**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                               |
|------------------------------------------------------------------------------------------------------------------------------|
| **ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**           |
|                                                                                                                         |
| **For the quarterly period ended March 31,  2005**                                                                           |
|                                                                                                                         |
| **OR**                                                                                                                       |
|                                                                                                                         |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**               |
|                                                                                                                         |
| **For the transition period from                  to** |
|                                                                                                                         |
| **Commission File Number 1-7516**                                                                                            |

 

**KEANE, INC.**

(Exact name of registrant as specified in itscharter)

 
| **MASSACHUSETTS**                                                           | ** ** | **04-2437166**                           |
|-----------------------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)             |       | (I.R.S. Employer Identification  Number) |
|                                                                        |       |                                     |
| **100 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 mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

 

As of March 31, 2005, there were 62,372,747 shares of Common Stock,$.10 par value per share, and no shares of Class B Common Stock issued andoutstanding.

 

 

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**Keane, Inc.**

**Table of Contents**

 
| **Part I.**    | **Financial Information**                                                                                      |   |
|----------------|----------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                           |   |
| Item 1.        | Financial  Statements                                                                                          |   |
|           |                                                                                                           |   |
|           | Unaudited Condensed Consolidated Statements  of Income for the three months ended March 31, 2005 and 2004      |   |
|           |                                                                                                           |   |
|           | Unaudited Condensed Consolidated Balance  Sheets as of March 31, 2005 and December 31, 2004                    |   |
|           |                                                                                                           |   |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows for the three months ended  March 31, 2005 and 2004 |   |
|           |                                                                                                           |   |
|           | 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  2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   |   |
|           |                                                                                                           |   |
| Item  6.       | Exhibits                                                                                                       |   |
|           |                                                                                                           |   |
| Signatures     |                                                                                                           |   |
|           |                                                                                                           |   |
| Exhibit  Index |                                                                                                           |

 

2

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**Part I.****     FinancialInformation**

 

**Item 1****.****    FinancialStatements**

 

**Keane, Inc.**

**UnauditedCondensed Consolidated Statements of Income**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,**                 | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(****In  thousands except per share amounts)** | ** ** |
| **Revenues**                                                                     |       | $                                                | 232,204    |   | $ | 215,824 |   |
|                                                                             |       |                                             |       |   |   |
| **Operating  expenses**                                                          |       |                                             |       |   |   |
| Salaries, wages, and other direct costs                                          |       | 162,193                                          |       | 149,990 |   |
| Selling, general, and administrative  expenses                                   |       | 54,172                                           |       | 53,217 |   |
| Amortization of intangible assets                                                |       | 4,070                                            |       | 3,913 |   |
| **Operating  income**                                                            |       | 11,769                                           |       | 8,704 |   |
|                                                                             |       |                                             |       |   |   |
| **Other  income (expense)**                                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest and dividend income                                                     |       | 1,105                                            |       | 1,055 |   |
| Interest expense                                                                 |       | (1,416                                           | )          | (1,438 | ) |
| Other (expense) income, net                                                      |       | (16                                              | )          | 125 |   |
| Minority interest                                                                |       | 683                                              |       | 761 |   |
| **Income  before income taxes**                                                  |       | 12,125                                           |       | 9,207 |   |
| Provision for income taxes                                                       |       | 4,850                                            |       | 3,683 |   |
| **Net  income**                                                                  |       | $                                                | 7,275      |   | $ | 5,524 |   |
|                                                                             |       |                                             |       |   |   |
| Basic earnings per share                                                         |       | $                                                | 0.12       |   | $ | 0.09 |   |
|                                                                             |       |                                             |       |   |   |
| Diluted earnings per share                                                       |       | $                                                | 0.11       |   | $ | 0.08 |   |
|                                                                             |       |                                             |       |   |   |
| Basic weighted average common shares  outstanding                                |       | 62,156                                           |       | 63,650 |   |
| Diluted weighted average common shares and  common share equivalents outstanding |       | 71,028                                           |       | 73,004 |   |

 

*The accompanying notes are an integral partof the unaudited condensed consolidated financial statements.*

 

3

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**Keane, Inc.**

**Unaudited Condensed Consolidated Balance Sheets**

** **
| ** **                                      | ** ** | **March 31,  2005**        | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**            | ** ** | ** **                 | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                      |       |                       |       |                       |       |
| Current:                                        |       |                       |       |                       |       |
| Cash and cash equivalents                       |       | $                          | 80,969     |                       | $          | 67,488 |   |
| Restricted cash                                 |       | 1,790                      |       | 986                        |       |
| Marketable securities                           |       | 127,020                    |       | 130,678                    |       |
| Accounts receivable, net                        |       | 142,957                    |       | 126,467                    |       |
| Prepaid expenses and deferred taxes             |       | 15,598                     |       | 16,515                     |       |
| Total current assets                            |       | 368,334                    |       | 342,134                    |       |
|                                            |       |                       |       |                       |       |
| Property and equipment, net                     |       | 76,509                     |       | 76,761                     |       |
| Goodwill                                        |       | 309,594                    |       | 305,965                    |       |
| Customer lists, net                             |       | 50,049                     |       | 53,040                     |       |
| Other intangible assets, net                    |       | 8,804                      |       | 9,904                      |       |
| Other assets, net                               |       | 15,415                     |       | 16,390                     |       |
| Total assets                                    |       | $                          | 828,705    |                       | $          | 804,194 |   |
| **Liabilities**                                 |       |                       |       |                       |       |
| Current:                                        |       |                       |       |                       |       |
| Short-term debt                                 |       | $                          | 671        |                       | $          | 892 |   |
| Accounts payable                                |       | 6,939                      |       | 9,511                      |       |
| Accrued restructuring                           |       | 4,054                      |       | 3,513                      |       |
| Unearned income                                 |       | 10,805                     |       | 9,376                      |       |
| Accrued compensation                            |       | 45,630                     |       | 39,763                     |       |
| Accrued expenses and other liabilities          |       | 64,386                     |       | 52,760                     |       |
| Total current liabilities                       |       | 132,485                    |       | 115,815                    |       |
|                                            |       |                       |       |                       |       |
| Long-term debt                                  |       | 150,013                    |       | 150,017                    |       |
| Accrued long-term building costs                |       | 39,414                     |       | 39,545                     |       |
| Accrued long-term restructuring                 |       | 4,167                      |       | 5,164                      |       |
| Deferred income taxes                           |       | 26,570                     |       | 25,924                     |       |
| Total liabilities                               |       | 352,649                    |       | 336,465                    |       |
|                                            |       |                       |       |                       |       |
| **Minority  Interest**                          |       | 5,343                      |       | 6,026                      |       |
|                                            |       |                       |       |                       |       |
| **Stockholders’  Equity**                  |       |                       |       |                       |       |
| Common stock                                    |       | 6,237                      |       | 6,218                      |       |
| Additional paid-in capital                      |       | 35,824                     |       | 33,752                     |       |
| Accumulated other comprehensive loss            |       | (7,122                     | )          | (6,657                     | )          |
| Retained earnings                               |       | 438,321                    |       | 431,046                    |       |
| Unearned compensation                           |       | (2,547                     | )          | (2,656                     | )          |
| Stockholders’ equity                       |       | 470,713                    |       | 461,703                    |       |
| Total liabilities and stockholders’ equity |       | $                          | 828,705    |                       | $          | 804,194 |   |

* *

*The accompanying notes are an integral partof the unaudited condensed consolidated financial statements.*

 

4

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**Keane, Inc.**

**Unaudited Condensed Consolidated Statements of CashFlows**

 
| ** **                                                                                    | ** ** | **Three months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars in thousands)**       | ** ** |
| **Cash  flows from operating activities:**                                                    |       |                             |       |   |   |
| Net income                                                                                    |       | $                                | 7,275      |   | $ | 5,524 |   |
| Adjustments to reconcile net income to net  cash provided by (used for) operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                                 |       | 7,165                            |       | 6,857 |   |
| Deferred income taxes                                                                         |       | 2,711                            |       | 3,884 |   |
| Provision for doubtful accounts                                                               |       | 1,193                            |       | 1,590 |   |
| Minority interest                                                                             |       | (683                             | )          | (761 | ) |
| (Gain) loss on sale of property and  equipment                                                |       | (168                             | )          | 110 |   |
| Loss (gain) on sale of investments                                                            |       | 34                               |       | (296 | ) |
| Other charges, net                                                                            |       | (208                             | )          | (1,332 | ) |
| Changes in operating assets and  liabilities, net of acquisitions:                            |       |                             |       |   |   |
| Increase in accounts receivable                                                               |       | (15,352                          | )          | (24,001 | ) |
| Decrease (Increase) in prepaid expenses and  other assets                                     |       | 1,838                            |       | (614 | ) |
| Increase in other liabilities                                                                 |       | 4,399                            |       | 10,043 |   |
| Increase (decrease) in income taxes payable                                                   |       | 925                              |       | (1,748 | ) |
| **Net cash  provided by (used for) provided by operating activities**                         |       | 9,129                            |       | (744 | ) |
|                                                                                          |       |                             |       |   |   |
| **Cash  flows from investing activities:**                                                    |       |                             |       |   |   |
| Purchase of investments                                                                       |       | (13,858                          | )          | (20,559 | ) |
| Sale and maturities of investments                                                            |       | 16,619                           |       | 38,820 |   |
| Purchase of property and equipment                                                            |       | (4,759                           | )          | (4,200 | ) |
| Restricted cash                                                                               |       | (587                             | )          | — |   |
| Proceeds from the sale of property and  equipment                                             |       | 366                              |       | 121 |   |
| Payments for current year acquisitions, net  of cash acquired                                 |       | 4,584                            |       | (17,711 | ) |
| Payments for prior years acquisitions                                                         |       | —                           |       | (36 | ) |
| **Net cash  provided by (used for) investing activities**                                     |       | 2,365                            |       | (3,565 | ) |
|                                                                                          |       |                             |       |   |   |
| **Cash  flows from financing activities:**                                                    |       |                             |       |   |   |
| Debt issuance costs                                                                           |       | —                           |       | (27 | ) |
| Principal payments under capital lease  obligations                                           |       | (105                             | )          | (138 | ) |
| Proceeds from issuance of common stock                                                        |       | 2,059                            |       | 2,749 |   |
| Repurchase of common stock                                                                    |       | —                           |       | (6,755 | ) |
| **Net cash  provided by (used for) financing activities**                                     |       | 1,954                            |       | (4,171 | ) |
|                                                                                          |       |                             |       |   |   |
| Effect of exchange rate changes on cash                                                       |       | 33                               |       | 127 |   |
| **Net  increase (decrease) in cash and cash equivalents**                                     |       | 13,481                           |       | (8,353 | ) |
| **Cash and  cash equivalents at beginning of period**                                         |       | 67,488                           |       | 56,736 |   |
| **Cash and  cash equivalents at end of period**                                               |       | $                                | 80,969     |   | $ | 48,383 |   |
|                                                                                          |       |                             |       |   |   |
| **Supplemental  information:**                                                                |       |                             |       |   |   |
| Income taxes paid                                                                             |       | $                                | 1,466      |   | $ | 1,483 |   |
|                                                                                          |       |                             |       |   |   |
| Interest paid                                                                                 |       | $                                | 3          |   | $ | 23 |   |

 

*The accompanying notes are an integral partof the unaudited condensed consolidated financial statements.*

 

5

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**Keane, Inc.**

**Notes to****Unaudited Condensed Consolidated Financial Statements**

 

**Note 1.****       Basis of Presentation**

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and, accordingly, do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Keane, Inc. and our wholly and majority owned subsidiaries.  In the opinion of management, alladjustments, consisting of normal recurring accruals, considered necessary fora fair presentation of the results of operations for the interim periodsreported and of our financial condition as of the date of the interim balancesheet have been included.  Operatingresults for the three months ended March 31, 2005 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2005 or for any other period.

 

The balance sheet at December 31, 2004 has been derived from theaudited consolidated financial statements at that date but does not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements.

 

Certain reclassifications have been made to the 2004 financialstatements to conform to the 2005 presentation. Such reclassifications have no effect on previously reported net incomeor stockholders’ equity.

 

For further information, refer to the consolidated financial statementsand footnotes thereto included in our Annual Report on Form 10-K for the yearended December 31, 2004 filed with the Securities and Exchange Commission onMarch 15, 2005.

 

**Note 2.****       Earnings Per Share Data**

The computation of earnings per share for the three months ended March31, 2005 and 2004 is as follows (in thousands, except per share data):

 
| **Three  Months Ended March 31,**                                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income used for basic earnings per  share                                                                                         |       | $        | 7,275      |     | $          | 5,524 |   |
| Interest expense associated with  convertible debentures, including amortization of debt issuance costs                               |       | 970      |       | 970      |       |
| Related tax effect                                                                                                                    |       | (388     | )          | (388     | )          |
| Net income used for diluted earnings per  share                                                                                       |       | $        | 7,857      |     | $          | 6,106 |   |
|                                                                                                                                  |       |     |       |     |       |
| Weighted average number of common shares  outstanding used in calculation of basic earnings per share                                 |       | 62,156   |       | 63,650   |       |
| Incremental shares from restricted stock,  employee stock purchase plan, and the assumed exercise of dilutive stock  options          |       | 697      |       | 1,179    |       |
| Incremental shares from assumed conversion  of convertible debentures                                                                 |       | 8,175    |       | 8,175    |       |
| Weighted average number of common shares  and common share equivalents outstanding used in calculation of diluted  earnings per share |       | 71,028   |       | 73,004   |       |
| Earnings per share                                                                                                                    |       |     |       |     |       |
| Basic                                                                                                                                 |       | $        | 0.12       |     | $          | 0.09 |   |
| Diluted                                                                                                                               |       | $        | 0.11       |     | $          | 0.08 |   |

 

6

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Potential common shares consist of employee stock options andrestricted common stock.  Employee stockoptions to purchase 1,701,000 and 1,325,000 shares for the three months endedMarch 31, 2005 and 2004, respectively, were outstanding, but were not includedin the computation of diluted earnings per share because the exercise price ofthe stock options was greater than the average share price of the common sharesduring the period and therefore, their effect would have been anti-dilutive.

 

Our2.0% Convertible Subordinated Debentures due 2013 (“Debentures”) areconvertible at the option of the holder into shares of our common stock at aninitial conversion rate of 54.4989 shares of common stock per $1,000 principalamount of Debentures, which is equivalent to an initial conversion price ofapproximately $18.349 per share. The Debentures become convertible under thefollowing circumstances: (a) during any fiscal quarter commencing afterSeptember 30, 2003 when, among other circumstances, the closing price pershare of our common stock is more than 120% of the conversion price(approximately $22.019 per share) for at least 20 trading days in the 30consecutive trading days ending on the last trading day of the preceding fiscalquarter; (b) during the five business days after any five consecutivetrading day period in which the trading price per $1,000 principal amount ofDebentures for each day of that period was less that 98% of the product of theclosing sale price per share of our common stock and the number of sharesissuable upon conversion of $1,000 principal amount of the Debentures;(c) if the Debentures have been called for redemption; or (d) uponthe occurrence of specified corporate transactions. The total amount of sharesissuable upon the conversion of the Debentures is approximately8.2 million.

 

We adopted the provisions of Emerging Issues Task Force (“EITF”) IssueNo. 04-8 (“EITF 04-8”), “The Effect of Contingently Convertible Debt onDiluted Earnings per Share” in the Fourth Quarter of 2004, which requires thatcontingently convertible debt be included in the calculation of dilutedearnings per share using the if-converted method regardless of whether themarket price trigger has been met. Under the if-converted method, the debt isconsidered converted to shares, with the resulting number of shares included inthe denominator of the earnings per share calculation and the related interestexpense (net of tax) added back to the numerator of the earnings per sharecalculation. EITF 04-8 also requires the restatement of previously reporteddiluted earnings per share upon adoption. Therefore, the weighted averageimpact of the 8.2 million shares issuable upon conversion of the Debentures,has been included in the calculation of diluted earnings per share for thethree months ended March 31, 2005 and 2004. 

 

**Note 3.****       Stock-Based Compensation**

 

We have stock-based compensation plans forwhich we have adopted the disclosure-only provisions of SFAS No. 148 (“SFAS 148”),“Accounting for Stock-Based Compensation—Transition and Disclosure,” anamendment of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-BasedCompensation.” Accordingly, no compensation expense has been recognized for ourstock-based compensation plans other than for restricted stock and certainstock options. As permitted by SFAS 148 and SFAS 123, we account for our stock-basedcompensation in accordance with Accounting Principles Board (“APB”) OpinionNo. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” 

 

In accordance with APB 25 we use the intrinsicvalue-based method to account for stock option grants and restricted stockawards. We grant stock options for a fixed number of shares to employees withan exercise price equal to the closing price of the shares at the date of grantand therefore, do not recognize compensation expense. We also grant restrictedstock for a fixed number of shares to employees for nominal consideration. In2003, in connection with our acquisition of a majority interest in KeaneWorldzen, certain employees were granted Keane Worldzen stock options. Inaccordance with Financial Accounting Standards Board (“FASB”) InterpretationNo. 44 (“FIN 44”), “Accounting for Certain Transactions Involving StockCompensation” and SFAS No. 141 (“SFAS 141”), “Business Combinations,”these stock options were recorded as unearned compensation at the date ofacquisition and vest over the life of the stock option. Compensation expenserelated to restricted stock awards

 

7

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and the Keane Worldzen stock options is recorded ratably over therestriction and vesting period, respectively, and is included in the selling,general, and administrative expenses in the accompanying unaudited condensed consolidatedstatements of income. Our Employee Stock Purchase Plan (“ESPP”) isnon-compensatory as defined in APB 25, and accordingly, we do not recognizecompensation expense in our consolidated financial statements.

 

Had compensation expense for our stock-basedcompensation plans been determined based on the fair value at the grant datesas calculated in accordance with SFAS 123 and using the Black-Scholesoption-pricing model, we would have recorded additional compensation expenseand our net income and earnings per for the three months ended March 31, 2005and 2004 would have been reduced to the pro forma amounts indicated below (inthousands, except per share data):

 
| **Three  Months ended March 31,**                                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income—as reported (1)                                                                                                             |       | $        | 7,275      |     | $          | 5,524 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                 |       | 84       |       | 116      |       |
| Deduct: Total stock-based employee  compensation expense determined under the fair value method for all awards,  net of related tax effects |       | (1,058   | )          | (1,057   | )          |
|                                                                                                                                        |       |     |       |     |       |
| Net income (loss)—pro forma                                                                                                            |       | $        | 6,301      |     | $          | 4,583 |   |
| Earnings (loss) per share:                                                                                                                  |       |     |       |     |       |
| Basic—as reported                                                                                                                      |       | 0.12     |       | 0.09     |       |
| Basic—pro forma                                                                                                                        |       | 0.10     |       | 0.07     |       |
| Diluted—as reported                                                                                                                    |       | 0.11     |       | 0.08     |       |
| Diluted—pro forma                                                                                                                      |       | 0.10     |       | 0.07     |       |

 

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(1) See Note 2 “Earnings Per Share Data” for reconciliation of netincome as reported to net income used in calculation of diluted earnings pershare.

 

**Note 4.****       Comprehensive Income and Accumulated OtherComprehensive Loss**

 

SFAS No. 130 (“SFAS 130”), “Reporting Comprehensive Income,”establishes rules for the reporting and display of comprehensive income and itscomponents. Components of comprehensive income include net income and certaintransactions that have generally been reported in the consolidated statement ofstockholders’ equity. Other comprehensive income is comprised of currencytranslation adjustments, available-for-sale securities valuation adjustments,and adjustments related to a foreign defined benefit plan.

 

Totalcomprehensive income (i.e., net income plus available-for-sale securitiesvaluation adjustments, currency translation adjustments and adjustments relatedto a foreign defined benefit plan, net of tax) was $6.8 million for the threemonths ended March 31, 2005 and was $1.5 million for the three monthsended March 31, 2004, respectively. See Note 5 “Pension Plan” for adiscussion of the minimum pension liability adjustments.

 

Thefollowing table summarizes the components of accumulated other comprehensiveloss, net of taxes (dollars 

inthousands):

 
| **As of**                                | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Foreign currency translation adjustments |       | $                   | 3,976      |                   | $          | 4,004 |   |
| Securities valuation adjustment          |       | (951                | )          | (514                   | )          |
| Minimum pension liability adjustment     |       | (10,147             | )          | (10,147                | )          |
|                                     |       |                |       |                   |       |
| Accumulated other comprehensive loss     |       | $                   | (7,122     | )                      | $          | (6,657 | ) |

 

8

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## **Note 5.**       Pension Plan

 

The United Kingdom (“UK”) defined benefit plan (“DBP”) provides pensionbenefits to employees of our UK subsidiary who were active on August 4, 1999,and not to employees who joined after that date, and are based on the employees’compensation and service.  Our policy isto fund amounts required by applicable government regulations.  The measurement date for the UK DBP isDecember 31.  

 

During the First Quarter of 2004, we decided to close our UK DBP tofuture salary accruals effective April 1, 2004. Accordingly, we accounted forthe closing of the UK DBP as a curtailment under SFAS No. 88 (“SFAS 88”),  “Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits.”  In 2004, we recorded a curtailment loss ofapproximately $0.2 million to expense the unrecognized prior service cost, andwe recorded an additional required minimum liability of approximately $6.6million through Accumulated other comprehensive loss in the accompanyingcondensed consolidated balance sheets. As of March 31, 2005, the UK pension liability was approximately $13.3million and is included in Accrued expenses and other liabilities in theaccompanying unaudited condensed consolidated balance sheets.  

 

Net periodic pension cost of the UK DBP forthe three months ended March 31, 2005 and 2004 is presented as follows (dollarsin thousands):

 
| **Three  months ended March 31,**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Service cost                                                  |       | $        | 15         |     | $          | 233 |   |
| Interest cost                                                 |       | 496      |       | 454      |       |
| Expected return on plan assets                                |       | (457     | )          | (395     | )          |
| Amortization of prior service cost                            |       | —   |       | —   |       |
| Amortization of transitional obligation                       |       | —   |       | —   |       |
| Recognized actuarial loss                                     |       | 116      |       | 123      |       |
| Net periodic pension cost                                     |       | $        | 170        |     | $          | 415 |   |
| Curtailment loss/(gain)                                       |       | 0        |       | 183      |       |
| Net periodic pension expense after  allowance for curtailment |       | $        | 170        |     | $          | 598 |   |

 

**Note 6.****       Business Acquisitions**

 

*netNumina Solutions, Inc.*

 

On February 28, 2005, we acquired netNuminaSolutions, Inc. (“netNumina”), a software development company based inCambridge, Massachusetts that specializes in technology strategy, architecture,and custom development, to enhance our capabilities in Development andIntegration services.  In exchange forall of the outstanding capital stock of netNumina, we agreed to pay $5.7million, including $0.6 million held back. As of March 31, 2005, the $5.7million was accrued and included in Accrued expenses and other liabilities inthe accompanying unaudited condensed consolidated balance sheet.  As of April 15, 2005, we had paid $4.7million of the $5.1 million not held back based on the stock certificatessurrendered for cancellation. We expect to pay the remaining $0.4 million notheld back in May 2005. The acquisition has been accounted for under the purchasemethod in accordance with SFAS No. 141 (“SFAS 141”), “BusinessCombinations,” and SFAS No. 142 (“SFAS 142”), “Goodwill and OtherIntangible Assets.”  The total cost ofthe transaction through March 31, 2005 was $4.9 million, which included netassets of approximately $5.2 million. Total assets acquired of $7.8 million consisted primarily of cash of$4.6 million and accounts receivable of $2.3 million.  In connection with the purchase priceallocation we recorded a $0.3 million fair value adjustment to reduce propertyand equipment that resulted from an excess book value of the assets acquiredover the purchase price.  As a result, wehave not recorded any goodwill or intangible assets in connection with thisacquisition. The valuation and purchase price

 

9

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allocation are preliminary as of March 31,2005.  The operating results of netNuminahave been included in our unaudited condensed consolidated statements of incomebeginning March 1, 2005.

 

At the date of acquisition, we entered into aplan to implement a workforce reduction of eight non-billable employees.  As a result, we recorded a restructuringliability of $1.0 million related to severance. In accordance with EITF Issue No. 95-3 (“EITF 95-3”), “Recognition ofLiabilities in Connection with a Purchase Business Combination”, these costs,which are not associated with the generation of future revenues and have nofuture economic benefit, are reflected as assumed liabilities in the allocationof the purchase price to the net assets acquired.       

* *

*Fast Track Holdings Limited*

 

On July 13, 2004, we acquired Fast Track Holdings Limited (“FastTrack”), a privately held consulting firm based in the UK that manages thedesign, integration, and rapid deployment of large-scale SAP implementations.In exchange for all of Fast Track’s outstanding capital stock, we paidapproximately $3.4 million in cash, including transaction costs, with thepotential to pay up to an additional approximate $5.0 million in earn-outconsideration over the next two years, contingent upon the achievement ofcertain future financial targets. The additional payments for earn-outconsideration, if any, will be accounted for as additional purchase price. Theacquisition has been accounted for under the purchase method in accordance withSFAS 141 and SFAS 142.  Thepurchase price for this acquisition may be subject to further refinements basedon future adjustments relating to the value of the acquired net assets. Theportion of the purchase price related to the intangible assets has beenfinalized and was identified utilizing standard valuation procedures andtechniques. The total cost of the acquisition through March 31, 2005 was$4.1 million, which included net assets acquired of approximately ($0.2)million, goodwill of approximately $3.1 million and intangible assets of$1.1 million, the majority of which is being amortized on a straight-linebasis over two years, and approximates the expected period of benefit. Totalassets acquired of $2.1 million consisted primarily of accounts receivableof $1.9 million. The operating results of Fast Track have been included inour unaudited condensed consolidated statement of operations beginningJuly 14, 2004. Pro forma results for this acquisition have not beenprovided since this acquisition was not material.

 

At the date of acquisition, we entered into a plan to exit certainactivities, to consolidate facilities and to implement a workforce reduction.As a result, we recorded a restructuring liability of $0.4 million relatedto the lease obligations and certain other costs for those facilities and$0.1 million related to severance and retention. In accordance with EITF95-3, these costs, which are not associated with the generation of futurerevenues and have no future economic benefit, are reflected as assumedliabilities in the allocation of the purchase price to the net assetsacquired.  

 

*Nims Associates, Inc.*

* *

On February 27, 2004, we acquired NimsAssociates, Inc. (“Nims”), an information technology and consultingservices company with offices in the Midwest and Advanced Development Centers (“ADCs”)in Indianapolis and Dallas, to expand our customer base, primarily in thefinancial and insurance industries. In exchange for all of Nims’ outstandingcapital stock, we paid $18.2 million in cash to the shareholders of Nims,with the potential to pay up to an additional $15.0 million in earn-outconsideration over the next three years, contingent upon the achievement ofcertain future financial targets. The additional payments for earn-outconsideration will be accounted for as additional purchase price. The firstearn-out was achieved as of March 31, 2005 and, as a result, we accrued the$3.3 million in earn-out consideration and included this amount in Accruedexpenses and other liabilities in the accompanying unaudited condensedconsolidated balance sheet and recorded a corresponding increase in Goodwill.We paid the $3.3 million in earn-out consideration in April 2005. Theacquisition was accounted for under the purchase method in accordance withSFAS 141 and SFAS 142. The total cost of the acquisition was$22.8 million, which includes net assets acquired of approximately$5.0 million, goodwill of approximately $14.1 million and intangibleassets of $7.0 million. The intangible assets are primarily amortized on astraight-line basis over 10 years, which approximates the expected periodof benefit. Total assets acquired of $8.8 million consisted primarily ofaccounts receivable of $5.6 million. The portion of the purchase pricerelated to the intangible assets has been finalized and was identified byutilizing standard valuation procedures and techniques. The operating resultsof Nims have been included in our unaudited condensed consolidated statementsof income beginning March 1, 2004. 

 

10

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At the date of acquisition, we entered into aplan to exit certain activities, to consolidate facilities and to implement aworkforce reduction of 22 non-billable employees. As a result, we recorded arestructuring liability of $1.4 million related to the lease obligationsand certain other costs for those facilities and $0.3 million related toseverance and retention. In accordance with EITF 95-3, these costs, which arenot associated with the generation of future revenues and have no futureeconomic benefit, are reflected as assumed liabilities in the allocation of thepurchase price to the net assets acquired. 

 

The unaudited pro forma combined condensedstatements of income below present our historical statements and ouracquisition of Nims on February 27, 2004 as if the purchase had occurred atJanuary 1, 2004. The following unaudited pro forma combined condensedfinancial information is presented for comparative purposes only and is notnecessarily indicative of the results of operations that would have actuallybeen reported had the purchase occurred at the beginning of the periodspresented, nor is it necessarily indicative of future financial position orresults of operations (dollars in thousands, except per share data):

 
| ** **                 | ** ** | **(Unaudited)** | ** ** |
|----------------------------|------------|-----------------|------------|
| **March  31,**             | ** ** | **2004**        | ** ** |
| Revenues                   |       | $               | 224,329    |   |
| Net income (1)             |       | 5,723           |       |
| Basic earnings per share   |       | 0.09            |       |
| Diluted earnings per share |       | 0.09            |       |
|                            |            |                 |            |  |

 

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(1)   SeeNote 2 “Earnings Per Share Data” for reconciliation of net income as reportedto net income used in calculation of diluted earnings per share.

* *

*Keane**Worldzen (see Note 12 “SubsequentEvents” for further discussion)*

 

OnOctober 17, 2003, we acquired a controlling interest in Keane Worldzen, aprivately held Business Process Outsourcing (“BPO”) firm. In connection withthe acquisition, we paid $9.0 million to acquire the Series Apreferred shares of Worldzen Holdings Limited held by an unrelated third party.We contributed to Keane Worldzen our Worldzen Holdings Limited shares,$4.3 million in cash and certain assets of our Keane Consulting Group (“KCG”),our business consulting arm. This transaction was accounted for under thepurchase method in accordance with SFAS 141 and SFAS 142. As a resultof the transaction, as of March 31, 2005, we owned approximately 62% of KeaneWorldzen’s outstanding capital stock. The former majority shareholders ofWorldzen Holdings Limited contributed their Worldzen Holdings Limited shares toKeane Worldzen in exchange for approximately 38% of Keane Worldzen’soutstanding capital stock and are currently members of Keane Worldzen’smanagement. The asset and liabilities contributed to Keane Worldzen wererecorded in relation to each shareholder’s ownership percentage in KeaneWorldzen as follows: (i) carryover basis related to assets and liabilitiescontributed to Keane Worldzen for which the individual shareholder had a priorinterest; and (ii) fair value for assets and liabilities for which anindividual shareholder had no prior interest. As a result, we recorded goodwillof approximately $13.8 million in the accompanying condensed consolidatedbalance sheet.

 

In connection with the acquisition, weobtained the right to purchase certain of the remaining shares held by theminority shareholders of Keane Worldzen at different times (“call options”).Our first call option is exercisable beginning on January 1, 2006 andending on December 31, 2006 and is based on a stated value for theunderlying shares of $6.5 million. The fair value of this first calloption, using a Black-Scholes valuation model, is approximately$3.8 million and is included in other assets in the accompanying unauditedcondensed consolidated balance sheets. The other call options are exercisable atthe fair market value of the underlying shares during the call periods, whichare exercisable at certain times during the period January 1, 2007 throughDecember 31, 2009. Since these other call options can only be exercised atthe fair value of the underlying shares, no amounts have been recorded forthese call options in our consolidated financial statements.

 

Also inconnection with the acquisition, the minority shareholders were given the rightto require us to purchase certain of their remaining shares at various times (“putoptions”) subject to the achievement of certain operating and financialmilestones related to Keane Worldzen’s business performance. The first putoption, the term of

 

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which is October 17,2003 through December 31, 2005, is exercisable based on a stated value forthe underlying shares of $2.8 million. The fair value of this put option,using a Black-Scholesvaluation model, was approximately $279,000 at the acquisition date andis currently being recognized as compensation expense in the accompanyingconsolidated financial statements through the expiration date of the option.The other put options are exercisable at fair market value for the underlyingshares during the put periods, which are exercisable at certain times duringthe period January 1, 2008 through March 1, 2010. Since these otherput options can only be exercised at the fair value of the underlying shares,no amounts have been recorded for these put options in our consolidatedfinancial statements. Pro forma results for this acquisition have not beenprovided since this acquisition was not material.

 

The results ofoperations of these acquired companies have been included in our unauditedcondensed consolidated statements of income from the date of acquisition. Theexcess of the purchase price over the fair value of the net assets has beenallocated to identifiable intangible assets and goodwill.  Identifiable intangible assets associatedwith these acquisitions are being amortized on a straight-line basis overperiods ranging from two to 10 years and approximate the expected periods ofbenefit.  Pro forma results of operationsfor Fast Track, Keane Worldzen, and netNumina have not been provided sincethese acquisitions were not material either individually or in the aggregate inthe year of acquisition.

* *

**Note 7.****       Restructurings**

* *

*Workforce reductions*

 

In connection withthe netNumina acquisition noted above, we entered into a plan to reduce theworkforce by eight employees, most of who have an expected termination date ofMay 31, 2005.  The employees affected inthe reduction are non-billable personnel whose responsibilities we plan tointegrate into our existing operations to realize the synergies of the twooperations.  We recorded a liability of$1.0 million associated with severance and other termination benefits andexpect the plan to be substantially completed by September 30, 2005.  In accordance with EITF 95-3, these costshave been reflected as assumed liabilities in the allocation of the purchaseprice to the net assets acquired.  As ofMarch 31, 2005, we had not made any payments for severance and retention costsand had a remaining balance of $1.0 million.

 

In connection with the FastTrack acquisition noted above, we entered into a plan to reduce the workforceby seven employees, most of who had a termination date of October 31, 2004. Theemployees affected in the reduction were non-billable personnel whoseresponsibilities were integrated into our existing operations to realize thesynergies of the two operations. We recorded a liability of approximately $0.1million associated with severance, retention and other termination benefitsand, by March 31, 2005, had completed the plan and paid $0.1 million in severanceand retention. In accordance with EITF 95-3, these costs have been reflected asassumed liabilities in the allocation of the purchase price to the net assetsacquired. 

 

In connection with the Nims acquisition notedabove, we entered into a plan to reduce the workforce by 22 employees, most ofwho had a termination date of April 30, 2004. The employees affected inthe reduction were non-billable personnel whose responsibilities wereintegrated into our existing operations to realize the synergies of the twooperations. We recorded a liability of $0.3 million associated with severance,retention and other termination benefits and, by March 31, 2005, had completedthe plan and paid $0.3 million in severance and retention.  In accordance with EITF 95-3, these costshave been reflected as assumed liabilities in the allocation of the purchaseprice to the net assets acquired. 

 

During 2003, we had two additional workforce reductions related to ourbusiness consulting arm and one of our North America branches, which included aheadcount reduction of 25 and 50 employees, respectively.  As a result of these workforce reductions, werecorded a total restructuring charge of $1.3 million in 2003, consistingof retention and severance costs. In accordance with SFAS No. 146 (“SFAS 146”),“Accounting for Costs Associated with Exit or Disposal Activities,” we accruedfor these costs beginning at the time of an employee’s notification through thetermination date. We completed all of the terminations and cashexpenditures related to the reductions in force for our business consulting armand one of our North America branches, respectively in

 

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2004. Cash expenditures in the first quarterended March 31, 2004 related to the 2003 severance and retention restructuringaccruals was $0.2 million.  No furthercosts are anticipated related to these restructurings.

 

In the Fourth Quarter of 2002 we recorded arestructuring charge under EITF Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (IncludingCertain Costs Incurred in a Restructuring),” of $3.2 million related to a workforce reduction ofapproximately 229 employees.  In 2002, wealso had a change in estimate of $0.3 million in connection with workforcereductions, which resulted in a net workforce restructuring charge of $2.9million. As of January 1, 2004, we had a remaining balance of approximately$24,000 related to the 2002 workforce reduction, of which $17,000 was paid inthe first quarter ended March 31, 2004 and the remainder was paid in the secondquarter ended June 30, 2004. No further payments related to the 2002 workforcereduction will be paid. 

 

*Branch office closures*

 

During December 2004, in accordance withSFAS 146, we accrued $2.3 million for a restructuring of one of ourreal estate locations that we vacated. Additionally, during the Fourth Quarterof 2004, we performed an evaluation of our restructuring balances forproperties restructured in prior periods and determined that we were overaccrued by $2.4 million, as a result of negotiating early lease terminations orobtaining a subtenant.  The net impact ofthese actions resulted in a net expense reduction to the restructuring chargeof $0.1 million in the Fourth Quarter of 2004 in our consolidated statement ofincome. Cash expenditures for the three months ended March 31, 2005 related tothe 2004 property restructurings totaled $0.1 million.

 

In connection with the Fast Track acquisition noted above, we enteredinto a plan to exit certain activities and to consolidate certain facilities.As a result, we recorded a restructuring liability of $0.4 million relatedto the lease obligation and certain other costs for one facility. In accordancewith EITF 95-3, these costs, which are not associated with the generation offuture revenues and have no future economic benefit, are reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.  As of March 31, 2005, $0.4 million had beenpaid and the restructuring plan was complete.

 

In connection with the Nims acquisition noted above, we entered into aplan to exit certain activities and to consolidate certain facilities. As aresult, we recorded an initial restructuring liability of $1.4 millionrelated to the lease obligation and certain other costs for eight facilities.During the Fourth Quarter of 2004, we determined that our original estimate forNims-related lease obligations was too high and reduced the accrual by $0.1million.  In accordance with EITF 95-3,these costs, which are not associated with the generation of future revenuesand have no future economic benefit, are reflected as assumed liabilities inthe allocation of the purchase price to the net assets acquired.  Cash expenditures for the three months endedMarch 31, 2005 related to all Nims-related branch office closings totaled $0.1million, which is net of approximately $28,000 of sublease payments received.  As of March 31, 2005, the remaining reservebalance was $0.7 million.

 

During December 2003, in accordance with SFAS 146, we accrued $0.9million for a restructuring of two of our real estate locations fromwhich we no longer were receiving economic benefit.  Additionally, during the Fourth Quarter of2003, we performed an evaluation of our restructuring balances for propertiesrestructured in prior periods and determined that we were over-accrued by $1.0million, as a result of negotiating early lease terminations or obtaining asubtenant.  In prior years, in accordancewith EITF Issue No. 94-3, we performed reviews of our business strategy andconcluded that consolidating some of our branch offices was key to oursuccess.  Cash expenditures for theperiod ended March 31, 2005 for all branch office closings relating torestructuring charges in 2003 and prior years were $0.9 million, which isnet of approximately $0.3 million of sublease payments received.

 

As part of our acquisitions of MetroInformation Services, Inc. (“Metro”) on November 30, 2001 and SignalTreeSolutions (“SignalTree”) on March 15, 2002, we entered into a plan to exitcertain activities and to consolidate facilities and recorded restructuringliabilities.  Included in the total of$0.9 million branch office cash expenditures were cash payments of $25,000 and$80,000, net of sublease income, for the lease obligations and other expensesassociated with the restructured locations assumed with the Metro andSignalTree acquisitions, respectively. As of March 31, 2005, we have a remaining lease obligation liability ofapproximately $0.5 million and $0.9 million for Metro and SignalTree,respectively.

 

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The activity for the three months ended March31, 2005 associated with restructuring charges is as follows (in thousands,except per share data):

 
| ** **                                         | ** ** | **January 1,  2005  Balance** | ** ** | **Cash  Expenditures** | ** ** | **Acquisition  Related  Charges in  Fiscal 2005** | ** ** | **March 31,   2005 Balance** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|------------------------------|------------|
| **Branch  office closures and other expenditures** |       |                          |       |                   |       |                                              |       |                         |       |
| 1999                                               |       | $                             | 18         |                   | $          | —                                            |       | $                            | —     |   | $ | 18 |   |
| 2000                                               |       | 4                             |       | (4                     | )          | —                                            |       | —                       |       |
| 2001                                               |       | 560                           |       | (108                   | )          | —                                            |       | 452                          |       |
| 2002                                               |       | 4,280                         |       | (530                   | )          | —                                            |       | 3,750                        |       |
| 2003                                               |       | 232                           |       | (150                   | )          | —                                            |       | 82                           |       |
| 2004                                               |       | 3,492                         |       | (574                   | )          | —                                            |       | 2,918                        |       |
| 2005                                               |       | —                        |       | —                 |       | —                                            |       | —                       |       |
|                                               |       | 8,586                         |       | (1,366                 | )          | —                                            |       | 7,220                        |       |
| **2002  Workforce reduction**                      |       | —                        |       | —                 |       | —                                            |       | —                       |       |
| **2003  Workforce reduction**                      |       | —                        |       | —                 |       | —                                            |       | —                       |       |
| **2004  Workforce reduction**                      |       | 91                            |       | (70                    | )          | —                                            |       | 21                           |       |
| **2005  Workforce reduction**                      |       | —                        |       | —                 |       | 980                                               |       | 980                          |       |
| **Total  Restructuring Balance**                   |       | $                             | 8,677      |                   | $          | (1,436                                            | )          | $                            | 980        |   | $ | 8,221 |   |

 

The restructuring balance is included incurrent accrued restructuring and accrued long-term restructuring costs in theaccompanying condensed unaudited consolidated balance sheets.

 

**Note 8.****       Convertible Subordinated Debentures**

 

In June 2003, we issued in a privateplacement $150.0 million principal amount of 2.0% Convertible SubordinatedDebentures due 2013 (“Debentures”). The Debentures are unsecured andsubordinated in right of payment to all of our senior indebtedness. TheDebentures accrue regular interest at a rate of 2.0% per year. Interest is payablesemi-annually in arrears on June 15 and December 15 of each year,beginning December 15, 2003. Beginning with the six-month interest periodcommencing June 15, 2008, we will pay additional contingent interestduring any six-month interest period if the trading price of the Debentures foreach of the five trading days immediately preceding the first day of theinterest period equals or exceeds 120% of the principal amount of theDebentures. During any interest period when contingent interest is payable, thecontingent interest payable per $1,000 principal amount of Debentures willequal 0.35% calculated on the average trading price of $1,000 principal amountof Debentures during the five trading days immediately preceding the first dayof the applicable six-month interest period and will be payable in arrears.

 

On or after June 15, 2008, we may, byproviding at least 30-day notice to the holders, redeem any of the Debenturesat a redemption price equal to 100% of the principal amount of the Debentures,plus accrued interest and unpaid interest, if any, and liquidated damages, ifany, to, but excluding, the redemption date.

 

The Debentures are convertible at the optionof the holder into shares of our common stock at an initial conversion rate of54.4989 shares per $1,000 principal amount of Debentures, which is equivalentto an initial conversion price of approximately $18.349 per share, subject toadjustments, prior to the close of business on the final maturity date onlyunder the following circumstances: (a) during any fiscal quartercommencing after September 30, 2003, and only during such fiscal quarter,if the closing sale price of our common stock exceeds 120% of the conversionprice (approximately $22.019) for at least 20 trading days in the 30 consecutivetrading day period ending on the last trading day of the preceding fiscalquarter; (b) during the five business days after any five consecutivetrading day period in which the trading price per $1,000 principal amount ofDebentures for each day of that period was less than 98% of the product of theclosing sale price of our common stock and the number of shares issuable uponconversion of $1,000 principal amount of the Debentures; (c) if theDebentures have been called for redemption; or (d) upon the occurrence ofspecified corporate transactions.  SeeNote 2 “Earnings Per Share Data” for further discussion of the Debentures. 

 

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Debt issuance costs were approximately$4.4 million and are included in other assets, net, in the accompanyingconsolidated balance sheets. These costs are being amortized to interestexpense over five years on a straight-line basis. As of March 31, 2005 andDecember 31, 2004, the unamortized debt issuance costs were approximately$2.8 million and $3.1 million, respectively.

 

## **Note 9.**       Capital Stock

 

On June 14, 2004, we announced that our Board of Directors hadauthorized us to repurchase an additional 3 million shares of our commonstock over the next 12 months effective June 13, 2004. Thisauthorization replaced the June 12, 2003 authorization to purchase3 million shares of our common stock, of which only 1,817,700 shares wererepurchased prior to the expiration of the June 2003 authorization.

 

During the three months ended March 31, 2005, a total of 189,188 sharesof our common stock were exercised or purchased by participants under our stockoption plans, ESPP and UK ESPP. 

 

**Note 10.****     Related Parties, Commitments, and Contingencies**

 

###### *Related PartyTransactions*

* *

Our principal executive office is located at 100 City Square in Boston,Massachusetts (the “New Facility”). In October 2001, we entered into alease with Gateway Developers LLC (“Gateway LLC”) for a term of 12 years,pursuant to which we agreed to lease approximately 95,000 square feet of officeand development space in the New Facility. We lease approximately 57% of theNew Facility and the remaining 43% is, or will be, occupied by other tenants.John Keane Family LLC is a member of Gateway LLC. The members of John Keane FamilyLLC are trusts for the benefit of John F. Keane, Chairman of our Board ofDirectors, and his immediate family members.

 

On October 31, 2001, Gateway LLC entered into a $39.4 millionconstruction loan with Citizens Bank of Massachusetts (the “Gateway Loan”) inconnection with the New Facility and an adjacent building located at 20 CitySquare, Boston, Massachusetts. John Keane Family LLC and John F. Keane are eachliable for certain obligations under the Gateway Loan if and to the extentGateway LLC requires funds to comply with its obligations under the GatewayLoan. Stephen D. Steinour, a member of our Board of Directors, is ChiefExecutive Officer of Citizens Bank of Pennsylvania. Citizens Bank ofMassachusetts and Citizens Bank of Pennsylvania are subsidiaries of CitizensFinancial Group, Inc. Mr. Steinour was not involved in the approvalprocess for the Gateway Loan.

 

We began occupying the New Facility and making lease payments inMarch 2003. Based upon our knowledge of lease payments for comparablefacilities in the Boston area, we believe that the lease payments under thelease for the New Facility, which will be approximately $3.2 million peryear ($33.00 per square foot for the first 75,000 square feet and $35.00 persquare foot for the remainder of the premises) for the first six years of thelease term and approximately $3.5 million per year ($36.00 per square footfor the first 75,000 square feet and $40.00 per square foot for the remainderof the premises) for the remainder of the lease term, plus specifiedpercentages of any annual increases in real estate taxes and operatingexpenses, were, at the time we entered into the lease, as favorable to us asthose which could have been obtained from an independent third party. Leasepayments to Gateway LLC in the three months ended March 31, 2005 wereapproximately $0.9 million.

 

Inview of these related party transactions, we concluded that, during theconstruction phase of the New Facility, the estimated construction in progresscosts for the New Facility would be capitalized in accordance with EITF IssueNo. 97-10, “The Effect of Lessee Involvement in Asset Construction.” Aliability in the same amount was included in the caption “Accrued long-termbuilding costs” in the accompanying unaudited condensed consolidated balancesheets. For purposes of the unaudited condensed consolidated statements of cashflows, we characterized this treatment as a non-cash financing activity.

 

As a result of the completion of the construction phase and our currentoccupancy, the related capitalized costs are now classified as “Building” andare included in property and equipment, net, in the accompanying

 

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unaudited condensed consolidated balance sheets. A liability for thesame amount appears as accrued expenses and other liabilities and accruedlong-term building costs, representing our short and long-term components. Thecosts of the building are being amortized on a straight-line basis over a39-year useful life. Additionally, the obligation will be reduced over the lifeof the lease at an interest rate of 8.67%. The net effect of the amortizationthat is included in the operating results approximates the rent expenseresulting from the contractual payments we are required to make under thelease.

 

In February 1985, we entered into a lease, which subsequently wasextended to a term of 20 years, with City Square Limited Partnership (“CitySquare”), pursuant to which we leased approximately 34,000 square feet ofoffice and development space in a building located at Ten City Square, inBoston, Massachusetts. We now lease approximately 88% of this building and theremaining 12% is leased by other tenants. John F. Keane, Chairman of our Boardof Directors, and Philip J. Harkins, a member of our Board of Directors, arelimited partners of City Square. Based upon our knowledge of lease payments forcomparable facilities in the Boston area, we believe that the lease paymentsunder this lease, which will be approximately $1.0 million per year($30.00 per square foot) for the remainder of the lease term (untilFebruary 2006), plus specified percentages of any annual increases in realestate taxes and operating expenses, which will be approximately$0.2 million per year, were, at the time we entered into the lease, asfavorable to us as those which could have been obtained from an independentthird party. As a result of our occupancy of the New Facility (as describedabove), we vacated and we have obtained a subtenant for approximately 17% ofTen City Square and are in the process of seeking a third party to sublease theremaining space.

 

As a result of the vacancy at Ten City Square in December 2002, wereserved the remaining lease payments due to City Square for the remainder ofthe lease term, resulting in a charge of approximately $3.9 million in theFourth Quarter of 2002. In the three months ended March 31, 2005, we paidapproximately $0.3 million in lease payments and as of March 31, 2005 wehad a remaining reserve balance of $1.5 million.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN46”), “Consolidation of Variable Interest Entities,” as amended by FASBInterpretation No. 46(R) (“FIN 46(R)”) in December 2003, whichrequires the consolidation of a variable interest entity, as defined, by itsprimary beneficiary. Primary beneficiaries are those companies that are subjectto a majority of the risk of loss or entitled to receive a majority of theentity’s residual returns, or both. In determining whether it is the primarybeneficiary of a variable interest entity, an entity with a variable interestshall treat variable interests in that same entity held by its related partiesas its own interests.

 

Wehave evaluated the applicability of FIN 46(R) to our relationship with each ofCity Square and Gateway LLC and determined that we are not required toconsolidate these entities within our unaudited condensed consolidatedfinancial statements. We have determined that Gateway LLC is not a variableinterest entity as the equity investment is sufficient to absorb the expectedlosses and the holders of the equity investment do not lack any of thecharacteristics of a controlling interest. We have concluded that as we nolonger occupy the space at Ten City Square and no longer derive any benefitfrom leasing the space, we would not be determined to be the related party mostclosely associated with City Square. As a result, we will continue to accountfor our leases with City Square and Gateway LLC consistent with our historicalpractices in accordance with generally accepted accounting principles. Webelieve that we do not have an interest in any variable interest entities thatwould require consolidation.

 

In July 2003, our Audit Committee approved a related partytransaction involving a member of our Board of Directors. We sub-contractedwith ArcStream Solutions, Inc. (“ArcStream”) to develop and assist in theimplementation of a wireless electronic application at two customer sites. Inaccordance with this transaction, we agreed to pay ArcStream a royalty fee forpotential future installations during the seven-year license period. John F.Keane, Jr., a member of our Board of Directors, is Chief Executive Officer, adirector, and founder of ArcStream. John F. Keane, Jr. is the son of John F.Keane, Sr., Chairman of our Board of Directors, and the brother of Brian T.Keane, our President, Chief Executive Officer and a director. EffectiveJune 21, 2004, our Audit Committee approved the termination of ouragreement with ArcStream and a payment of $150,000 by us to ArcStream inexchange for a release of all parties from any further performance or paymentobligations under the original agreement. The termination was for convenienceand was not related to ArcStream’s performance

 

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under the agreement. During the three months ended March 31, 2005, wedid not make any payments to ArcStream. See Note 12 “Subsequent Events” for a discussion of our acquisition ofcertain assets and assumption of specified liabilities of ArcStream.

* *

*Commitments and Contingencies*

 

We lease the New Facility from Gateway LLC as described above. We leaseadditional office space and apartments in more than 70 locations in NorthAmerica, the UK, and India under operating leases and capital leases, some ofwhich may be renewed for periods up to five years, subject to increased rentalfees.  

 

We are a guarantor with respect to a line of credit for Innovate EC, anentity in which we acquired a minority equity position as a result of aprevious acquisition. The total line of credit is for $600,000. We guarantee$300,000 of this obligation. The line is subject to review by the lendinginstitution. We would be required to meet our guarantor obligation in the eventthe lending institution refuses to extend the credit facility and Innovate ECis unable to satisfy its obligation.

 

In February 2003, we entered into a $50.0 million unsecuredrevolving credit facility (“credit facility”) with two banks. The creditfacility replaced a previous $10.0 million demand line of credit, whichexpired in July 2002. The terms of the credit facility require us tomaintain a maximum total funded debt and other financial ratios. The creditfacility also includes covenants that, subject to certain specific exceptionsand limitations, among other things, restrict our ability to incur additionaldebt, make certain acquisitions or disposition of assets, create liens, and paydividends**.** On June 11, 2003,we and the two banks amended certain provisions of the credit facility relatingto financial covenants. These covenants, which include total indebtedness andleverage ratios, are no more restrictive than those initially contained in thecredit facility. On October 17, 2003 and February 5, 2004, we and thetwo banks further amended certain provisions of the credit facility to expandour ability to make certain acquisitions. The annual commitment fee formaintaining the credit facility is 30 basis points on the unused portion of thecredit facility, up to a maximum of $150,000. As of March 31, 2005, we had nodebt outstanding under the credit facility. We may draw upon the creditfacility up to $50.0 million less any outstanding letters of credit thathave been issued against the credit facility. Any amounts drawn upon the creditfacility constitute senior indebtedness for purposes of the Debentures.Borrowings bear interest at one of the bank’s base rate or the Euro currencyreserve rate.

 

During the Third Quarter of 2002, in connection with an acquisition of abusiness complementary to our own, we recorded $3.0 million as deferredrevenue related to contingent service credits and issued a $3.0 millionnon-interest bearing note payable as partial consideration. During the threemonths ended March 31, 2005, we recognized revenue of approximately$0.2 in relation to the contingent service credits and reduced each of therelated deferred revenue and note by approximately $0.1 million. As ofMarch 31, 2005, the remaining deferred revenue and note payable balances wereeach $0.5 million.  The note had aone-year term with a one-year extension expiring on September 25, 2004.Effective September 25, 2004, the term of the contingent service creditswas extended one year through September 25, 2005.

 

Weare involved in litigation and various legal matters, which have arisen in theordinary course of business. We do not believe that the ultimate resolution ofthese matters will have a material adverse effect on our financial condition,results of operations, or cash flows.

 

**Note 11.****     Segment Information**

** **

Based on qualitative and quantitativecriteria established by SFAS No. 131 (“SFAS 131”), “Disclosures about Segmentsof an Enterprise and Related Information,” we operate within one reportablesegment: *Professional Services.* In this segment, we offer an integrated mix ofend-to-end business solutions, such as Application and Business ProcessOutsourcing (“Outsourcing”), Development & Integration and staffaugmentation (“Other IT”) services.

 

In accordance with the enterprise widedisclosure requirements of SFAS 131, our geographic information is as follows(in thousands):

 

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| ** **    | ** ** | **Three Months Ended March 31,** | ** ** | **At March 31,** | ** ** | **At December**              | ** ** |
|---------------|------------|----------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **    | ** ** | **2005**                         | ** ** | **2004**         | ** ** | **2005**                     | ** ** | **31, 2004** | ** ** |
| ** **    | ** ** | **Revenues**                     | ** ** | **Revenues**     | ** ** | **Property & Equipment** | ** ** | **Property & Equipment** | ** ** |
|          |       |                             |       |             |       |                         |       |   |   |
| Domestic      |       | $                                | 218,273    |             | $          | 205,215                      |       | $ | 63,334 |   | $ | 64,173 |   |
| International |       | 13,931                           |       | 10,609           |       | 13,175                       |       | 12,588 |   |
| Total         |       | $                                | 232,204    |             | $          | 215,824                      |       | $ | 76,509 |   | $ | 76,761 |   |
|               |            |                                  |            |                  |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

No singlecustomer provides revenues that equal or exceed 10 percent of our consolidatedrevenues.

 

# **Note 12.**     SubsequentEvents

 

On April 1, 2005, we increased our equity position in Keane Worldzen toapproximately 81% with an additional capital contribution of approximately $5.0million in cash and $3.0 million from the conversion of an outstanding loan toequity. The additional capital contribution will be accounted for under thepurchase method in accordance with SFAS 141 and SFAS 142. As a result of theadditional capital contribution, we will continue to consolidate the results ofKeane Worldzen, but will also consolidate their results for tax purposesstarting on April 1, 2005.  Upon ouradditional capital contribution, the minority interest shareholders ownapproximately 19% of the issued and outstanding capital stock. 

 

On April 4, 2005, weacquired certain assets and assumed specified liabilities of ArcStream for abase purchase price of zero ($0.00) dollars, subject to a working capitaladjustment, and additional consideration based on the performance of theArcStream business during the remainder of 2005. As a stockholder of ArcStream,John Keane, Jr. will be entitled to a portion of any additional consideration. John Keane, Jr. is the founder, President andChief Executive Officer of ArcStream.  He is also the brother of BrianKeane, the CEO of the Company, the son of John Keane, Sr., the Chairman of theBoard, and a member of Keane’s Board of Directors.  Inaddition, in connection with the transaction, John Keane, Jr., agreed toguarantee certain indemnification obligations of ArcStream and the Companyagreed to pay John Keane, Jr. $21,875 pursuant to a consulting arrangement toassist in the transition of the acquired business. The transaction was approvedby both the Audit Committee and the Board of Directors of the Company.

 

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**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 21E of the Securities Exchange Act of 1934, asamended, and Section 27A of the Securities Act of 1933, as amended.  For purposes of these Acts, any statementthat is not a statement of historical fact may be deemed a forward-lookingstatement.  For example, statementscontaining the words “believes,” “anticipates,” “plans,” “expects,” “estimates,”“intends,” “may,” “projects,” “will,” “would” and similar expressions may beforward-looking statements.  We cautioninvestors not to place undue reliance on any forward-looking statements in thisQuarterly Report on Form 10-Q.  Weundertake no obligation to publicly update any forward-looking statements,whether as a result of new information, future events or otherwise.  There are a number of factors that couldcause our actual results to differ materially from those indicated by theseforward-looking statements, including without limitation the factors set forthbelow under the caption “Certain Factors That May Affect Future Results.”  These factors and the other cautionarystatements made in this quarterly report should be read as being applicable toall related forward-looking statements wherever they appear in this quarterlyreport.  If one or more of these factorsmaterialize, or if any underlying assumptions prove incorrect, our actualresults, performance, or achievements may vary materially from any futureresults, performance or achievements expressed or implied by theseforward-looking statements.

 

The following discussion and analysis should be read in conjunctionwith the unaudited condensed consolidated financial statements and relatednotes included elsewhere in this Quarterly Report on Form 10-Q and the auditedconsolidated financial statements and related notes included in our AnnualReport on Form 10-K for the year ended December 31, 2004, and with theinformation under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our Annual Report on Form10-K for the year ended December 31, 2004.

 

**OVERVIEW**

 

**Components of Revenues**

 

Weseek to help clients improve their business and information technology (“IT”)effectiveness. We classify our service offerings into the following threecategories: Outsourcing, Development & Integration, and Other ITServices. 

 

*Outsourcing:*    Our outsourcing services include Application andBusiness Process Outsourcing, as well as ongoing maintenance related toDevelopment & Integration work for our Healthcare Solutions Division.Our Application Outsourcing services help clients manage existing businesssystems more efficiently and more reliably, improving the performance of theseapplications while frequently reducing costs. Under our Application Outsourcingservice offering, we assume responsibility for managing a client’s businessapplications with the goal of instituting operational efficiencies that enhanceflexibility, free up client personnel resources, and achieve higher usersatisfaction. We enter into large, long-term contracts for the provision ofApplication Outsourcing services, which generally do not require any capitaloutlay by us. These contracts usually span three to five years with the abilityto renew. We typically receive a fixed monthly fee in return for meeting orexceeding a contractually agreed upon service level. However, because ourcustomers typically have the ability to reduce services under their contracts,our monthly fees may be reduced from the stated contract amounts.

 

Throughour global delivery model we can offer customers the flexibility and economicadvantage of allocating work among a variety of delivery options. These includeonsite at a client’s facility, nearshore in Halifax, Nova Scotia, and Toronto,Ontario, and offshore at one of our four development centers in India. In 2004,we extended our global network of Advanced Development Centers with the openingof new facilities in Toronto, Ontario and Hyderabad, India. This integrated,flexible mix of cost-effective onsite, nearshore, and offshore delivery is nowa component of most of our new Application Outsourcing engagements. Thedistribution of work across multiple locations is typically based on a client’scost, technology, and risk management requirements. Our successful track recordin absorbing the local staff of our clients is particularly attractive to manyprospective clients.

 

OurBusiness Process Outsourcing (“BPO”) services are provided by our majorityowned subsidiary, Keane Worldzen, Inc. (“Keane Worldzen”), which weacquired on October 17, 2003. Keane Worldzen specializes in providing BPOservices to clients with complex processes in the financial services,insurance, and healthcare industries, and to clients with back-office processesin several industries. Keane Worldzen’s BPO services are designed to reduce thecost and increase the efficiency of our clients’ business transactions,enabling companies to focus on their more profitable activities

 

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andavoid the distraction of non-core back-office processes. Keane Worldzenprovides these low-cost, high-value outsourcing services from operations inboth the United States (“U.S.”) and India.

 

*Development & Integration:*  As application software becomesmore complex, it requires sophisticated integration between front-end andback-end systems to enhance access to critical corporate data, enable processimprovements, and improve customer service. Many of our Development &Integration projects focus on solutions for the integration of enterpriseapplications, supply chain, and customer service problems. We also provideDevelopment & Integration services to the public sector, whichincludes agencies within the U.S. Federal Government, various states, and otherlocal government entities. Additionally, our Healthcare Solutions Divisionprovides software solutions and integration support to both acute and long-termcare providers.

 

*Other IT Services:*  Other IT Services are primarilycomprised of IT consulting, project management, and supplemental staffengagements that are principally billed on a time and materials basis.

 

Globaleconomic and political conditions may cause companies to be cautious aboutincreasing their use of consulting and IT services, but we continue to see ademand for our services. We continue to experience pricing pressure fromcompetitors as well as from clients facing pressure to control costs. Inaddition, the growing use of offshore resources to provide lower-cost servicedelivery capabilities within our industry continues to be a source of pressureon revenues. We also experience wage inflation, primarily in India, as thedemand for those resources increases. In order for us to remain successful inthe near term, we must continue to maintain and grow our client base, providehigh-quality service and satisfaction to our existing clients, and takeadvantage of cross-selling opportunities. In the current economic environment,we must provide our clients with service offerings that are appropriatelypriced, satisfy their needs, and provide them with measurable businessbenefits. While we have recently experienced a more steady demand for ourservices, and gross margin as a percentage of revenue has stabilized over thepast two years, we believe that it is too early to determine if developmentswill translate into sustainable improvements in our pricing or margins for 2005and over the longer term.

 

Thereis a great deal of competition in the provision of Outsourcing services. Webelieve our evolving go-to-market strategy, where we seek to provide highvalue, repeatable business solutions to our clients, differentiates us from ourcompetitors.  We offer solutions thatcombine various Keane services and capabilities in response to a specific industryor client need.  These vertically-focusedsolution sets may include application services, business process outsourcing,an underlying technology platform or intellectual property, and global delivery.  The solution sets that we offer to ourclients may be comprised of five major elements. 

 

*•**             *First, they are vertically driven in that theyare value propositions designed to address specific needs, challenges, oropportunities within an industry.

 

*•**             *Second, they may include Application services,either in the form of applications development & integration, orapplication outsourcing.

 

*•**             *Third, these solutions may also involve abusiness process component, including process reengineering and businessprocess outsourcing.

 

*•**             *Fourth, we seek to leverage a technologyplatform, either provided by a third party or proprietary to Keane, as well asKeane intellectual capital, as a foundation for our solutions.

 

*•**             *And finally, these solution sets frequentlyincorporate our global delivery capabilities.

 

While,we are still in the early stages of implementing this new market approach, webelieve that our deep industry knowledge will differentiate us from ourcompetitors, allow us to go beyond simply delivering cost and performanceimprovements to our clients, and allow us to deliver transformational businessbenefits and ultimately, help grow our business and integrate our comprehensivecapabilities.

 

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**Components of Operating Expenses**

 

Theprimary categories of our operating expenses include: salaries, wages, andother direct costs; selling, general and administrative expenses; andamortization of intangible assets. Salaries, wages, and other direct costs areprimarily driven by the cost of client-service personnel, which consists mainlyof compensation, sub-contractor, and other personnel costs, and othernon-payroll costs. Selling expenses are driven primarily by businessdevelopment activities and client targeting, image-development, and brandingactivities. General and administrative expenses primarily include costs fornon-client facing personnel, information systems, and office space, which weseek to manage at levels consistent with changes in the activity levels in ourbusiness. We continue to anticipate changes in demand for our services and to identifycost management initiatives to balance our mix of resources to meet current andprojected future demand in our markets. We will also continue to use our globalsourcing as part of our cost effective delivery model.

 

Weevaluate our improvement in profitability by comparing gross margins, andselling, general, and administrative (“SG&A”) expenses as a percentage ofrevenues. Other key metrics that we use to manage and evaluate the performanceof our business include new contract bookings, the number of billablepersonnel, and utilization rates. We calculate utilization rates by dividingthe total billable hours per consultant by the total hours available, includingsick, holiday, and vacation, from the consultant.

 

**EMPLOYEES**

 

Asof March 31, 2005, we had 8,573 total employees, including 7,236 businessand technical professionals whose services are billable to clients. Thisincludes a base of 1,779 employees in India, including our Keane Worldzenoperations. We sometimes supplement our technical staff by utilizingsubcontractors, which as of March 31, 2005, consisted of 538 full-timeprofessionals.

 

## **NEW CONTRACT BOOKINGS**

 

New contract bookings for the three months ended March 31, 2005 were$268.1 million, a decrease of $141.6 million, or 34.6%, over new contractbookings of $409.7 million for the three months ended March 31, 2004. Forthe three months ended March 31, 2005, Outsourcing bookings decreased55.6% to $119.0 million, Development & Integration bookings increased16.5% to $44.2 million, and Other IT bookings increased 1.1% to$104.9 million compared to the same period in 2004. New contract bookingsfor the three months ended March 31, 2004 included the impact of a $137.0million ten-year contract. 

 

New contract bookings for the three months ended March 31, 2005increased $66.3 million, or 32.8%, over new contract bookings of $201.9 millionfor the three months ended December 31, 2004. For the three months ended March 31, 2005, Outsourcing bookings increased$21.2 million, or 21.7%, Development & Integration bookings increased $30.0million, or 211.5%, and Other IT bookings increased $15.1 million, or 16.8%,compared to the three months ended December 31, 2004. 

 

Weprovide information regarding our bookings because we believe it representsuseful information regarding changes in the volume of our new business overtime. However, information regarding our new bookings is not comparable to, norshould it be substituted for, an analysis of our revenues. Cancellations and/orreductions in existing contracted amounts are not reflected in new contractbookings.

 

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## **CONSOLIDATEDRESULTS OF OPERATIONS**

 

## **2005Compared to 2004**

 
| ** **                    | ** ** | **REVENUES (Dollars in thousands)** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended March 31,**    | ** ** | **Increase (Decrease)** | ** ** |
| ** **                    | ** ** | **2005**                            | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outsourcing                   |       | $                                   | 122,584    |   | 53 |   | $ | 105,253 |   | 49 |   | $ | 17,331 |   | 16.5 |   |
| Development & Integration |       | 41,757                              |       | 18 |   | 41,899 |   | 19 |   | (142 | ) | (0.3 | ) |
| Other IT Services             |       | 67,863                              |       | 29 |   | 68,672 |   | 32 |   | (809 | ) | (1.2 | ) |
|                          |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Total                         |       | $                                   | 232,204    |   | 100 | % | $ | 215,824 |   | 100 | % | $ | 16,380 |   | 7.6 |   |

 

## **Revenues**

Revenues forthe First Quarter ended March 31, 2005 were $232.2 million compared to revenuesof $229.2 million for the Fourth Quarter ended December 31, 2004. Thesequential increase in revenues was due to higher revenues from a few of ourlarge customers as well as revenues associated with new customers. Revenues forthe First Quarter ended March 31, 2005 increased $16.4 million, or 7.6%,compared to the First Quarter ended March 31, 2004 due partly to the fullquarter revenues from Nims Associates, Inc. (“Nims”), an IT and consultingservices company, which we acquired on February 27, 2004 and revenues generatedfrom new customers.  The operatingresults of Nims were included in our condensed consolidated financialstatements beginning March 1, 2004. The increases in revenues for the FirstQuarter ended March 31, 2005 are also due to approximately $1.3 million ofrevenues associated with the acquisition of netNumina Solutions, Inc. (“netNumina”),a softwaredevelopment company based in Cambridge, Massachusetts.  We acquired netNumina on February 28, 2005,and included its results of operations beginning March 1, 2005. In addition, wecompleted the acquisition of Fast Track Holdings Limited (“Fast Track”), aprivately held consulting firm based in the United Kingdom (“UK”) that managesthe design, integration, and rapid deployment of large-scale SAPimplementation, on July 13, 2004 and included their results of operationsbeginning July 14, 2004.   In addition,during the Fourth Quarter of 2004, a large UK client and another large USclient notified us that they would be reducing their purchasing requirements.We expect the reduction of purchasing requirements from the UK client willreduce our total annual revenues by approximately $10.0 million to $14.0million in 2005. We expect thereduction of purchasing requirements from the other large US customer willreduce our total annual revenues by approximately $6.0 million to $7.0 millionin 2005.  During the First Quarter endedMarch 31, 2005, this US customer also notified us that Keane and other currentvendor resources will be included in a proposal process for both current andfuture business.

 

*Outsourcing*.  Outsourcing service revenues for the FirstQuarter ended March 31, 2005 were $122.6 million, an increase of $3.1 million,or 2.6%, compared to the Fourth Quarter ended December 31, 2004. The sequentialincrease was primarily due to revenues from a new customer and netNumina, whichmore than offset the decrease from the large UK client.  Outsourcing service revenues for the FirstQuarter ended March 31, 2005 increased $17.3 million, or 16.5%, over the sameperiod in 2004. The increase in Outsourcing service revenues was partly due torevenues generated by Nims, which contributed approximately $11.8 million inApplications Outsourcing revenues in the First Quarter ended March 31, 2005compared to $3.0 million in the First Quarter ended March 31, 2004.  The increase in Outsourcing revenues alsoreflects higher revenues associated with existing and new customers, which morethan offsets the decrease from the large UK client and approximately $4.6million of revenue associated with a customer who terminated its contract withKeane in the Third Quarter of 2004. 

 

PacifiCare, one of our largest clients, has reduced the level ofservice from the stated baseline contract amounts in accordance with its rightunder the contract terms, thereby reducing the contract value. We have providedservices at or above the baseline levels set forth in the contract.  In accordance with the contract terms,PacifiCare engaged an independent third party to conduct a benchmark study tocompare our billing rates with those of comparable companies on comparableengagements. The independent third party issued a report stating that Keane’srates are higher

 

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than the rate identified in the benchmark study. While we do notnecessarily agree with the results of the benchmark study, we entered intodiscussions with PacifiCare and we have agreed to adjust the rates goingforward.  Consequently, we expect areduction in revenues of approximately $5.0 million to $6.0 million in the lastnine months of 2005.

 

*Development & Integration*.  Development & Integration servicerevenues for First Quarter ended March 31, 2005 were $41.8 million, a decreaseof $2.6 million, or 5.9%, compared to the Fourth Quarter ended December 31,2004. The sequential decrease was primarily due to decreases from the large UKclient and US client discussed above, but was slightly offset by revenuesassociated with netNumina. Development & Integration service revenues forthe First Quarter ended March 31, 2005 decreased  $0.1 million, or 0.3%, over the same periodin 2004. 

 

*Other IT Services*.  Other IT Services revenues for the FirstQuarter ended March 31, 2005 were $67.9 million, an increase of $2.6 million,or 3.9%, compared to the Fourth Quarter ended December 31, 2004.  Other IT Services revenues for the FirstQuarter ended March 31, 2005 decreased $0.8 million, or 1.2%, over the sameperiod in 2004. The sequential increase was primarily due to revenues fromexisting and new customers. 

 

The following table summarizes certain line items from our condensedconsolidated statements of income (dollars in thousands):

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** | **Increase (Decrease)** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2005**                         | ** ** | **2004**                | ** ** | **$** | ** ** | **%** | ** ** |
|                                    |       |                             |       |                    |       |   |   |   |   |
| Revenues                                |       | $                                | 232,204    |                    | $          | 215,824 |   | 16,380 |   | 7.6 |   |
| Salaries, wages, and other direct costs |       | 162,193                          |       | 149,990                 |       | 12,203 |   | 8.1 |   |
| Gross margin                            |       | $                                | 70,011     |                    | $          | 65,834 |   | 4,177 |   | 6.3 |   |
| Gross margin%                           |       | 30.2                             | %          | 30.5                    | %          |   |   |   |   |

 

**Salaries, wages, andother direct costs**

Salaries, wages, and other direct costs forthe First Quarter ended March 31, 2005 were $162.2 million, an increase of $2.9million compared to $159.3 million in the Fourth Quarter ended December 31,2004.  Salaries, wages, and other directcosts for the First Quarter ended March 31, 2005 increased $12.2 million, or8.1%, over the same period in 2004. These increases were primarily attributableto costs of client service personnel to support the increased service revenues,as well as an increase in direct costs in support of the revenues generated byNims business. Salaries, wages, and other direct costs were 69.8% of totalrevenues for the First Quarter ended March 31, 2005 compared to 69.5% of totalrevenues for the same period in 2004.  

 

Totalbillable employees for all operations were 7,236 as of March 31, 2005, comparedto 7,235 as of December 31, 2004 and 6,971 total billable employees as ofMarch 31, 2004. This includes 1,491 billable employees in India, whichincludes Keane Worldzen, and represents an increase of 37 employees, or 2.6%,over the Fourth Quarter ended December 31,2004 and an increase of 182 employees, or 17.6%, over the First Quarterended March 31, 2004.  We added our India operation inMarch 2002 with our acquisition of SignalTree Solutions and we acquiredour controlling interest in Keane Worldzen in October 2003. In addition tothese employees, we occasionally use subcontract personnel to augment ourbillable staff, which represented 538 full-time professionals as of March 31,2005. Overall utilization rates for all three periods remained stable as weincreased the number of billable employees.

 

**Gross margin**

Ourmanagement believes gross margin *(revenuesless salaries, wages, and other direct costs)* provides an importantmeasure of our profitability. Gross margin for the First Quarter endedMarch 31, 2005 increased $4.2 million, or 6.3%, over the same period in2004.  Gross margin as a percentage ofrevenues for the First Quarter ended March 31, 2005 was 30.2% compared to 30.5%for the same period in 2004 and 30.5% forthe Fourth Quarter ended December 31, 2004. We believe that the relativelyconstant gross margin percentage is indicative of a more stableenvironment for IT services, firmer utilization rates, as well as the benefitof our global sourcing capabilities. The lower labor cost associated with the increased use of offshoreresources at our India facilities helped reduce the impact of lower pricing ofour services on gross margin. We continue to closely monitor utilization ratesand other direct costs in an effort to avoid adverse impacts on our grossmargin.

 

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**Selling, general, and administrative expenses**

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** | **Increase** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                                                | ** ** | **2005**                         | ** ** | **2004**     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                | ** ** | ** **                       | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general, and administrative  expenses (SG&A) |       | $                                | 54,172     |         | $          | 53,217 |   | $ | 955 |   | 1.8 |   |
|                                                      |       |                             |       |         |       |   |   |   |   |
| SG&A as a % of revenue                                |       | 23.3                             | %          | 24.7         | %          |   |   |   |   |
|                                                           |            |                                  |            |              |            |  |  |  |  |  |  |  |

 

SG&Aexpenses include salaries for our corporate and branch administrativeemployees, sales and marketing expenses, as well as the cost of ouradministrative facilities, including related depreciation expense. SG&Aexpenses for the First Quarter ended March 31, 2005 increased $1.0 million, or1.8%, over the same period in 2004. The increase in SG&A expenses for thefirst three months of 2005 was due in part to a full quarter of additionalexpenses associated with Nims and higher recruiting costs associated with thegrowth of our operations.  SG&A expenses for the three months endedMarch 31, 2005 were 23.3% of total revenues, as compared to 24.7% of totalrevenues for the same period in 2004. The decrease in SG&A expenses as apercentage of revenue in the First Quarter ended March 31, 2005 was primarilydue to SG&A expenses increasing proportionally less than increasingrevenues.

 

**Amortization of intangible assets**

Amortization of intangible assets for the First Quarter ended March 31,2005 was $4.1 million, an increase of $0.2 million, or 4.0%, over the sameperiod in 2004.  The increase inamortization of intangible assets for the first three months of 2005 was primarilydue to the additional intangible assets resulting from the acquisitions of Nimsand Fast Track during in the First Quarter ended March 31, 2004 and SecondQuarter ended June 30, 2004, respectively.

 

**Interest and dividend income**

Interest and dividend income for the First Quarter ended March 31, 2005was $1.1 million and unchanged compared to the same period in 2004. Therelatively constant interest and dividend income was due to the relatively sameaverage cash balances and marketable securities for the First Quarter endedMarch 31, 2005 and 2004. To the extent we use our cash and marketablesecurities to fund acquisitions, our operations, and capital investments, ourinterest income will decline in future periods.

 

**Interest expense**

Interestexpense for the First Quarter ended March 31, 2005 was $1.4 million andunchanged compared to the same period in 2004. Interest expense was unchangedsince our Debentures were outstanding for the entire three months in both theFirst Quarter ended March 31, 2005 and 2004. We also record interest expense onthe accrued building costs associated with our corporate facility as explainedin Note 10 “Related Parties, Commitments, and Contingencies” in the notes tothe accompanying unaudited condensed consolidated financial statements. 

 

**Other (expense) income, net**

Other expense, net was $16,000 for the First Quarter ended March 31,2005 compared to other income, net of $0.1 million for the same period in2004.  The decrease during the firstthree months of 2005 was due to a reserve adjustment of approximately $0.2million related to a non-trade receivable. 

 

**Minority Interest**

Minorityinterest income for the First Quarter ended March 31, 2005 was $0.7 million, adecrease of $0.1 million, or 10.3%, compared to the same period in 2004. Theamount in minority interest income represents the loss attributable to minorityshareholders of Keane Worldzen for the period presented.  We completed our acquisition of a controllinginterest in Keane Worldzen in the Fourth Quarter for 2003 and as a result,consolidate the results of Keane Worldzen. Our initial investment resulted inan equity position of approximately 62% of the issued and outstanding capitalstock of Keane Worldzen. Consistent with the right to increase our ownershipposition over time, we increased our equity position to approximately 81% inApril 2005 with an additional capital contribution of approximately $5.0million in cash and $3.0 million from the conversion of an outstanding loan toequity. As a result of the additional capital contribution, we will continue toconsolidate the results of Keane Worldzen. Upon our additional capital contribution, the minority interestshareholders own approximately 19% of the issued and outstanding capital stock.  

 

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**Income taxes**

The provision for income taxes represents the amounts owed for federal,state, and foreign taxes.  Our effectivetax rate was 40.0% for the First Quarters ended March 31, 2005 and 2004.  The determination of the provision for incometax expense, deferred tax assets and liabilities and related valuationallowance involves judgment. As a global company, we are required to calculateand provide for income taxes in each of the tax jurisdictions where we operate.This involves making judgments regarding the recoverability of deferred taxassets, which can affect the overall effective tax rate. In addition, changesin the geographic mix or estimated level of pre-tax income can affect theoverall effective tax rate.

 

## **Net income**

Net income for the First Quarter ended March 31, 2005 was $1.8 millionhigher compared to the same period in 2004. The increase was due to higheroperating income as a result of higher revenues. 

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123(R)”)“Share-Based Payment,” which is a revision of SFAS 123 and supersedes APB25 and its related implementation guidance. Generally, the approach inSFAS 123(R) is similar to the approach described in SFAS 123.However, SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values at the date of grant. Pro forma disclosureis no longer an alternative. In April 2005, the Securities and ExchangeCommission (“SEC”) announced that it would provide for a phased-inimplementation process for SFAS 123(R). Specifically, the SEC will requirepublic companies that are not small business issuers as defined in SECRegulation S-B to adopt SFAS 123(R) no later than the beginning of the firstfiscal year beginning after June 15, 2005. Therefore, we are required to adopt SFAS 123(R) on January 1, 2006. 

 

SFAS 123(R)permits public companies to adopt its requirements using one of two methods: a “modifiedprospective” method, in which compensation cost is recognized beginning withthe effective date (a) based on the requirements of SFAS 123(R) forall share-based payments granted after the effective date and (b) based onthe requirements of SFAS 123 for all awards granted to employees prior tothe effective date of SFAS 123(R) that remain unvested on the effectivedate and a “modified retrospective” method which includes the requirements ofthe modified prospective method described above, but also permits entities torestate based on the amounts previously recognized under SFAS 123 forpurposes of pro forma disclosures either (a) all prior periods presentedor (b) prior interim periods of the year of adoption. We have yet todetermine which method we will use in adopting SFAS 123(R). As permittedby SFAS 123, we currently account for share-based payments to employeesusing APB 25’s intrinsic value method. Accordingly, the adoption ofSFAS 123(R)’s fair value method will have a significant impact on ourresults of operations. We are evaluating SFAS 123(R) and have not yetdetermined the impact in future periods.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**Consolidated Financial Condition (inthousands)**

 
| **Three  Months Ended March 31,**                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Cash Flows Provided By (Used for)                 |       |     |       |     |       |
| Operating activities                              |       | $        | 9,129      |     | $          | (744 | ) |
| Investing activities                              |       | 2,365    |       | (3,565   | )          |
| Financing activities                              |       | 1,954    |       | (4,171   | )          |
| Effect of exchange rate on cash                   |       | 33       |       | 127      |       |
| Increase (Decrease) in Cash and Cash  Equivalents |       | $        | 13,481     |     | $          | (8,353 | ) |

 

We have historically financed our operations with cash generated fromoperations. In addition, in 2003, we raised $150.0 million in proceeds for theissuance of our debentures. We use the net cash generated from these sources tofund capital expenditures, mergers and acquisitions, and stock repurchases. Ifwe were to experience a decrease in revenue as a result of a decrease in demandfor our services or a decrease in our ability to collect receivables, we wouldbe required to reduce

 

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discretionary spending related to SG&A expenses and adjust ourworkforce in an effort to maintain profitability. At March 31, 2005, we had$208.0 million in cash and cash equivalents and marketable securities. We intendto continue to use our cash and cash equivalents and marketable securities forgeneral corporate purposes, which may include additional repurchases of ourcommon stock under existing or future share repurchase programs and the fundingof future acquisitions and other corporate transactions.

 

## **Cash flows provided by (used for) operatingactivities**

Net cash provided by operating activities totaled $9.1 million forFirst Quarter ended March 31, 2005 compared to net cash used for operatingactivities of $0.7 million for the First Quarter ended March 31, 2004.  The increase in net cash provided byoperating activities was driven by the higher accounts receivable collectionand the timing of cash payments. Days Sales Outstanding (“DSO”), an indicatorof the effectiveness of our accounts receivable collections, was 52 days as ofMarch 31, 2005, unchanged compared to December 31, 2004 and March 31, 2004. Wecalculate DSO using the trailing three months total revenue divided by thenumber of days in the quarter to determine daily revenue.  The average accounts receivable balance forthe three-month period is then divided by daily revenue. Partially offsettingthe increase in accounts receivable was an increase in accrued liabilities.

 

**Cash flows used for investing activities**

Net cash provided by investing activities in First Quarter ended March31, 2005 was $2.4 million compared to net cash used for investing activities of$3.6 million for the First Quarter ended March 31, 2004. 

 

Duringthe First Quarter ended March 31, 2005, we purchased $13.9 million and sold$16.6 million in marketable securities, generating a net source of cash of $2.8million, compared to purchases of $20.6 million and sales of $38.8 million inthe First Quarter ended March 31, 2004. In addition, we invested $4.8 millionand $4.2 million in property and equipment, and capitalized software costsin connection with the implementation of our PeopleSoft Enterprise ResourcePlanning applications as of March 31, 2005 and 2004, respectively. On February28, 2005, we acquired netNumina. In exchange for all of the outstanding capitalstock of netNumina, we agreed to pay $5.7 million including $0.6 million heldback and acquired $4.6 million in cash. As of March 31, 2005, we had not paid the $5.7 million since all of theacquired stock certificates had not been surrendered for cancellation, howeverthe $5.7 million was accrued and included in Accrued expenses and otherliabilities in the accompanying unaudited condensed consolidated balance sheet.As of April 15, 2005, we had paid $4.7 million of the $5.1 million not heldback based on the stock certificates received. We expect to pay the remaining $0.4 million not held back in May 2005.  

 

OnFebruary 27, 2004, we acquired Nims. In exchange for all of theoutstanding capital stock of Nims, we paid $18.2 million in cash,including transaction costs and net of cash acquired. The purchase price forNims may increase with the potential to pay up to an additional$15.0 million in earn-out consideration over the next three years,contingent upon the achievement of certain future financial targets.  The first earn-out was achieved as of March31, 2005 and as a result, we paid the related $3.3 million in earn-outconsideration in April 2005.  The $3.3million was accrued and included in Accrued expenses and other liabilities inthe accompanying unaudited condensed consolidated balance sheet as of March 31,2005.  

 

## **Cash flows provided by (used for) financingactivities**

Net cash flows provided by financing activities was $2.0 million forthe First Quarter ended March 31, 2005, compared to net cash used for financingactivities of $4.2 million for the First Quarter ended March 31, 2004.  Net cash provided by financing activities forthe First Quarter ended March 31, 2005 were from the issuance of stockassociated with our employee stock purchase plan and stock option plans. Netcash flows used for financing activities for the First Quarter ended March 31,2004 were primarily for the repurchase of our common stock. The following is asummary of our repurchase activity for the First Quarter ended March 31, 2005and 2004 (dollars in thousands):  

 
| ** **                              | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                    |       |       |       |       |       |   |   |   |   |
| Prior year authorizations at January 1, |       | 2,871,600  |       |       |       | 3,181,200 |   |   |   |
| Authorizations                          |       | —     |       |       |       | — |   |   |   |
| Repurchases                             |       | —     |       | —     |       | (456,000 | ) | $ | 6,755 |   |
| Shares remaining as of March 31,        |       | 2,871,600  |       |       |       | 2,725,200 |   |   |   |
|                                         |            |            |            |            |            |  |  |  |  |  |

 

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These share repurchases more than offset the shares issued under ourvarious stock ownership programs. Under these stock ownership programs, weissued 189,188 shares and 256,264 shares and received proceeds of $2.0 millionand $2.7 million for the First Quarter ended March 31, 2005 and 2004,respectively. Between May 1999 and March 31, 2005, we have investedapproximately $259.8 million to repurchase approximately 20.6 million shares ofour common stock under ten separate authorizations. 

 

InFebruary 2003, we entered into a $50.0 million unsecured revolving creditfacility (“credit facility”) with two banks. The credit facility replaced aprevious $10.0 million demand line of credit, which expired inJuly 2002. The terms of the credit facility require us to maintain amaximum total funded debt and other financial ratios. The credit facility alsoincludes covenants that, subject to certain specific exceptions andlimitations, among other things, restrict our ability to incur additional debt,make certain acquisitions or disposition of assets, create liens, and paydividends. On June 11, 2003, we and the two banks amended certainprovisions of the credit facility relating to financial covenants. Thesecovenants, which include total indebtedness and leverage ratios, are no morerestrictive than those initially contained in the credit facility. OnOctober 17, 2003 and February 5, 2004, we and the two banks furtheramended certain provisions of the credit facility to expand our ability to makecertain acquisitions. The annual commitment fee for maintaining the credit facilityis 30 basis points on the unused portion of the credit facility, up to amaximum of $150,000. As of March 31, 2005, we had no debt outstanding under thecredit facility. We may draw upon the credit facility up to $50.0 millionless any outstanding letters of credit that have been issued against the creditfacility. Any amounts drawn upon the credit facility constitute seniorindebtedness for purposes of our Debentures. Borrowings bear interest at one ofthe bank’s base rate or the Euro currency reserve rate. Based on our currentoperating plan, we believe that our cash and cash equivalents on hand,marketable securities, cash flows from operations, and our line of credit willbe sufficient to meet our current capital requirements for at least the next12 months.

 

**Increase(Decrease) in Cash and Cash Equivalents**

Our cash and cash equivalents totaled $81.0 million and $48.4 millionat March 31, 2005, and 2004, respectively. 

 

**IMPACT OF INFLATION AND CHANGING PRICES**

 

Inflationaryincreases in costs have not been material in recent years and, to the extentpermitted by competitive pressures, are passed on to clients through increasedbilling rates. Rates charged by us are based on the cost of labor and marketconditions within the industry.

 

**CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

Thefollowing important 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 fromtime-to-time.

 

**Our quarterly operating results have varied, and arelikely to continue to vary significantly. This may result in volatility in themarket price of our common stock.**    We have experienced and expect to continue toexperience fluctuations in our quarterly results. Our gross margins vary basedon a variety of factors including employee utilization rates and the number andtype of services performed during a particular period. A variety of factorsinfluence our revenue in a particular quarter, including:

 

*•**             *general economic conditions, which mayinfluence investment decisions or cause downsizing;

 

*•**             *the number and requirements of clientengagements;

 

*•**             *employee utilization rates;

 

*•**             *changes in the rates we can charge clients forservices;

 

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*•**             *acquisitions; and

 

*•**             *other factors, many of which are beyond ourcontrol.

 

Asignificant portion of our expenses does not vary relative to revenue. As aresult, if revenue in a particular quarter does not meet expectations, ouroperating results could be materially adversely affected, which in turn mayhave a material adverse impact on the market price of our common stock. Inaddition, many of our engagements are terminable without client penalty. Anunanticipated termination of a major project could result in an increase inunderutilized employees and a decrease in revenue and profits.

 

**We continue to position ourselves to achieve increasingpercentages of revenues and growth through outsourcing. If we are successful inobtaining new outsourcing contracts, we may experience increased pressure onour overall margins during the early stages of these contracts.**    This could result inhigher concentrations of revenues and contributions to income from a smallernumber of larger clients on customized outsourcing solutions. If we were toreceive a higher concentration of our revenues from a smaller number ofclients, our revenues could decrease significantly if one or more of theseclients decreased their spending. Outsourcing contracts are generally long-termcontracts that require additional staffing in the initial phases of thecontract period, which often results in lower gross margins at the beginning ofthese contracts.

 

**If our clients are not satisfied with our services, wemay have exposure to liabilities, which could adversely affect ourprofitability and financial condition as well as our ability to compete forfuture work.**    Ifwe fail to meet our contractual obligations, we could be subject to legalliability, which could adversely affect our business, operating results andfinancial condition. The provisions we typically include in our contracts thatare designed to limit our exposure to legal claims relating to our services andthe applications we develop may not protect us or may not be enforceable undersome circumstances or under the laws of some jurisdictions. It is possible,because of the nature of our business, that we will be sued in the future. Inaddition, although we maintain professional liability insurance, the policylimits may not be adequate to provide protection against all potentialliabilities. Moreover, as a consulting firm, wedepend to a large extent on our relationships with our clients and ourreputation for high-quality services to retain and attract clients andemployees. As a result, claims made against our work may damage our reputation,which in turn, could impact our ability to compete for new work and negativelyimpact our revenue and profitability.

 

**The termination of a contract by a significant clientcould reduce our revenue and profitability or adversely affect our financialcondition.**    Ourfive largest clients, excluding the U.S. Federal government, accounted forapproximately 18.9% of our revenue in the First Quarter ended March 31, 2005,although no individual client accounted for more than 6.0% of our totalrevenue. The various agencies of the U.S. Federal government represent ourlargest client, accounting for approximately 9.5% of total revenue in First Quarterended March 31, 2005. We strive to develop long-term relationships with ourclients. Most individual client assignments are from three to twelve months;however, many of our client relationships have continued for many years. Ourclients typically retain us on a non-exclusive, engagement-by-engagement basis.Although they may be subject to penalty provisions, clients may generallycancel a contract at any time. Under many contracts, clients may reduce theiruse of our services under such contract without penalty. In addition, contractswith the U.S. Federal government contain provisions and are subject to laws andregulations that provide the U.S. Federal government with rights and remediesnot typically found in commercial contracts. Among other things, the U.S. Federalgovernment, as well as other public sector clients, may terminate contractswith short notice, for convenience and may cancel multi-year contracts if fundsbecome unavailable. When contracts are terminated, our revenue may decline andif we are unable to eliminate associated costs in a timely manner, ourprofitability may decline. In the First Quarter ended March 31, 2005,approximately 18.4% of our revenue was from public sector clients, includingU.S. Federal, state, and local governments and agencies. Often governmentspending programs are dependent upon the budgetary capability to support suchprograms. Many government budgets have been adversely impacted by the economicslowdown. Most states must operate under a balanced budget. As a result of suchbudget and deficit considerations, our existing and future revenues andprofitability could be adversely affected by reduced government IT spending.

 

**Unfavorable government audits could require us torefund payments we have received, to forego anticipated revenue, and couldsubject us to penalties and sanctions.**    The government agencies we contract withgenerally have the authority to audit and review our contracts with them. Aspart of that process, the government agency reviews our performance on thecontract, our pricing practices, our cost structure and our compliance withapplicable laws, regulations

 

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andstandards. If the audit agency determines that we have improperly receivedreimbursement, we would be required to refund any such amount. If a governmentaudit uncovers improper or illegal activities by us or we otherwise determinethat these activities have occurred, we may be subject to civil and criminalpenalties and administrative sanctions, including termination of contracts,forfeitures of profits, suspension of payments, fines and suspension ordisqualification from doing business with the government. Any such unfavorabledetermination could adversely impact our ability to bid for new work.

 

**We have pursued, and intend to continue to pursue,strategic acquisitions. Failure to successfully integrate acquired businessesor assets may adversely affect our financial performance.**    In recent years, wehave grown significantly through acquisitions. From January 1, 1999through April 15, 2005, we completed 15 acquisitions. The aggregate merger andconsideration costs of these acquisitions totaled approximately$422.6 million. Our future growth may be based in part on selectedacquisitions. At any given time, we may be in various stages of consideringacquisition opportunities. We may not be able to find and identify desirableacquisition targets or be successful in entering into a definitive agreementwith any one target. In addition, even if we reach a definitive agreement witha target, we may not be able to complete any future acquisition.

 

Wetypically anticipate that each acquisition will bring benefits, such as anincrease in revenue. Prior to completing an acquisition, however, it isdifficult to determine if these benefits will be realized. Accordingly, thereis a risk that an acquired company may not achieve an increase in revenue orother benefits for us. In addition, anacquisition may result in unexpected costs, expenses, and liabilities. Any ofthese events could have a material adverse effect on our business, financialcondition, and results of operations.

 

We have recorded a significant amount of goodwill and other intangibleassets resulting from our acquisitions. We review our goodwill and identifiableassets for impairment in accordance with SFAS 142 and SFAS No. 144 (“SFAS 144”),“Accounting for the Impairment or Disposal of Long-Lived Assets”,respectively.  If the estimated futurecash flows of the reporting units related to the underlying assets are notsufficient to support the carrying value of the associated underlying assets,we may be required to record impairment charges related to goodwill and otherintangible assets. Any material loss resulting from an impairment charge couldhave a material adverse effect on our results of operations. As of March 31,2005, our goodwill totaled $309.6 million, customer lists totaled $50.0 millionand other intangibles assets totaled $8.8 million.  

 

Theprocess of integrating acquired companies into our existing business might alsoresult in unforeseen difficulties. Unforeseen operating difficulties may absorbsignificant management attention, which we may otherwise devote to our existingbusiness. In addition, the process may require significant financial resourcesthat we might otherwise allocate to other activities, including the ongoingdevelopment or expansion of our existing operations.

 

Finally,future acquisitions could result in our having to incur additional debt and/orcontingent liabilities. We may also issue equity securities in connection withacquisitions, which could have a dilutive effect on our earnings per share. Anyof these possibilities could have a material adverse effect on our business,financial condition, and result of operations.

 

**We face significant competition for our services, andour failure to remain competitive could limit our ability to maintain existingclients or attract new clients.**    The market for our services is highlycompetitive. The technology for custom software services can change rapidly.The market is fragmented, and no company holds a dominant position.Consequently, our competition for client assignments and experienced personnelvaries significantly from city to city and by the type of service provided.Some of our competitors are larger and have greater technical, financial, andmarketing resources and greater name recognition in the markets they serve thanwe do. In addition, clients may elect to increase their internal information systemsresources to satisfy their custom software development and integration needs.

 

Inthe healthcare software systems market, we compete with some companies that arelarger in the healthcare market and have greater financial resources than wedo. We believe that significant competitive factors in the healthcare softwaresystems market include size and demonstrated ability to provide service totargeted healthcare markets.

 

Wemay not be able to compete successfully against current or future competitors. Inaddition, competitive pressures may materially adversely affect our business,financial condition, and results of operations.

 

**We conduct business in the UK, Canada, and India, whichexposes us to a number of difficulties inherent in international activities.**    As a result of ouracquisition of a controlling interest in Keane Worldzen in October 2003and

 

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theacquisition of SignalTree Solutions in March 2002, we now have foursoftware development facilities in India. As of March 31, 2005, we hadapproximately 1,506 technical professionals in the region, including KeaneWorldzen. India is currently experiencing conflicts with Pakistan over thedisputed territory of Kashmir as well as clashes between different religiousgroups within the country. These conflicts, in addition to other unpredictabledevelopments in the political, economic, and social conditions in India, couldeliminate or reduce the availability of these development and professionalservices. If access to these services were to be unexpectedly eliminated orsignificantly reduced, our ability to meet development objectives important toour strategy to add offshore delivery capabilities to the services we providewould be hindered, and our business could be harmed.

 

Ifwe fail to manage our geographically dispersed organization, we may fail tomeet or exceed our financial objectives and our revenues may decline. Weperform development activities in the U.S., Canada, and India, and have officesthroughout the U.S., UK, Canada, and India. This geographic dispersion requiresus to devote substantial management resources that locally based competitors donot need to devote to their operations.

 

Ouroperations in the UK, Canada, and India are subject to currency exchange ratefluctuations, foreign exchange restrictions, changes in taxation, and otherdifficulties in managing operations overseas. We may not be successful inmanaging our international operations.

 

Inaddition, there has been political discussion and debate related to worldwidecompetitive sourcing, particularly from the United States to offshorelocations. There is proposed federal and state legislation currently pendingrelated to this issue. It is too early to determine whether or in what formthis legislation will be adopted; however, future legislation, if enacted,could have an adverse effect on our business, results of operations andfinancial condition.

 

**We may be unable to re-deploy our professionalseffectively if engagements are terminated unexpectedly, which would adverselyaffect our results of operations.**    Our clients can cancel or reduce the scope oftheir engagements with us on short notice. If they do so, we may be unable toreassign our professionals to new engagements without delay. The cancellationor reduction in scope of an engagement could, therefore, reduce the utilizationrate of our professionals, which would have a negative impact on our business,financial condition, and results of operations.

 

Asa result of these and other factors, our past financial performance should notbe relied on as an indication of future performance. We believe thatperiod-to-period comparisons of our financial results are not necessarilymeaningful and we expect that our results of operations may fluctuate fromperiod-to-period in the future.

 

**Our growth could be limited if we are unable to attractand retain personnel in the information technology and business consultingindustries.**    Webelieve that our future success will depend in large part on our ability tocontinue to attract and retain highly skilled technical and managementpersonnel. The competition for such personnel is intense. We may not succeed inattracting and retaining the personnel necessary to develop our business. If wedo not, our business, financial condition, and results of operations could bematerially adversely affected.

 

**We may be prohibited from repurchasing, and may nothave the financial resources to repurchase, our Debentures on the date forrepurchase at the option of the holder or upon a designated event, as requiredby the indenture governing our Debentures, which could cause defaults under oursenior revolving credit facility and any other indebtedness we may incur in thefuture.**    TheDebenture holders have the right to require us to repurchase all or a portionof their Debentures on June 15, 2008. The Debenture holders may alsorequire us to repurchase all or a portion of their Debentures upon a designatedevent, as defined in the indenture governing the Debentures. If the Debentureholders elect to require us to repurchase their Debentures on any of the abovedates or if a designated event were to occur, we may not have enough funds topay the repurchase price for all tendered Debentures. We are currentlyprohibited under our senior revolving credit facility from repurchasing anyDebentures if a designated event were to occur. We may also be prohibited underany indebtedness we may incur in the future from purchasing any Debenturesprior to their stated maturity. In these circumstances, we will be required torepay all of the outstanding principal of, and pay any accrued and unpaidinterest on, such indebtedness or to obtain the requisite consents from theholders of any such indebtedness to permit the repurchase of the Debentures. Ifwe are unable to repay all of such indebtedness or are unable to obtain thenecessary consents, we will be unable to offer to repurchase the Debentures,which would constitute an event of default under the indenture for the Debentures,which itself could constitute a default under our senior revolving creditfacility or under the terms of any future indebtedness that we may incur. Inaddition, the events that constitute a designated event

 

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underthe indenture for the Debentures are events of default under our seniorrevolving credit facility and may also be events of default under otherindebtedness that we may incur in the future.

 

**We incurred indebtedness when we sold our Debentures.We may incur additional indebtedness in the future. The indebtedness created bythe sale of our Debentures, and any future indebtedness, could adversely affectour business and our ability to make full payment on the Debentures.**    Our aggregate level ofindebtedness increased in connection with the sale of our Debentures. As ofMarch 31, 2005, we had approximately $190.6 million of outstandingindebtedness and had the ability to incur additional debt under our revolvingcredit facility. We may also obtain additional long-term debt and workingcapital lines of credit to meet future financing needs, which would have theeffect of increasing our total leverage. Any increase in our leverage couldhave significant negative consequences, including:

 

•*             *increasingour vulnerability to adverse economic and industry conditions;

 

•*             *limitingour ability to obtain additional financing;

 

•*             *limitingour ability to make acquisitions;

 

•*             *requiringthe dedication of a substantial portion of our cash flow from operations toservice our indebtedness, thereby reducing the amount of our cash flowavailable for other purposes, including capital expenditures;

 

•*             *limitingour flexibility in planning for, or reacting to, changes in our business andthe industries in which we compete; and

 

•*             *placingus at a possible competitive disadvantage with less leveraged competitors andcompetitors that may have better access to capital resources.

 

Ourability to satisfy our future obligations, including debt service on ourDebentures, depends on our future operating performance and on economic,financial, competitive, and other factors beyond our control. Our business maynot generate sufficient cash flow to meet these obligations or to successfullyexecute our business strategy. If we are unable to service our debt and fundour business, we may be forced to reduce or delay capital expenditures, seekadditional financing or equity capital, restructure or refinance our debt orsell assets. We may not be able to obtain additional financing or refinanceexisting debt or sell assets on terms acceptable to us or at all.

 

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## **Item 3.**    Quantitative and Qualitative Disclosures AboutMarket Risk

 

We do not engage in trading market risk, sensitive instruments orpurchasing hedging instruments or “other than trading” instruments that arelikely to expose us to market risk, whether interest rate, foreign currencyexchange, and commodity price or equity price risk. We have not purchasedoptions or entered into swaps or forward or futures contracts. 

* *

*Interest Rate Risk*

 

We invest primarily in U.S. government obligations as well astax-exempt municipal bonds and corporate bonds. As a result, our primary marketrisk exposure is that of interest rate risk to our investments, which wouldaffect the carrying value of those investments. During 2004, the United StatesFederal Reserve Board began increasing benchmark interest rates and at theMarch 2005 meeting of the Federal Open Market Committee increased rates for theseventh time, a total of 175 basis points, since June 30, 2004. A significantincrease in interest rates would increase the rate of return on our cash andcash equivalents, but would have a negative impact on the carrying value of ourmarketable securities. Our interest income would change by approximately $0.7million for the three months ended March 31, 2005 and approximately $0.8million for the three months ended March 31, 2004 for each 100 basispoint increase or decrease in interest rates. The fair value of our investmentportfolio at March 31, 2005 would decrease by approximately $1.6 millionfor a 100 basis point increase in rates and increase $1.5 million for a 100basis point decrease in rates. The fair value of our investment portfolio at December31, 2004 would change by approximately $1.8 million for each 100 basispoint increase or decrease in rates. 

 

Changes in market rates and the related impact on the fair value of ourinvestments would not generally affect net income as our investments are fixedrate securities and are classified as available-for-sale. Investmentsclassified as available-for-sale are carried at fair value with unrealizedgains and losses recorded as a component of accumulated other comprehensiveloss in the accompanying consolidated balance sheets. However, when theinvestments are sold, the unrealized losses are recorded as realized losses andincluded in net income in the accompanying consolidated statements of income.As of March 31, 2005, we had a net unrealized loss of approximately $1.6million, which represents an increase of $0.8 million from December 31, 2004. 

* *

*Foreign Currency Risk*

 

Wetransact business in the UK, Canada, and India and as such have exposureassociated with movement in foreign currency exchange rates. For the threemonths ended March 31, 2005 compared to the same period in 2004, thefluctuation in foreign currency exchange rates negatively impacted operatingincome by approximately $0.8 million. Relative to the foreign currencyexposures existing at March 31, 2005, a 10% unfavorable movement would haveresulted in an additional $1.5 million reduction of operating income for thethree months ended March 31, 2005. Net revenues derived from our foreignoperations totaled approximately 6% of our total revenues for the three monthsended March 31, 2005 and totaled approximately 5% of our total revenuesfor the three months ended March 31, 2004.

 

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**Item 4.****    Controls andProcedures**

 

**Conclusion Regarding the Effectiveness of Disclosure Controlsand Procedures**

 

Keanemaintains disclosure controls and procedures designed to ensure thatinformation required to be disclosed in reports filed under the SecuritiesExchange Act of 1934, as amended, is recorded, processed and summarized andreported within the specified time periods. Our management, with theparticipation of our President and Chief Executive Officer and our Senior VicePresident of Finance and Administration and Chief Financial Officer, evaluatedthe effectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,2005. Based on this evaluation, our President and Chief Executive Officer andour Senior Vice President of Finance and Administration and Chief FinancialOfficer concluded that, as of March 31, 2005, our disclosure controls andprocedures were (1) designed to ensure that material information relatingto us, including our consolidated subsidiaries, is made known to our Presidentand Chief Executive Officer and our Senior Vice President of Finance andAdministration and Chief Financial Officer by others within these entities,particularly during the period in which this report was being prepared, and(2) effective, in that they provide reasonable assurance that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

 

Since2003, we have been in the process of implementing a PeopleSoft EnterpriseResource Planning (“ERP”) system for the majority of our processes andoperations. We currently plan to implement the following PeopleSoft modules:Resource Management, General Ledger, Accounts Payable, Expense and TimeReporting, Accounts Receivable, Contracts Management, Project Accounting,Billing and Enterprise Planning Management. The implementation of the ERPsystem is being phased in over time throughout Keane and we currently plan tocomplete the implementation for the majority of our processes and operations in2005. During 2004, we implemented the General Ledger, Accounts Receivable,Resource Management, Accounts Payable, Expense Reporting, and EnterprisePlanning Management modules for the majority of our operations. The secondphase of the implementation, which is planned for 2005, will include ContractsManagement, Time Reporting, Project Accounting and Billing. Implementing an ERPsystem involves significant changes in business processes and extensiveorganizational training. We believe the phased-in approach we are takingreduces the risks associated with making these changes. In addition, we aretaking the necessary steps to monitor and maintain appropriate internalcontrols during this period.

 

**Changes in Internal Control Over Financial Reporting**

 

Duringthe three months ended March 31, 2005, there have not been any significantchanges in our internal controls over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting. 

 

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**Keane, Inc.**

**Part II.****   Other Information**

 

**Item2. ****Unregistered Sales of Equity Securities and Use of Proceeds**

 

(c)           The following table provides information about purchases by Keane duringthe three months ended March 31, 2005 of equity securities that are registeredby Keane pursuant to Section 12 of the Exchange Act:

 

**ISSUER PURCHASES OF EQUITY SECURITIES**

** **
| ** **        | ** ** | **(a)**                                               | ** ** | **(b)**                                      | ** ** | **(c)**                                                                                      | ** ** | **(d)**                                                                               | ** ** |
|-------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Period**        | ** ** | **Total Number of  Shares (or Units)  Purchased (1)** | ** ** | **Average Price  Paid per Share (or  Unit)** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs (2)** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
| 01/01/05-01/31/05 |       | —                                                |       | $                                            | —     |                                                                                         | —     |                                                                                  | 2,871,600  |   |
| 02/01/05-02/28/05 |       | —                                                |       | $                                            | —     |                                                                                         | —     |                                                                                  | 2,871,600  |   |
| 03/01/05-03/31/05 |       | —                                                |       | $                                            | —     |                                                                                         | —     |                                                                                  | 2,871,600  |   |
| Total:            |       | —                                                |       | $                                            | —     |                                                                                         | —     |                                                                                  | 2,871,600  |   |

 

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(1)   For the three months ended March 31, 2005, we did not repurchase any ofour common stock. 

 

(2)   Our Board of Directors approved the repurchaseby us of 3.0 million shares of our common stock pursuant to theJune 2004 Program. The repurchases may be made on the open market or innegotiated transactions, and the timing and amount of shares to be purchasedwill be determined by our management based on its evaluation of market andeconomic conditions and other factors. Unless terminated earlier by resolutionof our Board of Directors, the June 2004 Program will expire upon theearlier of the date we repurchase all shares authorized for repurchasethereunder or June 13, 2005.

 

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**Item6.****    Exhibits**

 

(a)           Exhibits.

 

Exhibit 10.1 – Form of 1998 TARSAP award

 

Exhibit 10.2 – Form of 2001 TARSAP award

 

Exhibit 10.3 – Form of 1998 Restricted Stock award

 

Exhibit 10.4 – Form of 2001 Restricted Stock Award

 

Exhibit 10.5 – Consulting Agreement with John Keane, Jr.

 

Exhibit 31.1 - Certification pursuant to Exchange Act Rules 13a-14 and15d-14 of the Chief Executive Officer.

 

Exhibit 31.2 - Certification pursuant to Exchange Act Rules 13a-14 and15d-14 of the Chief Financial Officer.

 

Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350 of theChief Executive Officer.

 

Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350 of theChief Financial Officer.

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   | KEANE, INC.                                                                                                                    |   |
|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|   | (Registrant)                                                                                                                   |   |
|   |                                                                                                                           |   |
|   |                                                                                                                           |   |
| Date   | May 5, 2005                                                                                                                    |   | /s/ Brian T. Keane |   |   |
|   | Brian T. Keane                                                                                                                 |   |
|   | President and Chief Executive Officer                                                                                          |   |
|   |                                                                                                                           |   |
|   |                                                                                                                           |   |
| Date   | May 5, 2005                                                                                                                    |   | /s/ John J. Leahy |   |   |
|   | John J. Leahy                                                                                                                  |   |
|   | Senior Vice President of Finance and  Administration and Chief Financial Officer  (Principal Financial and Accounting Officer) |   |
|        |                                                                                                                                |        |  |  |  |  |

 

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Exhibit Index

 
| **Exhibit  No.** | ** ** | **Description**                                                                                 |
|------------------|------------|-------------------------------------------------------------------------------------------------|
|             |       |                                                                                            |
| 10.1             |       | Form of 1998 TARSAP award                                                                       |
|             |       |                                                                                            |
| 10.2             |       | Form of 2001 TARSAP award                                                                       |
|             |       |                                                                                            |
| 10.3             |       | Form of 1998 Restricted Stock Award                                                             |
|             |       |                                                                                            |
| 10.4             |       | Form of 2001 Restricted Stock Award                                                             |
|             |       |                                                                                            |
| 10.5             |       | Consulting Agreement with John Keane, Jr.                                                       |
|             |       |                                                                                            |
| 31.1             |       | Certification pursuant to Exchange Act  Rules 13a-14 and 15d-14 of the Chief Executive Officer. |
|             |       |                                                                                            |
| 31.2             |       | Certification pursuant to Exchange Act  Rules 13a-14 and 15d-14 of the Chief Financial Officer. |
|             |       |                                                                                            |
| 32.1             |       | Certification pursuant to 18 U.S.C. Section  1350 of the Chief Executive Officer.               |
|             |       |                                                                                            |
| 32.2             |       | Certification pursuant to 18 U.S.C. Section  1350 of the Chief Financial Officer.               |

 

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