**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 
| **(Mark  One)**                                                                                                                                                                                                                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                |
|                                                                                                                                                                                                                                              |
| **For the quarter ended September 30,  2002**                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                              |
| **OR**                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                              |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                    |
|                                                                                                                                                                                                                                              |
| **For the transition period  from                 to                 ** |

 

**CommissionFile Number 1-7516**

 

**KEANE, INC.**

(Exact name of registrant as specified in its charter)

 

| **MASSACHUSETTS**                                                 |   | **04-2437166**                            |
|-------------------------------------------------------------------|--------|-------------------------------------------|
| (State or other  jurisdictions of  incorporation or organization) |   | (I.R.S. Employer  Identification  Number) |
|                                                              |   |                                      |
| **Ten  City Square, Boston, Massachusetts**                       |   | **02129**                                 |
| (Address of  principal executive offices)                         |   | (Zip Code)                                |
|                                                              |   |                                      |
| Registrant’s  telephone number, including area code          |   | **(617)  241-9200**                       |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes ý    Noo

 

As of September 30, 2002,the number of issued and outstanding shares of Common Stock (excluding4,262,100 shares held in treasury) and Class B Common Stock are 71,283,036 and284,854 shares, respectively.

 

 

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**Keane,Inc. and Subsidiaries**

**TABLE OF CONTENTS**

 

 
| Item 1.  Financial Statements                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                           |
| Unaudited  Condensed Consolidated Statements of Income for the three months and nine  months ended September 30, 2002 and 2001 |
|                                                                                                                           |
| Condensed  Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December  31, 2001                             |
|                                                                                                                           |
| Unaudited  Condensed Consolidated Statements of Cash Flows for nine months ended  September 30, 2002 and 2001                  |
|                                                                                                                           |
| Notes  to Unaudited Condensed Consolidated Financial Statements                                                                |
|                                                                                                                           |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations                     |
|                                                                                                                           |
| Item  3.  Quantitative and Qualitative  Disclosures about market risk                                                     |
|                                                                                                                           |
| Item 4.  Controls and Procedures                                                                                          |
|                                                                                                                           |
| Part II - Other Information                                                                                                    |
|                                                                                                                           |
| Item  1.  Legal Proceedings                                                                                               |
|                                                                                                                           |
| Item  5.  Other Information                                                                                               |
|                                                                                                                           |
| Item 6.  Exhibits and Reports on Form 8-K                                                                                 |
|                                                                                                                           |
| Signature Page                                                                                                                 |
|                                                                                                                           |
| Certifications                                                                                                                 |

 

2

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**Keane, Inc. and Subsidiaries**

**Part I**

**Item 1.  FinancialStatements**

**Condensed Consolidated Statements ofIncome (unaudited)**

 
|                                                                               |   | **Three  months ended  September 30,**       |    | **Nine  months ended  September 30,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|---------------------------------------|--------|
|                                                                               |   | **2002**                                     |    | **2001**                              |   | **2002** |   | **2001** |   |
|                                                                               |   | **(In  thousands except per share amounts)** |    |
| Total revenues                                                                     |   | $                                            | 213,383 |                                  | $      | 186,637 |   | $ | 660,704 |   | $ | 591,978 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Salaries, wages  and other direct costs                                            |   | 154,714                                      |    | 129,414                               |   | 474,452 |   | 412,350 |   |
| Selling, general  and administrative expenses                                      |   | 48,129                                       |    | 46,488                                |   | 151,442 |   | 142,037 |   |
| Amortization of  goodwill and other intangible assets                              |   | 4,342                                        |    | 3,478                                 |   | 11,898 |   | 10,416 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Operating income                                                                   |   | 6,198                                        |    | 7,257                                 |   | 22,912 |   | 27,175 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Interest and  dividend income                                                      |   | 487                                          |    | 2,117                                 |   | 2,021 |   | 5,460 |   |
| Interest expense                                                                   |   | 37                                           |    | 51                                    |   | 176 |   | 245 |   |
| Other (income)  expenses, net                                                      |   | 131                                          |    | 415                                   |   | (214 | ) | (1,985 | ) |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Income before  income taxes                                                        |   | 6,517                                        |    | 8,908                                 |   | 24,971 |   | 34,375 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Provision for  income taxes                                                        |   | 2,607                                        |    | 3,606                                 |   | 9,987 |   | 13,921 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Net income                                                                         |   | $                                            | 3,910   |                                  | $      | 5,302 |   | $ | 14,984 |   | $ | 20,454 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Net income per  share (basic)                                                      |   | $                                            | .05     |                                  | $      | .08 |   | $ | .20 |   | $ | .30 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Net income per  share (diluted)                                                    |   | $                                            | .05     |                                  | $      | .08 |   | $ | .20 |   | $ | .30 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Weighted average  common shares outstanding (basic)                                |   | 73,841                                       |    | 68,072                                |   | 75,091 |   | 67,841 |   |
|                                                                               |   |                                         |    |                                  |   |   |   |   |   |
| Weighted average  common shares and common share equivalents outstanding (diluted) |   | 73,847                                       |    | 69,064                                |   | 75,549 |   | 68,749 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

3

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**Keane,Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 
|                                            |   | **September  30,  2002** |    | **December  31,  2001** |   |
|-------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                            |   | **(Unaudited)**          |    | **(See Note  1)**       |   |
|                                            |   | **(In  thousands)**      |    |
| Assets                                          |   |                     |    |                    |   |
| Current:                                        |   |                     |    |                    |   |
| Cash  and cash equivalents                      |   | $                        | 43,419  |                    | $      | 65,556 |   |
| Marketable  securities                          |   | 22,709                   |    | 63,687                  |   |
| Accounts  receivable, net:                      |   |                     |    |                    |   |
| Trade                                           |   | 150,543                  |    | 160,172                 |   |
| Other                                           |   | 1,991                    |    | 3,109                   |   |
| Prepaid  expenses and deferred taxes            |   | 26,139                   |    | 20,026                  |   |
| Total  current assets                           |   | 244,801                  |    | 312,550                 |   |
|                                            |   |                     |    |                    |   |
| Property  and equipment, net                    |   | 57,447                   |    | 33,701                  |   |
| Goodwill,  net                                  |   | 272,861                  |    | 224,891                 |   |
| Customer  lists, net                            |   | 65,415                   |    | 53,659                  |   |
| Other  intangible assets, net                   |   | 19,242                   |    | 26,292                  |   |
| Deferred  taxes and other assets, net           |   | 33,452                   |    | 28,810                  |   |
|                                            |   | $                        | 693,218 |                    | $      | 679,903 |   |
| Liabilities                                     |   |                     |    |                    |   |
| Current:                                        |   |                     |    |                    |   |
| Accounts  payable                               |   | 10,751                   |    | 13,723                  |   |
| Accrued  expenses and other liabilities         |   | 46,886                   |    | 51,980                  |   |
| Notes  Payable                                  |   | 3,000                    |    | 0                       |   |
| Accrued  compensation                           |   | 41,260                   |    | 34,161                  |   |
| Accrued  income taxes                           |   | 2,254                    |    | 4,675                   |   |
| Unearned  income                                |   | 5,064                    |    | 5,178                   |   |
| Current  capital lease obligations              |   | 753                      |    | 1,154                   |   |
| Total  current liabilities                      |   | 109,968                  |    | 110,871                 |   |
|                                            |   |                     |    |                    |   |
| Deferred  income taxes                          |   | 37,110                   |    | 25,656                  |   |
| Long-term  portion of capital lease obligations |   | 803                      |    | 1,203                   |   |
| Accrued  construction-in-progress costs         |   | 29,890                   |    | 13,000                  |   |
|                                            |   |                     |    |                    |   |
| Stockholders’  Equity                      |   |                     |    |                    |   |
| Common  stock                                   |   | 7,555                    |    | 7,522                   |   |
| Class  B common stock                           |   | 28                       |    | 28                      |   |
| Additional  paid-in capital                     |   | 166,264                  |    | 162,269                 |   |
| Accumulated  other comprehensive income         |   | (1,112                   | )       | (2,007                  | )      |
| Retained  earnings                              |   | 376,345                  |    | 361,361                 |   |
| Less  treasury stock                            |   | (33,633                  | )       | —                  |   |
| Total  stockholders’ equity                |   | 515,447                  |    | 529,173                 |   |
|                                            |   |                     |    |                    |   |
|                                            |   | $                        | 693,218 |                    | $      | 679,903 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

4

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**Keane,Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows (unaudited)**

 
|                                                                               |   | **Nine  Months ended September 30,** |       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                               |   | **2002**                             |       | **2001** |   |
|                                                                               |   | **(In  thousands)**                  |       |
| **Cash  flows from operating activities:**                                         |   |                                 | ** ** |   | ** ** |
| Net  income                                                                        |   | $                                    | 14,984     |   | $ | 20,454 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                                 |       |   |   |
| Depreciation  and amortization                                                     |   | 20,118                               |       | 19,420 |   |
| Deferred  income taxes                                                             |   | (1,377                               | )          | (2,166 | ) |
| Provision  for doubtful accounts                                                   |   | (1,048                               | )          | 4,709 |   |
| Loss  on sale of property and equipment                                            |   | 73                                   |       | 164 |   |
| Loss  on write down of equity investments                                          |   | —                               |       | 2,000 |   |
| Gain  on sale of business unit                                                     |   | —                               |       | (4,302 | ) |
| Changes  in operating assets and liabilities:                                      |   |                                 |       |   |   |
| Decrease  in accounts receivable                                                   |   | 19,741                               |       | 16,391 |   |
| Increase  in prepaid expenses and other assets                                     |   | (10,090                              | )          | (3,071 | ) |
| (Decrease)  Increase in accounts payable and other liabilities                     |   | (12,097                              | )          | 9,065 |   |
| Increase  in income taxes payable                                                  |   | 2,916                                |       | 5,119 |   |
| **Net  cash provided by operating activities**                                     |   | 33,220                               |       | 67,783 |   |
|                                                                               |   |                                 |       |   |   |
| **Cash  flows from investing activities:**                                         |   |                                 |       |   |   |
| Purchase  of investments                                                           |   | (18,699                              | )          | (77,800 | ) |
| Sale  of investments                                                               |   | 59,677                               |       | 47,219 |   |
| Purchase  of property and equipment                                                |   | (6,148                               | )          | (7,253 | ) |
| Proceeds  from sale of business unit                                               |   | —                               |       | 16,087 |   |
| Proceeds  from the sale of property and equipment                                  |   | 342                                  |       | 273 |   |
| Payments  for current and prior year acquisitions, net of cash acquired            |   | (61,229                              | )          | (2,383 | ) |
| **Net  cash used for investing activities**                                        |   | (26,057                              | )          | (23,857 | ) |
|                                                                               |   |                                 |       |   |   |
| **Cash  flows from financing activities:**                                         |   |                                 |       |   |   |
| Payments  under long term-debt                                                     |   | —                               |       | (5,006 | ) |
| Principal  payments under capital lease obligations                                |   | (1,067                               | )          | (1,989 | ) |
| Proceeds  from issuance of common stock                                            |   | 6,171                                |       | 6,022 |   |
| Repurchase  of common stock                                                        |   | (35,888                              | )          | (4,045 | ) |
| **Net  cash provided by (used for) financing activities**                          |   | (30,784                              | )          | 5,018 |   |
|                                                                               |   |                                 |       |   |   |
| Effect  of exchange rate changes on cash                                           |   | 1,484                                |       | 2,071 |   |
| Net  (decrease) increase in cash and cash equivalents                              |   | (22,137                              | )          | 40,979 |   |
| Cash  and cash equivalents, beginning of period                                    |   | 65,556                               |       | 53,783 |   |
| Cash  and cash equivalents at end of period                                        |   | $                                    | 43,419     |   | $ | 94,762 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

5

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**Keane, Inc. and Subsidiaries**

**Notes to Unaudited CondensedConsolidated Financial Statements**

(In thousands except per share amounts)

 

Note 1.                                                          Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and, accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments considered necessary for a fairpresentation of the results of operations for the interim periods reported andof the Company’s financial condition as of the date of the interim balancesheet have been included.  Operatingresults for the three and nine-month period ended September 30, 2002 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2002.

 

The balance sheet atDecember 31, 2001 has been derived from the audited financial statements atthat date, but does not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.

 

For further information,refer to the consolidated financial statements and footnotes thereto includedin the Company’s Annual Report on Form 10-K for the year ended December 31,2001.

 

Note 2.                                                          Computationof net income per share for the three and nine months ended September 30, 2002and 2001.

 
|                                                                                                     |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                                     |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Net  income                                                                                              |   | $                                      | 3,910  |                                  | $      | 5,302 |   | $ | 14,984 |   | $ | 20,454 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Weighted  average number of common shares outstanding used in calculation of basic earnings  per share   |   | 73,841                                 |   | 68,072                                |   | 75,091 |   | 67,841 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Incremental  shares from the assumed exercise of dilutive stock options                                  |   | 6                                      |   | 992                                   |   | 458 |   | 908 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Weighted  average number of common shares outstanding used in calculation of diluted  earnings per share |   | 73,847                                 |   | 69,064                                |   | 75,549 |   | 68,749 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Net  income per share                                                                                    |   |                                   |   |                                  |   |   |   |   |   |
| Basic                                                                                                    |   | $                                      | .05    |                                  | $      | .08 |   | $ | .20 |   | $ | .30 |   |
|                                                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Diluted                                                                                                  |   | $                                      | .05    |                                  | $      | .08 |   | $ | .20 |   | $ | .30 |   |

 

6

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Note 3.                                                          TheCompany offers an integrated mix of end-to-end business solutions, such asBusiness Consulting (Plan), Application Development and Integration Services(Build), and Application Development and Management Outsourcing (Manage).  The Company’s Healthcare Solutions Divisionrepresented 6% of the Company’s revenue during the first nine months of 2002.This revenue is included in  theCompany’s Build service revenues.

 

Note 4.                                                          Totalcomprehensive income (i.e. net income plus available-for-sale securitiesvaluation adjustments and currency translation adjustments) was $3.4 millionfor the third quarter of 2002  and $14.1million for the year to date, compared to $5.2 million for the third quarter of2001 and $22.4 million year to date.

 

Note 5.                                                          Inthe fourth quarter of 2001, 2000 and 1999, the Company recorded restructuringcharges of $10.4 million, $8.6 million and $13.7 million, respectively.  Of these charges, $4.4 million in 2001, $1.7million in 2000 and $3.8 million in 1999 related to workforce reductions,primarily technical consultants, of approximately 900, 200 and 600 employeesfor the years 2001, 2000 and 1999, respectively.  In addition, the Company performed a review of its businessstrategy and concluded that consolidating some of its branch offices was key toits success. As a result of this review, the Company wrote off  $ .8 million in 2001, $3.4 million in 2000and $4.8 million in 1999 of assets, which became impaired as a result of theserestructuring actions. The restructuring charges also included $5.1 million in2001, $3.5 million in 2000 and $5.1 million in 1999 for branch office closingsand certain other expenditures.

 

7

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A summary ofrestructuring activity, which is recorded in accrued expenses in theaccompanying balance sheet, is as follows:

 
|                              |   | **Workforce  Reduction** |   | **Impaired  Assets** |   | **Branch  Office  Closures and  Other  Expenditures** |   | **Total** |   |
|-----------------------------------|--------|--------------------------|--------|----------------------|--------|-------------------------------------------------------|--------|-----------|--------|
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Charges during  1999              |   | $                        | 3,800  |                 | $      | 4,753                                                 |   | $         | 5,100  |   | $ | 13,653 |   |
| Charges during  2000              |   | 1,743                    |   | 3,403                |   | 3,478                                                 |   | 8,624     |   |
| Charges  during  2001        |   | 4,417                    |   | 825                  |   | 3,957                                                 |   | 9,199     |   |
| Change in  estimates              |   | —                   |   | —               |   | 1,159                                                 |   | 1,159     |   |
|                              |   | 9,960                    |   | 8,981                |   | 13,694                                                |   | 32,635    |   |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Cash  expenditures during 1999    |   | (1,000                   | )      |                 |   |                                                  |   | (1,000    | )      |
| Cash  expenditures during 2000    |   | (3,138                   | )      |                 |   | (2,832                                                | )      | (5,970    | )      |
| Cash  expenditures during 2001    |   | (2,620                   | )      |                 |   | (2,494                                                | )      | (5,114    | )      |
|                              |   | (6,758                   | )      |                 |   | (5,326                                                | )      | (12,084   | )      |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Non cash charges  during 1999     |   |                     |   | (4,753               | )      | (819                                                  | )      | (5,572    | )      |
| Non cash charges  during 2000     |   |                     |   | (3,403               | )      | —                                                |   | (3,403    | )      |
| Non cash charges  during 2001     |   |                     |   | (825                 | )      | —                                                |   | (825      | )      |
|                              |   |                     |   | (8,981               | )      | (819                                                  | )      | (9,800    | )      |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Non cash  acquisition charges     |   | 7,226                    |   | —               |   | 3,746                                                 |   | 10,972    |   |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Balance as of  December 31, 2001  |   | 10,428                   |   | —               |   | 11,295                                                |   | 21,723    |   |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Cash  expenditures for 1999       |   | —                   |   |                 |   | (156                                                  | )      | (156      | )      |
| Cash  expenditures for 2000       |   | —                   |   |                 |   | (307                                                  | )      | (307      | )      |
| Cash  expenditures for 2001       |   | (4,993                   | )      |                 |   | (839                                                  | )      | (5,832    | )      |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Balance as of  March 31, 2002     |   | 5,435                    |   |                 |   | 9,993                                                 |   | 15,428    |   |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Cash  expenditures for 1999       |   |                     |   |                 |   | (141                                                  | )      | (141      | )      |
| Cash  expenditures for 2000       |   |                     |   |                 |   | (287                                                  | )      | (287      | )      |
| Cash  expenditures for 2001       |   | (4,649                   | )      |                 |   | (1,356                                                | )      | (6,005    | )      |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Balance as of  June 30, 2002      |   | 786                      |   |                 |   | 8,209                                                 |   | 8,995     |   |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Cash  expenditures for 1999       |   |                     |   |                 |   | (157                                                  | )      | (157      | )      |
| Cash  expenditures for 2000       |   |                     |   |                 |   | (252                                                  | )      | (252      | )      |
| Cash  expenditures for 2001       |   | (527                     | )      |                 |   | (1,306                                                | )      | (1,833    | )      |
|                              |   |                     |   |                 |   |                                                  |   |      |   |
| Balance as of  September 30, 2002 |   | $                        | 259    |                 |   |                                                  | $      | 6,494     |   | $ | 6,753 |   |
|                                   |        |                          |        |                      |        |                                                       |        |           |        |  |  |  |  |

 

Note 6.                                                          InOctober, 2001, the Company entered into a lease with Gateway Developers LLC(“Gateway LLC”) for a term of twelve years. Under this lease, the Company has agreed to lease approximately 95,000square feet of office and development space in a building under construction at100 City Square in Boston, Massachusetts (the “New Facility”).  The Company will lease approximately 57% ofthe New Facility and the remaining 43% will be occupied by other tenants.  John Keane Family LLC is a member ofGateway LLC.  The members of John KeaneFamily LLC are trusts for the benefit of John F. Keane, Chairman of the Boardof the Company, and his immediate family members,

 

8

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including Brian Keane,President, Chief Executive Officer and a director of the Company.

 

On October 31, 2001, Gateway LLC entered into a $39.4million construction loan (the “Gateway Loan”) in connection with developmentof the New Facility and an adjacent building to be located at 20 City Square,Boston, Massachusetts.  John KeaneFamily LLC and John F. Keane are each liable for certain obligations under theGateway Loan if and to the extent Gateway LLC requires funds to comply with itsobligations under the Gateway Loan.

 

The Company currently expects to occupy the newfacility in March 2003. The Company will consolidate several existingfacilities it has in the Boston area as part of this move. Based upon its knowledge of rental paymentsfor comparable facilities in the Boston area, the Company believes that therental payments under the lease for the New Facility, which will beapproximately $3.2 million per year ($33.00 per square foot for the first75,000 square feet and $35.00 per square foot for the remainder of thepremises) for the first six years of the lease term and $3.5 million per year($36.00 per square foot for the first 75,000 square feet and $40.00 per squarefoot for the remainder of the premises) for the remainder of the lease term,plus specified percentages of any annual increases in real estate taxes andoperating expenses, were, at the time the Company entered into the lease, asfavorable to the Company as those which could have been obtained from anindependent third party.

 

In view of these related party transactions, theCompany has concluded that, during the construction phase of the New Facility,the estimated construction in progress costs for the New Facility will becapitalized in accordance with EITF No. 97-10, “The Effect of LesseeInvolvement in Asset Construction.” A credit in the same amount is included in thecaption “Accrued construction-in-progress costs” in the accompanying balancesheet. For purposes of the consolidated statement of cash flows, the Companycharacterizes this treatment as a non-cash financing activity.

 

Note 7.                                                          EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets.”  Under SFAS 142,goodwill and indefinite lived intangible assets are no longer amortized but arereviewed annually (or more frequently if impairment indicators arise) forimpairment. Separable intangible assets that are not deemed to have anindefinite life will continue to be amortized over their useful lives. Theamortization provisions of SFAS 142 apply to goodwill and intangible assetsacquired on or after June 30, 2001. With respect to goodwill and intangibleassets acquired prior to June 30, 2001, companies are required to adopt SFAS142 in their first fiscal year beginning after December 15, 2001. Because ofthe different transition dates for goodwill and intangible assets acquired onor before June 30, 2001 and those acquired after that date, pre-existinggoodwill and intangibles will be amortized during this transition period untiladoption whereas new goodwill and indefinite lived intangible assets acquiredafter June 30, 2001 will not.

 

The Company is requiredto report, in the period of adoption, a disclosure reflecting net income andearnings per share for the prior year, adjusted to exclude amortization expenserelated to goodwill and other intangible assets effected by SFAS 142.

 

9

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The followingtable discloses the reconciliation of reported net income to the adjusted netincome.

 

**Goodwill & Other IntangibleAssets – Adoption of SFAS 142**

**(In thousands except per shareamounts)**

 
|                         |   | **For the  three months  ended September 30,** |   | **For the  nine months  ended September 30,** |   |
|------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                         |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
| Reported  net income         |   | $                                              | 3,910  |                                          | $      | 5,302 |   | $ | 14,984 |   | $ | 20,454 |   |
| Goodwill  amortization       |   | —                                         |   | 799                                           |   | — |   | 2,380 |   |
| Closing  costs amortization  |   | —                                         |   | 10                                            |   | — |   | 31 |   |
| Employee  value amortization |   | —                                         |   | 291                                           |   | — |   | 874 |   |
| Adjusted  net income         |   | $                                              | 3,910  |                                          | $      | 6,402 |   | $ | 14,984 |   | $ | 23,739 |   |
|                         |   |                                           |   |                                          |   |   |   |   |   |
| Basic  earnings per share:   |   |                                           |   |                                          |   |   |   |   |   |
| Reported  net income         |   | $                                              | .05    |                                          | $      | .08 |   | $ | .20 |   | $ | .30 |   |
| Goodwill  amortization       |   | —                                         |   | .01                                           |   | — |   | .04 |   |
| Closing  costs amortization  |   | —                                         |   | .00                                           |   | — |   | .00 |   |
| Employee  value amortization |   | —                                         |   | .00                                           |   | — |   | .01 |   |
| Adjusted  net income         |   | $                                              | .05    |                                          | $      | .09 |   | $ | .20 |   | $ | .35 |   |
|                         |   |                                           |   |                                          |   |   |   |   |   |
| Diluted  earnings per share: |   |                                           |   |                                          |   |   |   |   |   |
| Reported  net income         |   | $                                              | .05    |                                          | $      | .08 |   | $ | .20 |   | $ | .30 |   |
| Goodwill  amortization       |   | —                                         |   | .01                                           |   |   |   | .04 |   |
| Closing  costs amortization  |   | —                                         |   | .00                                           |   |   |   | .00 |   |
| Employee  value amortization |   | —                                         |   | .00                                           |   |   |   | .01 |   |
| Adjusted  net income         |   | .05                                            |   | .09                                           |   | $ | .20 |   | $ | .35 |   |

 

**Acquired Intangible Assets**

**(In thousands)**

 
|                                       |   | **As of  September 30, 2002** |    |
|--------------------------------------------|--------|-------------------------------|---------|
|                                       |   | **Gross  Carrying  Amount**   |    | **Accumulated  Amortization** |   |
| **Amortized  intangible assets**           |   |                          |    |   |   |
| Contracts                                  |   | $                             | 29,250  |   | $ | (18,434 | ) |
| Non-compete  agreements                    |   | 7,524                         |    | (3,974 | ) |
| Customer  lists                            |   | 74,932                        |    | (9,518 | ) |
| Technology                                 |   | 7,775                         |    | (2,899 | ) |
| Total                                      |   | $                             | 119,481 |   | $ | (34,825 | ) |
|                                       |   |                          |    |   |   |
| **Aggregate  Amortization Expense**        |   |                          |    |   |   |
| For  the nine month period ended September |   |                          |    | $ | 11,898 |   |
|                                       |   |                          |    |   |   |
| **Estimated  Amortization Expense**        |   |                          |    |   |   |
| For  the year ended December 31, 2002      |   |                          |    | $ | 15,919 |   |
| For  the year ended December 31, 2003      |   |                          |    | 14,831 |   |
| For  the year ended December 31, 2004      |   |                          |    | 14,470 |   |
| For  the year ended December 31, 2005      |   |                          |    | 13,518 |   |
| For  the year ended December 31, 2006      |   |                          |    | 13,286 |   |

 

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**Goodwill**

The changes in thecarrying amounts of goodwill for the quarter ended September 30, 2002 are asfollows:

 
| Balance  as of January 1, 2002                            |   | $      | 224,891 |   |
|-----------------------------------------------------------|--------|--------|---------|--------|
| Goodwill  acquired during the year                        |   | 42,880 |    |
| Unamortizable  intangible assets reclassified as goodwill |   | 5,090  |    |
| Balance  as of September 30, 2002                         |   | $      | 272,861 |   |

 

Upon adoption ofSFAS 142, the Company is required to perform a transitional impairment test onall indefinite lived intangible assets and goodwill. To the extent that animpairment charge is required, it will be treated as a cumulative effect of achange in accounting principle. The Company completed its analysis of the impact of SFAS No. 142, including thetransitional impairment test, during the second quarter of 2002 and determinedthat the change in accounting principle did not yield an impairment charge.

 

Effective January 1, 2002, the Company adopted SFASNo. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” SFASNo. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-livedAssets and for Long-lived Assets to Be Disposed of,” and provides a singleaccounting model for long-lived assets to be disposed of. The Company hasdetermined that the impact of SFAS 144 did not have a material effect on itsresults of operations for the quarter ended September 30, 2002.

 

Note 8                                                             Duringthe quarter ended September 30, 2002, the Company completed an acquisition of abusiness complementary to the Company’s business strategy. The Companypurchased all of the stock of the acquired business at a total cost of $ 6.2million, consisting of $ 2.9 million in cash along with a Note Payable for anadditional $ 3.0 million and the remaining balance related to transactioncosts. The Note Payable has an initial term of one year and may be settled, atthe option of the holder, through cash payment or through services rendered bythe Company to the holder. Based upon certain earn-out targets and othercriteria, future consideration related to the acquisition could amount to $6.9million. As of September 30, 2002, the Company has preliminarily allocated theexcess of the purchase price over the fair value of the net assets acquired togoodwill. During the fourth quarter, the Company will complete this allocation,including the identification of the other intangible assets in accordance withSFAS 141, “Business Combinations”. The results of operations of the acquiredbusiness have been included in the Company’s consolidated statements of incomefrom the date of acquisition.  Proformaresults of operations have not been provided, as they were not material to theCompany on either an individual or aggregate basis.

 

Note 9                                                             OnMarch 15, 2002, the Company acquired SignalTree Solutions Holding, Inc(“SignalTree”), a privately-held, U.S.-based corporation with two softwaredevelopment facilities in India and additional operations in the United States.Under the terms of the merger agreement, the Company paid $68.2 million in cashfor SignalTree.

 

In accordance with recently issued SFAS 141, “ BusinessCombinations,” and certain provisions of SFAS 142, “Goodwill and otherIntangible Assets,” the Company used the purchase method of accounting for abusiness combination to account for the acquisition, as well as the newaccounting and reporting

 

11

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regulations for goodwill and other intangibles. Underthese methods of accounting, the assets and liabilities of SignalTree,including intangible assets, were recorded at their respective fair values. Allintangible assets will be amortized over their estimated useful life with theexception of goodwill. The financial position, results of operations and cashflows of SignalTree were included in the Company’s financial statementseffective as of the purchase date.

 

The total cost of the merger was $78.0 million.Portions of the purchase price, including intangible assets, were identified byindependent appraisers utilizing proven valuation procedures and techniques.

 

The components of the purchase price allocation are as follows:

 
| **(in  thousands)**            |   |   |   |
|--------------------------------|--------|--------|--------|
| Consideration  paid            |   | $      | 66,927 |   |
| Transaction  costs             |   | 1,301  |   |
| Deferred Tax  Liability, net   |   | 9,751  |   |
| Total                          |   | $      | 77,979 |   |
|                           |   |   |   |
| Allocation of  purchase price: |   |   |   |
| Net Asset Value  Acquired      |   | $      | 16,135 |   |
| Customer lists                 |   | 18,800 |   |
| Non-compete  agreements        |   | 2,700  |   |
| Goodwill                       |   | 40,344 |   |
| Total                          |   | $      | 77,979 |   |

 

The following table presents the condensed balance sheet disclosing theamounts assigned to each of the major assets acquired and liabilities assumedof SignalTree at the acquisition date:

 
| **(in  thousands)**                   |   |   |   |
|---------------------------------------|--------|--------|--------|
| Cash                                  |   | $      | 2,650  |   |
| Accounts  receivable                  |   | 7,304  |   |
| Other current  assets                 |   | 3,562  |   |
| Property, plant  & equipment, net |   | 8,013  |   |
| Total assets                          |   | 21,529 |   |
|                                  |   |   |   |
| Accounts payable                      |   | 569    |   |
| Accrued  compensation                 |   | 1,569  |   |
| Other  liabilities                    |   | 3,256  |   |
| Net assets                            |   | $      | 16,135 |   |

 

The unaudited pro forma combined condensed statements of income belowcombine the historical statements of the Company and SignalTree as if thepurchase had occurred at January 1, 2001. Unaudited pro forma combinedcondensed financial information is presented for comparative purposes only andis not necessarily indicative of the results of operations that would haveactually been reported had the purchase occurred at the beginning of theperiods presented, nor is it necessarily indicative of the Company’s futurefinancial position or results of operations.

 

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|                            |   | **For the  Three Months  Ended September 30,** |    | **For the  Nine Months  Ended September 30,** |   |
|---------------------------------|--------|------------------------------------------------|---------|-----------------------------------------------|--------|
|                            |   | **2002**                                       |    | **2001**                                      |   | **2002** |   | **2001** |   |
| Total revenues                  |   | $                                              | 213,383 |                                          | $      | 200,168 |   | $ | 670,913 |   | $ | 633,761 |   |
| Net income                      |   | 3,910                                          |    | 6,553                                         |   | 15,713 |   | 21,867 |   |
| Net income per  share (basic)   |   | .05                                            |    | .10                                           |   | .21 |   | .32 |   |
| Net income per  share (diluted) |   | .05                                            |    | .09                                           |   | .21 |   | .32 |   |
|                                 |        |                                                |         |                                               |        |  |  |  |  |  |  |  |  |

 

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**Keane,Inc. and Subsidiaries**

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

This Quarterly Report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 31E of the Securities Exchange Act of 1934, as amended, thatinvolve risks and uncertainties.  Forthis purpose, any statements contained herein that are not statements of historicalfact may be deemed forward-looking statements. Without limiting the foregoing, the words “projects,” “believes,”“anticipates,” “plans,” “expects,” “estimate,” “intend,” “should,” “would,”“could,” “may” and similar expressions are intended to identify forward-lookingstatements.  There are a number ofimportant factors that could cause the Company’s actual results to differmaterially 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 FutureResults.”  These factors and the othercautionary statements made in this quarterly report should be read as beingapplicable to all related forward-looking statements wherever they appear inthis quarterly report.  If one or more ofthese factors materialize, or if any underlying assumptions prove incorrect,the Company’s actual results, performance or achievements may vary materiallyfrom any future results, performance or achievements expressed or implied bythese forward-looking statements.  Inaddition, any forward-looking statements represent the Company’s estimates onlyas of the date this quarterly report was filed with the Securities and ExchangeCommission and should not be relied upon as representing the Company’s estimatesas of any subsequent date.  While theCompany may elect to update forward-looking statements at some point in thefuture, the Company specifically disclaims any obligation to do so, even if itsestimates change.

 

**RESULTSOF OPERATIONS:**

 

The Company’s total revenue for the quarter ended September 30, 2002was $213.4 million, a 14% increase from revenue of $186.6 million in thequarter ended September 30, 2001. This increase in total revenue was primarilythe result of the acquisition of Metro Information Services, Inc. which closedon November 30, 2001, and the acquisition of SignalTree Solutions Holding,Inc., which closed on March 15, 2002.

 

For the quarter ended September 30, 2002, revenue from the Company’sPlan services was $16.3 million, down from $18.1 million during the quarterended September 30, 2001. Plan revenue is comprised primarily of businessconsulting services delivered by Keane Consulting Group (KCG), the Company’sbusiness consulting arm, and IT consulting services, which are sold and implementedout of Keane’s network of branch offices. This decrease in Plan revenue wasprimarily the result of the deferral of consulting projects and a decrease inbilling rates caused by general economic conditions.

 

For the quarter ended September 30, 2002, revenue from the Company’sBuild Services was $53.6 million, down from $65.4 million during the quarterended September 30, 2001.  Keane’s Buildrevenue, which consists primarily of application development and integrationbusiness, was also adversely affected during the period by the deferral ofdiscretionary new software development projects in both North America and theUnited Kingdom, as well as by reduced billing rates due to the currentchallenging economic environment.  However, the Company’s Build Services revenue benefited from the lesscyclical public sector and healthcare related vertical markets, whichcontributed growing and more stable revenue streams within Build servicessector.

 

Revenue from the Company’s Manage services, which consist primarily ofKeane’s Application Development and Management (ADM) Outsourcing service, aswell as Staff Augmentation services and

 

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other Maintenance and Migration services, grew to $143.5 million duringthe quarter ended September 30, 2002, an increase of 39% from $103.1 millionduring the quarter ended September 30, 2001. This increase was the result of increasing revenue from Keane’s ADMOutsourcing service, which was $100.4 million during the period, up 3% from$97.2 million during the comparable period in 2001 and the acquisitions ofMetro Information Services, Inc. and SignalTree Solutions Holding, Inc.  Although not immune from economicfluctuations, ADM Outsourcing revenues are more stable than those associatedwith Plan or Build due to the long-term and recurring nature of outsourcingcontracts and the cost-saving benefits associated with outsourcing.

 

Generally, under an ADM Outsourcing agreement, the Company receives afixed monthly fee in return for meeting or exceeding a contractually agreedupon service level.  ADM Outsourcingagreements generally do not require any capital outlay from the Company, whichrecognizes outsourcing revenue and expense on a monthly basis consistent withthe service provided to its customers. The Company does not make use ofpercentage of completion accounting on its outsourcing agreements.

 

Total revenue for the nine months ended September 30, 2002 was $660.7million, up 13% from $586.8 million for the comparable period in 2001,excluding revenue associated with the Company’s Help Desk operations, which wasdivested during the first quarter of 2001. Total revenue for the nine monthsended September 30, 2002 was up 12% from $592.0 million for the comparableperiod in 2001, including revenue associated with the Company’s divested HelpDesk operations.  Revenue from Keane’sADM Outsourcing service was $302.0 million during the nine months endedSeptember 30, 2002, and represented 46% of total revenue, up slightly from$299.4 million, or 51% of revenue during the comparable period in 2001.

 

Plan, Build, and Manage revenues for the nine months ended September30, 2002 were $50.1 million, $165.2 million, and $445.4 million, respectively,as compared to $58.0 million, $212.2 million, and $321.8 million, respectively,during the nine months of 2001. Excluding Help Desk operations, Manage revenue,was $316.5 million for the nine months ended September 30, 2001.

 

The Company observed no indications of a significant increase in discretionaryIT spending during the three months ended September 30, 2002.  As a result, the Company anticipatescontinuing softness in its Application Development and Integration business,which represents a majority of its Build sector, and its Plan sector, untileconomic conditions improve and customers once again begin funding capitalprojects.  However, the Companycontinues to see ongoing opportunities in its ADM Outsourcing business, whichrepresents a majority of its Manage sector, and anticipates that outsourcingrevenues will continue to act as a mitigating influence on future declines inits revenues.

 

With organic growth difficult in the current business environment, theCompany’s strategy is to focus its marketing efforts on services to helpcustomers lower costs, improve efficiency, and enhance the flexibility of theirinformation technology (IT) assets. This mix of services includes ADMOutsourcing, and Applications Rationalization, a service which helps customersto identify and eliminate higher cost, end-of-life applications or those withredundant functionality or written in non-core technology.  In addition, the Company seeks to providecost-effective services and to enhance its operating margins through the use ofits near shore Advanced Development Center in Halifax, Nova Scotia, and itsoffshore Advanced Development Centers in Hyderabad and Delhi, India.  The Company acquired its offshore facilitiesas a result of its acquisition of SignalTree Solutions Holding, Inc.  The Company anticipates that use of itsoffshore facilities will increase as a result of its focus on global deliveryand the need of customers to continue to decrease costs associated withinvestments in technology.

 

The Company’s base of billable employees within its India operation was352 billable employees at September 30, 2002, up 17% from 300 billableemployees at June 30, 2002.  The Companydid not have billable employees in India during the period ended September 30,2001.  Total billable employees for all

 

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operations, including subcontractors, was 6,587 billable employees atSeptember 30, 2002, down from 6,843 total billable employees at June 30, 2002,but up from 5,529 total billable employees at the period ended September 30,2001.  This year-over-year increase isthe result of the addition of billable employees from the acquisitions of MetroInformation Services, Inc., SignalTree Solutions Holding, Inc., and those hiredas a result of an outsourcing contract entered into between the Company andPacifiCare, Inc..

 

Salaries, wages and other direct costs for the three months ended September 30, 2002 were $154.7 million,or 72.5% of total revenue, compared to $129.4 million, or 69.3% of totalrevenue, for the three months ended September 30, 2001. The increase in directcosts is primarily attributable to the Metro and SignalTree acquisitions asmentioned previously. In addition, the increase in direct costs as a percentageis the result of declining revenue as well as the time delays and associatedseverance costs necessary to bring personnel resources in alignment withrevenue. The Company's gross margins for the three months ended September 30,2002 were 27.5%, as compared to 30.7% during the three months ended September 30,2001. The decrease in gross margins reflects continuing softness in the demandfor IT services resulting in lower billing rates and utilization of billablepersonnel as well as ongoing costs associated with employee severance.

 

For the nine months ended September 30, 2002, salaries, wages and otherdirect costs were $474.5 million, or 71.8% of total revenue, compared to $412.4million, or 69.7% of total revenue, for the first nine months of 2001. Theincrease in direct costs is primarily attributable to the Metro and SignalTreeacquisitions as mentioned previously. The Company's gross margins for the ninemonths ended September 30, 2002 were 28.2%, as compared to 30.3% during thenine months ended September 30, 2001. The numbers reflect similar trends, suchas softness in demand for IT services and lower billing rates rates andutilization of billable personnel, as those cited for the quarter over quartercomparisons.

 

Selling, General & Administrative (“SG&A”) expenses for thequarter ended September 30, 2002 were $48.1 million, or 22.6% of total revenue,as compared to $46.5 million, or 24.9% of total revenue, for the quarter endedSeptember 30, 2001.  For the nine monthsended September 30, 2002 SG&A expense was $151.4 million, or 22.9% of totalrevenue, compared to $142.0 million, or 24.0% of total revenue for the ninemonths ended September 30, 2001. The decrease in SG&A as a percentage ofrevenue is the result of cost synergies obtained from the acquisition of MetroInformation Services, Inc. as well as the Company’s continuing focus on tightlycontrolling discretionary expenses.

 

As part of its acquisition of Metro Information Services, Inc., theCompany identified approximately $15 million in redundant annualized SG&Aexpenses and expects to realize at least $11 million of these savings duringthe second half of 2002.  During thefirst quarter of 2002, the Company completed the integration of Metro’scorporate functions with its own, and during the second quarter of 2002, theCompany completed the consolidation and relocation of overlapping branchoffices. During the second quarter of 2002, the Company also integratedU.S.-based operations acquired from SignalTree Solutions with its own.  During the quarter ended September 30, 2002,the Company integrated all corporate functions of SignalTree into its corporateheadquarters in Boston, Massachusetts. During the fourth quarter, the Companywill be evaluating costs associated with real estate and related fixed assets,as a result of acquisitions, analyzing assumptions with respect to previousrestructuring charges and evaluate costs associated with workforce reductions.It is expected that the Company will take a charge to earnings as a result ofthese actions. The amount of the charge is expected to be in the range of $9 to$12 million.

 

Amortization of intangible assets for the quarter ended September 30,2002 was $4.3 million, or 2.0% of total revenue, compared to $3.5 million, or1.9% of total revenue, in the quarter ended September 30, 2001. For the nine monthsended September 30, 2002, amortization of intangible assets was $11.9 million,or 1.8% of total revenue, compared to $10.4 million, or 1.8% of total revenue,for the nine months ended September 30, 2001. The increase in amortization isattributable to additional intangible assets as a result of the Company’sacquisitions****of Metro Information Services, Inc., and SignalTree Solutionsoffset by the fact that, effective January 1, 2002, goodwill is no longeramortized under generally accepted accounting principles.

 

Interest and dividend income totaled $.5 million for the quarter endedSeptember 30, 2002, compared to $2.1 million for the quarter ended September30, 2001. For the nine months ended September 30, 2002, interest and dividendincome totaled $2.0 million, compared to $5.5 million for the first monthsended September 30, 2001. The decrease in interest and dividend income wasattributable to fewer cash

 

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reserves earning interest and dividends due to the use of cash toretire debt associated with the acquisition of Metro Information Services,Inc., the acquisition of Signal Tree, and the repurchase of shares of theCompany’s common stock, as well as interest rate declines. Other expense was$131,000 for the quarter ended September 30, 2002, as compared to other expenseof $415,000 in the quarter ended September 30, 2001.  For the nine months ended September 30, 2002, otherexpense/income was $214,000 compared to $1.9 million for the nine months endedSeptember 30, 2001.  Otherexpense/income during the nine months ended September 30, 2001 was related to(i) a gain of $4.0 million from the sale of the Company’s Help Desk businesspartially offset by the Company’s decision to write-off certain equity investmentstotaling $2.0 million, and (ii) gains from the sale of investments.

 

The Company’s effective tax rate was 40.0% for the three and ninemonths ended September 30, 2002, down from 40.5% in the three and nine monthsended September 30, 2001. This decrease is a direct result of the adoption ofSFAS 142.  The Company anticipates asimilar rate for the remainder of 2002.

 

 

**Liquidityand Capital Resources**

 

The Company’s cash and investments at the quarter ended September 30,2002 was $66.1 million, down from $69.4 million at the quarter ended June 30,2002. The decrease in cash was primarily attributable to the Company’srepurchase of its common stock.

 

On July 26, 2002, the Board of Directors authorized a share repurchaseprogram, which allows the Company to repurchase up to 5 million shares of itscommon stock.  During the quarter endedSeptember 30, 2002, the Company repurchased approximately 4.3 million shares atan average price of $7.89, representing an investment of $33.6 million.  As of October 25, 2002, the Company hadrepurchased an additional 400,000 shares under the July repurchase program fora total of 4.7 million shares at an average price of  $ 7.78 and a total investment of $ 36.1 million.

 

On October 25, 2002, the Board of Directors authorized the Company torepurchase an additional 5 million shares of its common stock over the next 12months.  The repurchases may be made onthe open market or in negotiated transactions, and the timing and amount ofshares repurchased will be determined by the Company’s management based on itsevaluation of market and economic conditions and other factors. The repurchaseprogram will be funded using the Company’s cash reserves.  Between May 1999 and October 25, 2002, theCompany has invested $144.7 million to repurchase 9,894,300 shares of itscommon stock under six separate authorizations. In addition to the repurchaseauthorization, the board approved the Company’s participation as a guarantorwith respect to a $ 300,000 line of credit for Innovate EC, an entity in whichthe Company acquired a small equity position as a result of a previousacquisition.

 

During the quarter ended September 30, 2002, the Company paid $ 2.2million associated with restructuring charges from previous years. Refer toNote 5 to the unaudited condensed consolidated financial statements for asummary of the restructuring activity.

 

During the quarter ended September 30, 2002, the Company completed anacquisition of a business complementary to the Company’s business strategy. TheCompany purchased all of the stock of the acquired business at a total cost of$ 6.2 million, consisting of $ 2.9 million in cash along with a Note Payablefor additional $ 3.0 million and the remaining balance related to transactioncosts. The Note Payable has an initial term of one year and may be settled, atthe option of the holder, through cash payment or through services rendered bythe Company to the holder. Based upon certain earn-out targets and othercriteria, future consideration related to the acquisition could amount to $6.9million.

 

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Net cash provided from operations for the quarter ended September 30,2002 was $33.2 million, compared to $ 8.4 million for the second quarter. Thisincrease in net cash is primarily the result of the Company continuing itsefforts to decrease days sales outstanding. The Company is focused on optimizing its cash flow in order to fund itsshare repurchase program, potential mergers and acquisitions, and to build long-termshareholder value.

 

The Company has available a $10 million unsecured demand line of creditwith a major Boston bank for operations and acquisition opportunities.Currently, the Company has no outstanding loans from this line of credit.

 

Based on the Company’s current operating plan, the Company believesthat its cash and cash equivalents on hand, cash flows from operations, and itscurrent available line of credit will be sufficient to meet its current capitalrequirements for at least the next twelve months.

 

**CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTS:** The followingimportant factors, among others, could cause actual results to differmaterially from those indicated by forward-looking statements made in thisQuarterly Report on Form 10-Q and presented elsewhere by management from timeto time.

 

**Keane’squarterly operating results have varied, and are likely to continue to varysignificantly. This may result in volatility in the market price of Keane’sshares.** Keane has experienced and expects to continue toexperience fluctuations in its quarterly results.  Keane’s gross margins vary based on a variety of factorsincluding employee utilization rates and the number and type of servicesperformed by Keane during a particular period. A variety of factors influenceKeane’s revenue in a particular quarter, including:

 

•                    generaleconomic conditions which may influence investment decisions or causedownsizing;

 

•                    the number andrequirements of client engagements;

 

•                    employeeutilization rates;

 

•                    changes in therates Keane can charge clients for services;

 

•                    acquisitions;and

 

•                    other factors,many of which are beyond Keane’s control.

 

A significant portion of Keane’s expenses do not vary relative torevenue.  As a result, if revenue in aparticular quarter does not meet expectations, Keane’s operating results couldbe materially adversely affected, which in turn may have a material adverseimpact on the market price of Keane common stock.  In addition, many of Keane’s engagements are terminable withoutclient penalty. An unanticipated termination of a major project could result inan increase in underutilized employees and a decrease in revenue and profits.

 

**Keanehas pursued, and intends to continue to pursue, strategic acquisitions.  Failure to successfully integrate acquiredbusinesses or assets may adversely affect Keane’s financial performance**.In the past five years, Keane has grown significantly throughacquisitions.  From January 1, 1999through September 30, 2002, Keane has completed ten acquisitions.  The aggregate cost of these acquisitionstotaled approximately $337.5 million. Keane’s future growth may be based in part on

 

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selected acquisitions.  At anygiven time, Keane may be in various stages of considering acquisitionopportunities.  Keane can provide noassurances that it will be able to find and identify desirable acquisitiontargets or that it will be successful in entering into a definitive agreementwith any one target.  In addition, evenif Keane reaches a definitive agreement with a target, there is no assurancethat Keane will complete any future acquisition.

 

Keane typically anticipates that each acquisition will bring benefits,such as an increase in revenue.  Priorto completing an acquisition, however, it is difficult to determine if Keanecan realize these benefits. Accordingly, there is a risk that an acquired company may not achieve anincrease in revenue or other benefits for Keane.  In addition, an acquisition may result in unexpected costs,expenses and liabilities. Any of these events could have a material adverseeffect on Keane’s business, financial condition and results of operations.

 

The process of integrating acquired companies into Keane’s existingbusiness may also result in unforeseen difficulties. Unforeseen operatingdifficulties may absorb significant management attention, which Keane mightotherwise devote to its existing business. In addition, the process may requiresignificant financial resources that Keane might otherwise allocate to otheractivities, including the ongoing development or expansion of Keane’s existingoperations.

 

Finally, future acquisitions could result in Keane having to incuradditional debt and/or contingent liabilities. Any of these possibilities couldhave a material adverse effect on Keane’s business, financial condition andresult of operations.

 

**Thecomplex process of integrating Metro and SignalTree Solutions with Keane maydisrupt Keane’s business activities and affect employee morale, thus affectingthe Keane’s ability to pursue its business plan and retain key employees**.Integrating the operations and personnel of Metro Information Services, Inc.,which Keane acquired in November 2001, and SignalTree Solutions, Inc. whichKeane acquired in March 2002 is a complex process.  The integration of each of Metro and SignalTree Solutions may notbe completed in the expected time period or may not achieve the anticipatedbenefits of the merger.  The successfulintegration of Metro and SignalTree Solutions with Keane requires, among otherthings, integration of finance, human resources and sales organizations.  The diversion of the attention of Keane’smanagement and any difficulties encountered in the process of combining thecompanies could cause the disruption of, or a loss of momentum in, theactivities of the combined company’s business. Further, the process of combining Metro and SignalTree Solutions withKeane could negatively affect employee morale and the ability of the combinedcompany to retain some of its key employees. The inability to successfully integrate the operations and personnel ofMetro and SignalTree Solutions with Keane could have a material adverse effecton Keane’s business, financial condition and results of operations.

 

**Keanefaces significant competition for its services, and its failure to remaincompetitive could limit its ability to maintain existing clients or attract newclients.** The market for Keane’s services is highlycompetitive.  The technology for customsoftware services can change rapidly. The market is fragmented, and no company holds a dominant position.  Consequently, Keane’s competition for clientassignments and experienced personnel varies significantly from city to cityand 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 marketsthey serve than does Keane.  Inaddition, clients may elect to increase their internal information systemsresources to satisfy their custom software development and integration needs.

 

In the healthcare software systems market, Keane competes with somecompanies that are larger in the healthcare market and have greater financialresources than Keane.  Keane believesthat significant competitive factors in the healthcare software systems marketinclude size and demonstrated ability to provide service to targeted healthcaremarkets.

 

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Keane may not be able to compete successfully against current or futurecompetitors.  In addition, competitivepressures faced by Keane may materially adversely affect its business,financial condition and results of operations.

 

**Keaneconducts business in the United Kingdom and India, which exposes it to a numberof difficulties inherent in international activities.**  As a result of its acquisition of SignalTreeSolutions in March 2002, Keane has two software development facilities in Indiaand has added approximately 400 technical professionals to its professionalservices organization.  India iscurrently experiencing conflicts with Pakistan over the disputed territory ofKashmir as well as clashes between different religious groups within thecountry.  These conflicts, in additionto other unpredictable developments in the political, economic and socialconditions in India, could eliminate or reduce the availability of thesedevelopment and professional services. If access to these services were to be unexpectedly eliminated orsignificantly reduced, Keane’s ability to meet development objectives importantto its new strategy would be hindered, and its business could be harmed.

 

If Keane fails to manage its geographically dispersed organization, itmay fail to meet or exceed its financial objectives and its revenues maydecline.  Keane performs developmentactivities in the U.S., Canada and in India, and has offices throughout theUnited States, the United Kingdom, Canada and India.  This geographic dispersion requires substantial managementresources that locally-based competitors do not need to devote to theiroperations.

 

Keane’s operations in the U.K. and India are subject to currencyexchange rate fluctuations, foreign exchange restrictions, changes in taxationand other difficulties in managing operations overseas.  Keane may not be successful in itsinternational operations.

 

**Keanemay be unable to redeploy its professionals effectively if engagements areterminated unexpectedly, which would adversely affect its results ofoperations. **Keane’sclients can cancel or reduce the scope of their engagements with Keane on shortnotice. If they do so, Keane may be unable to reassign its professionals to newengagements without delay.  Thecancellation or reduction in scope of an engagement could, therefore, reducethe utilization rate of Keane’s professionals, which would have a negativeimpact on Keane’s business, financial condition and results of operations.

 

As a result of these and other factors, the Company’s past financial performanceshould not be relied on as an indication of future performance.  Keane believes that period to periodcomparisons of its financial results are not necessarily meaningful and itexpects that results of operations may fluctuate from period to period in thefuture.

 

**Keane’sgrowth could be limited if it is unable to attract personnel in the InformationTechnology and business consulting industries.**  Keane believes that its future success willdepend in large part on its ability to continue to attract and retain highlyskilled technical and management personnel. The competition for such personnel is intense.  Keane may not succeed in attracting and retaining the personnelnecessary to develop its business.  IfKeane does not, its business, financial condition and result of operationscould be materially adversely affected.

 

Item 3.   Quantitative and QualitativeDisclosure About Market Risk

 

The Company does not engage in trading market risksensitive instruments or purchasing hedging instruments or “other than trading”instruments that are likely to expose the Company to market risk, whetherinterest rate, foreign currency exchange, and commodity price or equity pricerisk.  The Company has not purchasedoptions or entered into swaps or forward or futures contracts.  The Company’s primary market risk exposureis that of interest rate risk on its investments,

 

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which would affect the carrying value of thoseinvestments.  Additionally, the Companytransacts business in the United Kingdom, Canada and India and as such hasexposure associated with movement in foreign currency exchange rates.

 

Item4.   Controls and Procedures

 

(a)    *Evaluationof disclosure controls and procedures.*  Based on their evaluation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934) as of a date within 90 days of the filing dateof this Quarterly Report on Form 10-Q, the Company’s chief executive officerand chief financial officer have concluded that the Company’s disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and are operating in aneffective manner.

 

(b)    *Changes ininternal controls.*  Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their most recent evaluation.

 

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**Keane,Inc. and Subsidiaries**

Part II- Other Information

 

Item 1.    Legal Proceedings

 

In April 1998,United Services Planning Association, Inc. and Independent Research Agency forLife Insurance, Inc. filed a complaint in the District Court for TarrantCounty, Texas (Civil Action No. 96-173235-98) against the Company and two ofits employees alleging that the Company misrepresented its ability to completea project contracted for by the plaintiffs and concealed from the plaintiffsmaterial facts related to the status of the project. The parties are currentlyengaged in conducting discovery and it is not likely that the case will go totrial before the fall of 2003. The plaintiffs seek monetary relief. The Companybelieves that it has meritorious defenses to the plaintiff's complaint andintends to contest the claims vigorously. At this juncture, it is impossible toestimate with any reasonable degree of accuracy the likelihood of either partysucceeding on its claims or defenses.

 

Item 5.    Other Information

 

The Companyannounced on October 25, 2002 that its Board of Directors had authorized theCompany to repurchase an additional 5 million shares of its common stock overthe next 12 months.  The authorizationwas in addition to the 5 million share repurchase authorization announced bythe Company on July 26, 2002, which program expires in July 2003.  As of October 25, 2002, the Company hadrepurchased approximately 4.7 million shares to date under the July repurchaseprogram and anticipates repurchasing the remaining 300,000 shares before theJuly repurchase program expires.

 

The Repurchasesmay be made on the open market or in negotiated transactions, and the timingand amount of shares repurchased will be determined by the Company’s managementbased on its evaluation of market and economic conditions and other factors.  The repurchase program will be funded usingthe Company’s cash reserves.  Therepurchased shares will be available for use in connection with the Company’sstock option plans, employee stock purchase and other stock benefit plans, andfor general corporate purposes, including acquisitions.

 

On September 26, 2002, the Company filed a TenderOffer Statement in connection with its offer to exchange currently held stockoptions with new options. The downturn in the stock market and the resultingunderwater position of the Company’s stock option had created a potentialmotivation and retention issue with key employees and executives of theCompany. Consistent with the Company’s philosophy of using stock options tomotivate and retain management and employees, on August 20, 2002, the Company’sBoard of Directors approved the opportunity for employees to request that theCompany exchange outstanding options to purchase shares of the Company’s CommonStock, which were granted on or after January 1, 2000 and have an exerciseprice of $ 12.00 or greater per share, for new options to purchase shares ofCommon Stock on substantially the following terms (“the Offer”).  Pursuant the terms of the Offer:

 

(i)                               alleligible and outstanding options issued under all of the Company’s stock optionplans could be exchanged for new options at an exchange rate of four for everyfive surrendered;

 

(ii)                            thegrant date of the new options would be the first business day that is at leastsix months and one day after the date of the expiration of the Offer; and

 

(iii)                         theexercise price of each new option would be the closing price of the Company’scommon stock on the new grant date, which is at least six months and one dayafter the expiration of the Offer.

 

The Offer expired on October 7, 2002 (“expiration date”).  Options for 1,888,394 shares of theCompany’s common stock with a weighted average exercise price of $ 20.45 wereeligible for the Offer.  Of this amount,1,458,298 options were surrendered for exchange, with 324,902 options beingretained, with the balance of the 105,194 being canceled because ofterminations. As a result, the Company anticipates that on the first businessday that is at least six months and one day from the expiration date, theCompany will grant new options for 1,166,638 shares of the Company’s commonstock.

 

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Item 6.    Exhibits and Reports on Form 8-K

 

(a)                              Exhibit- 99.1 Certification by the Registrant’s President and Chief Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

Exhibit – 99.2Certification by the Registrant’s Senior Vice President and Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

(b)                             Reportson Form 8-K.  The Company filed acurrent report on Form 8-K with the SEC on July 26, 2002, announcing the Boardof Directors authorization for the Company to repurchase up to 5,000,000 sharesof common stock.

 

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**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |              |   |                      |
|--------|-------------------|--------|---------------------------|
|   |              |   |                      | KEANE, INC. |
|   |              |   |                      | (Registrant) |
|   |              |   |                      |
|   |              |   |                      |
| Date   | November 13, 2002 |   | /s/  Brian T.  Keane |   |
|   |              |   |                      | Brian T. Keane |
|   |              |   |                      | President and Chief  Executive Officer |
|   |              |   |                      |
|   |              |   |                      |
| Date   | November 13, 2002 |   | /s/  John J. Leahy   |   |
|   |              |   |                      | John J. Leahy |
|   |              |   |                      | Senior Vice President  and  Chief Financial Officer |
|   |              |   |                      | (Principal Financial  and Accounting Officer) |
|        |                   |        |                           |  |  |  |

 

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CERTIFICATIONS

 

I, Brian T. Keane, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Keane, Inc.;

 

2.               Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                 designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                 presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                 all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
|   |              | /s/ Brian T. Keane                           |   |
|--------|-------------------|----------------------------------------------|--------|
| Dated: | November 13, 2002 | Brian T. Keane                               |
|   |              | President and Chief   Executive Officer |

 

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I, John J. Leahy, certify that:

 

7.               I have reviewedthis quarterly report on Form 10-Q of Keane, Inc.;

 

8.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

9.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

10.         The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                 designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                 presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

11.         The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)                 all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

12.         The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
|   |              | /s/ John J. Leahy                                                       |   |
|--------|-------------------|-------------------------------------------------------------------------|--------|
| Dated: | November 13, 2002 | John J. Leahy                                                           |
|   |              | Senior Vice President  — Finance and Chief  Financial Officer |

 

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