**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

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

 

**(MarkOne)**

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarter ended June 30, 2003**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from                 to                 **

 

**CommissionFile Number 1-7516**

 

**KEANE, INC.**

(Exact name of registrantas specified in its charter)

 

|   | **MASSACHUSETTS**                                                | **04-2437166**                           |
|--------|------------------------------------------------------------------|------------------------------------------|
|   | (State or other jurisdictions 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 fileras defined in Rule 12b-2 of the Securities Exchange Act of 1934, asamended.  Yes ýNo o

 

As of June 30, 2003, the number of issued and outstanding shares ofCommon Stock (excluding 12,067,219 shares held in treasury) and Class B Common Stockare 63,478,172 and 284,599 shares, respectively.

 

 

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**Keane, Inc. and SubsidiariesTable Of Contents**

 
| **Part 1**     | **  Financial  Information**                                                                                   |
|----------------|--------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                     |
| Item  1.       | Unaudited  Condensed Consolidated Statements of Income for the three months and six  months ended June 30, 2003 and 2002 |
|           |                                                                                                                     |
|           | Condensed  Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31,  2002                            |
|           |                                                                                                                     |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows for the six months ended June  30, 2003 and 2002              |
|           |                                                                                                                     |
|           | 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.       | Changes  in Securities and Use of Proceeds                                                                               |
|           |                                                                                                                     |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                                     |
|           |                                                                                                                     |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                                        |
|           |                                                                                                                     |
| Signature Page |

 

2

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**Keane, Inc. and SubsidiariesPart I****                 FinancialInformation**

 

**Item 1.****        Financial Statements**

 

**Keane, Inc. and SubsidiariesCondensed Consolidated Statementsof Income (Unaudited)**

 
|                                                                               |   | **Three Months Ended June 30,**              |    | **Six Months Ended June 30,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|-------------------------------|--------|
|                                                                               |   | **2003**                                     |    | **2002**                      |   | **2003** |   | **2002** |   |
|                                                                               |   | **(In  Thousands Except Per Share Amounts)** |    |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Total revenues                                                                     |   | $                                            | 203,511 |                          | $      | 226,062 |   | $ | 408,173 |   | $ | 447,321 |   |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Salaries, wages  and other direct costs                                            |   | 137,877                                      |    | 161,905                       |   | 280,308 |   | 319,738 |   |
| Selling, general  and administrative expenses                                      |   | 50,146                                       |    | 51,022                        |   | 98,221 |   | 103,313 |   |
| Amortization of  intangible assets                                                 |   | 4,030                                        |    | 4,248                         |   | 8,077 |   | 7,556 |   |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Operating income                                                                   |   | 11,458                                       |    | 8,887                         |   | 21,567 |   | 16,714 |   |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Interest and  dividend income                                                      |   | 898                                          |    | 510                           |   | 1,246 |   | 1,534 |   |
| Interest expense                                                                   |   | 1,066                                        |    | 72                            |   | 1,099 |   | 139 |   |
| Other expense  (income), net                                                       |   | 259                                          |    | 125                           |   | (6,918 | ) | (345 | ) |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Income before  income taxes                                                        |   | 11,031                                       |    | 9,200                         |   | 28,632 |   | 18,454 |   |
| Provision for  income taxes                                                        |   | 4,411                                        |    | 3,679                         |   | 11,451 |   | 7,380 |   |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Net income                                                                         |   | $                                            | 6,620   |                          | $      | 5,521 |   | $ | 17,181 |   | $ | 11,074 |   |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Earnings per  share (basic)                                                        |   | $                                            | 0.10    |                          | $      | 0.07 |   | $ | 0.25 |   | $ | 0.15 |   |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Earnings per  share (diluted)                                                      |   | $                                            | 0.10    |                          | $      | 0.07 |   | $ | 0.25 |   | $ | 0.15 |   |
|                                                                               |   |                                         |    |                          |   |   |   |   |   |
| Weighted average  common shares outstanding (basic)                                |   | 66,351                                       |    | 75,733                        |   | 67,681 |   | 75,724 |   |
| Weighted average  common shares and common share equivalents outstanding (diluted) |   | 66,799                                       |    | 76,308                        |   | 67,809 |   | 76,399 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

3

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**Keane, Inc. and SubsidiariesCondensed Consolidated BalanceSheets**

 
|                                   |   | **June 30,  2003** |    | **December  31,  2002** |   |
|----------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                   |   | **(Unaudited)**    |    | **(See Note A)**        |   |
|                                   |   | **(In Thousands)** |    |
| **Assets**                             |   |               |    |                    |   |
| Current:                               |   |               |    |                    |   |
| Cash and cash equivalents              |   | $                  | 155,524 |                    | $      | 46,383 |   |
| Marketable securities                  |   | 28,907             |    | 21,872                  |   |
| Accounts receivable, net:              |   |               |    |                    |   |
| Trade                                  |   | 121,256            |    | 129,432                 |   |
| Other                                  |   | 851                |    | 1,004                   |   |
| Prepaid expenses and deferred taxes    |   | 34,679             |    | 37,430                  |   |
| Total current assets                   |   | 341,217            |    | 236,121                 |   |
|                                   |   |               |    |                    |   |
| Property and equipment, net            |   | 28,656             |    | 24,729                  |   |
| Building, net                          |   | 40,451             |    | 40,888                  |   |
| Goodwill                               |   | 277,650            |    | 277,435                 |   |
| Customer lists, net                    |   | 63,551             |    | 69,193                  |   |
| Other intangible assets, net           |   | 15,222             |    | 17,613                  |   |
| Deferred taxes and other assets, net   |   | 25,020             |    | 19,695                  |   |
|                                   |   | $                  | 791,767 |                    | $      | 685,674 |   |
| **Liabilities**                        |   |               |    |                    |   |
| Current:                               |   |               |    |                    |   |
| Accounts payable                       |   | 12,049             |    | 11,986                  |   |
| Accrued expenses and other liabilities |   | 38,080             |    | 34,917                  |   |
| Accrued building costs                 |   | 439                |    | 234                     |   |
| Accrued restructuring                  |   | 10,536             |    | 13,694                  |   |
| Accrued compensation                   |   | 32,403             |    | 36,346                  |   |
| Note payable                           |   | 2,892              |    | 3,100                   |   |
| Accrued income taxes                   |   | 6,757              |    | 81                      |   |
| Unearned income                        |   | 9,446              |    | 11,535                  |   |
| Current capital lease obligations      |   | 823                |    | 887                     |   |
| Total current liabilities              |   | 113,425            |    | 112,780                 |   |
|                                   |   |               |    |                    |   |
| Convertible debentures                 |   | 150,000            |    | —                  |   |
| Accrued long-term building costs       |   | 40,276             |    | 40,654                  |   |
| Accrued long-term restructuring        |   | 8,870              |    | 12,541                  |   |
| Deferred income taxes                  |   | 28,266             |    | 28,343                  |   |
| Long-term capital lease obligations    |   | 296                |    | 772                     |   |
|                                   |   |               |    |                    |   |
| **Stockholders’ equity**          |   |               |    |                    |   |
| Common stock                           |   | 7,555              |    | 7,555                   |   |
| Class B common stock                   |   | 28                 |    | 28                      |   |
| Additional paid-in capital             |   | 166,643            |    | 166,598                 |   |
| Accumulated other comprehensive income |   | 13                 |    | (1,411                  | )      |
| Retained earnings                      |   | 386,723            |    | 369,542                 |   |
| Less treasury stock, at cost           |   | (110,328           | )       | (51,728                 | )      |
| Total stockholders’ equity        |   | 450,634            |    | 490,584                 |   |
|                                   |   | $                  | 791,767 |                    | $      | 685,674 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

4

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**Keane, Inc. and SubsidiariesCondensed Consolidated Statementsof Cash Flows (Unaudited)**

 
|                                                                                          |   | **Six Months  Ended June 30,** |    |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                          |   | **2003**                       |    | **2002** |   |
|                                                                                          |   | **(In  Thousands)**            |    |
| **Cash flows  from operating activities:**                                                    |   |                           |    |   |   |
| Net income                                                                                    |   | $                              | 17,181  |   | $ | 11,074 |   |
| Adjustments to reconcile  net income to net cash provided by (used for) operating activities: |   |                           |    |   |   |
| Depreciation and  amortization                                                                |   | 13,711                         |    | 13,071 |   |
| Deferred income taxes                                                                         |   | 1,516                          |    | (1,004 | ) |
| Provision for doubtful  accounts, net                                                         |   | (1,054                         | )       | (1,049 | ) |
| (Gain) loss on sale of  property and equipment                                                |   | (24                            | )       | 9 |   |
| Accrued interest on  long-term debt                                                           |   | 93                             |    | — |   |
| Other charges, net                                                                            |   | (27                            | )       | — |   |
| Changes in operating assets  and liabilities, net of acquisitions:                            |   |                           |    |   |   |
| Decrease in accounts  receivable                                                              |   | 9,383                          |    | 14,335 |   |
| Increase in prepaid  expenses and other assets                                                |   | (1,907                         | )       | (8,027 | ) |
| Decrease in other  liabilities                                                                |   | (9,911                         | )       | (24,692 | ) |
| Increase in income taxes  payable                                                             |   | 6,764                          |    | 4,724 |   |
| **Net cash  provided by operating activities**                                                |   | 35,725                         |    | 8,441 |   |
|                                                                                          |   |                           |    |   |   |
| **Cash flows  from investing activities:**                                                    |   |                           |    |   |   |
| Purchase of investments                                                                       |   | (13,304                        | )       | (8,416 | ) |
| Sale and maturities of  investments                                                           |   | 6,269                          |    | 57,841 |   |
| Purchase of property and  equipment                                                           |   | (6,152                         | )       | (5,153 | ) |
| Proceeds from the sale of  property and equipment                                             |   | 125                            |    | 199 |   |
| Payments for current year  acquisitions                                                       |   | —                         |    | (65,459 | ) |
| Payments for prior years  acquisitions                                                        |   | (903                           | )       | — |   |
| **Net cash  used for investing activities**                                                   |   | (13,965                        | )       | (20,988 | ) |
|                                                                                          |   |                           |    |   |   |
| **Cash flows  from financing activities:**                                                    |   |                           |    |   |   |
| Proceeds from issuance of  convertible debentures                                             |   | 150,000                        |    | — |   |
| Debt issuance costs                                                                           |   | (3,874                         | )       | — |   |
| Principal payments under  capital lease obligations                                           |   | (540                           | )       | (495 | ) |
| Proceeds from issuance of  common stock                                                       |   | 2,339                          |    | 3,701 |   |
| Repurchase of common stock                                                                    |   | (60,894                        | )       | (2,255 | ) |
| **Net cash  provided by financing activities**                                                |   | 87,031                         |    | 951 |   |
|                                                                                          |   |                           |    |   |   |
| Effect of exchange rate  changes on cash                                                      |   | 350                            |    | 1,135 |   |
| Net increase (decrease) in  cash and cash equivalents                                         |   | 109,141                        |    | (10,461 | ) |
| Cash and cash equivalents  at beginning of period                                             |   | 46,383                         |    | 65,556 |   |
| **Cash and  cash equivalents at end of period**                                               |   | $                              | 155,524 |   | $ | 55,095 |   |
|                                                                                          |   |                           |    |   |   |
| **Supplemental  Information:**                                                                |   |                           |    |   |   |
| Income taxes paid                                                                             |   | $                              | 2,293   |   | $ | 7,350 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

5

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**Keane, Inc. and SubsidiariesNotes to Unaudited CondensedConsolidated Financial Statements**(In Thousands Except Per Share Amounts)

 

**NoteA.****        Basisof Presentation**

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and, accordingly, donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, alladjustments considered necessary for a fair presentation of the results ofoperations for the interim periods reported and of our financial condition asof the date of the interim balance sheet have been included.  Operating results for the three-month andsix-month period ended June 30, 2003 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2003 or for anyother period.

 

The balance sheet at December 31, 2002 has beenderived from the audited financial statements at that date, but does notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.

 

Certain reclassifications have been made to the 2002financial statements to conform to the 2003 presentation.  Such reclassifications have no effect onpreviously reported net income or stockholders’ equity.

 

For further information, refer to the consolidatedfinancial statements and footnotes thereto included in our Annual Report onForm 10-K for the year ended December 31, 2002 and filed with the Securitiesand Exchange Commission on March 26, 2003.

 

**NoteB.****        EarningsPer Share Data**

Computation of net earnings per share for thethree-month and six-month period ended June 30, 2003 and 2002 is as follows:

 
|                                                                                                    |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                                    |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net income                                                                                              |   | $                                | 6,620  |                           | $      | 5,521 |   | $ | 17,181 |   | $ | 11,074 |   |
|                                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Weighted average number of common shares outstanding  used in calculation of basic earnings per share   |   | 66,351                           |   | 75,733                         |   | 67,681 |   | 75,724 |   |
|                                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Incremental shares from the assumed exercise of  dilutive stock options                                 |   | 448                              |   | 575                            |   | 128 |   | 675 |   |
|                                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Weighted average number of common shares outstanding  used in calculation of diluted earnings per share |   | 66,799                           |   | 76,308                         |   | 67,809 |   | 76,399 |   |
|                                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Earnings per share                                                                                      |   |                             |   |                           |   |   |   |   |   |
| Basic                                                                                                   |   | $                                | 0.10   |                           | $      | 0.07 |   | $ | 0.25 |   | $ | 0.15 |   |
|                                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Diluted                                                                                                 |   | $                                | 0.10   |                           | $      | 0.07 |   | $ | 0.25 |   | $ | 0.15 |   |

 

Our 2% Convertible Subordinated Debentures(“Debentures”) are convertible at the option of the holder into shares of ourcommon stock at an initial conversion rate of 54.4989 shares of common stockper 

 

6

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$1,000 principal amount of Debentures, which isequivalent to an initial conversion price of approximately $18.349 pershare.  The Debentures becomeconvertible during any fiscal quarter commencing after September 30, 2003 when,among other circumstances, the closing price of our common stock is more than120% of the conversion price (approximately $22.019 per share) for at least 20trading days in the 30 consecutive trading days ending on the last trading dayof the preceding fiscal quarter.  Thetotal amount of shares issuable upon the conversion of the Debentures isapproximately 8.2 million.

 

For the quarter ended June 30, 2003, the 8.2 millionshares issuable upon the conversion of the Debentures were not included in thecomputation of diluted earnings per share because, in accordance with theirterms, the Debentures had not yet become convertible.

 

**Note C.****        Stock-Based Compensation**

Our stock-based compensation plans provide for grantsof stock options to employees, officers and directors of, and consultants andadvisors to, Keane at a purchase price of not less than 100% of the fair marketvalue of our stock on the date of grant. This stock-based compensation is accounted for utilizing the intrinsicvalue method in accordance with the provisions of Accounting Principles BoardOpinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” andrelated Interpretations.  We haveadopted the disclosure-only provisions of Statement of Financial AccountingStandards No. 148 (SFAS 148), “Accounting for Stock-Based Compensation —Transition and Disclosure,” an amendment of Statement of Financial AccountingStandards No. 123 (SFAS 123). Accordingly, no compensation expense has been recognized for ourstock-based compensation plans other than for restricted stock.

 

Had we accounted for stock-based compensationutilizing the fair value method and provisions proscribed in Statement ofFinancial Accounting Standards No. 123 (SFAS No. 123), “Accounting forStock-Based Compensation,”**ournet income and earnings per share would have been reduced to the pro formaamounts indicated below:

 
|                                                                                                                              |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                                                              |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                                              |   |                             |   |                           |   |   |   |   |   |
| Net income - as reported                                                                                                          |   | $                                | 6,620  |                           | $      | 5,521 |   | $ | 17,181 |   | $ | 11,074 |   |
| Less: Total stock-based employee compensation  expense determined under the fair value method for all awards, net of tax  effects |   | 1,355                            |   | 2,844                          |   | 2,653 |   | 5,777 |   |
|                                                                                                                              |   |                             |   |                           |   |   |   |   |   |
| Net income - pro forma                                                                                                            |   | 5,265                            |   | 2,677                          |   | 14,528 |   | 5,297 |   |
|                                                                                                                              |   |                             |   |                           |   |   |   |   |   |
| Earnings per share                                                                                                                |   |                             |   |                           |   |   |   |   |   |
| Basic - as reported                                                                                                               |   | $                                | 0.10   |                           | $      | 0.07 |   | $ | 0.25 |   | $ | 0.15 |   |
| Basic - pro forma                                                                                                                 |   | $                                | 0.08   |                           | $      | 0.04 |   | $ | 0.22 |   | $ | 0.07 |   |
|                                                                                                                              |   |                             |   |                           |   |   |   |   |   |
| Diluted - as reported                                                                                                             |   | $                                | 0.10   |                           | $      | 0.07 |   | $ | 0.25 |   | $ | 0.15 |   |
| Diluted - pro forma                                                                                                               |   | $                                | 0.08   |                           | $      | 0.04 |   | $ | 0.21 |   | $ | 0.07 |   |

 

We also grant restricted stock for a fixed number ofshares to employees for nominal consideration. Compensation expense related to restricted stock awards is recordedratably over the restriction period.

 

7

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**Note D.****        Comprehensive Income**

Total comprehensive income (i.e. net income plusavailable-for-sale securities valuation adjustments, currency translationadjustments and adjustments related to a foreign defined benefit plan, net oftax) was $5.1 million for the Second Quarter ended June 30, 2003 and $15.8million for the six-month period ended June 30, 2003, and was $7.2 million and$13.7 million, respectively, for the three-month and six-month period endedJune 30, 2002.

 

**Note E.****          Business Acquisitions**

On March 15, 2002, we acquired SignalTree SolutionsHolding, Inc. (SignalTree Solutions), a privately held, United States-basedcorporation with two software development facilities in India and additionaloperations in the United States.  Underthe terms of the merger agreement, we paid $68.2 million in cash for SignalTreeSolutions.

 

We accounted for the acquisition as a purchase,pursuant to which the assets and liabilities of SignalTree Solutions, includingintangible assets, were recorded at their respective fair values.  All identifiable intangible assets are beingamortized over their estimated useful lives with the exception of goodwill.  The financial position, results of operationsand cash flows of SignalTree Solutions were included in our financialstatements effective as of the acquisition date.

 

The total cost of the acquisition was $78.9million.  Portions of the purchaseprice, including intangible assets, were identified by independent appraisersutilizing proven valuation procedures and techniques.  Goodwill was recorded at $41.3 million and other identifiedintangible assets were valued at $21.5 million.  At the date of acquisition, we entered into a plan to exitcertain activities and consolidate facilities. As a result, we recorded a restructuring liability of $1.6 millionrelated to the lease obligations and certain other costs for the consolidatedfacilities.  In accordance with EITF95-3, “Recognition of Liabilities in Connection with a Purchase BusinessCombination,” these costs have been reflected in the purchase price of theacquisition.

 

The components of the purchase price allocation are asfollows:

 
|                                     |   | **December 31,  2002** |   | **Total**  Adjustments |   | **June 30,**2003 |   |
|------------------------------------------|--------|------------------------|--------|------------------------|--------|------------------|--------|
| **Consideration and merger costs:**      |   |                   |   |                   |   |             |   |
| Consideration paid                       |   | $                      | 66,927 |                   | $      | —           |   | $ | 66,927 |   |
| Transaction costs                        |   | 1,303                  |   | 5                      |   | 1,308            |   |
| Restructuring                            |   | 1,553                  |   | —                 |   | 1,553            |   |
| Deferred tax liability                   |   | 9,120                  |   | —                 |   | 9,120            |   |
| **Total**                                |   | $                      | 78,903 |                   | $      | 5                |   | $ | 78,908 |   |
|                                     |   |                   |   |                   |   |             |   |
| **Allocation of purchase price:**        |   |                   |   |                   |   |             |   |
| Net asset value acquired                 |   | $                      | 16,133 |                   | $      | 245              |   | $ | 16,378 |   |
| Customer lists (seven-year life)         |   | 18,800                 |   | —                 |   | 18,800           |   |
| Non-compete agreements (three-year life) |   | 2,700                  |   | —                 |   | 2,700            |   |
| Goodwill                                 |   | 41,270                 |   | (240                   | )      | 41,030           |   |
| **Total**                                |   | $                      | 78,903 |                   | $      | 5                |   | $ | 78,908 |   |

 

The following table presents the condensed balancesheet disclosing the amounts assigned to each of the major assets acquired andliabilities assumed of SignalTree Solutions at the acquisition date and 2003adjustments recorded to finalize the purchased balance sheet:

 

8

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|                            |   | **December  31,  2002** |   | **Total  Adjustments** |   | **June 30,  2003** |   |
|---------------------------------|--------|-------------------------|--------|------------------------|--------|--------------------|--------|
| **Condensed balance sheet:**    |   |                    |   |                   |   |               |   |
| Cash                            |   | $                       | 2,650  |                   | $      | —             |   | $ | 2,650 |   |
| Accounts receivable             |   | 7,304                   |   | —                 |   | 7,304              |   |
| Other current assets            |   | 3,562                   |   | (2                     | )      | 3,560              |   |
| Property, plant, equipment, net |   | 8,011                   |   | (75                    | )      | 7,936              |   |
| **Total assets**                |   | 21,527                  |   | (77                    | )      | 21,450             |   |
|                            |   |                    |   |                   |   |               |   |
| Accounts payable                |   | 569                     |   | (16                    | )      | 553                |   |
| Accrued compensation            |   | 1,569                   |   | —                 |   | 1,569              |   |
| Other liabilities               |   | 3,256                   |   | (306                   | )      | 2,950              |   |
| **Net assets**                  |   | $                       | 16,133 |                   | $      | 245                |   | $ | 16,378 |   |

 

The unaudited pro forma combined condensed statementsof income below present our historical statements and our acquisition ofSignalTree Solutions on March 15, 2002 as if the acquisition had occurred atJanuary 1, 2002.  Unaudited pro formacombined condensed financial information is presented for comparative purposesonly and is not necessarily indicative of the results of operations that wouldhave actually been reported had the acquisition occurred at the beginning ofthe periods presented, nor is it necessarily indicative of future financialposition or results of operations.

 
|                            |   | **For the  Three Months  Ended June 30,** |    | **For the  Six Months  Ended June 30** |   |
|---------------------------------|--------|-------------------------------------------|---------|----------------------------------------|--------|
|                            |   | **2003**                                  |    | **2002**                               |   | **2003** |   | **2002** |   |
| Total revenues                  |   | $                                         | 203,511 |                                   | $      | 226,062 |   | $ | 408,173 |   | $ | 457,550 |   |
| Net income                      |   | 6,620                                     |    | 5,521                                  |   | 17,181 |   | 11,803 |   |
| Net income per  share (basic)   |   | .10                                       |    | .07                                    |   | .25 |   | .16 |   |
| Net income per  share (diluted) |   | .10                                       |    | .07                                    |   | .25 |   | .15 |   |
|                                 |        |                                           |         |                                        |        |  |  |  |  |  |  |  |  |

 

In addition to the SignalTree Solutions acquisition,we completed an acquisition of a business complementary to our businessstrategy during the Third Quarter of 2002. The merger and consideration costs of this acquisition, which wereaccounted for using the purchase method of accounting, totaled  $13.4 million in 2002.  The purchase price included contingentconsideration based upon operating performance of the acquired business.  During the First Quarter of 2003, we paid anadditional $895,000 related to earn-outs for this acquisition and have recordedthis amount as additional purchase price. Future earn-outs are based on specific net revenue targets.  Payments for achieving these goals willrange from $1.0 to $2.0 million in future periods, not to exceed $3.0million.  We also recorded $3.0 millionas deferred revenue related to contingent service credits and issued a $3.0million non-interest bearing note payable as partial consideration.  As of June 30, 2003, the deferred revenueand non-interest bearing note had a balance of $2.8 million, respectively.  The note has a one-year term with a possibleone-year extension based on additional contingent service credits.  As of June 30, 2003, we had not recordedadditional contingent liabilities in relation to the earn-outs.

 

The results of operations of these acquired companieshave been included in our condensed consolidated statement of income from thedate of acquisition.  The excess of thepurchase price over the fair value of the net assets has been allocated toidentifiable intangible assets and goodwill. Identifiable intangible assets are being amortized on a straight-linebasis over periods ranging from three to seven years.  Pro forma results of operations for these acquisitions have notbeen provided, as they were not material on either an individual or anaggregate basis.

 

**Note F.****          Restructurings**

During the Second Quarter of 2003, we reevaluated theestimates recorded for the restructuring charge taken in 2002 for a workforcereduction and, as a result, reduced our accruals by  $882,000.  In addition, wehad an additional workforce reduction of fifty-four employees and, as a result,recorded a charge of $321,000 related to retention and severance costsconsisting of salaries, wages, and other direct costs.  In 

 

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accordance with Statements of Financial AccountingStandard No. 146 (SFAS146), “Accounting for Cost Associated with Exit orDisposal Activities,” we accrued for these costs, beginning at the time of anemployee’s notification through his or her termination date.  We anticipate completing this reorganizationplan by the Fourth Quarter of 2003.  Thenet impact during the Second Quarter was a credit to our Condensed ConsolidatedStatements of Income of $561,000.

 

In the Fourth Quarters of 2002, 2001, 2000, and 1999,we recorded restructuring charges of $17.6 million, $10.4 million, $8.6million, and $13.7 million, respectively. Of these charges, $3.2 million, $4.4 million, $1.7 million and $3.8million related to a workforce reduction of approximately 229, 900, 200 and 600employees for the years 2002, 2001, 2000 and 1999, respectively.  In 2002, we also had a change in estimate of$251,000 in connection with workforce reduction, which resulted in a networkforce restructuring charge of $2.9 million.  Cash expenditures for the six months ended June 30, 2003 relatedto workforce reductions were $1.5 million.

 

We also performed a review of our business strategyand concluded that consolidating some of our branch offices was key to our success.  As a result of this review, ourrestructuring charges included $12.1 million in 2002, $4.0 million in 2001,$3.5 million in 2000, and $5.1 million in 1999 for branch office closings andcertain other expenditures.  Inconjunction with the review during the Fourth Quarter of 2002, we alsoperformed a review of accrual balances for properties restructured in prioryears.  As a result, we determined thatthe cost to consolidate and/or close certain non-profitable offices would behigher than the original estimate.  Thechange in estimates resulted in a net charge to our restructuring liability of$756,000 and $1.2 million in 2002 and 2001, respectively.  The resulting net charge in 2002 and 2001was $12.9 million and $5.1 million, respectively.  Cash expenditures for the six months ended June 30, 2003 relatedto branch office closures and other expenditures were $4.8 million.

 

On November 30, 2001, we completed the acquisition ofMetro Information Services, Inc. (Metro). At the date of acquisition, we entered into a plan to exit certainactivities and consolidate facilities. As a result, we recorded a restructuring liability of $11.0 million in2001 related to the lease obligations and certain other costs for theconsolidated facilities.  During 2002, thevaluation of the liability assumed for the restructured facilities and forother matters unresolved at the time of the acquisition was adjusted, resultingin an increase of $3.1 million.  OnMarch 15, 2002, we acquired SignalTree Solutions.  At the date of acquisition, we entered into a plan to exitcertain activities and consolidate facilities. As a result, we recorded a restructuring liability of $1.6 millionrelated to the lease obligations and certain other costs for the consolidatedfacilities.  In accordance with EITF95-3, “Recognition of Liabilities in Connection with a Purchase BusinessCombination,” these costs have been reflected in the purchase price of theacquisition.

 

The activity for the six months ended June 30, 2003associated with restructuring charges is as follows:

 
|                                               |   | **January 1,  2003 Balance** |   | **Cash  Expenditures** |    | **Change in  Estimate** |   | **Charges in  Fiscal 2003** |   | **June 30, 2003  Balance** |   |
|----------------------------------------------------|--------|------------------------------|--------|------------------------|---------|-------------------------|--------|-----------------------------|--------|----------------------------|--------|
| **Branch  office closures and other expenditures** |   |                         |   |                   |    |                    |   |                        |   |                       |   |
| 1999                                               |   | $                            | 623    |                   | $       | (261                    | )      | $                           | — |                       | $      | — |   | $ | 362 |   |
| 2000                                               |   | 760                          |   | (265                   | )       | —                  |   | —                      |   | 495                        |   |
| 2001                                               |   | 6,615                        |   | (2,035                 | )       | —                  |   | —                      |   | 4,580                      |   |
| 2002                                               |   | 14,952                       |   | (2,222                 | )       | —                  |   | —                      |   | 12,730                     |   |
|                                               |   | 22,950                       |   | (4,783                 | )  | —                  |   | —                      |   | 18,167                     |   |
| **2002  Workforce reduction**                      |   | 3,285                        |   | (1,485                 | )       | (882                    | )      |                        |   | 918                        |   |
| **2003  Workforce reduction**                      |   | —                       |   | —                 |    | —                  |   | 321                         |   | 321                        |   |
| **Total  Restructuring Balance**                   |   | $                            | 26,235 |                   | $       | (6,268                  | )      | $                           | (882   | )                          | $      | 321 |   | $ | 19,406 |   |

 

The restructuring balance is included in currentaccrued restructuring costs and accrued long-term restructuring costs in thecondensed consolidated balance sheets.

 

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**Note G.****        Segment Information**

Based on qualitative and quantitative criteriaestablished by Statement of Financial Accounting Standards No. 131 (SFAS 131),“Disclosures about Segments of an Enterprise and Related Information,” weoperate within one reportable segment: *ProfessionalServices.* In this segment,we offer an integrated mix of end-to-end business solutions, such as BusinessConsulting (Plan), Application Development and Integration (Build), and ApplicationDevelopment and Management Outsourcing (Manage).

 

In accordance with the enterprise wide disclosurerequirements of SFAS 131, our geographic information is as follows:

 
|                     |   | **For the  Three Months  Ended June 30,** |    | **For the  Six Months  Ended June 30** |   |
|--------------------------|--------|-------------------------------------------|---------|----------------------------------------|--------|
|                     |   | **2003**                                  |    | **2002**                               |   | **2003** |   | **2002** |   |
| Revenues:                |   |                                      |    |                                   |   |   |   |   |   |
| Domestic                 |   | $                                         | 198,777 |                                   | $      | 207,561 |   | $ | 397,749 |   | $ | 419,124 |   |
| International            |   | 4,734                                     |    | 18,501                                 |   | 10,424 |   | 28,197 |   |
| Total Revenues           |   | $                                         | 203,511 |                                   | $      | 226,062 |   | $ | 408,173 |   | $ | 447,321 |   |
|                     |   |                                      |    |                                   |   |   |   |   |   |
| Long-lived  Assets:      |   |                                      |    |                                   |   |   |   |   |   |
| Domestic                 |   |                                      |    |                                   |   | $ | 409,542 |   | $ | 390,831 |   |
| International            |   |                                      |    |                                   |   | 26,000 |   | 28,700 |   |
| Deferred Tax  Assets     |   |                                      |    |                                   |   | 15,008 |   | 27,155 |   |
| Total Long-lived  Assets |   |                                      |    |                                   |   | $ | 450,550 |   | $ | 446,686 |   |

 

No single customer provides revenues that equal orexceed 10 percent of our consolidated revenues.

 

**Note H.****        Convertible SubordinatedDebentures**

In June 2003, we issued in a private placement $150.0million principal amount of 2.0% Convertible Subordinated Debentures due 2013(Debentures).  The Debentures are unsecuredand subordinated in right of payment to all of our senior indebtedness.  The Debentures accrue regular interest at arate of 2.0% per year.  Interest ispayable semi-annually in arrears on June 15 and December 15 of each year,beginning December 15, 2003.  Beginningwith the six-month interest period commencing June 15, 2008, we will payadditional contingent interest during any six-month interest period if thetrading price of the Debentures for each of the five trading days immediatelypreceding the first day of the interest period equals or exceeds 120% of theprincipal amount of the Debentures. 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 proceeding the first dayof the applicable six-month interest period and will be payable in arrears.

 

On or after June 15, 2008, we may, by providing atleast 30 day notice to the holders, redeem any of the Debentures at aredemption price equal to 100% of the principal amount of the Debentures, plusaccrued interest and unpaid interest, if any, and liquidated damages, if any,to, but excluding, the redemption date.

 

The Debentures are convertible at the option of theholder into shares of our common stock at an initial conversion rate of 54.4989share per $1,000 principal amount of Debentures, which is equivalent to aninitial 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 quarter commencingafter September 30, 2003, and only during such fiscal quarter, if the closingsale price of our common stock exceeds 120% of the conversion price(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 consecutive tradingday period in which the trading price per $1,000 principal amount of Debenturesfor each day of that period was less that 98% of the product of the closingsale price of our common stock and the number of shares issuable uponconversion of $1,000 principal amount of the Debentures; (c) if the Debentureshave been called for redemption; or  (d)upon the occurrence of specified corporate transactions.

 

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Debt issuance costs were approximately $4.5 millionand are included in other assets in the accompanying condensed consolidatedbalance sheets.  These costs are beingamortized over five years to interest expense on a straight-line basis.  The unamortized debt issuance costs were$4.4 million as of June 30, 2003.

 

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

Our principal executive office is located at 100 CitySquare in Boston, Massachusetts (the “New Facility”).  We lease the New Facility from Gateway Developers LLC (“GatewayLLC”) as described below.  We leaseadditional office space and apartments in more than seventy locations in NorthAmerica, the United Kingdom, and India under operating leases and capitalleases, some of which may be renewed for periods up to five years, subject toincreased rental fees.

 

In October 2001, we entered into a lease with GatewayLLC for a term of twelve years, pursuant to which we agreed to leaseapproximately 95,000 square feet of office and development space.  We lease approximately 57% of the NewFacility and the remaining 43% is, or will be, occupied by other tenants.  John Keane Family LLC is a member ofGateway LLC.  The members of John KeaneFamily LLC are trusts for the benefit of John F. Keane, Chairman of the Boardof the Company, and his immediate family members.

 

On October 31, 2001, Gateway LLC entered into a $39.4million construction loan with Citizens Bank of Massachusetts (the “GatewayLoan”) in connection with the New Facility and an adjacent building located at20 City Square, Boston, Massachusetts. John Keane Family LLC and John F. Keane are each liable for certainobligations under the Gateway Loan if and to the extent Gateway LLC requiresfunds to comply with its obligations under the Gateway Loan.  Stephen D. Steinour, a director of theCompany, is Chief Executive Officer of Citizens Bank of Pennsylvania.  Citizens Bank of Massachusetts and Citizens Bankof Pennsylvania are subsidiaries of Citizens Financial Group, Inc.  Mr. Steinour was not involved in theapproval process for the Gateway Loan.

 

We began occupying the New Facility and making leasepayments in March 2003.  Based upon ourknowledge of lease payments for comparable facilities in the Boston area, webelieve that the lease payments under the lease for the New Facility, whichwill be approximately $3.2 million per year ($33.00 per square foot for thefirst 75,000 square feet and $35.00 per square foot for the remainder of thepremises) for the first six years of the lease term and approximately $3.5million per year ($36.00 per square foot for the first 75,000 square feet and$40.00 per square foot for the remainder of the premises) for the remainder ofthe lease term, plus specified percentages of any annual increases in realestate taxes and operating expenses, were, at the time we entered into thelease, as favorable to us as those which could have been obtained from anindependent third party.

 

In view of these related party transactions, weconcluded that, during the construction phase of the New Facility, theestimated construction in progress costs for the New Facility would becapitalized in accordance with EITF No. 97-10, “The Effect of LesseeInvolvement in Asset Construction.”  Acredit in the same amount was included in the caption “Accruedconstruction-in-progress costs.”  Forpurposes of the consolidated statement of cash flows, we characterized thistreatment as a non-cash financing activity.

 

As a result of the completion of the constructionphase and our current occupancy, the related capitalized costs are nowclassified as “Building” in the accompanying balance sheets.  A credit for the same amount appears asaccrued building costs into both our short and long-term components.  The costs of the building are beingamortized on a straight-line basis over a 39-year useful life.  Additionally, the obligation will be reducedover the life of the lease at an interest rate of 8.67%.  The net effect of the amortization that isincluded in the operating results approximates the rent expense resulting fromthe contractual payments we are required to make under the lease.

 

In February 1985, we entered into a lease, whichsubsequently was extended to a term of 20 years, with City Square LimitedPartnership (“City Square”), pursuant to which we leased approximately 34,000square feet of office and development space in a building located at Ten CitySquare, in Boston, Massachusetts.  Wenow lease approximately 88% of this building and the remaining 12% is leased byother tenants.  John F. Keane, Chairmanof the Board of the Company, and Philip J. Harkins, a director of the Company,are limited partners of City Square. Based upon our knowledge of lease payments for 

 

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comparable facilities in the Boston area, we believethat the lease payments under this lease, which will be approximately $0.8million per year ($25.00 per square foot) for the remainder of the leaseterm  (until February 2006), plusspecified percentages of any annual increases in real estate taxes andoperating expenses, were, at the time we entered into the lease, as favorableto us as those which could have been obtained from an independent third party.As a result of its occupancy of the New Facility (as described above), we arein the process of seeking a third party to sublease the space we occupied atTen City Square.

 

As a result of the vacancy at Ten City Square inDecember 2002, we reserved the remaining lease payments due to City Square forthe remainder of the lease term, resulting in a charge of approximately $3.9million in the Fourth Quarter of 2002 financial statements.

 

In January 2003, the Financial Accounting StandardsBoard issued Financial Interpretation No. 46 (FIN 46), “Consolidation of VariableInterest Entities,” which requires the consolidation of a variable interestentity, as defined, by its primary beneficiary.  Primary beneficiaries are those companies that are subject to amajority of the risk of loss or entitled to receive a majority of the entity’sresidual returns, or both.  Indetermining whether it is the primary beneficiary of a variable interestentity, an entity with a variable interest shall treat variable interests inthat same entity held by its related parties as its own interests.

 

We are currently evaluating whether or not City Squareand Gateway LLC are variable interest entities, as defined by FIN 46, and ifso, whether or not we are the primary beneficiary of these entities.

 

If we determine that City Square or Gateway LLC, orboth, are variable interest entities, we will be required to consolidate thefinancial position and results of operations of the entity or entities forwhich we determine we are the primary beneficiary.  Such consolidation will be required beginning July 1, 2003 andwill be reflected in our financial statements for the period ended September30, 2003.  If we conclude that we arenot required to consolidate either of these entities and that we are the primarybeneficiary, we will continue to account for our leases with City Square andGateway LLC in accordance with generally accepted accounting principles.  With respect to the Gateway LLC lease, if weconclude that we are not required to consolidate this entity, we will continueto amortize the asset and liability.

 

In March 2003, our Audit Committee approved a relatedparty transaction involving a director of Keane.  We have subcontracted with Guardent, Inc. (“Guardent”) for acustomer project.  Maria Cirino, adirector of Keane, is an executive officer, director, and shareholder ofGuardent.  The payments to Guardent arenot expected to exceed approximately $25,000. In addition, the Audit Committee permitted us to engage Guardent as asub-contractor for the purposes of providing future services to Keane’scustomers.  No payment to Guardent for asingle engagement may exceed $75,000 and no payment to Guardent for allengagements in any calendar year may exceed $250,000.  As of June 30, 2003, we made payments of approximately $143,000to Guardent.

 

In April 2003, our Audit Committee approved anadditional related party transaction involving a director of Keane.  We sub-contracted with ArcStream, Inc(“ArcStream”) for two customer projects. John F. Keane, Jr., a director of Keane, is Chief Executive Officer,director, and founder of ArcStream, Inc. John 

 

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F. Keane, Jr. is the son of John F. Keane, Sr., ourChairman of the Board of Directors, and the brother of Brian T. Keane, ourPresident, Chief Executive Officer and a director.  The payments to ArcStream related to these projects were notexpected to exceed $50,000 at that time. In addition, the Audit Committee permitted us to engage ArcStream as asub-contractor for the purposes of providing future services to ourcustomers.  No payments to ArcStream fora single engagement may exceed $75,000 and no payments to ArcStream for allengagements in any calendar year may exceed $250,000.  On July 23, 2003, our Audit Committee amended its previous approvalsrelating to ArcStream.  The payments toArcStream related to the two customer projects previously approved, not toexceed $50,000, have now been approved not to exceed $250,000.  In addition, the Board of Directors gave usapproval to engage ArcStream for future engagements such that no payments toArcStream for a single engagement may exceed $100,000 and no payments toArcStream for all engagements in any calendar year may exceed $500,000.  As of June 30, 2003, we made payments ofapproximately $34,000 to ArcStream.

 

We are a guarantor with respect to a line of creditfor Innovate EC, an entity in which we acquired a minority equity position as aresult of a previous acquisition.  Thetotal line of credit is for $600,000. We guarantee $300,000 of this obligation.  The line is subject to review by the lending institution.  We would be required to meet our guarantorobligation in the event the lending institution refuses to extend the creditfacility and Innovate EC is unable to satisfy its obligation.

 

During the First Quarter of 2003, we paid $895,000related to certain earn out considerations in connection with an acquisitionmade during the Third Quarter of 2002.** **Future earn-outs are based onspecific net revenue targets.  Paymentsfor achieving these goals will range from $1.0 to $2.0 million in futureperiods, not to exceed $3.0 million.  Wealso recorded, in the Third Quarter of 2002, $3.0 million as deferred revenuerelated to contingent service credits and issued a $3.0 million non-interestbearing note payable as partial consideration. During the six months ended June 30, 2003, we recognized revenue of$416,000 in relation to the contingent service credits and reduced each of therelated deferred revenue and note by $208,000. The note has a one-year term with a possible one-year extension based onadditional contingent service credits.

 

In April 1998, First Command (formerly United ServicesPlanning Association, Inc.) and Independent Research Agency for Life Insurance,Inc. filed a complaint in the District Court for Tarrant County, Texas (CivilAction No. 96-173235-98), against us and two of our employees alleging that wemisrepresented our ability to complete a project contracted for by theplaintiffs and concealed from the plaintiffs material facts related to thestatus of the project.  The parties arecurrently engaged in discovery. The case is scheduled to go to trial in Octoberof 2003.  The plaintiffs seek monetaryrelief.  We believe that we have ameritorious defense to the plaintiff’s complaint and intend to contest theclaims vigorously. However, we are presently unable to assess the likelyoutcome of the matter.

 

During the First Quarter of 2003, we received a $7.3million award in connection with an arbitration proceeding initiated by us in2000 against Signal Corporation for a breach of an agreement between SignalCorporation and our Federal Systems subsidiary.

 

We are involved in other litigation and various legalmatters, which have arisen in the ordinary course of business.  We do not believe that the ultimateresolution of these matters will have a material adverse effect on ourfinancial condition, results of operations, or cash flows.  We believe that legal claims against us arewithout merit and intend to defend these matters vigorously.

 

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**Keane, Inc. and SubsidiariesItem 2.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

This Report contains forward-looking statements within the meaning of Section21E of the Securities Exchange Act of 1934, as amended, and Section 27A of theSecurities Act of 1933, as amended.  Forpurposes of these Acts, any statement that is not a statement of historicalfact may be deemed a forward-looking statement.  For example, statements containing the words “believes,”“anticipates,” “plans,” “expects,” and similar expressions may beforward-looking statements.  We cautioninvestors not to place undue reliance on any forward-looking statements in thisReport.  We undertake no obligation topublicly update any forward-looking statements, whether as a result of newinformation, future events or otherwise. There are a number of factors that could cause our actual results todiffer materially from those indicated by these forward-looking statements,including without limitation, the factors set forth below under the caption“Certain Factors That May Affect Future Results”.  These factors and the other cautionary statements made in thisquarterly report should be read as being applicable to all relatedforward-looking statements wherever they appear in this quarterly report.  If one or more of these factors materialize,or if any underlying assumptions prove incorrect, our actual results,performance, or achievements may vary materially from any future results,performance or achievements expressed or implied by these forward-lookingstatements.

 

**RESULTSOF OPERATIONS**

 

**2003COMPARED TO 2002**

 

**REVENUES(in thousands, except percentages)**

 
|   |   | **Three Months Ended June 30,** |    | **Six Months Ended June 30,** |   |
|--------|--------|---------------------------------|---------|-------------------------------|--------|
|   |   | **2003**                        |    | **%**                         |   | **2002** |   | **%** |   | **2003** |   | **%** |   | **2002** |   | **%** |   |
|   |   |                            |    |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Plan   |   | $                               | 13,065  |                          | 6      |   | $ | 15,339 |   | 7 |   | $ | 26,593 |   | 6 |   | $ | 33,824 |   | 8 |   |
| Build  |   | 50,191                          |    | 25                            |   | 55,713 |   | 25 |   | 100,313 |   | 25 |   | 111,624 |   | 25 |   |
| Manage |   | 140,255                         |    | 69                            |   | 155,010 |   | 68 |   | 281,267 |   | 69 |   | 301,873 |   | 67 |   |
|   |   |                            |    |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  |   | $                               | 203,511 |                          | 100    | % | $ | 226,062 |   | 100 | % | $ | 408,173 |   | 100 | % | $ | 447,321 |   | 100 | % |

 

Total revenues for the Second Quarter endedJune 30, 2003 were $203.5 million compared to revenues of $204.7 million fromthe quarter ended March 31, 2003.  Ourrelatively flat revenue performance on a sequential basis is the result ofincreasing stability in demand forIT services in North America.  Total revenues for the quarter ended June 30,2003 decreased $22.6 million, or 10%, compared to the Second Quarter of2002.  Total revenues for the first sixmonths of 2003 were $408.2 million, a decrease of $39.1 million, or 8.8%, overthe same period in 2002.  The decreasein total revenues year over year was primarily the result of clients continuingto defer discretionary technology-related expenditures as a result of economicuncertainty.

 

Although we have seen increasing stability forthe demand of our services, we have not yet seen indications of a broad-basedand sustainable trend for increases in discretionary IT spending.  As a result, we anticipate continuedsoftness in our Application Development and Integration (AD&I) business,which represents a majority of the Build sector, and in the Plan sector, untilgeneral economic conditions improve and customers once again begin fundingtechnology projects.

 

*Plan*.  Plan service revenues for the quarter ended June 30, 2003 were$13.1 million, a decrease of $463,000, or 3.4%, compared to the quarter endedMarch 31, 2003.  Plan service revenuesfor the quarter ended June 30, 2003 decreased $2.3 million, or 14.8%, and forthe first six months of 2003 decreased $7.2 million, or 21.4%, over the sameperiods in 2002.  Plan revenue is comprisedprimarily of business consulting services, including our ApplicationsRationalization Service, delivered by Keane Consulting Group, our businessconsulting arm.  Additional IT-focusedconsulting services within Plan are sold and delivered out of our network ofbranch offices.  The decrease in Planrevenues on a year over year basis was primarily the result of the deferral ofconsulting projects and a decrease in billing rates caused by general economicconditions.

 

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*Build*.  Build service revenues for the quarter ended June 30, 2003 were$50.2 million, an increase of $100,000, compared to the quarter ended March 31,2003, reflecting our belief that the marketplace for AD&I services,although still challenging, is becoming more stable.  Build service revenues for the quarter ended June 30, 2003decreased $5.5 million, or 9.9%, and for the first six months of 2003 decreased$11.3 million, or 10.1% over the same periods in 2002.  Build revenues, which consist primarily ofthe AD&I business, were adversely affected during the first six months of2003 by customers’ deferral of software development projects due to thereduction in capital spending related to technology.  The products and services sold within the less cyclicalhealthcare and public sector vertical markets have remained consistent yearover year and have helped to stabilize build service revenue.

 

*Manage*.  Manage service revenues for the quarter ended June 30, 2003 were$140.3 million, a decrease of $757,000, or 0.5% compared to the quarter endedMarch 31, 2003.  Manage service revenuesfor the quarter ended June 30, 2003 decreased $14.8 million, or 9.5%, and forthe first six months of 2003 decreased $20.6 million, or 6.8%, over the sameperiods in 2002.  The decrease in Manageservice revenues was due to lower revenues associated with staff augmentationand other services, offset in part by an increase in Application Outsourcingrevenues.

 

Manage services consist primarily of Applications Outsourcing services,together with Staff Augmentation and other Maintenance and Migrationservices.  Generally, under ApplicationsOutsourcing agreements, we receive a fixed monthly fee in return for meeting orexceeding a contractually agreed upon service level.  Applications Outsourcing agreements generally do not require anycapital outlay from us.  Outsourcingrevenue and expenses are recognized on a monthly basis consistent with theservice provided by us to our customers. We do not employ percentage-of-completion accounting on our outsourcingagreements.

 

Within our Applications Outsourcing business, we carefully monitor andreport what we designate as large, long-term strategic Application Outsourcingengagements.  These deals representoutsourcing contracts that have been signed since January of 2000, with aminimum contract value of $5.0 million in revenue.  We believe that these engagements are representative of the typeof Applications Outsourcing business that forms the core element of our growthstrategy.  During the Second Quarter of2003, these long-term strategic Applications Outsourcing engagements generated$57.6 million in revenue, a 15.7% increase from $49.8 million in revenue fromthese engagements in the Second Quarter of 2002.

 

**Salaries, wages, and otherdirect costs**

Salaries, wages and other direct costs for thequarter ended June 30, 2003 decreased $24.0 million, or 14.8%, and for thefirst six months of 2003 decreased $39.4 million, or 12.3%, over the sameperiods in 2002.  The decrease was primarilyattributable to ongoing efforts to bring our costs in alignment withanticipated revenue through workforce reductions and increased offshorestaffing, primarily at our India facilities. During the Second Quarter of 2003 we recorded a charge of $321,000related to retention and severance costs and also recorded a credit of $704,000as the result of a re-evaluation of our 2002 workforce reduction charge.  Salaries, wages, and other direct costs were$137.9 million, or 67.7%, of total revenue, for the quarter ended June 30, 2003and $280.3 million, or 68.7%, of total revenue for the first six months of 2003compared to $161.9 million, or 71.6%, of total revenue and $319.7 million, or71.5% of total revenue, respectively, for the same periods in 2002.  Salaries, wages, and other direct costs alsodecreased 3.2% on a sequential basis from $142.4 million in the quarter endedMarch 31, 2003.

 

Total billable employees for all operations were 5,819 as of June 30,2003, compared to 5,925 total billable employees as of March 31, 2003 and 6,426as of June 30, 2002.  In addition tothese employees, we occasionally use sub-contract personnel to augment ourbillable staff.  The sequential decreasewas the result of bringing personnel resources, which account for the vastmajority of our direct costs, in alignment with our current and expectedrevenue stream.  The base of billableemployees within our India operation was 623 as of June 30, 2003, an increaseof 123 employees or 24.6%, over the quarter ended March 31, 2003 and anincrease of 325 employees, or 109.1%, over the quarter ended June 30,2002.  We added our India operation inMarch 2002 with our acquisition of SignalTree Solutions.

 

**Gross margin**

Management believes gross margin *(revenueless salaries, wages, and other direct costs)* provides an importantmeasure of our profitability.  Grossmargin for the quarter ended June 30, 2003 increased $1.5 million, or 2.3%, andfor the first six months of 2003 increased $282,000, or 0.2%, over the sameperiods in 2002.  Gross margin as apercentage of revenue for the quarter ended June 30, 2003 was 32.3%, and forthe first six months of 2003 was 31.3% compared to 28.4% and 28.5%, respectively, for the same periods in2002.  Gross margin as a percentage ofrevenue also improved on a sequential basis from 30.4% in the quarter endedMarch 31, 2003.  The increase ingross 

 

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margin both year over year and sequentially as a percentage of revenuewas largely the result of a more stable environment for IT services andimproved utilization related to our base of billable personnel in NorthAmerica.  Also contributing to theimprovement in the gross margin percentage was our lower labor cost due toincreased use of offshore resources at our India facilities.  We closely monitor utilization rates andother direct costs in an effort to avoid adverse impacts to our gross margin.

 

**Selling, General & Administrative**

Selling, General & Administrative (SG&A) expenses for thequarter ended June 30, 2003 decreased $876,000, or 1.7%, and for the first sixmonths of 2003 decreased $5.1 million, or 4.9%, over the same periods in2002.  SG&A expenses for the quarterended June 30, 2003 were $50.1 million, or 24.6%, of total revenue, and for thefirst six months of 2003 were $98.2 million, or 24.1%, of total revenue ascompared to $51.0 million, or 22.6%, of total revenue and $103.3 million, or23.1%, of total revenue, respectively, for same periods in 2002.  The decrease in SG&A expenses was attributableto cost synergies obtained from the acquisition of Metro as well as ourcontinuing focus on tightly controlling discretionary expenses.  During the Second Quarter of 2003, werecorded a credit of $178,000 as a result of a re-evaluation of the 2002 workforcereduction charge taken in the Fourth Quarter of 2002.

 

**Amortization of intangible assets**

Amortization of intangible assets for the quarter ended June 30, 2003was $4.0 million, a decrease of 5.1%, and for the first six months of 2003 was$8.1 million, an increase of 6.9%, over the same periods in 2002.  The increase in amortization of intangibleassets for the first six months of 2003 was primarily due to additionalintangible assets resulting from the acquisitions****of SignalTree Solutions inMarch 2002 and one other acquisition complementary to our business strategymade during the Third Quarter of 2002.

 

**Interest and dividend income**

Interest and dividend income for the quarter ended June 30, 2003 was$898,000 and for the first six months of 2003 was $1.2 million, compared to$510,000 and $1.5 million, respectively, for the same periods in 2002.  The decrease in interest and dividend incomefor the first six months was the result of lower average cash balances andmarketable securities as well as overall lower interest rates compared to thesame periods in 2002.  The lower averagecash balances and marketable securities was due to our use of cash to purchaseshares of our common stock, as well as for our use of cash for acquisitions inthe First Quarter of 2002.

 

**Interest expense**

Interest expensefor the quarter ended June 30, 2003 was $1.1 million and for the first sixmonths of 2003 was $1.1 million, compared to $72,000 and $139,000,respectively, for the same periods in 2002. The interest expense increase is primarily related to the accounting forour new corporate facility. The accounting for the facility as noted in Note I, requires us to incur interest expense, with a  corresponding reduction to SG&A.

 

**Other expenses (income)**

Other expenses were $259,000 for the quarter ended June 30, 2003compared to other expense of $125,000 in the same period of 2002.  For the first six months of 2003, otherincome was $6.9 million compared to $345,000 for the same period of 2002.  Other income during the first six months of2003 included a $7.3 million favorable judgment in an arbitration awardproceeding related to damages for breach of an agreement between SignalCorporation and our Federal Systems subsidiary.

 

**Income Taxes**

We generated income before taxes of $11.0 million for the SecondQuarter ended June 30, 2003 and $28.6 million for the first six months of 2003,compared to $9.2 million and $18.5 million, respectively, for the same periodsin 2002.  The provision for income taxesrepresents the amounts owed for federal, state, and foreign taxes.  Our effective tax rate was 40.0% for thequarters ended June 30, 2003 and 2002 and for the first six months in 2003 and2002.

 

**Net Income**

Net income increased to $6.6 million for the quarter ended June 30,2003 and $17.2 million for the first six months of 2003, compared to $5.5million and $11.1 million, respectively, for the same periods in 2002.  As compared to the quarter ended March 31,2003, net income decreased by 37.3%. The sequential decrease in net income was largely attributable to ourreceipt of a favorable judgement in an arbitration award proceeding ofapproximately $4.4 million after tax recorded in the quarter ended March 31,2003.

 

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**RECENTACCOUNTING PRONOUNCEMENTS**

In January2003, the Financial Accounting Standards Board (FASB) issued FinancialInterpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,”which requires the consolidation of a variable interest entity, as defined byits primary beneficiary.  Primary beneficiariesare those companies that are subject to a majority of the risk of loss orentitled to receive a majority of the entity’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.  TheInterpretation is effective prospectively for all variable interests obtainedsubsequent to December 31, 2002.  Forvariable interests existing prior to December 31, 2002, consolidation will berequired beginning July 1, 2003.  TheCompany is currently evaluating the impact of adopting the Interpretation, buthas not yet determined what effect, if any, the adoption of FIN 46 will have onthe Company's financial position or results of operations.

 

In April 2003,the FASB issued Statement of Financial Accounting Standards  No. 149 (SFAS 149), “Amendment of Statement133 on Derivative Instruments and Hedging Activities.”  SFAS 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under FASB Statement No. 133 (SFAS 133),“Accounting for Derivative Instruments and Hedging Activities.”  This statement is effective for contractsentered into or modified after June 30, 2003. Presently, we intend to adopt this statement prospectively and do notanticipate adoption of this statement to have a significant effect on ourconsolidated financial position or results of operations.

 

In November2002 and May 2003, the EITF reached a consensus on Issue 00-21, “RevenueArrangements with Multiple Deliverables”. EITF Issue 00-21 provides guidance and criteria for determining when amultiple deliverable arrangement contains more than one unit ofaccounting.  The guidance also addressesmethods of measuring and allocating arrangement consideration to separate unitsof accounting.  The guidance will beeffective for revenue arrangements entered into after June 15, 2003.  Presently, we intend to adopt this statementprospectively and do not anticipate a material impact to our financialcondition or results of operation as a result of adoption.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”.  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  This statementis effective for financial instruments entered into or modified after May 31,2003.  Presently, we intend to adoptthis statement prospectively and do not anticipate adoption of this statementto have a significant effect on our consolidated financial position or resultsof operations.

 

In May 2003,the EITF reached a consensus on Issue No. 01-08, “Determining Whether anArrangement Contains a Lease”.  EITFIssue No. 01-08 provides guidance on how to determine whether an arrangementcontains a lease that is within the scope of FASB Statement No. 13, “Accountingfor Leases”.  The guidance in Issue No.01-08 is based on whether the arrangement conveys to the purchaser (lessee) theright to use a specific asset.  TheIssue 01-08 will be effective for arrangements entered into or modified in thesecond quarter of fiscal 2004. Presently, we intend to adopt this statement prospectively and do notanticipate adoption of this statement to have a significant effect on ourconsolidated financial position or results of operations.

 

**LIQUIDITYAND CAPITAL RESOURCES**

We are focused on continuing to generate strong cash flow in order tofund potential mergers and acquisitions, stock repurchases, and build long-termshareholder value.  Our cash andinvestments at June 30, 2003, increased to $184.4 million from $54.4 million atMarch 31, 2003 and $68.3 million at December 31, 2002.  This increase was primarily due to theissuance of $150.0 million in convertible subordinated debentures in June2003.  We simultaneously investedapproximately $37.3 million of the proceeds from the sale in the repurchase of3 million shares of our common stock from authorizations approved by the Boardof Directors in October of 2002 and May of 2003.  Net proceeds after the repurchase of shares and debt issue costswere approximately $108.8 million.

 

Net cash provided by operating activities totaled $35.7 million for thesix months ended June 30, 2003, as compared to $8.4 million for the six monthsended June 30, 2002.  The increase innet cash provided by operating activities was driven in part by an improvementin working capital and a $7.3 million award that we received in the quarterended March 31, 2003 in connection with an arbitration proceeding initiated byus in 2000 against Signal Corporation for a breach of an agreement betweenSignal Corporation and our Federal Systems subsidiary.  Partially offsetting this increase isapproximately $6.3 million that we paid associated with previously reportedrestructuring charges.  Day SalesOutstanding (DSO) was 57 days as of June 30, 2003 as compared to 67 days as ofJune 30,

 

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2002.  We calculate DSO usingthe trailing three months total revenue divided by 91 days in a period to equaldaily revenue.  The average accountsreceivable balance for the three-month period is then divided by daily revenue.

 

Net cash used in investing activities was $14.0 million and $21.0million for the six months ended June 30, 2003 and 2002, respectively.  Net cash used in investing activities ineach of these periods was primarily the result of investments, acquisitions,and capital expenditures.  During thesix months ended June 30, 2003, we purchased investments of $13.3 million andsold $6.3 million in marketable securities. In addition, we spent $6.2 million on property and equipment along with$903,000 for payments related to prior years acquisitions.  In connection with an acquisition madeduring the Third Quarter of 2002, we may incur additional payments related toearn-out considerations that are based on achieving specific net revenuetargets.** **Payments for achieving these goals may range from $1.0 to$2.0 million in future periods.  We alsorecorded, in the Third Quarter of 2002, $3.0 million as deferred revenuerelated to contingent service credits and issued a $3.0 million non-interestbearing note payable as partial consideration. As of June 30, 2003, the deferred revenue and non-interest bearing notehad a balance of $2.8 million, respectively. The note has a one-year term with a possible one-year extension based onadditional contingent service credits.

 

Net cash provided by financing activities totaled $87.0 million for thefirst six months of 2003 compared to $951,000 for the first six months of2002.  The increase reflects $150.0million in proceeds from our issuance of convertible subordinated debentures,which was offset in part by our repurchase of 6,052,100 shares of our commonstock for approximately $60.9 million and approximately $3.9 million in debtissue costs.

 

In June 2003, we issued, in a private placement, $150.0 millionprincipal amount of 2.0% convertible subordinated debentures due June 15, 2013(Debentures).  The Debentures areunsecured and subordinated in right of payment to all of our seniorindebtedness.  The Debentures accrueregular interest at a rate of 2.0% per year. Interest is payable semi-annually in arrears on June 15 and December 15of each year beginning December 15, 2003. Beginning with the six-month interest period commencing June 15, 2008,we will pay additional contingent interest during any six-month interest periodif the trading price of the Debentures for each of the five trading daysimmediately preceding the first day of the interest period equals or exceeds120% of the principal amount of the Debentures.  During any interest period when contingent interest is payable,the contingent 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 proceeding the first dayof the applicable six-month interest period and will be payable in arrears.

 

On or after June 15, 2008, we may, by providing at least 30 day noticeto the holders, redeem any of the Debentures at a redemption price equal to100% of the principal amount of the Debentures, plus accrued interest andunpaid interest, if any, and liquidated damages, if any, to, but excluding, theredemption date.

 

The Debentures are convertible at the option of the holder into sharesof our common stock at an initial conversion rate of 54.4989 share per $1,000principal amount of Debentures, which is equivalent to an initial conversionprice of approximately $18.349 per share, subject to adjustments, prior to theclose of business on the final maturity date only under the followingcircumstances: (a) during any fiscal quarter commencing after September 30,2003, and only during such fiscal quarter, if the closing sale price of ourcommon stock exceeds 120% of the conversion price (approximately $22.019) forat least 20 trading days in the 30 consecutive trading day period ending on thelast trading day of the preceding fiscal quarter; (b) during the five businessdays after any five consecutive trading day period in which the trading priceper $1,000 principal amount of Debentures for each day of that period was lessthan 98% of the product of the closing sale price of our common stock and thenumber of shares issuable upon conversion of $1,000 principal amount of theDebentures; (c) if the Debentures have been called for redemption; or  (d) upon the occurrence of specifiedcorporate transactions.

 

On June 12, 2003, the Board of Directors authorized us to repurchase 3million shares of its common stock.  Theauthorization is in addition to the 3 million share repurchase authorizationthat the Board of Directors authorized on May 30, 2003 and in addition to the 5million share repurchase authorization we announced on October 25, 2002, whichexpires in October 2003.  Therepurchases may be made on the open market or in negotiated transactions, andthe timing and amount of shares purchased will be determined by our managementbased on its evaluation of market and economic conditions and otherfactors.  During the first six months of2003, we purchased (i) 3,676,400 shares of our common stock under the October2002 authorization for a total investment of $31.3 million at an average shareprice of $8.52 and (ii) 2,375,700 shares under the May 2003 authorization for atotal investment of $29.6 million at an average share price of $12.44.  There are 3,624,300 shares remaining to berepurchased, of which 624,300 shares remain from the May authorization and 3million shares remain from the June, 2003 authorization.  

 

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The authorizations expire in May 2004 and June 2004, respectively.  Between May 1999 and June 30, 2003, we haveinvested $223.9 million to repurchase 18.0 million shares of its common stockunder nine separate authorizations.

 

In February 2003, we entered into a new $50.0 million credit facilitywith two banks.  The credit facilityreplaces a previous  $10.0 milliondemand line of credit, which expired in July 2002.  The terms of the credit facility require us to maintain a maximumtotal funded debt and other financial ratios. On June 11, 2003, we and two of our banks amended certain provisions ofthe credit facility relating to financial covenants.  These covenants, which include total indebtedness and leverageratios are no more restrictive than those initially contained in the creditfacility.  As of June 30, 2003, we haveno debt outstanding under the credit facility. Based on our current operating plan, we believe that its cash and cashequivalents on hand, marketable securities, cash flows from operations, and ournew line of credit will be sufficient to meet our current capital requirementsfor at least the next twelve months.

 

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**IMPACTOF INFLATION AND CHANGING PRICES**

Inflationary increases in costs have not been material in recent yearsand, to the extent permitted by competitive pressures, are passed on to clientsthrough increased billing rates.  Ratescharged by us are based on the cost of labor and market conditions within theindustry.

 

**CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTS**

The following important factors, among others, could cause actualresults to differ materially from those indicated by forward-looking statementsmade in this Quarterly Report on Form 10-Q and presented elsewhere bymanagement from time to time.

 

**Our quarterly operating results have varied, and arelikely to continue to vary significantly. This may result in volatility in the market price of our common stock.**  We have experienced and expect to continueto experience fluctuations in our quarterly results.  Our gross margins vary based on a variety of factors includingemployee utilization rates and the number and type of services performed duringa particular period.  A variety offactors influence our revenue in a particular quarter, including:

 

•                                          generaleconomic conditions which may influence investment decisions or causedownsizing;

•                                          thenumber and requirements of client engagements;

•                                          employeeutilization rates;

•                                          changesin the rates we can charge clients for services;

•                                          acquisitions;and

•                                          otherfactors, many of which are beyond our control.

 

A significant portion of our expenses do not vary relative torevenue.  As a result, if revenue in aparticular quarter does not meet expectations, our operating results could bematerially adversely affected, which in turn may have a material adverse impacton the market price of our common stock. In addition, many of our engagements are terminable without clientpenalty.  An unanticipated terminationof a major project could result in an increase in underutilized employees and adecrease in revenue and profits.

 

**We have pursued, and intend to continue to pursue,strategic acquisitions.  Failure tosuccessfully integrate acquired businesses or assets may adversely affect ourfinancial performance.** In recent years, we have grown significantly through acquisitions.  From January 1, 1999 through June 30, 2003,we have completed eleven acquisitions. The aggregate merger and consideration costs of these acquisitionstotaled approximately $359.8 million. Our future growth may be based in part on selected acquisitions.  At any given time, we may be in variousstages of considering acquisition opportunities.  We can provide no assurances that we will be able to find andidentify desirable acquisition targets or that we will be successful inentering into a definitive agreement with any one target.  In addition, even if we reach a definitiveagreement with a target, there is no assurance that we will complete any futureacquisition.

 

We typically anticipate that each acquisition will bring benefits, suchas an increase in revenue.  Prior tocompleting an acquisition, however, it is difficult to determine if we canrealize these benefits.  Accordingly,there is a risk that an acquired company may not achieve an increase in revenueor other benefits for us.  In addition,an acquisition may result in unexpected costs, expenses, and liabilities.  Any of these events could have a materialadverse effect on our business, financial condition, and results of operations.

 

The process of integrating acquired companies into our existingbusiness might also result in unforeseen difficulties. Unforeseen operatingdifficulties may absorb significant management attention, which we mayotherwise devote to our existing business. 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 incuradditional debt and/or contingent liabilities. We may also issue equity securities in connection with acquisitions,which could have a dilutive effect on our earnings per share.  Any of these possibilities could have amaterial adverse effect on our business, financial condition, and result ofoperations.

 

**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 highly competitive.  The technology for custom software servicescan change rapidly.  The market is fragmented,and no company holds a dominant position. Consequently, our competition for client assignments and experiencedpersonnel varies 

 

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significantly from city to city and by the type of service provided.  Some of our competitors are larger and havegreater technical, financial, and marketing resources and greater namerecognition in the markets they serve than we do.  In addition, clients may elect to increase their internalinformation systems resources to satisfy their custom software development andintegration needs.

 

In the healthcare software systems market, we compete with somecompanies that are larger in the healthcare market and have greater financialresources than we do.  We believe thatsignificant competitive factors in the healthcare software systems marketinclude size and demonstrated ability to provide service to targeted healthcaremarkets.

 

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

 

**We conduct business in the United Kingdom, Canada, andIndia, which exposes us to a number of difficulties inherent in international activities.**  As a result of our acquisition of SignalTreeSolutions in March 2002, we now have two software development facilities inIndia.  Moreover, we have addedapproximately 620 technical professionals to our professinal servicesorganization in the region.  India iscurrently experiencing conflicts with Pakistan over the disputed territory ofKashmir as well as clashes between different religious groups within thecountry.  These conflicts, in additionto other unpredictable developments in the political, economic, and socialconditions in India, could eliminate or reduce the availability of thesedevelopment and professional services. If access to these services were to be unexpectedly eliminated orsignificantly reduced, 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.

 

If we fail to manage our geographically dispersed organization, we mayfail to meet or exceed our financial objectives and our revenues maydecline.  We perform developmentactivities in the United States, Canada, and in India, and have officesthroughout the United States, and in the United Kingdom, Canada, andIndia.  This geographic dispersion requiresus to devote substantial management resources that locally based competitors donot need to devote to their operations.

 

Our operations in the United Kingdom, Canada, and India are subject tocurrency exchange rate fluctuations, foreign exchange restrictions, changes intaxation, and other difficulties in managing operations overseas.  We may not be successful in managing ourinternational operations.

 

**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 of their engagementswith us on short notice.  If they do so,we may be unable to reassign our professionals to new engagements withoutdelay.  The cancellation or reduction inscope of an engagement could, therefore, reduce the utilization rate of ourprofessionals, which would have a negative impact on our business, financialcondition, and results of operations.

 

As a result of these and other factors, our past financial performanceshould not be relied on as an indication of future performance.  We believe that period-to-period comparisonsof our financial results are not necessarily meaningful and we expect that ourresults of operations may fluctuate from period to period in the future.

 

**Our growth could be limited if we are unable toattract and retain personnel in the information technology and businessconsulting industries.** We believe that our future success will depend in large part on our abilityto continue to attract and retain highly skilled technical and managementpersonnel.  The competition for suchpersonnel is intense.  We may notsucceed in attracting and retaining the personnel necessary to develop ourbusiness.  If we do not, our business,financial condition, and results of operations could be materially adverselyaffected.

 

**We are currently evaluating whetheror not certain entities from whom we lease property are variable interestentities, as defined by Financial Interpretation No. 46 (FIN 46)  and, if so, whether or not we are theprimary beneficiary of these entities, which would require us to consolidatethe financial position and results of operations of such entities.**InJanuary 2003, the Financial Accounting Standards Board  (FASB) issued FIN 46, “Consolidation ofVariable Interest Entities,” which requires the consolidation of a variableinterest entity, as defined, by its primary beneficiary.  Primary beneficiaries are those companiesthat are subject to a majority of the risk of loss or entitled to receive amajority of the entity’s residual returns, or both.  In determining whether it is the primary beneficiary of avariable interest entity, an entity with a variable****

 

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interest must treat variable interests in that sameentity held by its related parties as its own interests.  This consolidation is required beginningJuly 1, 2003.  If we determine thatGateway Developers LLC or City Square Limited Partnership, entities from whomwe lease property, or both, are variable interest entities, we will be requiredto consolidate the financial position and results of operation of the entitiesfor which we determine we are the primary beneficiary.

 

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**Item 3.**        Quantitativeand Qualitative Disclosure About Market 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 purchased options or entered into swaps or forward orfutures contracts.  Our primary marketrisk exposure is that of interest rate risk on our investments, which wouldaffect the carrying value of those investments.  Since January 1, 2001, the United States Federal Reserve Boardhas significantly decreased certain benchmark interest rates, which has led toa general decline in market interest rates. The decline in market interest rates has resulted in a significantdecline in our interest income. Additionally, we transact business in the United Kingdom, Canada, and Indiaand as such has exposure associated with movement in foreign currency exchangerates.

 

**Item 4.**           Controls andProcedures

 

a)  Evaluation of DisclosureControls and Procedures.  Ourmanagement, with the participation of our president and chief executive officerand senior vice president of finance and chief financial officer, evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003.  Based on this evaluation, our president andchief executive officer and senior vice president of finance and chieffinancial officer concluded that, as of June 30, 2003, our disclosure controlsand procedures were (1) designed to ensure that material information relatingto us, including our consolidated subsidiaries, is made known to our presidentand chief executive officer and senior vice president of finance and chieffinancial officer by others within these entities, particularly during theperiod in which this report was being prepared and (2) effective, in that theyprovide reasonable assurance that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms.

 

b)  Changes in InternalControls.  No change to our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) occurred during the fiscal quarter ended June 30, 2003that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**Keane, Inc. and SubsidiariesPart II****             OtherInformation**

 

**Item 2.****           Changes in Securitiesand Use of Proceeds**

On June 18, 2003, we issued $125 million principalamount of 2% Convertible Subordinated Debentures due 2013 (the“Debentures”).  An additional $25million principal amount of the Debentures were issued on June 23, 2003,pursuant to an option granted to the initial purchasers.  The Debentures were issued in a privateplacement to three institutional purchasers (the “Initial Purchasers”) inreliance on exemption from registration under Section 4(2) of the SecuritiesAct of 1933, as amended (the “Securities Act”) and the Debentures were offeredby the Initial Purchasers only in the United States to “qualified institutionalbuyers” (as defined in Rule 144A) in reliance on Rule 144A in transactionsexempt from the registration requirements of the Securities Act.

 

The Debentures are convertible at the option of theholder into shares of our common stock at an initial conversion rate of 54.4989share per $1,000 principal amount of Debentures, which is equivalent to aninitial 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 quarter commencingafter September 30, 2003, and only during such fiscal quarter, if the closingsale price of our common stock exceeds 120% of the conversion price(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 consecutive tradingday period in which the trading price per $1,000 principal amount of Debenturesfor each day of that period was less that 98% of the product of the closingsale price of our common stock and the number of shares issuable uponconversion of $1,000 principal amount of the Debentures; (c) if the Debentureshave been called for redemption; or  (d)upon the occurrence of specified corporate transactions.

 

Simultaneously with the sale of the Debentures, weinvested approximately $37.3 million of the proceeds from the sale in therepurchase of 3 million shares of our common stock from authorizations approvedby the Board of Directors in October of 2002 and May of 2003.  Net proceeds after the repurchase of sharesand debt issue costs were approximately $108.8 million, which will be used forgeneral corporate purposes.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

The following matters were submitted to a vote of thestockholders at our 2003 Annual Meeting of Stockholders held on May 28, 2003(the “Annual Meeting”): (1) electing three Class II directors for the ensuingthree years, and (2) ratifying and approving the selection by the Board ofDirectors of Ernst & Young LLP as our independent accountants for thecurrent year.  The number of shares ofcommon stock and Class B common stock outstanding and eligible to vote as ofthe record date of March 31, 2003 were 69,285,949 and 284,599,respectively.  Each of these matters wasapproved by the requisite vote of our stockholders.  Set forth below is the number of votes cast for, against orwithheld, as well as the number of abstentions and broker non-votes as to therespective matters, including a separate tabulation with respect to eachnominee for director:

 

**Proposal1: electing three Class II directors for the ensuing three years**

 
| **Nominees**           |   | **For**    |   | **Withheld** |   |
|------------------------|--------|------------|--------|--------------|--------|
| Philip J. Harkins      |   | 46,999,430 |   | 14,847,817   |   |
| Winston R. Hindle, Jr. |   | 59,094,530 |   | 2,752,717    |   |
| Brian T. Keane         |   | 60,713,050 |   | 1,134,197    |   |

 

**ProposalII: ratifying and approving the selection by the Board of Directors of Ernst& Young LLP as the Company’s independent accountants for the current year**

 
|   |   | **For**    |   | **Against** |   | **Abstain** |   |
|--------|--------|------------|--------|-------------|--------|-------------|--------|
|   |   | 59,489,752 |   | 2,317,230   |   | 40,265      |   |

 

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**Item6.****          ****Exhibits and Reports on Form 8-K**

(a)                                  Exhibits.

 

Exhibit 4.1 - Indenture,dated as of June 18, 2003, between the Registrant and Wachovia Bank, NationalAssociation, as trustee, for 2% Convertible Debentures due 2013, isincorporated herein by reference to Exhibit 4.1 to Registrant’s Current Reporton Form 8-K, filed on June 23, 2003.

 

Exhibit 4.2 –Registration Rights Agreement, dated as of June 18, 2003, by and among Keane,Inc., Morgan Stanley & Co. Incorporated, Wachovia Securities, LLC and FleetSecurities, Inc., is incorporated herein by reference to Exhibit 4.1 to theRegistrant’s Current Report on Form 8-K, filed on June 20, 2003.

 

Exhibit 31.1 -Certification by the Registrant’s President and Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 31.2 - Certificationby the Registrant’s Senior Vice President of Finance and Chief FinancialOfficer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32.1 -Certification by the Registrant’s President and Chief Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

Exhibit 32.2 -Certification by the Registrant’s Senior Vice President of Finance and ChiefFinancial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Reportson Form 8-K.

 

1.               On April 23, 2003,we furnished a Current Report on Form 8-K under Item 9, containing a copy ofour earnings release for the period ended March 31, 2003 (including financialstatements) pursuant to Item 12 (Results of Operation and Financial Condition).

 

2.               On June 12, 2003,we filed a Current Report on Form 8-K to report that we issued a press releaseannouncing our intention to offer $125 million (plus up to an additional $25 million)of Convertible Senior Debentures due 2013, through a Rule 144A offering toqualified institutional buyers and another press release announcing that ourBoard of Directors authorized us to repurchase an additional 3 million sharesof our common stock over the next 12 months.

 

3.               On June 12, 2003,we filed a Current Report on Form 8-K to report that we issued a press releaseannouncing our intention to offer $125 million (plus up to an additional $25million) of Convertible Senior Debentures due 2013, through a Rule 144Aoffering to qualified institutional buyers in order to correct a prior pressrelease issued by us that incorrectly identified the Debentures as “ConvertibleSenior Debentures due 2023” and another press release reaffirming the previouslystated guidance relating to our financial results for the quarter ending June30, 2003.

 

4.               On June 13, 2003,we filed a Current Report on Form 8-K to report that we issued a press release announcing that we had entered into anagreement to sell $125 million (plus an option to purchase an additional $25 million) of 2.0% Convertible SubordinatedDebentures due 2013 and we had agreed to purchase, concurrently with theoffering, approximately $37.3 million of our common stock sold short bypurchasers of the Debentures in negotiated transactions.

 

5.               On June 20, 2003,we filed a Current Report on Form 8-K to report a press release announcing thatwe had completed our sale of $125 million (plus an option to purchase an

 

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additional $25 million) of 2% Convertible SubordinatedDebentures due 2013 on June 18, 2003.

 

6.               On June 23, 2003,we filed a Current Report on Form 8-K to report a press release announcing thatwe had sold an additional $25 million of 2% Convertible Subordinated Debenturesdue 2013, pursuant to the exercise of an option we had granted to the initialpurchasers of $125 million aggregate principal amount of Debentures.

 

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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   | August 14, 2003 |   | /s/ Brian T. Keane |   |
|   |            |   | Brian T. Keane  President and Chief Executive Officer |
|   |            |   |   |   |
|   |            |   |   |   |
| Date   | August 14, 2003 |   | /s/ John J. Leahy |   |
|   |            |   | John J. Leahy  Senior Vice President of Finance and  Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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