development services, the Company's "build"
services, assist clients in implementing new technology to achieve strategic
objectives.  The services include Customer Relationship Management ("CRM") and
Customer Application Development solutions that may leverage industry-leading
packaged software, data warehousing, and web-based technology. Many of the
industries Keane strivesserves are initiating CRM programs to usetarget key customers,
improve sales effectiveness, and increase customer loyalty.  Keane's Application
Development projects can encompass IT planning and assessment; design,
development, and integration of software applications; and program management
services.

Keane considers its qualifications in the following areas as important strengths
in the Application Development arena: (i) its operations improvement and change
management competencies; (ii) its software package, application, and system
architecture expertise; (iii) its enterprise application integration

                                       2

 
experience; and (iv) its industry-renowned project management processes. By
combining these capabilities, Keane seeks to deliver complete Application
Development solutions that fully leverage advanced technology while extending
the life and payback of existing IT assets.

Manage Services: The growing attention on new technology implementations has not
diminished the tremendous need to more effectively manage the existing IT assets
known as legacy systems. Keane's flagship Application Outsourcing solution,
together with its Migration and Call Center services, help clients address this
need.

Application Outsourcing services, encompassing management and enhancements of
mission-critical software applications, are designed to enable clients to
realize ongoing business value from their IT assets. On these engagements, Keane
focuses on advancing clients' application environments to Level 3 on the
Software Engineering Institute's Capability Maturity Model ("CMM"). The CMM is
recognized within the IT industry as the standard for measuring the
effectiveness, or maturity, of IT development and management processes.  By
advancing to CMM Level 3, clients are able to eliminate defects in software,
reduce lengthy cycle times, lower support costs, and improve service to their
user community.

To date, 17 of Keane's outsourcing engagements were independently certified at
CMM Level 3, including those at BankBoston, Bell Atlantic, Blue Cross Blue
Shield of Maryland, Public Service Electric & Gas, and Toyota Motor Sales.  In
addition, as proven in its engagements, Keane can achieve this certification
within 12 months, as compared to the industry standard of 3 1/2 years according
to the Center for Systems Management. Keane believes its ability to deliver such
a strategic advantage in its outsourcing programs is a critical competitive
differentiator in the Application Outsourcing marketplace.

STRATEGIC DIFFERENTIATORS: Keane considers the following characteristics of the
Company critical to its positioning in the marketplace:

     A delivery structure of world-class corporate practices supporting local
     branches, enabling it to deliver its organizational strengths responsively
     and cost-effectively at the local level.
     Industry expertise developed from serving clients in banking, insurance,
     utilities, telecommunications, manufacturing, healthcare, and government.
     Operations improvement expertise, enabling it to help clients realize the
     benefits of integrating operations improvements with technology
     initiatives.
     Capabilities across the application development and management lifecycle,
     enabling it to help clients leverage advanced technologies while extending
     the return on investment of existing technology.
     Focus on rigorous process and management disciplines, through its
     proprietary methodologies and best 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,
enableenabling it to provide
     clients with consistent, high quality, results and give itmeasurable results.
     Long-term client relationships, which create greater opportunities for
     recurring revenues through ongoing service delivery based on exposure to
     clients' business, technical and organizational requirements.

MARKETPLACE DRIVERS:  The Company believes that there are significant
opportunities for growth in the IT services industry, particularly in the
application management, application development and consulting markets.
Dataquest Incorporated, a competitive advantagemarket research firm, estimated the U.S. and European
markets for service offerings such as Keane's at $116 billion and $80 billion,
respectively, for 1999.  Moreover, according to Dataquest Incorporated,
expenditures on externally provided IT services in winning large projects.the areas of consulting,
application development and integration, and IT/application management (Keane's
core "plan, build, manage" service offerings) are among the industry's highest
growth areas.

The Company believes that the following factors will continue to drive market
growth in the softwareIT services business served by ISD:

 .        Competitive Environment.Keane:

1.   Increased Dependence on Information Technology: Globalization,
     deregulation, consolidation, and the rapid pace of change in today's business environment have increased
     reliance on information technology. Companies are applying technology to
     bring products to market first or faster, integrate key business processes
     to improve

                                       3

 
     quality and reduce costs, and improve customer service. Enterprises are
     using outsourcing strategies to enable them to achieve business-driven IT
     initiatives.

2.   IT Changing the importanceBasis of timely accessIndustry Competition: Advances in new technology,
     especially the Internet, are enabling companies to information. These conditionsfundamentally change the
     basis of competition within industries. Products and services can be
     delivered to customers in innovative ways, and the costs associated with
     delivering these products and services can be significantly different.
     Companies must have a proactive IT strategy to achieve a competitive
     advantage in this environment.

3.   Organizational Focus on Core Competencies: The intense competition and
     rapid change characteristics of many industries have led senior management
     to a
         strategic focusconcentrate on information systems.

 .their core competencies in order to compete more
     effectively. Businesses are consequently outsourcing more frequently,
     especially IT services.

4.   The Growing Challenges of Managing Corporate IS Organizations.IT Organizations: The ISIT
     environment has grown increasingly complex, costly and burdensome as a
     result of the challenges of deploying new technology, maintaining older
     systems (including meeting Year 2000 compliance requirements) and meeting staffing requirementsfinding
     skilled staff in a market with a shrinkinglimited pool of qualified ISIT professionals. .        Organizational Focus on Core Competencies Resulting in Increased
         OutsourcingAdvisory
     services and outsourcing solutions enable companies to implement operations
     improvements, achieve faster time to market of Software Services.new technology, gain control
     over existing software assets and strategic development initiatives.

5.   The intense competitionGrowing Trend toward Reengineering IT Organizations: With the growing
     acceptance of IT as a critical business asset 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 ISinternal pressures
     experienced within IT organizations, seek to address these and other challenges, theyexecutive managers are increasingly
     finding that outsourcingseeking ways to software services providers can assist themmake IT more effective. Similar to the reengineering
     efforts undertaken 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 sectorsparts of the healthcare field,business in recent years,
     executives are now focusing on improving processes and seeksperformance in IT.
     Outsourcing to increase the breadth of its healthcare
applications through ongoing product development effortsa firm with proven methodologies and strategic
alliances.performance metrics
     enables these organizations to implement world-class processes and
     systematically target improvement objectives.

BUSINESS STRATEGY:  Keane believes that the pressureIT pressures companies are
experiencing, together with requirements to reduce costs, decrease cycle times,
and adapt quickly to changing market dynamics, is changingcausing companies to focus on
achieving significant improvements in their IT organizations.  Those service
providers best able to deliver reliable and quantifiable business benefit and
results -- i.e., on-time, within budget and according to technical
specifications, business requirements and targeted performance metrics -- will
appeal to organizations focused on using outsourcing as a strategic business
tool.  Moreover, service providers with the basis of competitioncritical mass and infrastructure to
operate and grow efficiently have a competitive advantage in the software services industry.servicing client
needs.  In orderan effort to achieve profitable growth in this environment, Keane is
increasing market share with both new and existing clients while deriving an
increasing portion of its business from large-scale, multiyear projects with
large organizations. Keane believes that its (i) long-term client relationships, which
create greater opportunities for recurring revenues; (ii) full range of value-
added services, which differentiates the Company from many of its competitors;
(iii) strong branch office network, which enables it to deliver services cost-
effectively; and (iv) disciplined methodologies and best practices, which are
designed to ensure replication of organizational experience, allow the Company
to compete effectively against both national and local competitors. The key elements of the Company's growth strategy are
to:described below.

1.   Increase Concentration of Core Solutions Business: The Company is focusing
     on large, Keane-managed business within its core "plan, build and manage"
     service offerings. These opportunities include consulting, application
     development, application management, migration services (including Year
     2000 compliance services), call center management and enterprise healthcare
     information solutions. Keane believes its full range of services parallel
     the overall spending patterns in the IT services market, in which clients
     are turning to service providers for assistance in planning, building and
     managing business-driven IT initiatives. In addition, it believes that
     providing one type of service positions it for follow-on business in its
     other core services. Growth of Keane's core services continued to increase
     during the year, representing 76% of total revenue for 1998, up from 66% in
     1997.

2.   Build Long-Term Strategic Partnerships with Clients-TheClients: The Company also seeks
     to build long-term strategic partnerships with its clients. Sales representatives are
assigned to a limited numberThe Company
     believes that its branch office structure, which consists of target accountslocal branches
     located near clients, assists Keane in order to developdeveloping an in-depthintimate understanding
     of each client's particular needs.its clients' business, IT and organization requirements. This approach enables
     the
CompanyKeane to build long-term relationships with its clients based onoffer knowledgeable,

                                       4

 
     highly responsive solutions to clients, and cost-effective service. During 1995, the
Company derivedto do so more cost-effectively
     than 85%many of its revenues from clientscompetitors. Keane enjoys a strong recurring revenue rate,
     demonstrating its ability to which it had
provided services in the prior year (excluding revenues generated from
businesses acquired during the year).

Another critical elementrespond to building long-termclient needs on an ongoing basis
     with client satisfaction. One way Keane is extending its client
     relationships is by growing business with its large base of Year 2000
     clients. Keane has been leveraging its market share by helping these
     clients with other IT services. As of the end of 1998, Keane sold over $700
     million in other services to its Year 2000 project clients, up from over
     $262 million at the end of 1997. Keane's use ofstrategy is to leverage 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 clientsincreased client base by introducing and delivering cost-effective software
solutions. Keane's extensive network of branch offices allows the Companyits other strategic
     services to stay close to itsnew Year 2000 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.where possible.

3.   Achieve Critical Mass through a Strong Branch Office Network-Growingand Strengthen Its Services Portfolio: Growing market
     share and achieving critical mass in each market it serves are fundamental
     to the Company's strategy. Keane accomplishes this by growing the
     organization and expanding its service offerings to meet the demands of its
     clients.

     Critical Mass Strategy: Keane defines its critical mass objectives on three
     -----------------------                                                    
     levels: at the account, at the branch, and at the enterprise. By reaching
     critical mass objectives in each of these three areas, Keane seeks to
     strengthen client partnerships through a particular location asstrong local presence, achieve
     economies of scale by spreading costs across a broad revenue base, and
     implement continuous improvements by investing in its methodologies and
     infrastructure.

     Critical mass at the account level is measured by revenues generated by
     individual clients. Keane targets clients with potential to generate more
     than $1 million in revenues annually primarily through delivery of large
     project and multiyear outsourcing engagements. This strategy enables Keane
     to sell and deliver services more cost-effectively and provides Keane with
     a more predictable revenue stream. In 1998, the number of clients from
     which the Company generated $1 million or more each increased 75% from
     1997.

     Critical mass at the branch level equates with being one of the two largest
     softwareIT services firms in that market and having the depth and breadth of
     managerial, sales and technical capability to deliver complex solutions
     locally. CriticalReaching branch-level critical mass andobjectives produces the local
     presence Keane relies on to strengthen client partnerships. Keane measures
     critical mass progress at the branch level according to growth in revenues
     per branch. In 1998, the average revenues generated by each of Keane's
     branches increased market share enable25% from 1997. Finally, critical mass at the Company to spread indirect costsenterprise
     level can be measured by the Company's annual revenue growth rate, which
     has been 44% compounded 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.the last five years.

     Overseas Expansion: In addition, as clients continue to outsource their ISin 1998, Keane expanded into the European
     -------------------                                                       
     marketplace, establishing Keane Ltd operations and buy larger and more complex solutions, it is critical that Keane
invest in the developmentUnited Kingdom
     through the acquisition of standardized delivery methodologies, best practices
and tool sets. Keane believes thatIcom Systems Ltd. Overseas operations are a
     significant step in Keane's critical mass objectives, affording Keane a
     foothold in its branches will enable it
to make necessary investments in capabilities and methodologiesthe U.K. market 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&T Corporation and a
$4.3 million outsourcing engagement with Elf Atochem North America. The Company
seeks to improvestrengthening its ability to managesupport the
     needs of its global customers.

     Acquisition Strategy: Keane's acquisition strategy, to a large projects andextent, has
     ---------------------                                                     
     been the strategy used to quickly 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
achievingcompany's critical mass,
     enhancing market share, increasing capabilitiesstrengthen its presence in existing markets and establish a strong presence
     in new regions. Recently, acquisitions have also been used to deliver large, complex solutionsstrengthen
     Keane's ability to provide clients with a full-service solution across the
     "plan, build, and supplementing internal growthmanage" application life-cycle. For example, Keane's
     acquisition of Bricker & Associates, Inc. in June 1998 provided the company
     with strong management consulting capabilities. Likewise, the acquisition
     of Fourth Tier, Inc. in October 1998 provides Keane with credentials in the
     Customer Relationship Management market. Keane believes marketing services
     throughout the "plan, build, and will
continue to evaluate acquisition opportunities where appropriate.manage" application life-cycle is
     synergistic.

     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.market,
     and will continue to evaluate appropriate acquisition opportunities. In
     1998, the Company completed five acquisitions. Since July 1986, Keane has
     completed 1722 acquisitions of companies with annual revenues at the time of
     acquisition ranging from approximately $1 million to

                                       5
approximately $170 million. In identifying potential acquisition
     candidates, the Company seeks firms with client profiles, geographic
     markets, and technical capabilities and corporate cultures similar or
     complementary to its own. Because the softwareIT services industry is highly
     fragmented, the Company expects that there will continue to be attractivesuitable
     acquisition opportunities.opportunities, although competition for these acquisitions has
     been intense and will likely intensify further.

     The Company's ability to expand successfully by acquisitions depends on
     many factors, including the successful identification and acquisition of
     businesses and management's ability to integrate and operate the new
     businesses effectively. The Company competes for acquisition candidates
     with other entities, some of whom have greater financial resources than the
     Company. Increased competition for acquisition candidates may result in
     fewer acquisition opportunities being made available to the Company as well
     as less advantageous acquisition terms, including increased purchase
     prices. The anticipated benefits from any acquisition may not be achieved
     unless the operations of the acquired business are successfully combined
     with those of the Company in a timely manner. TheThese integration of the Company's
acquisitions requiresactivities
     require 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-KeaneTo support these needs,
     Keane has internally developeda Director of Mergers and continuously refines numerous bestAcquisitions overseeing due-diligence
     and other acquisition-related requirements, and it uses its Knowledge
     Management resources to facilitate the smooth integration of newly acquired
     organizations.

4.   Continuously Strengthen Keane's Infrastructure: A strong infrastructure is
     required to successfully sell and execute large and complex projects.
     Keane's infrastructure encompasses a series of corporate practices, the
     Company's delivery methodologies, and such internal processes 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 developmentsales,
     recruiting and management of systems projects, Keane relies onoperations. This infrastructure--the processes,
     expertise and competencies that make up the Company and its project
management approach, Productivity Management, as well as its Frameworks
Application Development methodologiesvalue
     proposition--are all supported by investment in organizational training 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 numerousknowledge management processes to govern and guide its sales,
recruiting, training, financial and operational activities.technologies. Keane believes that the
     investment made in all of these processes,areas, 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 highhigh-
     quality solutions to its clients. Below is a summary of key activities in
     strengthening Keane's infrastructure.

     Corporate Practices and Industry Focus: To help clients derive greater 
     ---------------------------------------
     value from IT, Keane continues to formalize corporate practices in its core
     services and along its industry lines. Keane's core practices include
     operations improvement consulting, custom application development, customer
     relationship management, data warehousing/business intelligence, e-
     solutions (application solutions that leverage web-based technologies),
     application management outsourcing and call center outsourcing. Through its
     Corporate Practices, Keane is also leveraging the expertise and best
     practices it has developed serving banking, insurance, manufacturing,
     utilities, high technology, healthcare, telecommunications, and government
     clients. These clients are each facing unique business challenges stemming
     from such forces as deregulation, consolidation, changing currencies, and
     new competitors. The strategic use of IT, together with innovation in
     processes and organization, enables clients to gain competitive strength in
     this environment.

     Keane's earliest industry focus is in the healthcare industry, where it
     offers clients an enterprisewide solution that spans both its full range of
     services and its industry-leading suite of healthcare information systems.
     Keane expects its Healthcare Solutions Practice will continue to grow in
     importance as healthcare organizations address ongoing mergers and shifts
     in regulations, and demand grows for an integrated healthcare delivery
     system. While many of Keane's competitors in this arena are just beginning
     to focus on IT services, Keane has a well-established presence in the IT
     services market as well as a comprehensive product offering through its
     Healthcare Solutions Practice. To leverage this competitive strength, Keane
     intends to continue integrating its products and services, drawing on its
     experience serving the industry since 1975, its operational improvement
     capabilities, and its demonstrated ability to move clients to CMM Level 3.

                                       6

 
     Methodologies:  All of Keane's services are based on the application of
     --------------                                                         
     rigorous processes and management disciplines. The Company captures these
     processes, as well as its organizational experience, in its methodologies.
     The underlying management principles within these methodologies are
     embodied in Productivity Management, Keane's approach to managing projects
     which has evolved over the last 33 years from actual delivery experience.
     Methodologies enable the Company to improve productivity and predictability
     in its services. As a result, Keane invests in improving its existing
     methodologies and introducing new methodologies as needed. In 1998, Keane
     introduced its Customer Relationship Management methodology (its CRM
     Framework), which addresses how Keane delivers enterprise-wide solutions
     that help clients plan, build and manage application solutions to support
     and integrate such processes as sales, marketing and customer service.

     Training and Knowledge Management: Keane also invests in training at all
     ----------------------------------                                      
     levels of the organization. To Keane, training offers an effective means of
     sharing the company's organizational knowledge, building critical job
     skills, and fostering the development of company culture. In addition,
     Keane supports a Knowledge Management program. This program is an
     integrated system of people, processes, and technology focused on capturing
     and sharing organizational knowledge and best practices, while filling
     critical knowledge voids. Keane's Knowledge Management program is tied
     closely to its organizational learning teams, training organization, and
     quality assurance practice. This unique integration provides a powerful
     learning continuum, which allows Keane to leverage the value of its
     companywide experience and deliver solutions faster, better, and more
     efficiently.

MARKETING, SALES AND CLIENTS:  Keane markets its software development services and software products
through its direct sales force, which is based in eachits branch office.offices.  Keane's
sales representatives are assigned to a limited number of accounts generally no more than six to eight, in order toso they can
develop an in-depth understanding of each client's individual needs and form
strong client relationships.  These representatives are responsible for providing highlyensuring
that clients receive responsive service and ensuring that Keane's software solutions
achieve client objectives.

Keane focuses its marketing efforts on large corporations and healthcare
entitiesorganizations with significant ISIT budgets
and recurring software development and outsourcing needs.  While Keane performs
work for companies in most major industries as well asand for state and federal
governments, most of the Company's revenue is derived from organizations within
threethe following industry groups serviced by ISD:groups: manufacturing, financial services (including
banking and insurance. Allinsurance services businesses), government, software, energy,
healthcare, telecommunications, public utilities, and retail/consumer
organizations. Organizations in each of HSD's clientsthese industries are in the healthcare
industry. ISD projectshighly information-
dependent and use mission-critical information systems as a competitive
advantage.  Projects and services for these industry groups address both front
office (e.g. sales, marketing and customer service) and back office (e.g., human
resources, billing and logistics) processes, organization, and technology.  For
instance, projects for manufacturing clients 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 1995:1998:

   
     3M Company                           GTE Data Service IncorporatedCorporation                      Baylor Health Care System    
     Aldus Corp.                         Guardian Life InsuranceBell Atlantic                
     American Express Co., Inc.          Hoffmann-La Roche, IncBritish Airways              
     Ameritech                           International Business Machines CorporationCargill                      
     AT&T Corporation                    Jewel Food Stores, Inc.Carrier                      
     Bose Corporation                    Liberty Mutual Insurance Co.               
Bank of BostonCIGNA Corporation            
     McDonald'sBankBoston Corporation              Cincinnati Bell Telephone    
     Baxter Healthcare Corporation       Department of Justice         

                                       7

 
     Discover Card                       McDonald's Corporation            
     Eastman Kodak Company               McKesson Corporation                 
     Bell AtlanticElf Atochem North America           Microsoft Corporation                
     CargillEMC Corporation                     Miller Brewing                       
     CarrierExxon Corporation                   National Assn. of Security Dealers   
     CIGNA CorporationFidelity                            Northern Mutual Life Insurance       
     Cincinnati Bell TelephoneFarmers Insurance Group             Northern Telecom, Inc.               
     Department of JusticeFirst Bank                          The Pillsbury Company                
     Discover CardGeneral Electric Company            Princess Cruise Lines                
     GTE Data Service Incorporated       Procter & Gamble Company             
     Eastman Kodak CompanyGuardian Life Insurance             The Putnam Companies, Inc.           
     Elf Atochem North AmericaHoffmann-La Roche, Inc              Reader's Digest Association, Inc.    
     ExxonInternational Business              Robert Wood Johnson Hospital      
       Machines Corporation              SD Warren                         
     FidelityJ.D. Edwards                        Transquest                           
     Farmers Insurance GroupJewel Food Stores, Inc.             U.S. Customs                         
     First BankJohns Hopkins Hospital              Whirlpool Corporation                 
     General Electric CompanyLiberty Mutual Insurance Co.                

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%25% and 33%19%
of the Company's total revenues during the years ended December 31, 19941997 and
1995,1998, respectively.  The Company's two largest clients during these periods have been1997 and 1998 were
IBM and General Electric. Duringvarious organizations within the 12 months ended December 31, 1995,Federal Government. IBM and
General Electric accounted for
approximately 13.2%10% and 8.8%, respectively,6% of the Company's total revenues. The Company provides services to multiple General
Electric (GE)revenues for 1997 and International Business Machines (IBM) locations. The Company
believes that1998,
respectively, and various organizations within the Federal Government accounted
for approximately 5% of the Company's total revenues in each GEof 1997 and IBM location served by the Company is essentially
autonomous. Each location contracts separately for its services and each
contract involves different projects.1998. 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, 1995.1998.

In accordance with industry practice, nearly all of the Company's orders are
terminable by either the client or the Company on short notice.  The Company
does not believe that backlog is material to the business.  The Company had
orders at December 31, 19951998 of approximately $131.0$900 million, in comparison to
orders of approximately $106.0$636 million at December 31, 1994.1997.

YEAR 2000: Among the services that the Company provides are assessment,
planning, migration/remediation, testing services and independent verification
and validation for Year 2000 compliance. In 1998, Keane was recognized by
Gartner Group as one of the top three service providers in this market.  The
Company has devoted significant resources to services that address the Year 2000
problem and believes the demand for these services will continue through 1999
and, to a lesser degree, into 2000 and beyond.  Although the Company believes
that the demand for its services relating to the Year 2000 problem will continue
to exist after the Year 2000, this demand will diminish significantly over time
and will eventually disappear. Keane's strategy is to leverage and build on its
leadership position in Year 2000 compliance services. The Company's leadership
in this market has enabled it to significantly increase market share, gain
visibility with client executives, and expand its reputation for delivering
large, mission-critical projects. These are all important advantages in
positioning Keane to meet clients' current needs for application management and
development. As reflected in its sales performance, Keane has been effective in
leveraging this success by introducing Year 2000 clients to its other strategic
services. As of the end of 1998, Keane cross-sold more than $700 million of non-
Year 2000 services to its Year 2000 customers, up from more than $262 million as
of the end of 1997.

The Company's services addressing the Year 2000 problem involve key aspects of
its clients' computer systems.  A failure in a client's system could result in a
claim for substantial damages against the Company, regardless of the

                                       8

 
Company's responsibility for such failure.  Litigation, regardless of its
outcome, could result in substantial cost to the Company.  Accordingly, any
contract liability claim or litigation against the Company could have an adverse
effect on the Company's business, operations and financial results.

BRANCH OFFICES:  Keane provides custom software development services through its headquarters in Boston, Massachusetts, and a network of ISD branch offices
located in major metropolitan areas throughoutin the United States, Canada and in the provinces of Ontario and Quebec.United
Kingdom.  Branch offices are responsible for providing marketing, software
planning, analysis, design, implementation and maintenance services for clients
within assigned geographic territories.  Each of these offices has the necessary
technical resources and management depth to service its targeted area.  Each
office is led by a resident branch managermanaging director and has one or more client sales
representatives, consultingservice delivery managers, staffing and employee development
managers and personnel recruiters. Nearly 50%In 1998, the average revenues generated by
each of the Company's branch offices, excluding satellite
offices, generated more than $10.0Keane's branches was $20 million, in annual revenues and are staffed by
approximately 140 employees.which is up 25% from 1997. Keane
believes thisa strong local presence and capability PAGE 6
enable it to provide its clients
with highly responsive, and cost-effective service as well asand dependable results. Keane also maintains five HSD offices
located in California, Iowa, Maryland, New Yorkresults, and
Texas.

The size and diversity of client projects atprovide employees with an attractive work environment with minimal travel
demands.

Keane's branch offices are afforded the benefits of being part of a large
organization with many resources.  Keane's knowledge sharing resources and
hospital
sitescorporate practices, for instance, enable itthe Company to learn from its
experience at one branch and refine and leverage that experience at other
locations.  Keane's infrastructure is designed to capture and then continuously
improve the software planning, development and maintenance process.
Keane's branch offices are afforded the benefits of being part of a large
organization with many resources.management processes. Frequently,
branches transfer personnel from other branches with expertise within a specific
technology, application or industry.

Each branch office is linked electronically so that experiences can be
shared and continuous process improvements can be realized.

EMPLOYEES:  On December 31, 1995,1998, Keane had 5,33810,537 employees, including 4,7749,493
technical staff whose services are billable to clients. At such date, 4,915
individuals were employed by ISD and 318 individuals were employed by HSD, with
the remaining 105 individuals providing Company-wide services at the Company's
corporate headquarters.

The Company believes that its future success will depend in part uponon its
continued ability to attract and retain highly skilled managerial, technical,
sales and support personnel.  Accordingly, Keane devotes significant resources
to its Human Resources Department, including a staff of 74over 125 recruiters.
The Company's current employees are also a valuable recruiting tool.  During
1995,1998, approximately 27%28% of the Company's new billable employees were referred to
the Company by existing personnel.  There can be no assurance that the Company
will be able to continue to attract and retain personnel necessary for the
development of its business.

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:  The custom softwareIT services market is highly competitive and characterized by
continual change and improvement in technology.  The market is fragmented, and
no company holds a dominant position.  Consequently, the Company's competition
for client assignments and experienced personnel varies significantly from city
to city.  The Company believes it is among the ten10 largest custom software
developmentservices firms serving the commercial market in the United States.

The Company's competition also varies by the type of service provided.  For
large application development and outsourcing projects, the Company competes
with consulting divisions of large public accounting firms, such as Andersen
Consulting, as well as companies such as Electronic Data Systems Corporation and
ISSC, the consulting division of IBM.IBM Global Services.  For systems implementation and maintenance, the Company
often competes with small, local firms, as well as large nationalinternational firms,
including Analysts International Corp., Cap Gemini America, Computer Horizons
Corporation, Computer Sciences Corporation, and Computer Task Group, Inc.  For
management consulting engagements, the Company competes with large public
accounting firms, McKinsey and Booz-Allen & Hamilton. In the healthcare software
systems market, Keane competes with such companies as Shared Medical Systems,
HBOC/McKesson, and MEDITECH, Inc.  The Company believes its well-established
presence in the IT services market as well as its comprehensive product offering
is a significant competitive differentiator in serving the healthcare market.
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 custom software development needs.

                                       9

 
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, utilizeuse comprehensive delivery
methodologies and achieve organizational learning by implementing standardized
operational processes.  The Company believes that it competes favorably with
respect to these 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.  Several of the
Company's officers, directors and shareholders are limited partners of this
partnership.  See Item 13 -- "Certain PAGE 7
Relationships and Related Transactions."
At December 31, 19951998, the Company leased and maintained sales and support
offices in 52more than 50 locations in the United States.States and three locations in
the United Kingdom.  The aggregate annual rental expense for the Company's sales
and service offices was approximately $6,778,000$13,433,000 in 1995.1998.  The aggregate annual
rental expense for all of the Company's facilities was approximately $8,880,000$16,111,000
in 1995.1998.  For additional information regarding the Company's lease obligations,
see Note K of Notes"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 vote of the Company's security holders during the
fourth quarter of the year ended December 31, 1995.1998.

                                       10

 
EXECUTIVE OFFICERS OF THE COMPANY:  The executive officers and directors of the
Company are as follows:


NAME AGE POSITION ---- --- -------- John F. Keane(1) 65NAME AGE POSITION - ---- --- -------- John F. Keane(1) 67 Chief Executive Officer, President, and Director Edward H. Longo 52 Senior Vice President - Information Services Division Raymond W. Paris 58 Vice President and General Manager - Healthcare Services Division John F. Keane, Jr. 36 Vice President - Area Manager Wallace A. Cataldo 46 Vice President - Finance and Administration Brian T. Keane 35 Vice President - Area Manager Winston R. Hindle, Jr.(1)(2) 65 Director John F. Rockart (1)(2) 64 Director Robert A. Shafto(1)(2) 60 Director
____________________________John F. Keane, Jr. 39 Office of the President, Executive Vice President, Director Brian T. Keane 38 Office of the President, Executive Vice President, Director Edward H. Longo 55 Senior Vice President Raymond W. Paris 61 Vice President Healthcare Solutions Practice Wallace A. Cataldo 49 Vice President, Finance and Administration Renee Southard 44 Vice President Human Resources Philip J. Harkins(1)(2) 51 Director Winston R. Hindle, Jr.(1)(2) 68 Director John F. Rockart(1)(2) 67 Director Robert A. Shafto(1)(2) 63 Director __________________________________ (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. Longo joined the Company in March 1980Keane is also a director or Firstwave Technologies, Inc. and has been Senior Vice President -- Information Services Division since December 1994. From January 1993 to December 1994, he was Vice President -- Information Services Division, Eastern Region. From May 1987 to January 1993, he was Vice President of the New England area of the Information Services Division. From June 1986 to May 1987, he was an Area Manager of the Information Services Division. PAGE 9 Mr. Paris joined the Company in November 1976. Mr. Paris became Area Manager of the Healthcare Systems Division in 1981 and has served as Vice President and General Manager of HSD since August 1986. Mr. Cataldo joined the Company in June 1975 and has been Vice President -- Finance 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.EG&G, Inc. 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. Prior to this role, Mr. Keane had been Senior Vice President since December 1996. 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, President, Chief Executive Officer and a director of the Company, and a brother of Brian Keane, Area Vice President of the Company.Keane. Mr. Brian Keane joined the Company in 1986 and was promotedappointed Executive Vice President and a member of the Office of the President in September 1997. Prior to this role, Mr. Keane had been Senior Vice President since December 1996. From December 1994 to December 1996, he was an Area Vice President in the Information Services Division in December 1994.President. From July 1992 to December 1994, Mr. Keane served as an ISDa Business Area Manager and from January 1990 to July 1992, he served as an ISDa Branch Manager. Mr. Keane has been a director of the Company since May 1998. Brian Keane is a son of John Keane, the founder, President, Chief Executive Officer and a director of the Company, and a brother of John Keane, Jr., Area Mr. Longo joined the Company in March 1980 and has been Senior Vice President since December 1994. From January 1993 to December 1994, he was Vice President, Eastern Region. From May 1987 to January 1993, he was Vice President of the New England area. From June 1986 to May 1987, he was an Area Manager. 11 Mr. Paris joined the Company in November 1976. Mr. Paris became Area Manager of the Healthcare Solutions Practice in 1981 and has served as Vice President and General Manager of the Healthcare Solutions Practice since August 1986. Mr. Cataldo joined the Company in June 1975 and has been Vice President - Finance and Administration since October 1985. Mr. Cataldo served as Chief Financial Officer from November 1983 to October 1985 and as Controller from November 1978 to November 1983. Ms. Southard joined the Company in July 1983 and has been Vice President - Human Resources since December 1995. Ms. Southard served as Director of HR Operations from August 1994 to December 1995, Manager of Human Resources and Administration from September 1993 to August 1994, and Staffing and Employment Manager from August 1988 to September 1993. Mr. Harkins has been a director since February 1997. Mr. Harkins is currently the President and Chief Executive Officer of Linkage, Inc., an organizational development company founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins was Vice President of Human Resources of the Company. Mr. Hindle has been a director since February 1995. Mr. Hindle is currently retired. From September 1962 to July 1994, Mr. Hindle served as a Vice President and, subsequently, Senior Vice President of Digital Equipment Corporation. Mr. Hindle is also a director of CP Clare Corporation and Mestech,Mestek, 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 The Center for Information Systems Research since 1976. Dr. Rockart is also a director of ComShare Inc. and Renaissance Solutions, Inc. Mr. Shafto has been a director since July 1994. Mr. Shafto is 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 nonemployee directors currently consists of an annual director's fee of $4,000 plus $1,000 and expenses for each meeting of the Board of Directors attended. Directors who are officers or employees of the Company do not receive any additional compensation for their services as directors. 12 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, 1996,12, 1999, there were no shares of Preferred Stock outstanding; 15,957,76071,363,755 shares of Common Stock outstanding and held of record by approximately 1,6723,197 stockholders; and 288,258285,213 shares of Class B Common Stock outstanding and held of record by approximately 174 stockholders. PAGE 10 127 stockholders; and no shares of Preferred Stock outstanding. On October 9, 1998, the Company privately issued 915,571 shares of Keane, Inc. Common Stock in exchange for all of the outstanding capital stock of Fourth Tier, Inc., a privately-held provider of enterprise relationship management services. Such issuance was made pursuant to the exemption provided for private offerings in Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. COMMON STOCK AND CLASS B COMMON STOCK: Voting. Each share of Common Stock is entitled to one vote on all matters submitted to stockholders and each share of Class B Common Stock is entitled to ten votes on all such matters. The holders of Common Stock and Class B Common Stock vote as a single class on all actions submitted to a vote of the Company's stockholders, except that separate class votes of the holders of Common Stock and Class B Common Stock are required to authorize further issuances of Class B Common Stock and certain charter amendments. Voting for directors is noncumulative. As of March 15, 1996,12, 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-shareshare-for- share basis. Shares of Class B Common Stock are automatically converted into an equal number of such shares of Common Stock in connection with any transfer of such shares other than to a Permitted Transferee. In addition, all of the outstanding shares of Class B Common Stock are convertible into shares of Common Stock upon a majority vote of the Board of Directors. Future Issuances of Class B Common Stock; Retirement of Class B Common Stock Upon Conversion into Common Stock. The Company may not issue any additional shares of Class B Common Stock without the approval of a majority of the votes of the outstanding shares of Common Stock and Class B Common Stock voting as separate 13 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. Issuance of Preferred Stock, while providing desirable flexibility in connection with acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY: The Company's Common Stock is traded on the American Stock Exchange under the symbol "KEA." The following table sets forth, for the periods indicated, the high and low closing prices per share as reported by the American Stock Exchange.
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 ---- --- 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 1997 First Quarter $18.56 $14.88 Second Quarter 29.35 15.06 Third Quarter 34.47 27.06 Fourth Quarter 40.69 26.88 The closing price of the Common Stock on the American Stock Exchange on March 15, 199612, 1999 was $29.00.$26.94. 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 1214 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, 1995------------- -------------- ------------- -------------- Total revenues $90,452 $94,647 $96,516 $101,124 Pretax income 9,037 9,429 8,171 5,948 Net income 5,151 5,375 4,943 3,788 Net income per share .32 .33 .30 .23 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 4,178 Net22,784 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 Year Ended December 31, 1997 Total revenues $151,776 $163,301 $182,140 $209,584 Income before income taxes 18,580 21,092 23,106 25,305 Net income 10,884 12,371 13,561 14,555 *Net income per share (basic) .16 .18 .19 .21 *Net income per share (diluted) .15 .17 .19 .20
PAGE 13*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 have been restated to reflect the acquisitions in 1998 of Bricker & Associates, Inc., Icom Systems Ltd and Fourth Tier, Inc., which were accounted for as poolings-of-interests. 15 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 - ------------------------------------------------------------------------------- Income Statement Data:----------------------------------------------------------------------------------------------------- Income Statement Data: Total Revenues $95,562 $99,279 $175,808 $344,583 $382,739revenues $351,346 $394,619 $505,982 $706,801 $1,076,198 Operating Income 8,789 9,649 16,430 31,180 31,611income 32,643 33,659 47,403 85,163 170,187 Net income 5,891 6,278 9,058 16,235 19,25717,308 20,148 28,173 51,371 96,349 Net income per share .54 .57 .76 1.15 1.18 Shares used in(basic) .30 .30 .40 .73 1.36 Net income per share calculation 10,875 11,034 11,898 14,161 16,348(diluted) .29 .30 .40 .72 1.33 *Weighted average common 57,964 67,036 69,780 70,096 71,053 shares outstanding (basic) *Weighted average common 58,984 67,728 70,540 71,603 72,284 shares and common share equivalents outstanding (diluted) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: Total assets $41,079 $49,316$181,259 $198,191 $251,771 $329,176 $ 99,615 $179,002 $194,398457,560 Total debt 154 206 4,323 12,317 9,146 16,502 9,493 3,930 Stockholders' equity 36,234 43,408 83,114 144,387 167,221145,915 169,526 201,768 257,037 363,784 Book value per share 3.39 3.97 6.21 9.04 10.33 Number2.20 2.53 2.89 3.65 5.10 *Number of shares 66,244 67,114 69,792 70,342 71,336 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%95.2% 12.3% 28.2% 39.7% 52.3% Net margin 6.2% 6.3% 5.2% 4.7% 5.0%4.9% 5.1% 5.6% 7.3% 9.0% Return on average equity 17.9% 15.8% 16.7% 16.1% 12.3%15.1% 12.8% 15.2% 22.4% 31.0%
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 have been restated to reflect the acquisitions in 1998 of Bricker & Associates, Inc., Icom Systems Ltd and Fourth Tier, Inc., which were accounted for as poolings-of-interests. 16 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, 19951998 VS. 1994:1997: The Company's revenuesrevenue for 1995 were $382.7 million, up 11.1%1998 was $1.08 billion, a 52.3% increase from $344.6$706.8 million in 1994. Revenues from1997. The increase in revenue was a result of strong growth generated by the Company's Informationservice offerings, and by five strategic acquisitions made during the year. The Company experienced the largest revenue growth in Year 2000 Compliance Services Divisionand 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 as a result of the acquisition of Bricker & Associates, Inc. Help Desk revenue increased 25.5% to $49.2 million, Health Care Services and Sales increased 22.4% to $37.1 million, Supplemental Staffing revenue increased 13.5% to $263.9 million, and all other services increased 6.8% to $17.2 million. The Company's largest revenue increase was from Year 2000 Compliance. Keane expects its Year 2000 revenues will gradually decrease over the next two years, but anticipates that revenues from Strategic Service offerings may increase as companies that have completed their Year 2000 Compliance projects are now able to concentrate on other strategic IT development projects. Salaries, wages, and other direct costs for 1998 were $696.8 million, or 64.7% of revenue, compared to $469.4 million, or 66.4% of revenue for 1997, a decrease of 1.7%. This decrease as a percentage of revenue is due to the Company's ability to increase average billing rates by more than the increase in related technical salary costs, as a result of the increase in strategic services work being performed by the Company. Selling, General, & Administrative ("ISD"SG&A") amountedexpenses for 1998 were $193.4 million or 18.0% of revenue, compared to $356.8$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 continue to reduce SG&A, as a percentage of revenue, by realizing the economies of scale associated with increasing revenue without proportionately increasing SG&A, investing in MIS to increase productivity, and continuing to implement cost saving programs such as national purchasing for 1995,volume purchase discounts in such areas as travel, office supplies, and computer equipment. Amortization of goodwill and other intangible assets for 1998 was $7.7 million, or 0.7% of revenue, compared to $14.0 million, or 2.0% of revenue, in 1997. The decrease is primarily attributable to assets which were fully amortized at the end of 1997. Merger costs for 1998 were $8.1 million as compared to $0 for 1997. This increase is the result of investment banking, legal, accounting and other professional fees associated with the acquisitions of Bricker & Associates, Inc., Icom Systems Ltd and Fourth Tier, Inc., which were all accounted for as poolings-of-interests. Interest and other expenses for 1998 totaled $1.2 million, compared to $1.3 million in 1997. Interest and dividend income for 1998 totaled $5.2 million, compared to $4.2 million in 1997. The increase in interest and other related income can be attributed to the increase in investments, which grew to $77.5 million at year-end 1998 from $50.7 million at year-end 1997. Pretax income for 1998 was $174.2 million, or 16.2% of revenue, up 11.2%97.7% from 1994.pretax income of $88.1 million, or 12.5% of revenue in 1997. The Company's effective tax rate for 1998 was 44.7% compared to 41.7% in 1997. This increase is due to $8.1 million of merger costs that are not deductible for state and federal taxes and a one-time tax expense of $1.7 million as the result of the requirement to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting. 17 Net income and earnings per share for 1998 were $96.3 million and $1.33 per share diluted, respectively, up 87.6% and 84.7%, respectively from $51.4 million and $.72 per share diluted, respectively, in 1997. RESULTS OF OPERATIONS, 1997 VS. 1996: In 1997, revenue increased 39.7% to $706.8 million, from $506.0 million in 1996. This increase in ISD revenues is primarilyrevenue resulted from strong growth in each of the Company's service offerings, including Year 2000 application outsourcing, application development, helpdesk and IT consulting services. Year 2000 revenue increased 724% to $149.9 million, and application outsourcing revenue increased 114% to $104.4 million. Revenue from application development services increased 36% to $98.0 million. Helpdesk revenue increased 39% to $39.2 million. IT consulting services revenue increased 14% to $36.4 million. Other revenue increased 40% to $16.1 million. The Company believes that these revenue increases are attributable to a strong economy in which companies investedmade substantial investments in their information systems. In addition, the Company generated new revenues in 1997 as a result of its Microsoft Help Deskthe Year 2000 compliance issue, which is requiring many large corporations to contract for Windows 95 andwith outside service providers in order to achieve systems compliance by the openingYear 2000. Revenue from supplemental staffing services decreased 14% to $232.5 million. This decrease resulted from the Company's decision to de- emphasize supplemental staffing in 1997 in favor of a new office in Grand Rapids, Michigan. Revenues forstrategic services, which, historically, produce higher margins than supplemental staffing. Revenue from the Company's Healthcare Services Division ("HSD") were $25.9 million, up 9.3% from 1994. The increase in HSD revenues is primarily attributableSolutions Practice increased to the acquisition of Community Health Computing Corporation in April 1995 and of Source Data Systems, Inc. in November 1995.$30.3 million. Salaries, wages, and other direct costs for 19951997 were $256.5$469.4 million, or 67.0%66.4% of revenues,revenue, compared to $225.6$341.4 million, or 65.5%67.5% of revenues, in 1994,revenue, for 1996, a 1.5% increasedecrease of 1.1%. This decrease as a percentage of revenues. The increase in direct cost(s), as a percentage of revenues,revenue is primarily attributabledue to the fact that large clients are negotiating and obtaining competitive bids for high quality services at lower costs. This results 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-third of the Company's direct cost increase as a percentage of revenues, as a result of its new National Vendor Agreement that the Company signed 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 nationalaverage billing rates which at the time were approximately 15% lowerby more than the ratesincrease in related technical salary costs, which, in turn, is attributable to an increase in strategic services work being performed by the Company had been charging. 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.Company. Selling, General, & Administrative ("SG&A") expenses for 19951997 were $82.5$138.2 million, or 21.5%19.5% of revenues,revenue, compared to $76.4$104.5 million, or 22.2%20.6% of revenues,revenue, in 1994,1996, a 0.7% decrease of 1.1% as a percentage of revenues.revenue. The Company's objective is to continue to attempt to reduce 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.&A, and to continue to implement cost saving programs in such areas as travel and employee benefits. Amortization of goodwill and other intangible assets for 19951997 was $12.2$14.0 million, or 3.2%2.0% of revenues,revenue, compared to $11.5$12.7 million, or 3.3%2.5% of revenues,revenue, in 1994.1996. Interest and other related expenses for 19951997 and 1996 totaled $0.7$1.3 million, compared to $3.1 million in 1994. This decrease is primarily attributable to the Company's secondary stock offering of 2.3 million shares of Common Stock in November of 1994, a portion of the proceeds of which were used by the Company to repay all of its outstanding bank indebtedness.respectively. Interest and other related income for 1995 totalled $1.61997 totaled $4.2 million, compared to $0.5$2.7 million in PAGE 15 1994. This1996. The increase is duein interest and other related income can be attributed to the Company investing the net proceeds of the stock offering after paying down the bank indebtedness.increase in investments. Pretax income for 19951997 was $32.6$88.1 million, or 8.5%12.5% of revenues,revenue, up 14.4%80.9% from pretax income of $28.5$48.7 million, or 8.3%9.6% of revenues,revenue, in 1994.1996. The Company's effective tax rate for 19951997 was 40.9%41.7% compared to 43.0%42.2% in 1994. This decline is primarily attributable to1996. The effective tax rate reflects a reduction incombination of federal and state income taxes and the recognition of a research and development tax credit.taxes. Net income and earnings per share for 19951997 were $19.3$51.4 million and $1.18$.72 per share diluted, respectively, up 18.6%82.3% from $16.2$28.2 million and $1.15$.40 per share diluted, respectively, in 1994. RESULTS OF OPERATIONS, 1994 VS. 1993: The Company's revenues for 1994 were $344.6 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. The increase is primarily attributable to the acquisition of AGS on January 5, 1994. Revenues in 1994 for HSD were $23.7 million, up 59.1% from 1993. The increase is primarily attributable to the acquisition of Professional Healthcare Systems in August 1993. Salaries, wages and other direct costs for 1994 were $225.6 million, or 65.5% of revenues, compared to $113.0 million, or 64.2% of revenues, in 1993. This increase in direct costs for 1994, as a percentage of revenues, is primarily due to the inability to pass on cost increases to existing accounts, pressure by large clients to provide volume discounts, and the need to charge lower rates to win new business and gain market share. The Company attempts 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% of revenues, compared to $39.7 million, or 22.6% of revenues, in 1993. Part of the Company's strategy to increase contribution, despite the increase of direct costs, is to aggressively grow both internally and through acquisitions so that SG&A expenses are spread over a broader base of revenues. Amortization of goodwill and other intangible assets for 1994 was $11.5 million, or 3.3% of revenues, compared to $6.8 million, or 3.8% of revenues, in 1993. 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 increase is primarily attributable to the debt incurred to finance the acquisition of AGS. In November 1994, the Company completed a public offering of 2.3 million shares of Common Stock resulting in net proceeds to the Company of approximately $42.3 million. The Company used approximately $23.0 million of the proceeds to repay the outstanding balance of its bank indebtedness. Pretax income for 1994 was $28.5 million, or 8.3% of revenue, compared to $15.6 million, or 8.9% of revenues, in 1993. The Company's effective tax rate for 1994 was 43.0% compared to 41.9% in 1993. The increase in the Company's effective tax rate is principally due to nondeductible goodwill associated with the acquisition of AGS. Net income and earnings per share for 1994 were $16.2 million and $1.15 per share, respectively, compared to $9.1 million and $.76 per share, respectively, for 1993.1996. LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and short-term investments at December 31, 19951998 increased to $33.2$129.2 million from $26.3$91.0 million at December 31, 1994.1997. This increase was primarily attributable to net income, increased accounts payable and accrued expenses of approximtely $15.2 million, offset by increased accounts receivable of approximtely $73.9 million and expenditures associated with the adding and expanding of facilities to support the Company's growth of approximtely $16.7 million. In addition, the Company maintains and has available a $20 million unsecured demand line of credit split equally between two major Boston banks 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. 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. 18 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 1998. This is resulting,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 OVERVIEW 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. As a result, software and computer systems may need to be upgraded or replaced in order to ensure that they accept four digit date codes. STATE OF READINESS Company Services and Products. 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. Certain of these products are not fully Year 2000 operable. Keane has advised its customer base for these products that it does not intend to offer Year 2000 compliant versions of these products and has encouraged them to migrate to new products offered by Keane that are Year 2000 ready. The Company anticipates that some cases,customers will choose not to migrate to these products and will therefore terminate their relationship with Keane's Healthcare Solutions Practice. The exact amount of anticipated lost customers has not been determined. The Company believes that the revenue lost as a result of these events will be immaterial to its overall operations. In addition to its own products, Keane markets certain third party software products through its Healthcare Solutions Practice. The Company is seeking assurances from the vendors of these products that all licensed software is Year 2000 compliant. The Company has received substantially all of these assurances in lower rates for new business and, at times, limitsthe first quarter of 1999. Company Systems. Keane has established a Year 2000 task force that has - --------------- completed its assessment of the Company's abilityInformation Technology-related ("IT- related") systems for the Year 2000 issue. For IT-related systems, the Company believes that most of the critical systems, including its accounting software, AS400 applications and payroll systems, are now Year 2000 compliant. However, Keane's Federal Systems subsidiary uses a software product for its accounting system that is not Year 2000 compliant. The vendor for this product has advised the Company that it plans to increase rates atrelease a Year 2000 compliant upgrade for its product in the first quarter of 1999. The Company is in the process of replacing its billing software because the current software product is not Year 2000 compliant. The cost to replace this software is currently estimated to be approximately $500,000. Keane believes that the new software will be operational by the end of the first quarter of 1999. Keane's Year 2000 task force is also evaluating the Company's non-IT systems, including alarm systems, sprinkler systems, elevators, fax machines and other miscellaneous systems that may contain embedded technology, for the Year 2000 Issue. Keane expects to complete its identification and assessment of Year 2000 Issues in non-IT systems in 1999 and to establish a remediation plan to address any outstanding Year 2000 Issues concerning the Company's non-IT systems. Costs to Address Year 2000 Issues - --------------------------------- Keane anticipates that it will incur direct costs to modify or replace existing accounts.systems used by Keane in the operation of its business to ensure that all systems will be operable in the Year 2000, including the costs to replace its billing 19 software described above. The Company believes that the total amounts spent by it to date and that it expects to spend in 1999 addressing the Year 2000 issue are not material. Risks to the Company - -------------------- In the event of a failure of some or all of the Company's IT-related and non-IT systems on January 1, 2000, the Company's operations may be substantially curtailed until the Company or its third-party suppliers develop a solution to address such system's failure. In such event, the Company may be unable to: (a) perform billing functions, (b) keep track of time performed on projects for its clients, (c) access client records, (d) communicate between field offices and headquarters, (e) operate its Internet site, (f) receive and send email or (g) prepare its financial statements for the fourth quarter of 1999 or periods thereafter. Among the services that Keane provides are assessment, planning, migration/remediation and testing services for Year 2000 compliance. Keane has devoted significant resources to services that address the Year 2000 problem and believes the market for these services will decline as the Year 2000 approaches. Although Keane believes that the demand for its services relating to the Year 2000 problem will continue to exist after the Year 2000, this demand will diminish significantly over time and will eventually disappear. Keane's services addressing the Year 2000 problem involve key aspects of its clients' computer systems. A failure in a client's system could result in a claim for substantial damages against Keane, regardless of Keane's responsibility for the failure. Keane could incur substantial costs in connection with any resulting litigation, regardless of the outcome. Contingency Plans - ----------------- As described above, the Company has identified potential vulnerabilities associated with the change of the century. The Company is devoting resources to working with providers of systems to the Company to ensure that its business is not substantially interrupted as a result of the date change. The Company currently does not have a contingency plan in the event of a particular system not being Year 2000 compliant. Such a plan will be developed if it becomes clear that the company is not going to achieve its scheduled compliance objectives. 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: 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; the number and requirements of client engagements,engagements; employee utilization rates,rates; changes in the rates the Company is able toKeane can charge clients for its services, acquisitions by the Companyservices; acquisitions; and other factors, many of which are beyond the Company'sKeane's control. Since a20 A significant portion of theKeane's expenses of the Company do 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, 1998, Keane has completed the acquisitions of Quantum Associates, Inc. d/b/a Omega Systems in Pittsburgh, Pennsylvania, GSE Erudite Systems in Salt Lake City, Utah, Bricker & Associates, Inc. in Chicago, Illinois, Icom Systems Ltd in Birmingham, England, Fourth Tier, Inc. in El Segundo, California, Emergent Corporation in San Mateo, California and the Company'sAdvanced Solutions Inc. in New York, New York. 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 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: compete cost-effectively,cost-effectively; develop strong client relationships,relationships; generate recurring revenues,revenues; utilize comprehensive delivery methodologiesmethodologies; and achieve organizational learning by implementing standard operational processes. In the healthcare software systems market, Keane competes with some companies that are larger in the healthcare market and have greater financial resources than Keane. 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 will21 Keane may not be able to compete successfully against current or future competitors. In addition, competitive pressures faced by Keane may materially adversely affect its business, financial condition and results of operations. Year 2000 Compliance; Risks Associated with Provision of Year 2000 Services. - --------------------------------------------------------------------------- Keane has reviewed its internal computer systems and has identified certain internal systems that are not Year 2000 compatible (i.e., such systems use only two digits to represent the year in date data fields and, consequently, may not accurately distinguish between the 20th and 21st centuries or may not function properly at the turn of the century). Keane is in the process of correcting these systems or replacing them with Year 2000 compliant systems. Keane expects to implement successfully the systems and programming changes necessary to address Year 2000 issues and does not believe that the cost of such actions will have a material effect on Keane's financial condition or results of operations. There may, however, be a delay in, or increased costs associated with, the implementation of these changes. Keane's inability to implement changes could have a material adverse effect on Keane's business, financial condition or results of operations. Among the services that Keane provides are assessment, planning, migration/remediation and testing services for Year 2000 compliance. Keane has devoted significant resources to services that address the Year 2000 problem and believes the market for these services will decline as the Year 2000 approaches. Although Keane believes that the demand for its services relating to the Year 2000 problem will continue to exist after the Year 2000, this demand will diminish significantly over time and will eventually disappear. Keane's services addressing the Year 2000 problem involve key aspects of its clients' computer systems. A failure in a client's system could result in a claim for substantial damages against 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, 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. 22 ITEM 8. FINANCIAL HIGHLIGHTS:STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PagePage(s) Report of Independent Accountants......................................... 20Accountants................................ 24 Consolidated Balance Sheets as of December 31, 19941997 and 1995.............. 211998..... 25 Consolidated Statements of Income for the Years Ended December 31, 1993, 19941996, 1997 and 1995...................... 221998............. 26 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 19941996, 1997 and 1995.............................. 231998..................... 27 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 19941996, 1997 and 1995.................................... 241998........................... 28 Notes to Consolidated Financial Statements................................25-36 PAGE 19Statements....................... 29-38 23 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.: We have auditedIn our opinion, the accompanying consolidated financial statementsbalance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial statement scheduleposition of Keane, Inc. and its subsidiaries listedat December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in Items 14a(1) and (2) of this Form 10-K.the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements and the financial statement schedule are the responsibility of the Company's management. Ourmanagement; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards. Those standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In ourthe opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keane, Inc. as of December 31, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts Coopers & Lybrand L.L.P. March 21, 1996 PAGE 20February 26, 1999 24 KEANE, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1994 19951997 1998 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT SHARE AMOUNTS) Assets Current: Assets Current: Cash and cash equivalents $ 26,287,72640,276 $ 21,913,322 Investments (Note B) -- 11,331,22851,696 Short term investments 6,607 6,165 Accounts receivable, net (Note C):net: Trade 69,045,912 81,022,024157,921 229,457 Other 993,898 1,090,6882,041 1,573 Prepaid expenses and other current assets (Note L) 3,975,377 4,847,649 -------------- --------------10,729 23,376 -------- -------- Total current assets 100,302,913 120,204,911217,574 312,267 Long term investments 44,139 71,368 Property and equipment,net (Note D) 11,600,214 12,425,54223,613 29,973 Intangible assets, net (Note E) 65,599,870 58,767,00035,825 35,714 Other assets, net (Note L) 1,499,216 3,000,659 -------------- -------------- $ 179,002,213 $ 194,398,112 ============== ==============8,025 8,238 -------- -------- $329,176 $457,560 ======== ======== Liabilities Current: Accounts payable $ 3,490,41622,709 $ 4,696,30020,222 Accrued expenses and other liabilities (Note F) 9,250,153 5,360,01313,191 30,647 Accrued compensation 6,852,305 7,925,78623,691 25,429 Notes payable (Note H) 4,400,011 3,177,922 Capital6,927 1,000 Accrued income taxes 3,055 13,548 Current capital lease obligations (Note G) 434,523 433,963 -------------- --------------822 954 -------- -------- Total current liabilities 24,427,408 21,593,984 Notes payable (Note H) 6,941,000 5,427,00070,395 91,800 Long-term portion of capital lease obligations (Note G) 541,686 107,448 Deferred income taxes (Note L) 2,705,000 49,0001,379 1,976 Notes payable 365 --- Commitments and contingencies (Note K) 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 15,991,41270,361,354 in 19941997 and 16,210,38971,363,272 in 1995 1,599,141 1,621,0391998 7,036 7,136 Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding 288,965286,615 in 19941997 and 288,258285,303 in 1995 28,896 28,8251998 29 29 Additional paid-in capital 90,019,442 93,542,841 Cumulative97,680 109,606 Foreign currency translation adjustment (74,114) (42,542)(372) (764) Retained earnings 55,226,080 74,482,933155,077 250,546 Less treasury stock at cost, 303,414305,615 shares of Common Stock in 19941997 and 304,314313,064 shares of Common Stock in 1995 (2,412,326) (2,412,416) -------------- --------------1998 (2,413) (2,769) -------- -------- Total stockholders' equity 144,387,119 167,220,680 -------------- -------------- $ 179,002,213 $ 194,398,112 ============== ============== - ------------------------------------------------------------------------------------------------257,037 363,784 -------- -------- $329,176 $457,560 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. PAGE 2125
KEANE, INC. CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1993 1994 19951996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Total revenues $ 175,808,454505,982 $ 344,582,663706,801 $ 382,739,4921,076,198 Salaries, wages and other direct costs 112,953,112 225,550,990 256,474,275341,434 469,433 696,752 Selling, general and administrative expenses 39,661,278 76,361,573 82,470,444104,481 138,168 193,438 Amortization of goodwill and other intangible assets 6,764,199 11,490,247 12,184,014 -------------- -------------- --------------12,664 14,037 7,701 Merger costs --- 8,120 ---------- ---------- ---------- Operating income 16,429,865 31,179,853 31,610,759 Investment47,403 85,163 170,187 Interest and dividend income 153,741 451,110 1,635,9532,676 4,212 5,189 Interest expense 828,589 2,757,628 486,027602 244 163 Other expenses, net 176,766 392,843 175,832 -------------- -------------- --------------741 1,048 1,057 ---------- ---------- ---------- Income before income taxes 15,578,251 28,480,492 32,584,85348,736 88,083 174,156 Provision for income taxes (Note L) 6,520,000 12,245,000 13,328,000 -------------- -------------- --------------20,563 36,712 77,807 ---------- ---------- ---------- Net income $ 9,058,25128,173 $ 16,235,49251,371 $ 19,256,853 ============== ============== ==============96,349 ========== ========== ========== Net income per share $0.76 $1.15 $1.18 ============== ============== ==============(basic) $ 0.40 $ 0.73 $ 1.36 ========== ========== ========== Net income per share (diluted) $ 0.40 $ 0.72 $ 1.33 ========== ========== ========== Weighted average common shares outstanding (basic) 69,780 70,096 71,053 ========== ========== ========== Weighted average common shares and common share equivalents outstanding 11,897,817 14,161,500 16,347,753 ============== ============== ==============(diluted) 70,540 71,603 72,284 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. PAGE 2226 KEANE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1993, 1994 and 1995
For the Years Ended December 31, 1996, 1997 and 1998 - ---------------------------------- (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 $ 14,765,677December 31, 1995 67,129,584 $6,713 288,258 $29 $88,683 Common Stock issued under: 1982under 929,307 93 3,380 stock option and employee purchase plans Stock Option Plan 141,938 14,193 578,763 1982 Nonstatutoryissued by pooled 1,751,116 175 companies Conversions of Class B Common 645 (645) Stock Option Plan 26,625 2,662 62,288 1992 Employeeinto Common Stock Purchase Plan 47,617 4,763 501,356Income tax benefit from stock option plans 583 Other comprehensive income Treasury Stock purchase Dividends paid to shareholders Net income --------------------------------------------------------------- Balance December 31, 1996 69,810,652 6,981 287,613 29 92,646 Common Stock issued under 549,704 55 4,006 stock option and employee purchase plans Conversions of Class B Common 998 (998) Stock into Common Stock Income tax benefit from stock 1,028 option plans Other comprehensive income Dividends paid to shareholders Net income --------------------------------------------------------------- Balance December 31, 1997 70,361,354 7,036 286,615 29 97,680 Pooling of interests with Omega (Note N) Common Stock issued under 769,795 77 6,191 stock option and employee purchase plans Issuance of common stock for 230,811 23 (23) business acquisitions Merger expenses paid by shareholders 1,571 Conversions of Class B Common 1,312 (1,312) Stock into Common Stock Income tax benefit from stock option plans 4,187 Other comprehensive income Dividends paid to shareholders Net income --------------------------------------------------------------- Balance December 31, 1998 71,363,272 $7,136 285,303 $29 $109,606 =============================================================== -------- Treasury Stock Foreign -------- Total Currency at Cost Stock- Trans- Retained -------- holders' lation Earnings Shares Amount Equity - ------------------------------------------------------------------------------- Balance December 31, 1995 ($42) $ 76,555 (304,314) ($2,412) $169,526 Common Stock issued under stock option and employee purchase plans 3,473 Stock issued by pooled companies 175 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 28,947,026- Income tax benefit from stock option plans 312,000583 Other comprehensive income (3) (3) Treasury Stock purchase (1,301) (1) (1) Dividends paid to shareholders (158) (158) Net income ------------------------------------------------------------------------28,173 28,173 ------------------------------------------------- Balance December 31, 1993 13,399,666 1,339,967 290,603 29,060 45,167,1101996 (45) 104,570 (305,615) (2,413) 201,768 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 4,061 stock option and employee purchase plans Conversions of Class B Common - 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 1,028 option plans 343,000 Foreign currency translation adjustmentOther comprehensive income (327) (327) Dividends paid to shareholders (864) (864) Net income ------------------------------------------------------------------------51,371 51,371 ------------------------------------------------ Balance December 31, 1994 15,991,412 1,599,141 288,965 28,896 90,019,4421997 (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 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 9,250 925 191,013under (7,449) (356) 5,912 stock option and employee purchase plans Issuance of common stock for - business acquisitions Merger expenses paid by 1,571 shareholders Conversions of Class B Common - Stock into Common Stock 707 71 (707) (71) Income tax benefit from stock 4,187 option plans 485,000 Foreign currency translation adjustment Treasury Stock purchaseOther comprehensive income (392) (392) Dividends paid to shareholders (1,469) (1,469) Net income ------------------------------------------------------------------------96,349 96,349 ------------------------------------------------ Balance December 31, 1995 16,210,389 $1,621,039 288,258 $28,825 $ 93,542,841 Cumulative Treasury Stock at Cost Translation Retained -------------------------- Adjustment Earnings Shares Amount Total - ------------------------------------------------------------------------------------------------------- Balance January 1, 1993 $29,932,337 (303,414) $(2,412,326) $ 43,408,097 Common Stock issued under: 1982 Stock Option Plan 592,956 1982 Nonstatutory Stock Option Plan 64,950 1992 Employee Stock Purchase Plan 506,119 Conversions of Class B Common Stock into Common Stock -- Proceeds from issuance of Common Stock 29,172,026 Income tax benefit from stock option plans 312,000 Net income 9,058,251 9,058,251 ------------------------------------------------------------------------ Balance December 31, 1993 38,990,588 (303,414) (2,412,326) 83,114,399 Common Stock issued under: 1982 Stock Option Plan 1,176,126 1992 Employee Stock Purchase Plan 1,313,051 Conversions of Class B Common Stock into Common Stock -- Proceeds from issuance of Common Stock 42,279,165 Income tax benefit from stock option plans 343,000 Foreign currency translation adjustment $ (74,114) (74,114) Net income 16,235,492 16,235,492 ------------------------------------------------------------------------ Balance December 31, 1994 (74,114) 55,226,080 (303,414) (2,412,326) 144,387,119 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 191,938 Conversions of Class B Common Stock into Common Stock -- Income tax benefit from stock option plans 485,000 Foreign currency translation adjustment 31,572 Treasury Stock purchase (900) (90) (90) Net income 19,256,853 19,256,853 ------------------------------------------------------------------------ Balance December 31, 1995 $ (42,542) $74,482,933 (304,314) $(2,412,416) $167,220,6801998 ($764) $250,546 (313,064) ($2,769) $363,784 ================================================
The accompanying notes are an integral part of the consolidated financial statements. PAGE 2327 KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1993 1994 19951996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ (IN THOUSANDS) Cash Flows From Operating Activities: C> Net income $ 9,058,25128,173 $ 16,235,49251,371 $ 19,256,85396,349 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,024,500 16,321,231 17,767,55320,551 22,659 21,018 Deferred income taxes (2,160,000) 1,660,000 (1,023,000)(4,267) (6,896) (10,553) Provision for doubtful accounts 1,164,000 619,491 850,7713,621 3,391 5,332 Loss (gain) on sale of property and equipment 5,045 74,565 72,657 Accrued(18) 14 25 Non-cash interest on long-term debt net 200,007 656,005 134,740380 197 --- Tax Benefitbenefit from stock options 312,000 343,000 485,000583 1,028 4,187 Changes in assets and liabilities, net of acquisitions: (Increase) in accounts receivable (7,486,728) (14,073,680) (11,285,320)(22,377) (59,993) (73,854) (Increase) in prepaid expenses and other assets (540,102) (870,013) (3,255,602) (Decrease)(220) (451) (1,995) Increase in accounts payable and accrued expenses and other liabilities (3,503,708) (9,720,942) (4,011,861)12,843 29,098 15,228 Increase (decrease) in income taxes payable 1,927,253 (2,779,966) -- ------------- ------------- -------------5,410 (3,990) 10,493 -------- -------- -------- Net cash provided by operating activities 8,000,518 8,465,183 18,991,791 ------------- ------------- -------------44,679 36,428 66,230 -------- -------- -------- Cash Flows From Investing Activities: Purchase of investments (4,869,389) -- (13,343,294)(34,586) (60,080) (97,592) Sale of investments 538,103 4,869,389 2,012,06615,675 39,577 70,805 Purchase of property and equipment (1,751,120) (3,581,214) (5,675,206)(5,842) (17,502) (16,740) Proceeds from the sale of property and equipment 23,245 156,400 111,056308 519 385 Payments for acquisitions (38,094,000) (47,122,012) (8,909,564) ------------- ------------- -------------(747) --- (9,150) -------- -------- -------- Net cash used for(used for) investing activities (44,153,161) (45,677,437) (25,804,942)(25,192) (37,486) (52,292) -------- -------- -------- 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 (3,302) (4,161) (7,292) Principal payments under capital lease obligations (82,712) (511,994) (430,377)(1,158) (921) (1,240) Proceeds from issuance of common stock 30,336,051 44,768,342 2,869,123 ------------- ------------- -------------3,474 4,061 7,483 Dividends paid (158) (864) (1,469) -------- -------- -------- Net cash provided by(used for) financing activities 30,253,339 44,256,348 2,438,746 ------------- ------------- -------------(1,144) (1,885) (2,518) Net increase (decrease) in cash and cash equivalents (5,899,304) 7,044,094 (4,374,405)18,343 (2,943) 11,420 Cash and cash equivalents at beginning of year 25,142,936 19,243,632 26,287,726 ------------- ------------- -------------24,876 43,219 40,276 -------- -------- -------- Cash and cash equivalents at end of year $ 19,243,63243,219 $ 26,287,72640,276 $ 21,913,321 ============= ============= =============51,696 ======== ======== ======== Supplemental information: Interest paid $ 629,000 $ 2,102,000 $ -- Income taxes paid 6,595,000 14,042,000 14,463,000 - -------------------------------------------------------------------------------------------------------------------------------$ 18,241 $ 45,922 $ 68,540
The accompanying notes are an integral part of the consolidated financial statements. PAGE 2428 KEANE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Keane, Inc. (the Company)"Company") and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. As described in Note N, 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 with the current year presentation. NATURE OF OPERATIONS: The Company provides management and information technology (IT) consulting, application software design, development and integration, application management, and call center management services forto corporations, government agencies, and healthcare facilities. The Company serves its clients through two operating divisions and a series of corporate practices that support the Company's network of 40 branch offices in the major markets of the U.S., Canada, and satellite offices located across the United States and in Canada. The Information Services Division ("ISD"), which accounted for approximately 93%Kingdom. 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.cost-effective local level. The Company primarily provides services to Fortune 1000 companies. REVENUE RECOGNITION: The Company provides system design, implementation and support services under fixed price and time and materials contracts. 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$28 million, $29 million and $33,000,000$31 million in 1993, 19941996, 1997 and 1995,1998, respectively. Aggregate revenues for IBM totaled approximately $21,000,000, $57,000,000$55 million, $70 million and $51,000,000$66 million in 1993, 19941996, 1997 and 1995,1998, 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 at December 31, 1995 include1998 included investments in commercial paper ($15.041.2 million), municipal bonds ($1.0 million) and money market funds ($3.51.1 million). Cash equivalents at December 31, 1997 included investments in commercial paper ($22.0 million), corporate bonds ($4.3 million) and money market funds ($2.3 million). 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 29 investments and trade receivables. The Company's cash, cash equivalents and investments are held with financial institutions with high credit standings. The 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 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,"available- for-sale, and as such, unrealized gains and losses are reported in a separate component of stockholders' equity. At December 31, 1995,1997 and 1998, the market value of these investments approximated cost. PAGE 25 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 3 to 5 years for office equipment, computer equipment and software. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvement or the term of the lease. Upon disposition, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is included in income. INTANGIBLE ASSETS: Intangible assets consist principally of goodwill, the excess of the purchase price over the appraised fair value of assets acquired in acquisitions, and acquired customer-based intangibles, noncompetition agreements, and software initially recorded at appraised fair value. Intangibles are amortized on a straight-line basis over 14 or 15 years for goodwill and 3 to 15 years for other intangibles. At each 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 $500,000 and $1,300,000$0.5 million of computer software development costs during 1994 and 1995, respectively. These1996. There were no costs will becapitalized in 1997 or 1998. Costs are amortized over the expected life of the product, beginning in 1996 when the product is released.approximately 5 years, upon release. INCOME TAXES: The Company accounts for income taxes under the liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 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, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") was issued. The Company intends to adopt SFAS 121 in 1996 and does not expect it to have a material impact on the Company's financial condition, results of operations or net cash flows. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. INVESTMENTS The Company determinesAt December 31, 1998, 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)33.6 million), municipal bonds ($10.9 million), corporate pass throughs ($12.8 million) and corporate bonds ($20.2 million). At December 31, 1997, the Company's investments included obligations of the U.S. Government ($11.8 million), municipal bonds ($7.6 million), mortgage pass throughs ($9.6 million), corporate bonds ($19.7 million) and commercial paper ($5,036,043)2.0 million). Contractual maturities at December 31, 19951998 were $2,605,798$6.1 million due within one year and $8,725,430$71.4 million due after one through threefive years. Actual maturities may differ from contractual maturities because the issuers of these securities may have the right to prepay obligations without penalty. There was no gain or loss, based on a specific identification basis, realized on the sale of available for sale securities during the yearyears ended December 31, 1995. PAGE 261996, 1997 and 1998. 30 C. ACCOUNTS RECEIVABLE Accounts receivable are presented net of an allowance for doubtful accounts of approximately $2,483,000$4.9 million and $1,916,000$8.1 million at December 31, 19941997 and 1995,1998, respectively. The provisions charged to the statement of operations were $3.6 million, $3.3 million and $5.3 million in 1996, 1997, and 1998, respectively, and write-offs against the allowances were $1.7 million, $2.1 million and $2.1 million in 1996, 1997, and 1998, respectively. D. PROPERTY AND EQUIPMENT (IN THOUSANDS) Property and equipment consist of the following:
December 31, 1994 1995 ----------- -----------1997 1998 ------- ------- Buildings and improvements $ 707,063772 $ 893,065772 Office equipment 17,384,308 21,268,33038,467 50,191 Computer equipment and software 2,721,917 4,121,6485,517 8,946 Leasehold improvements 1,848,723 2,352,386 ----------- ----------- 22,662,011 28,635,4295,301 7,387 ------- ------- 50,057 67,296 Less accumulated depreciation and amortization 11,061,797 16,209,887 ----------- ----------- $11,600,214 $12,425,542 =========== ===========26,444 37,323 ------- ------- $23,613 $29,973 ======= =======
Depreciation expense totaled $2,228,152, $4,801,424$7,887, $8,622 and $5,583,539$13,317 in 1993, 19941996, 1997 and 1995,1998, respectively. Computer equipment and software includes assets arising from capital lease obligations at a cost of $1,636,448$1,628 and $1,773,276$1,510, with accumulated amortization totaling $693,525$1,263 and $1,116,436$1,030, at December 31, 19941997 and 1995,1998, respectively. PAGE 27 E. INTANGIBLE ASSETS (IN THOUSANDS) Intangible assets consist of the following:
December 31, 1994 1995 -----------------------------1997 1998 ---- ---- Goodwill $ 19,302,21 $20,213,814$23,695 $23,695 Noncompetition agreements 21,985,000 22,135,00022,203 2,268 Customer-based intangibles 37,463,963 37,855,33637,915 44,501 Software 5,169,450 8,088,7898,089 5,618 Other 294,000 -- ----------- ----------- 84,214,631 88,292,9391,208 273 ------- ------- 93,110 76,355 Less accumulated amortization 18,614,761 29,525,939 ----------- ----------- $65,599,870 $58,767,000 =========== ===========57,285 40,641 ------- ------- $35,825 $35,714 ======= =======
31 F. ACCRUED EXPENSES AND OTHER LIABILITIES (IN THOUSANDS) Accrued expenses and other liabilities consist of the following:
December 31, 1994 1995 ----------- -----------1997 1998 ---- ---- Deferred savings and profit sharing plan $ 1,681,2453,156 $ 1,664,738 Health insurance costs 1,895,062 301,5105,250 Accrued employee benefits 2,100 3,412 Employee stock withholdings 936 4,265 Accrued payroll taxes 817,335 443,893609 6,164 Accrued rent obligations 1,350,015 622,9511,299 2,130 Other 3,506,496 2,326,921 ----------- ----------- $ 9,250,153 $ 5,360,013 =========== ===========5,091 9,426 ------- ------- $13,191 $30,647 ======= =======
G. CAPITAL LEASE OBLIGATIONS (IN THOUSANDS) The Company finances certain equipment through capital leases. At December 31, 1995,1998, future minimum lease payments under noncancelable capital leases, together with the present value of minimum lease payments, are summarized below: Year ending December 31, 1996 $464,6331999 $1,044 Year ending December 31, 1997 109,494 --------2000 1,017 Year ending December 31, 2001 782 Year ending December 31, 2002 564 ------ Total minimum payments 574,1273,407 Less amount representing future interest 32,716 --------477 ------ Present value of net minimum payments 541,4112,930 Less current portion 433,963 --------954 ------ Long-term portion of capital lease payments $107,448 ========$1,976 ======
Equipment acquired under capital lease obligations in 1995 totaled approximately $162,000. PAGE 28 H. NOTES PAYABLE In conjunction with the Company's acquisition of General Electric Consulting (see Note N), a $4 million note with interest of 5% was payable to General ElectricGSE Erudite Software, Inc. on December 29, 1995. The note was subject to reduction to the extent that the Company's average annual revenue from business with General Electric and its affiliates during the three year period ending December 31, 1995 was less than a specified amount. The Company's revenue from business with General Electric was less than the specified amount and, accordingly, the principal amount was reduced to $324,750 which was paid in January 1996. In addition, the $400,010 of interest accrued in prior years was reduced to approximately $52,000. The reduction in the principal amount of the note resulted in a commensurate reduction in goodwill. The reduction in previously accrued interest of approximately $348,000 was recorded as a reduction in interest expense in 1995. In conjunction with the AGS acquisition (see Note N),April 20, 1998, the Company and NYNEX also executedissued a separate noncompetition agreement covering a four-year period in exchange for a noninterest-bearing $12.0$1.0 million subordinateddollar note payable 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 conjunction with the Company's acquisition of Source Data Systems, Inc. on November 1, 1995, an $800,000 note, bearing interest at 5%, is payable one year from the purchase date. At December 31, 1997, Icom Systems Ltd., had $3.9 million of outstanding debt, which was paid during 1998. I. 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.32 The Company has three classes of share capital: Preferred Stock, Common Stock and Class B Common Stock. Holders of Common Stock are entitled to one vote for each share held. Holders of Class B Common Stock generally vote as a single class with holders of Common Stock but are entitled to 10 votes for each share held. The Board of Directors is authorized to determine the rights, preferences, privileges and restrictions, including the dividend rights, conversion rights, voting rights, terms of redemption price or prices and liquidation preferences, of any series of Preferred Stock, and to fix the number of shares of any such series. The Common Stock and Class B Common Stock have equal liquidation and dividend rights except that any regular quarterly dividend declared shall be $.05 per share less for holders of Class B Common Stock. Class B Common Stock is nontransferable, except under certain conditions, but may be converted into Common Stock on a share-for-share basis at any time. Conversions to common stock totaled 3,945, 1,638645, 998 and 7071,312 shares in 1993, 19941996, 1997 and 1995,1998, respectively. Shares of common stock reserved for conversions totaled 288,258285,303 at December 31, 1995. PAGE 29 1998. J. STOCK OPTION, STOCK PURCHASE, COMPENSATION AND RETIREMENT 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," in 1996 and has continued to apply APB Opinion 25 and related Interpretations in accounting for its plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net income and earnings per share for the years ended December 31, 1996, 1997 and 1998 would have been reduced to the pro forma amounts indicated below:
Years Ended December 31, 1996 1997 1998 ---------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net income - as reported $ 28,173 $ 51,371 $ 96,349 Net income - pro forma 27,379 49,386 91,020 Net income per share - as reported (diluted) .40 .72 1.33 Net income per share - pro forma (diluted) .39 .69 1.26
The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of effects on reported net income for future years. SFAS 123 does not apply to awards prior to 1995 and additional awards in future years are anticipated. The fair market value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: an expected life of 4.5 years in 1996 and 4.0 years in 1997 and 1998, expected volatility of 37% in 1996 , 41% in 1997 and 47% in 1998, a dividend yield of 0% and risk-free interest rates between 4.22-6.70%. 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 provides for grants of stock options for up to 2,000,000 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. 33 The weighted-average fair value of options granted under both Plans during the years ended December 31, 1995, there were 37,775 shares currently exercisable1996, 1997 and 420,250 shares remained available for future grant.1998 was $2.45, $8.40 and $14.73, respectively. Transactions under the plan since the inceptionCompanys' stock option plans are as follows:
Weighted Common OptionAverage Stock Exercise Price Range ------------------------------------------ -------------- Outstanding at December 31, 1992 --1995 1,793,469 $ 4.00 Granted 332,625 $11.11 -- $15.33799,630 5.92 Exercised (346,434) 3.15 Canceled/Expired (18,000)(128,000) 4.29 --------- Outstanding at December 31, 1993 314,6251996 2,118,665 4.84 Granted 106,000 18.42 -- 24.67575,432 19.91 Exercised (413,004) 3.73 Canceled/Expired (47,625)(93,998) 6.83 --------- Outstanding at December 31, 1994 373,000 11.11 -- 24.671997 2,187,095 8.93 Granted 186,500 20.75 -- 29.00953,789 34.15 Exercised (44,225)(782,577) 4.21 Canceled/Expired (79,750)(120,247) 18.80 --------- Outstanding at December 31, 1995 435,525 $11.11 -- $29.00 =========1998 2,238,060 $20.80
The following table summarizes information about stock options that were outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------ -------------------------- Weighted Average Remaining Range of Number Contractual Weighted Average Number Weighted Average Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price --------------- ----------- ------------------ ---------------- ----------- ---------------- $ 0.04 - $ 5.19 322,740 1.3 years $ 4.70 154,283 $ 4.17 $ 5.42 - $ 7.25 472,987 2.1 years $ 6.02 60,337 $ 6.06 $ 7.35 - $15.06 361,333 3.0 years $14.46 - - $15.32 - $28.19 145,250 4.6 years $27.70 - - $30.69 - $38.38 822,250 4.3 years $33.97 36,844 $ 32.58 $43.50 - $55.63 113,500 3.9 years $44.41 - - --------- $ 0.04 - $55.63 2,238,060 3.2 years $20.80 251,464 $ 9.16
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 1998. At December 31, 1995, 344,4401998, 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 $.10 per share of the purchase price, is amortized to compensation expense over the three-year vesting period. The amount of amortization for 19951996 and 1997 was $53,000.$54 and $47, respectively. There was no amortization in 1998. 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, 19941996, 1997 and 1995,1998, participants in this plan purchased 47,618, 72,195257,776, 136,700 and 79,04572,832 shares, respectively. Shares available for future purchases totaled 125,3351,234,032 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.1998. 34 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, 19941996, 1997 and 19951998 approximated $1,824,000, $4,887,000$4,224, $6,661 and $5,075,000,$9,505, 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, 19941996, 1997 and 19951998 amounted to approximately $1,004,000, $1,682,000$705, $3,156 and $1,664,000,$4,818, respectively. K. COMMITMENTS AND CONTINGENCIES The Company's corporate offices are located in Boston, Massachusetts. The building is leased from a partnership in which certain officers, directors and shareholders of the Company are limited partners. The lease is for a term of twenty years at annual rentals of $682,000 through February 1996 and at prevailing market rates in subsequent years through 2006. The Company is also required to pay specified percentages of annual increases in real estate taxes and operating expenses. The Company leases additional office space and apartments under operating leases, some of which may be renewed for periods up to five years, subject to increased rentals. Rental expense for all of the Company's facilities amounted to approximately $3,763,000$11.6 million in 1993, $8,100,0001996, $13.0 million in 19941997 and $8,880,000$16.1 million in 1995.1998. The Company is committed to minimum annual rental payments under all leases of approximately $9,389,000 in 1996, $6,640,000 in 1997, $4,899,000 in 1998, $3,147,000$17.7 million in 1999, $1,726,000$14.9 million in 2000, $13.0 million in 2001, $10.7 million in 2002, $7.2 million in 2003 and an aggregate of $3,989,000$8.8 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. 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 -----------------------------------------------, 1996 1997 1998 ---------------------------------------- (IN THOUSANDS) Current: Federal $19,936 $35,236 $ 6,545,000 $ 8,315,000 $11,097,00067,740 State 2,135,000 2,617,000 3,185,0004,830 8,161 15,499 Foreign (347,000) 69,000 ----------- ----------- -----------64 211 5,121 ------- ------- -------- Total 8,680,000 10,585,000 14,351,000 ----------- ----------- -----------24,830 43,608 88,360 Deferred: Federal (1,634,000) 1,260,000 (847,000)(3,948) (7,073) (7,626) State (526,000) 400,000 (176,000) ----------- ----------- -----------(255) 251 (2,717) Foreign (64) (74) (210) ------- ------- -------- Total (2,160,000) 1,660,000 (1,023,000) ----------- ----------- -----------(4,267) (6,896) (10,553) ------- ------- -------- $20,563 $36,712 $ 6,520,000 $12,245,000 $13,328,000 =========== =========== ===========77,807 ======= ======= ========
PAGE 3335 A reconciliation of the statutory income tax provision with the effective income tax provision is as follows:
Years Ended December 31, 1993 1994 1995 ---------------------------------------------1996 1997 1998 ----------------------------- (IN THOUSANDS) Federal income taxes at 35% $5,452,000 $ 9,968,000 $11,405,000$17,058 $30,829 $60,955 State income taxes, 1,046,000 1,961,000 2,127,0002,996 5,164 8,307 net of federal tax benefit Merger related costs - 2,916 Tax credits -- -- (241,000)(130) (35) - Other, net 22,000 316,000 37,000 ---------- ----------- ----------- $6,520,000 $12,245,000 $13,328,000 ========== =========== ===========639 754 5,629 ------- ------- ------- $20,563 $36,712 $77,807 ======= ======= =======
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, 1997 1998 (IN THOUSANDS) Current: Current: Allowance for doubtful accounts and other reserves $ 609,000 $ 1,030,000 $ 754,0005,476 $14,206 Employee medical benefits 465,000 785,000 (352,000)(374) (367) Accrued expenses -- 437,000 217,000 ---------- ----------- -----------397 946 --------- --------- Total current assets $1,074,000 $ 2,252,000 $ 619,000 ========== =========== ===========5,499 $14,785 ========= ========= Long-term: Customer based intangibles $ -- $(7,152,000) $(6,654,000)(5,478) $(4,980) Amortization of intangible assets 1,416,000 3,759,000 6,495,00011,118 11,913 Accrued rents -- 750,000 177,00070 - Depreciation and other (275,000) (62,000) (67,000) ---------- ----------- -----------73 117 --------- --------- Long-term assets (liabilities) $1,141,000 $(2,705,000) $ (49,000) ========== =========== ===========5,783 $ 7,050 ========= =========
The current component is included in prepaid expenses and other current assets on the balance sheet. The long-term component is included in the other assets on the balance sheet. M. RESEARCH AND DEVELOPMENT Research and development expenses included in SG&A were approximately $1,566,000, $2,842,000$4.1 million, $2.9 million and $3,997,000$3.5 million in 1993, 19941996, 1997 and 1995,1998, respectively. N. BUSINESS ACQUISITIONS Effective January 1, 1993,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 business and selected assets and liabilitiesdate 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,acquisition. On April 30, 1998, the Company also acquiredpurchased substantially all of the software and selected assets of Professional Healthcare Systems,GSE Erudite Software, Inc. (PHS) for cashThe aggregate purchase price of $4,400,000 and assumed liabilities totaling $2,404,000. These acquisitions werethis acquisition was approximately $9.8 million. The acquisition was accounted for by the purchase method of accounting. Accordingly, the assets acquired, including primarily customer-based intangibles and 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 as goodwill and is being amortized on a straight-line basis over a 15-year period. The unaudited proforma results of operations of the Company and AGS, as if the acquisition had occurred on January 1, 1993, based on the final allocation of purchase price is as follows: 1993 total revenues, $342,699,000, net income, $12,840,000, and net income per share, $1.08. The unaudited proforma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of January 1, 1993. Effective April 1, 1994, the Company acquired specific assets and assumed certain liabilities of The Geary Corporation at an estimated purchase price of $3.2 million. The Geary Corporation was based 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 of approximately $1.0 million. During 1995, the Company completed three acquisitions. The aggregate purchase price of these acquisitions totaled $7.9 million. These acquisitions were accounted for by the purchase method of accounting. Accordingly, the assets acquired, including primarily customer-based intangibles, noncompetition agreements and software, have been recorded at their fair values at the date of acquisitions. The customer-based intangibles, noncompetition agreements and software are being amortized on a straight-line basis over periods ranging from three to five years. The excessOn 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 36 in exchange for approximately 2,336,196 million shares of Keane, Inc. common stock (the "merger"). The merger has been recordedaccounted for as goodwilla pooling-of- interests. During the quarter ended June 30, 1998, the Company incurred a $4.1 million charge to operations to reflect investment banking, legal, accounting and is being amortized onother professional fees associated with the Bricker transaction. Revenue and net income of the combined entities for the three-month period prior to the merger and the corresponding period in the prior year are presented in the following table. Prior to the merger, there were no intercompany transactions between the two companies.
Three months ended March 31, 1998 March 31, 1997 -------------- ------------------ (IN THOUSANDS) 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 straight-lineprivately-held provider of information technology business solutions in Birmingham, England, and issued or reserved for issuance approximately 894,500 shares of Keane common stock in connection with the acquisition, 835,545 of which were issued in exchange for shares of Icom capital stock which Keane acquired at the closing of the transaction, and up to approximately 58,955 of which will be issuable upon the exercise of options to acquire shares of Keane common stock that Keane issued in exchange for certain options to acquire shares of Icom capital stock held by the Icom optionholders. The merger has been accounted for as a pooling-of-interests. 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 intercompany transactions between the two companies.
Six months ended June 30, 1998 June 30, 1997 ------------- ------------- (IN THOUSANDS) 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-interests. 37 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 as a result of the requirement to convert Fourth Tier, Inc. from cash to accrual basis over a 15-year period.for tax reporting. 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 intercompany transactions between the two companies.
Nine months ended September 30, 1998 September 30, 1997 ------------------ ------------------ (IN THOUSANDS) 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 ======== ========
O. BANK DEBT In January 1994, the Company entered into a new $45,000,000 revolving credit agreement replacing its existing line of credit. The outstanding balance was repaid with the proceeds of the 1994 offering described in Note I. Borrowings under the line were at the bank's corporate rate. 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.banks, which expires in May of 1999. Borrowings will bear interest at the bank's base rate (the prime rate). There were no borrowings under either line during 1995. PAGE 351997 or 1998. P. EARNINGS PER SHARE A summary of the Company's calculation of earnings per share is as follows:
Years Ended December 31, 1996 1997 1998 ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net income $ 28,173 $51,371 $96,349 Weighted average number of common shares outstanding used in calculation of basic earnings per share 69,780 70,096 71,053 Incremental shares from the assumed exercise of dilutive stock options 760 1,507 1,231 ----------- ----------- ----------- Weighted average number of common shares outstanding used in calculation of diluted earnings per share 70,540 71,603 72,284 =========== =========== =========== Earnings per share Basic $ .40 $ .73 $ 1.36 =========== =========== =========== Diluted $ .40 $ .72 $ 1.33 =========== =========== ===========
For the period ending December 31, 1998, there were 120,000 options for common stock, which were excluded because they were anti-dilutive. 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 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, 199626, 1999 (the "1996"1999 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 19961999 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 19961999 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 19961999 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................Page(s) Report of Independent Accountants............................... 24 Consolidated Balance Sheets as of December 31, 1997 and 1998.... 25 Consolidated Statements of Income For the Years Ended December 31, 1996, 1997 and 1998............ 26 Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1996, 1997 and 1998............ 27 Consolidated Statements of Cash Flows For the Years Ended December 31, 1996, 1997 and 1998............ 28 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...................... 29-38 (b) Exhibits -------- The Exhibits listed belowset forth in the Exhibit Index are filed as part of this Annual Report. 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(c) Reports on Form S-3 (File No. 33-85206). 3.2 -- By-Laws of8-K ------------------- The Company filed the Registrant, as amended, are incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Reportfollowing current Reports on Form 10-Q for8-K during 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 yearthree-month period ended December 31, 1988 (the "1988 Form 10-K"). On January 9, 1990, the Board of Directors of the Registrant adopted an Amendment to Section 4 of the Option Plan increasing the number of shares eligible for issuance thereunder to 900,000. *10.4 -- Amendments to the Option Plan effective as of February 15, 1990 and March 7, 1990 are incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). *10.5 -- 1978 Employee Stock Purchase Plan (the "Stock Purchase Plan") is incorporated herein by reference to Exhibit 10(b) to the 1988 Form 10-K. *10.6 -- Amendments to the Stock Purchase Plan effective as of February 15, 1990 are incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (the "1992 Form 10-K"). *10.7 -- 1983 Restricted Stock Plan (the "Restricted Stock Plan") is incorporated herein by reference to Exhibit 10.5 to the Registration Statement. *10.8 -- Amendment to the Restricted Stock Plan effective as of February 15, 1990 is incorporated herein by reference to Exhibit 10-4 of the 1990 Form 10-K. 10.9 -- 1992 Stock Option Plan is incorporated herein by reference to Exhibit 10.9 to the 1992 Form 10-K. 10.10 -- 1992 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.10 to the 1992 Form 10-K. 10.11 -- Lease dated February 20, 1985, between the Registrant and Jonathan G. Davis, as Trustee of City Square Development Trust (the "Trust"), is incorporated herein by reference to Exhibit 10.6 to the Registration Statement. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(A) and (C) of this report. PAGE 38 10.12 -- First Amendment of Lease dated March 19, 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to the Registration Statement. 10.13 -- Second Amendment of Lease dated November 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to the Registration Statement. 10.14 -- Documents relating to the 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's1998: i. 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)September 30, 1998, reaffirming that there were no known issues with respect to the Registrant'sCompany's business outlook. ii. 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 referenceOctober 6, 1998, announcing agreement to Exhibit 27(B) to the Registrant'sacquire Fourth Tier, Inc. iii. Current Report on Form 8-K, dated January 19, 1994. (d) Promissory NoteOctober 9, 1998, announcing the acquisition 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. PAGEFourth Tier, Inc. 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 to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KEANE, INC. (Registrant) /s/ John F. Keane ---------------------------------------------- By: John F. Keane President and Chief Executive Officer (Principal Executive Officer) Date: March 27, 199626, 1999 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 3/27/96March 26, 1999 /s/ Wallace A. Cataldo 3/27/96March 26, 1999 - ----------------------------- ------- ----------------------------- ------- John F. Keane----------------- -------------- ---------------------- -------------- Date Wallace A. Cataldo Date President,John F. Keane Vice President - Finance and PrincipalPresident, Administration Chief Executive Officer Principal(Principal Financial Officer) and Director (Principal Accounting Officer andOfficer) (Principal Executive Officer) /s/ Brian T. Keane March 26, 1999 /s/ John F. Keane, Jr. March 26, 1999 - ------------------ -------------- ---------------------- -------------- Brian T. Keane John F. Keane, Jr. Date Director Director /s/ John F. Rockart 3/27/96March 26, 1999 /s/ Robert A. Shafto 3/27/96March 26, 1999 - ----------------------------- ------- ----------------------------- ------- John F. Rockart------------------ -------------- ---------------------- -------------- Date Robert A. Shafto Date John F. Rockart Director Director /s/ Philip J. Harkins March 26, 1999 /s/ Winston R. Hindle, Jr. 3/27/96 ----------------------------- -------March 26, 1999 - ------------------ -------------- ---------------------- -------------- Philip J. Harkins Date Winston R. Hindle, Jr. Date Director Director
PAGE 4541 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS KEANE, INC. FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995Exhibit Index - -------------
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 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"). *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 1998 Equity Incentive Plan is incorporated herein by reference to Exhibit 10 to the Company's Registration Statement on Form S-8 (File No. 333-56119), as filed with and declared effective by the Commission on June 5, 1998. *10.10 1992 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.10 to the 1992 Form 10-K. 10.11 Lease dated February 20, 1985, between the Registrant and Jonathan G. Davis, as Trustee of City Square Development Trust (the "Trust"), is incorporated herein by reference to Exhibit 10.6 to the Registration Statement. 10.12 First Amendment of Lease dated March 19, 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to the Registration Statement.
* 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. 42 10.13 Second Amendment of Lease dated November 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to the Registration Statement. 10.14 Documents relating to the Demand Lines of Credit with Shawmut Bank, N.A. and the First National Bank of Boston (the "Banks") are incorporated herein by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995: (a) Demand Money Market Promissory Note dated as of May 1, 1995, $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 1,468,000in the amount of $10,000,000, between the Registrant and Shawmut Bank. (b) Loan Agreement dated July 20, 1995, in the amount of $10,000,000, between the Registrant and Bank of Boston. 21. Schedule of Subsidiaries of the Registrant.............................................,... Ex 21-1 23. Consent of PricewaterhouseCoopers LLP...................................................... Ex 23-1 27.1 Restated Financial Data Schedule for the year ended December 31, 1996...................... Ex 27-1 27.2 Restated Financial Data Schedule for the three months ended March 31, 1997................. Ex 27-2 27.3 Restated Financial Data Schedule for the six months ended June 30, 1997.................... Ex 27-3 27.4 Restated Financial Data Schedule for the nine months ended September 30, 1997.............. Ex 27-4 27.5 Financial Data Schedule for the year ended December 31, 1997............................... Ex 27-5 27.6 Restated Financial Data Schedule for the three months ended March 31, 1998................. Ex 27-6 27.7 Restated Financial Data Schedule for the six months ended June 30, 1998.................... Ex 27-7 27.8 Restated Financial Data Schedule for the nine months ended September 30, 1998.............. Ex 27-8 27.9 Financial Data Schedule for the year ended December 31, 1998............................... Ex 27-9
(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. PAGE 4643