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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission file number: 0-19922
THE BISYS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3532663
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(Address of principal executive offices) (Zip Code)
212-907-6000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $0.02 PAR VALUE
(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
State the aggregate market value of voting stock held by nonaffiliates
of the Registrant as of September 20, 2002: $2,174,857,173.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of September 20, 2002: 119,334,571 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Fiscal 2002
Annual Report to Shareholders incorporated by reference in Part II and IV
herein; Portions of the Registrant's Definitive Proxy Statement for its November
14, 2002 Annual Meeting of Stockholders incorporated by reference in Part III
herein.
THE BISYS GROUP, INC.
FORM 10-K
JUNE 30, 2002
PAGE
----
Part I
Item 1. Business................................................................... 1
Item 2. Properties................................................................. 13
Item 3. Legal Proceedings.......................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................ 14
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................................... 14
Item 6. Selected Financial Data.................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 15
Item 8. Financial Statements and Supplementary Data................................ 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................... 15
Part III
Item 10. Directors and Executive Officers of the Registrant......................... 15
Item 11. Executive Compensation..................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 15
Item 13. Certain Relationships and Related Transactions............................. 15
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................................... 15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference in this report
contain "forward-looking statements" within the meaning of the securities laws.
These forward-looking statements are subject to a number of risks and
uncertainties, many of which are beyond our control. All statements other than
statements of historical facts included or incorporated by reference in this
report, regarding our strategy, future operations, financial position, estimated
revenues, projected costs, prospects, plans and objectives of management are
forward-looking statements. When used in this report or incorporated by
reference herein, the words "will," "believe," "anticipate," "intend,"
"estimate," "expect," "project," "plan," "target" and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain such identifying words. All forward-looking
statements speak only as of the date of this report. We do not undertake any
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise. Although we believe
that our plans, intentions and expectations reflected in or suggested by the
forward-looking statements we make in this report and in documents incorporated
by reference herein are reasonable, we can give no assurance that such plans,
intentions or expectations will be achieved. Factors that could cause our
results to materially differ from our expectations include, but are not limited
to, those factors set forth in this report under Item 1 "Business - Risk
Factors." The cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
PART I
ITEM I. BUSINESS.
The BISYS(R) Group, Inc., together with its wholly owned subsidiaries,
supports more than 20,000 financial institutions and corporate clients with
products and services provided through three principal business groups: BISYS
Investment Services, BISYS Insurance and Education Services, and BISYS
Information Services. We distribute and administer more than 1,300 mutual fund
portfolios for approximately 110 clients; provide administration services to
approximately 600 hedge and private equity funds representing more than $64
billion in assets; provide retirement plan recordkeeping services to
approximately 15,000 companies in partnership with 36 of the nation's leading
bank and investment management companies, and support approximately 400,000
employers and four million IRA holders with ERISA plan documents and ancillary
services; provide insurance distribution solutions, professional certification
training and continuing education, and licensing-related products and services;
and provide information processing and check and document imaging solutions to
approximately 1,150 financial institutions nationwide.
We seek to be our clients' single source for our offered outsourcing
solutions and to improve their performance, profitability and competitive
position. We endeavor to expand the scope of our services through focused
account management, emphasizing services with recurring revenues and long-term
contracts. We increase our business base through (i) direct sales to new
clients, (ii) sales of additional products and services to existing clients, and
(iii) acquisitions of businesses that provide similar and/or complementary
outsourcing solutions to financial organizations and other customers.
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We were organized in August 1989 to acquire certain banking and thrift
data processing operations of Automatic Data Processing, Inc. ("ADP"). Our
initial business was established in 1966 by United Data Processing, Inc., the
predecessor of the banking and thrift information processing operations of ADP.
Together with our predecessors, we have been providing outsourcing solutions to
the financial services industry for more than 35 years. We are incorporated
under the laws of Delaware and have our principal executive offices at 90 Park
Avenue, New York, New York 10016 (telephone 212-907-6000).
Since our founding in 1989, we have completed more than 35 acquisitions as
part of our strategic growth plan. During the last fiscal year, we acquired the
following businesses:
October 2001 - Life Brokerage Corporation, now part of BISYS Insurance and
Education Services, a Florida-based insurance brokerage firm;
February 2002 - The Hanleigh Companies, now part of BISYS Insurance and
Education Services, a provider of distribution services for specialty life
and disability income insurance products;
March 2002 - Hemisphere Management Limited and affiliated companies
("Hemisphere"), now part of BISYS Investment Services, a provider of hedge
fund administration services;
May 2002 - Dalton Publications, L.L.C., now part of BISYS Insurance and
Education Services, a provider of education products, including curricula
for the Certified Financial Planners(TM) designation;
May 2002 - DML, now part of BISYS Investment Services, a provider of
private equity fund administration and accounting services; and
May 2002 - Harrison James, Inc., now part of BISYS Insurance and
Education Services, an insurance brokerage firm serving the Midwest and
Southwest.
COMPANY STRATEGY
Financial organizations today are challenged to compete more effectively,
improve productivity and maximize profits during periods of both economic growth
and decline. We provide viable alternatives for automating critical tasks and
functions, and provide specific expertise and experience to financial
organizations. Our outsourcing solutions deliver to our clients operational and
economic benefits as well as additional resources to generate incremental
revenues.
Our objectives are to increase our client base and to expand the services
we offer to them. We seek to be the premier, full-service outsourcing business
partner focused on enhancing our clients' growth, profits and performance. We
seek to build value for our shareholders by consistently increasing both
revenues and earnings per share, through a combination of organic growth from
existing clients, cross-sales to existing clients, sales to new clients and
strategic acquisitions. Five key principles have guided us since our formation
and continue to shape our strategy for growth:
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FOCUS ON CLIENT SERVICE. We seek to thoroughly understand the financial
services industry and proactively respond to its evolving support
requirements. Our industry-recognized customer service and levels of
customer satisfaction are based on decades of day-to-day experience,
sophisticated support tools, and a company-wide commitment to strengthen
every client relationship with unsurpassed service.
GROW INTERNALLY AND SELL AGGRESSIVELY. We seek to sell our business
solutions to new clients and cross-sell additional products and services
to our existing clients. We intend to continue to focus highly targeted
sales initiatives on growing markets, and introduce new business solutions
that will enable our clients to retain and attract customers and enter new
markets. We seek to grow and profit from our clients' growth and success.
LEVERAGE BUSINESS AND PRODUCT SYNERGIES. We seek to leverage the inherent
synergies among our business lines to capitalize on the opportunities
generated by the converging segments of the financial services industry.
We will continue to seek to acquire complementary firms capable of
enhancing our product lines, competitive positioning, client relationships
and shareholder value.
LEVERAGE TECHNOLOGICAL ADVANCEMENTS. We seek to enhance our outsourcing
platforms by integrating leading-edge products, services and technologies.
We will continue to seek to leverage the tremendous power of the Internet
to revolutionize how we support global clients and deliver products,
services and vital information.
OPTIMIZE HUMAN RESOURCES. We value the contribution of our employees who
represent critical technical and business disciplines in the financial
services industry. We depend on their collective experience and expertise
to sustain our industry leadership and growth.
We provide our products and services principally through three major
business groups: BISYS Investment Services, BISYS Insurance and Education
Services, and BISYS Information Services. These business groups are separately
managed strategic business units and are reported as operating segments. Certain
of the business segment information required to be included herein is
incorporated herein by reference to Note 15 of our consolidated financial
statements included in our 2002 Annual Report to Shareholders (the "Annual
Report") on pages 38 and 39. Portions of the Annual Report incorporated by
reference in this report are included in this report as Exhibit 13.
BISYS INVESTMENT SERVICES
Our Investment Services group provides a broad array of investment
services including mutual fund, alternative investment, and retirement plan
services.
We support approximately 110 domestic and offshore mutual fund clients,
representing more than 1,300 registered and non-registered funds, and
approximately $500 billion in assets. Our fund services include administration
and accounting, transfer agency and shareholder services, compliance and legal
support, and marketing and distribution solutions. Through our Financial
Research Corporation (FRC) subsidiary, we also provide specialized analytical
research and competitive intelligence that enable financial services firms to
proactively respond to the changes impacting investment products.
3
Following our acquisition of Hemisphere, we are a leading global hedge
fund administrator, supporting approximately 400 hedge funds, funds of hedge
funds, and other alternative investments, representing more than $50 billion in
assets. Our full-service hedge fund solution includes fund accounting and
valuation; investor and transfer agency services; director and corporate
secretarial services; and legal, compliance, and tax support.
Following our acquisition of DML, we are also a leading provider of
accounting, administration, consulting and tax services for private equity
funds, supporting approximately 200 funds with invested capital of more than $14
billion.
Through our relationships with 36 institutional clients, we support
approximately 15,000 small and mid-size retirement plans and their 1.2 million
eligible employees. Our comprehensive retirement plan solution includes
prototype plan design and maintenance, administration and recordkeeping, ERISA
documents and forms, reference resources, and customized marketing and sales
support. In addition, we provide a turnkey administration and recordkeeping
solution for owner-only Individual(k) plans. We also support approximately
400,000 employers and four million IRA holders with ERISA documents and
ancillary services, and train approximately 12,000 industry professionals
annually.
BISYS INSURANCE AND EDUCATION SERVICES
Our Insurance and Education Services group provides an overall solution
for insurance distribution, financial services education and licensing
automation.
We are the leading independent distributor of life insurance and provider
of the support services required to sell multiple lines of life-related
insurance and annuities. We distribute the products of more than 200 of the most
highly rated insurance companies through more than 100,000 career and
independent insurance agents and financial services professionals who sell
insurance. The insurance companies manufacture the insurance products and assume
the underwriting risk and full responsibility for the policy benefits, while
these agents and financial services professionals deal directly with consumers.
We support the entire sales process for term and fixed universal life, variable
life, long-term care, disability, and fixed and variable annuities with a
comprehensive suite of services, including agent contracting, sales support,
advanced case design, application processing, medical underwriting support,
commission reconciliation, and policy owner services. We also provide a robust
insurance administration system and advanced Internet-based capabilities,
designed to expedite the sales process.
We provide training solutions for insurance and investment professionals,
supporting compliance requirements at various stages of career development with
more than 250 pre-licensing, continuing education, and advanced designation
courses. Financial services professionals have enrolled in more than 300,000 of
our courses during the past year, which are delivered through traditional
instructor-led and self-study programs, or through technology-based alternatives
including computer- and Internet-based programs.
Our suite of integrated products and services automates the complex
insurance licensing and securities registration processes, and ensures
compliance with state and federal regulations. More than 800 insurance
companies, broker-dealers and banks utilize our integrated, Internet-enabled
products and services to automate and track the licensing process.
4
BISYS INFORMATION SERVICES
Our Information Services group supports banks with information processing
and imaging solutions, and insurance companies and corporate-sponsored cash
management programs with asset retention solutions.
Our enterprise-wide banking platform supports approximately 300 banks with
integrated core deposit and lending, ATM and debit card processing, Internet
banking, customer relationship management, information and decision systems, and
document imaging.
We provide a complete imaging platform, integrating check and document
imaging solutions. Our check imaging solution has been implemented by more than
1,150 organizations to convert paper-based checks into digital or "virtual"
checks and process them electronically. Our document imaging and archiving
capabilities enable financial institutions and other businesses to capture,
store and retrieve digital forms, applications, correspondence and faxes.
The American Bankers Association, through its Corporation for American
Banking subsidiary, endorses both our core information processing solution and
our check imaging platform on an exclusive basis as the recommended solutions
for community banks.
Our asset retention solutions leverage our traditional banking services to
provide an industry-leading suite of asset retention solutions, including
information and transaction processing, and call center services. These services
enable life and property/casualty insurance companies to establish ongoing
customer relationships with claimants and beneficiaries by offering personalized
checking accounts and online debit and stored value cards as alternatives to
lump sum payments. Our specialized back-office services also provide complete
program management for corporate-sponsored cash management accounts. We
currently enable more than 120 life and property/casualty insurance companies to
retain approximately $7 billion in assets and generate substantial incremental
annual earnings.
CONTRACTS
We provide services to our clients, for the most part, on the basis of
long-term contracts, wherever possible, that renew for successive terms unless
terminated by either party.
In our Investment Services group, contracts for distribution services to
mutual funds, as required by the Investment Company Act, provide that such
contracts may continue for a period longer than two years only if such
continuance is specifically approved at least annually by both a majority of the
disinterested directors and either the other members of the board of directors
or the holders of a majority of the outstanding shares of the fund. Our fee
structure for mutual fund and alternative investment services clients is, in
some cases, based on the average net asset value of the fund, subject to minimum
charges, and in some cases consists of or includes account-based fees and other
fixed charges. Our retirement services fee structure is generally based upon the
number of eligible participants in a plan subject to certain minimums, as well
as position-based fees based on assets held in the retirement plans we service
and transaction fees. Our retirement services documents and forms are sold on a
per unit or annual subscription basis, and our ERISA training and reference
services are provided on a fee-for-service basis.
In our Insurance and Education Services group, contracts with insurance
carriers supplying products for our customers provide for compensation based on
a percentage of
5
premiums paid and transaction charges, and are generally cancelable on less than
90 days notice at the discretion of either party. We also maintain long-term
contracts with the distribution arms of a number of insurance companies,
producer groups, broker-dealers and banks to provide insurance products and
services. Our insurance services fee structure is generally based on sharing
with our clients a percentage of commissions and/or profits we receive. Our
education services products are generally provided to customers on an "as
needed" basis pursuant to long-term programs.
In our Information Services group, our fee structure for banking solutions
and asset retention clients is based primarily on number of accounts, loans,
participants and/or transactions handled for each service, in some cases,
subject to minimum charges, plus additional charges or special options, services
and features. Our check imaging software is licensed subject to a one-time fee
with recurring maintenance fees.
Although contract terminations and non-renewals have an adverse effect on
recurring revenues, we believe that the contractual nature of our businesses,
combined with our historical renewal experience, provides a high level of
recurring revenues.
CLIENT BASE
Our clients are located in all 50 states and several international
locations, principally Western Europe, Bermuda and the Cayman Islands. We
provide outsourcing solutions to commercial banks, mutual savings institutions,
thrift organizations, mutual funds, hedge funds, private equity funds, insurance
companies, insurance producer groups, corporate clients and other financial
organizations including investment counselors and brokerage firms. Total revenue
from unaffiliated clients located outside the United States for fiscal 2000,
2001 and 2002, was approximately $20.5 million, $29.3 million and $36.5 million,
respectively.
DISASTER RECOVERY SYSTEMS
We have implemented business continuity and disaster recovery plans and
procedures for each of our businesses. The key restoration services include
off-site storage and rotation of critical files, availability of a third-party
"hot site" and telecommunications recovery capability. We routinely test our
disaster recovery and business continuity plans, in cooperation with, where
appropriate, our clients.
SALES, MARKETING AND CLIENT SUPPORT
We sell our services directly to potential clients. In addition, we
support insurance agents and companies, brokerage firms and other entities in
their endeavors to gain new clients. We have a number of sales offices located
throughout the United States.
We utilize an account executive staff that provides client account
management and support. In accordance with our strategy of providing a single
source solution to our clients, the account executive staff also markets and
sells additional products and services to existing clients and manages the
contract renewal process. Using centralized resources, we provide our direct
sales staff and account executives with marketplace data, presentation materials
and telemarketing data. We maintain client support personnel that are
responsible for day-to-day interaction with clients, and also market our
products and services to our existing clients.
6
COMPETITION
We believe that the markets for our products and services are highly
competitive. We believe that we remain competitive due to several factors,
including our overall company strategy and commitment, product quality,
reliability of service, a comprehensive and integrated product line, timely
introduction of new products and services, and competitive pricing. We believe
that, by virtue of our range of product and service offerings, and our overall
commitment to client service and relationships, we compete favorably in these
categories. In addition, we believe that we have a competitive advantage as a
result of our position as an independent vendor, rather than as a cooperative,
an affiliate of a financial institution, a hardware vendor or competitor to our
clients.
Our principal competitors are independent vendors of computer software and
services, in-house departments, affiliates of financial institutions or large
computer hardware manufacturers, processing centers owned and operated as user
cooperatives, insurance companies, third-party administration firms, mutual fund
companies and brokerage firms. We believe that no single competitor provides the
full range of products and services that we offer.
PROPRIETARY RIGHTS
We regard certain of our software as proprietary and rely upon trade
secret law, internal nondisclosure guidelines and contractual provisions in our
license, services and other agreements for protection. Other than one patent
relating to our check imaging system, we do not hold any registered patents or
registered copyrights on our software. We believe that legal protection of our
software is less significant than the knowledge and experience of our management
and personnel, and their ability to develop, enhance and market new products and
services. We believe that we hold all proprietary rights necessary to conduct
our business.
Application software similar to that licensed by us is generally available
from alternate vendors. In addition, in instances where we believe that
additional protection is required, the applicable license agreement provides us
with the right to obtain access to the software source code upon the occurrence
of certain events.
GOVERNMENT REGULATION
Certain of our subsidiaries are registered as broker-dealers with the
Securities and Exchange Commission ("SEC"). Much of the federal regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
the National Association of Securities Dealers, Inc. ("NASD") and the national
securities exchanges. Broker-dealers are subject to regulation which covers all
aspects of the securities business, including sales methods, trading practices,
use and safekeeping of customers' funds and securities, capital structure,
recordkeeping and the conduct of directors, officers and employees. Additional
legislation, changes in rules and regulations promulgated by the SEC, the
Municipal Securities Rulemaking Board, the Office of the Comptroller of the
Currency ("OCC"), the Federal Deposit Insurance Corporation ("FDIC"), the
Federal Reserve Board ("FRB") and the self-regulatory organizations or changes
in the interpretation of enforcement of existing laws, rules and regulations,
may also directly affect the mode of operations and profitability of
broker-dealers. The SEC, the FRB, the self-regulatory organizations, state
securities law administrators, the OCC and the FDIC may conduct regulatory
proceedings for violations of applicable laws, rules and regulations. Such
violations can result in disciplinary actions (such as censure, the imposition
of fines, the issuance of cease-and-desist
7
orders or the suspension or revocation of registrations, memberships or licenses
of a broker-dealer or its officers, directors or employees), as well as civil
and criminal penalties. The principal purpose of such regulations generally is
the protection of the investing public and the integrity of securities markets,
rather than protection of securities firms or their creditors or stockholders.
In addition, our broker-dealer subsidiaries are subject to SEC Rule 15c3-1
(commonly known as the "Net Capital Rule"). The Net Capital Rule, which
specifies the minimum amount of net capital required to be maintained by
broker-dealers, is designed to measure the general financial integrity and
liquidity of broker-dealers, and requires that a certain part of broker-dealers'
assets be kept in relatively liquid form. Failure to maintain the required
minimum amount of net capital may subject a broker-dealer to suspension or
revocation of licenses, registration or membership with the New York Stock
Exchange, Inc., the SEC, the NASD, and various state securities law
administrators, and may ultimately require liquidation of the broker-dealer.
Under certain circumstances, the Net Capital Rule also prohibits payment of cash
dividends, redemption or repurchase of stock, distribution of capital and
prepayment of subordinated indebtedness. Thus, compliance with the Net Capital
Rule could restrict our ability to withdraw capital from our broker-dealer
subsidiaries. At June 30, 2002, each of our broker-dealer subsidiaries met or
exceeded the requisite net capital requirement. At June 30, 2002, our
broker-dealer subsidiaries had aggregate net capital of approximately $14.7
million, which exceeded the requirements of the Net Capital Rule by
approximately $12.9 million.
Under the Investment Company Act of 1940, the distribution agreements
between each mutual fund and our subsidiary terminate automatically upon
assignment of the agreement. The term "assignment" includes direct assignments
by us, as well as assignments which may be deemed to occur, under certain
circumstances, upon the transfer, directly or indirectly, of a controlling block
of our voting securities. The Investment Company Act of 1940 presumes that any
transfer of more than 25% of the voting securities of any person represents a
transfer of a controlling block of voting securities.
Our offshore Fund Services and Alternative Investment Services operations
are regulated by financial regulatory bodies in their respective jurisdictions.
These operating platforms are examined periodically by such regulatory bodies
and failure to comply with their rules and regulations can result in
disciplinary actions (such as censure, the imposition of fines, the issuance of
cease-and-desist orders, or the suspension or revocation of registrations,
memberships or licenses of our offshore subsidiaries or its officers, directors
or employees), as well as civil and criminal penalties. The principal purpose of
such regulations generally is the protection of the investing public and the
integrity of securities markets, rather than protection of securities firms or
their creditors or stockholders.
As a provider of services to banking institutions, we are not directly
subject to federal or state banking regulations. However, we are subject to
review from time to time by the FDIC, the National Credit Union Association, the
Office of Thrift Supervision, the OCC and various state regulatory authorities.
These regulators make certain recommendations to us regarding various aspects of
our operations. In addition, our processing operations are reviewed annually by
an independent auditing firm.
Banks and other depository institutions doing business with us are subject
to extensive regulation at the federal and state levels under laws, regulations
and other requirements specifically applicable to regulated financial
institutions, and are subject to extensive
8
examination and oversight by federal and state regulatory agencies. As a result,
the activities of our bank clients are subject to comprehensive regulation and
examination, including those activities specifically relating to the sale by or
through them of mutual funds and other investment products. We are not presently
aware of any facts which would lead us to believe that any of our bank clients
are not in compliance with applicable federal and state laws, regulations and
other requirements concerning the administration and distribution of bank
managed mutual funds.
Federal regulatory agencies have promulgated guidelines or other
requirements which apply to depository institutions subject to their respective
supervisory jurisdiction with respect to the sale of mutual funds and other
non-FDIC insured investment products to retail customers. These requirements
apply to, among other things, sales of investment products on bank premises by
or through the use of third-party service providers. These requirements
generally require banking institutions which contract to sell investment
products through the use of third-party service providers to implement
appropriate measures to ensure that such activities are being conducted in
accordance with applicable bank and securities regulatory requirements
(including the agencies' retail sales guidelines), and may in some instances
impose certain "due diligence" obligations on regulated depository institutions
with respect to the nature and the quality of services provided by such
third-party service providers. Such regulatory requirements may increase the
extent of oversight which federal regulatory agencies may require our bank
clients to exercise over our activities.
Federal and state banking laws grant state and federal regulatory agencies
broad authority to take administrative enforcement and other adverse supervisory
actions against banks and other regulated depository institutions where there is
a determination that unsafe and unsound banking practices, violations of laws
and regulations, failures to comply with or breaches of written agreements,
commitments or undertakings entered into by such banks with their regulatory
agencies, or breaches of fiduciary and other duties exist. Banks engaged in,
among other things, mutual fund-related activities may be subject to such
regulatory enforcement and other adverse actions to the extent that such
activities are determined to be unlawful, unsound or otherwise actionable.
Certain of our operations are subject to regulation by the insurance
departments of the states in which we distribute insurance products. Certain of
our employees are required to be licensed as insurance producers in certain
states.
The Financial Services Modernization Act of 1999 and regulations
promulgated thereunder also impose restrictions on financial institutions with
respect to the use and disclosure of non-public consumer information. Some of
our businesses may be covered entities under the Act and therefore subject to
regulations governing privacy of non-public consumer information. In addition,
as a service provider to financial institutions, we are required by our
customers to safeguard non-public consumer information of their customers that
comes into our possession.
The recently adopted USA Patriot Act and regulations promulgated
thereunder impose certain additional requirements on our clients and certain of
our businesses to establish anti-money laundering programs. These programs are
required to include processes for verifying the identities of customers,
identifying suspicious transactions and reporting such transactions to the
appropriate governmental agency, and checking certain customer names against
published lists of terrorist organizations. Certain of these regulations are
currently effective with the remainder expected to become effective in October
2002.
9
EMPLOYEES
As of June 30, 2002, we employed approximately 4,800 employees. None of
our employees are represented by a union and there have been no work stoppages,
strikes or organization attempts. We believe that our relations with our
employees are good.
The service nature of our businesses makes our employees an important
corporate asset. Most of our employees are not subject to employment agreements;
however, a limited number of executives of our operating subsidiaries have such
agreements that were entered into in connection with the acquisition of their
businesses.
RISK FACTORS
OUR BUSINESS CAN BE SIGNIFICANTLY AFFECTED BY DIRECT AND INDIRECT GOVERNMENTAL
REGULATION, WHICH REDUCES OUR FLEXIBILITY AND INCREASES THE COSTS OF DOING
BUSINESS.
Our business is affected by federal, state and foreign regulations. Our
noncompliance with these regulations could result in the suspension or
revocation of our licenses or registrations, including broker-dealer licenses
and registrations, and insurance producer licenses and registrations. Regulatory
authorities could also impose on us civil fines and criminal penalties for
noncompliance.
Some of our subsidiaries are registered with the Securities Exchange
Commission as broker-dealers. Much of the federal regulation of broker-dealers
has been delegated to self-regulatory organizations, principally the National
Association of Securities Dealers, Inc. and the national securities exchange.
Broker-dealers are subject to regulations which cover all aspects of their
securities business, including, for example:
- sales methods;
- trading practices;
- use and safekeeping of customers' funds and securities;
- capital structure;
- recordkeeping; and
- the conduct of directors, officers and employees.
The operations of our broker-dealers and their profitability could be affected
by:
- federal and state legislation;
- changes in rules and regulations of the SEC, banking and other
regulatory agencies, and self-regulatory agencies; and
- changes in the interpretation or enforcement of existing laws, rules
and regulations.
Banks and other depository institutions with whom we do business are also
subject to extensive regulation at the federal and state levels under laws and
regulations applicable to regulated financial institutions. They are also
subject to extensive examination and oversight by federal and state regulatory
agencies. Changes in the laws, rules and regulations affecting our client banks
and financial institutions, and the examination of their activities by
applicable regulatory agencies could adversely affect our results of operations.
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Some of our subsidiaries, and officers and employees of these
subsidiaries, are required to be licensed as insurance producers in various
jurisdictions in which we conduct our insurance services business. They are
subject to regulation under the insurance laws and regulations of these
jurisdictions. Changes in the laws, rules and regulations affecting licensed
insurance producers could adversely affect our operations.
OUR REVENUES AND EARNINGS ARE SUBJECT TO CHANGES IN THE SECURITIES MARKETS.
A significant portion of our earnings are derived from fees based on the
average daily market value of the assets we administer for our clients. Changes
in interest rates or a substantial decline in the securities market could
influence an investor's decision whether to invest or maintain an investment in
a mutual fund. As a result, fluctuations could occur in the amount of assets
which we administer. If investors were to seek alternatives to mutual fund
investments, it could have a negative impact on our revenues by reducing the
amount of assets we administer.
CONSOLIDATION IN THE BANKING AND FINANCIAL SERVICES INDUSTRY COULD ADVERSELY
IMPACT OUR BUSINESS BY ELIMINATING THE NUMBER OF EXISTING AND POTENTIAL CLIENTS.
There has been and continues to be merger, acquisition and consolidation
activity in the banking and financial services industry. Mergers or
consolidations of banks and financial institutions in the future could reduce
the number of our clients or potential clients. A smaller market for our
services could have a material adverse impact on our business and results of
operations. Also, it is possible that the larger banks or financial institutions
which result from mergers or consolidations could decide to perform some or all
of the services themselves which we currently provide or could provide. If that
were to occur, it could have a material adverse impact on our business and our
results of operations.
OUR ACQUISITION STRATEGY SUBJECTS US TO RISKS, INCLUDING INCREASED DEBT,
ASSUMPTION OF UNFORESEEN LIABILITIES AND DIFFICULTIES IN INTEGRATING OPERATIONS.
In the past several years, we have acquired a number of other companies.
We may make additional acquisitions. We cannot predict if or when any additional
acquisitions will occur or whether they will be successful.
Acquiring a business involves many risks, including:
- incurrence of unforeseen obligations or liabilities;
- difficulty in integrating the acquired operations and personnel;
- difficulty in maintaining uniform controls, procedures and policies;
- possible impairment of relationships with employees and customers as
a result of the integration of new personnel;
- risk of entering markets in which we have minimal prior experience;
- decrease in earnings as a result of non-cash charges;
11
- dilution to existing stockholders from the issuance of our common
stock to make or finance acquisitions; and
- incurrence of debt.
OUR SYSTEMS MAY BE SUBJECT TO INFILTRATION BY UNAUTHORIZED PERSONS.
We maintain and process data on behalf of our clients, some of which is
critical to the business operations of our clients. For example, our Information
Services group maintains account information for our bank and insurance company
clients we service, and our Investment Services group maintains transfer agency
records and processes trades for our mutual fund clients. If our systems or
facilities were infiltrated and damaged by unauthorized persons, our clients
could experience data loss, financial loss and significant business
interruption. If that were to occur, it could have a material adverse effect on
our business, financial condition and results of operations.
WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES.
Many of our competitors are well-established companies, and some of them
have greater financial, technical and operating resources than we do.
Competition in our business is based primarily upon:
- pricing;
- quality of products and services;
- breadth of products and services;
- new product development; and
- the ability to provide technological solutions.
WE DEPEND ON KEY MANAGEMENT PERSONNEL, MOST OF WHOM DO NOT HAVE LONG-TERM
EMPLOYMENT AGREEMENTS.
Our success depends upon the continued services of our key senior
management personnel, including our executive officers and the senior managers
of our businesses. None of our executive officers have employment agreements
with us and substantially all of our other senior management personnel do not
have employment agreements with us. The loss or unavailability of these
individuals could have a material adverse effect on our business prospects.
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN SKILLED PERSONNEL.
Our success depends on our ability to attract and retain highly skilled
personnel in all areas of our business. We cannot assure that we will be able to
attract and retain personnel on acceptable terms in the future. Our inability to
attract and retain highly skilled personnel could have an adverse effect on our
business prospects.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never paid cash dividends to stockholders and do not anticipate
paying cash dividends in the foreseeable future. In addition, our existing
credit facility limits our ability to pay cash dividends.
12
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
The market price of our common stock has been volatile. From July 1, 2001
to September 26, 2002, the last sale price of our common stock ranged from a low
of $16.00 per share to a high of $35.90 per share.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
adversely affect the market price for our common stock. As of August 31, 2002,
we had 119,327,155 shares of common stock outstanding. As of August 31, 2002, we
also had options to purchase 13,887,026 shares of our common stock outstanding,
and 8,109,780 shares of our common stock reserved for issuance pursuant to
options available for issuance under our stock option plans and employee stock
purchase plan, and 8,983,740 shares of our common stock reserved for issuance
upon the conversion of our 4% Convertible Subordinated Notes due 2006.
ANTI-TAKEOVER EFFECTS OF CERTAIN BY-LAW PROVISIONS, DELAWARE LAW, AND OUR
SHAREHOLDER RIGHTS PLAN COULD DISCOURAGE, DELAY OR PREVENT A CHANGE IN CONTROL.
We have a shareholder rights plan. Under the plan, if a person or group
were to acquire or announce the intention to acquire 15% or more of our
outstanding shares of common stock, and in some cases 10%, each right would
entitle the holder, other than the acquiring person or group, to purchase shares
of our common stock at $175, the exercise price of the right, with a value of
twice the exercise price. This plan could have the effect of discouraging,
delaying or preventing persons from attempting to acquire us.
In addition, the Delaware General Corporation Law, to which we are
subject, prohibits, except under circumstances specified in the statute, a
corporation from engaging in any mergers, significant sales of stock or assets,
or business combinations with any stockholder or group of stockholders who own
at least 15% of our common stock.
ITEM 2. PROPERTIES.
All of our principal properties are leased. We maintain offices
throughout the United States and in the United Kingdom, Ireland, Guernsey,
Luxembourg and Bermuda. Our principal data centers and operating centers are
located in:
- Atlanta, Georgia (Insurance and Education Services);
- Lombard, Illinois (Information Services);
- Boston, Massachusetts (Investment Services);
- Brainerd, Minnesota (Investment Services);
- Cherry Hill, New Jersey (Information Services);
- New York, New York (Investment Services);
- Columbus, Ohio (Investment Services);
- Dresher, Pennsylvania (Investment Services);
- Harrisburg, Pennsylvania (Insurance and Education Services);
- Houston, Texas (Information Services);
13
- Salt Lake City, Utah (Insurance and Education Services);
- Hamilton, Bermuda (Investment Services);
- Guernsey, Channel Islands (Investment Services);
- Dublin, Ireland (Investment Services); and
- The Grand Duchy of Luxembourg (Investment Services).
Leases on our properties expire periodically during the next 15 years.
We own or lease central processors and associated peripheral equipment
used in our data processing operations and communications network, retirement
services business and electronic banking business.
We believe that our existing facilities and equipment, together with
expansion in the ordinary course of business, are adequate for our present and
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in litigation arising in the ordinary course of business.
We believe that we have adequate defenses and/or insurance coverage against
claims arising in such litigation and that the outcome of these proceedings,
individually or in the aggregate, will not have a material adverse effect upon
our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our security holders during the
fourth quarter of fiscal 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Certain of the information required by this Item 5 is incorporated herein
by reference to page 40 of our 2002 Annual Report under the heading "Market
Price Information" and Note 5 to our consolidated financial statements included
therein. We have not paid or declared any cash dividends during our most recent
two fiscal years. Portions of the Annual Report incorporated by reference in
this report are included in this report as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item 6 is incorporated herein by
reference to page 19 of the Annual Report, included in this report as Exhibit
13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this Item 7 is incorporated herein by
reference to pages 20 through 23 of the Annual Report, included in this report
as Exhibit 13.
14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not have material exposure to market risk from derivative or
non-derivative financial instruments. We do not utilize such instruments to
manage market risk exposures or for trading or speculative purposes. We do,
however, invest available cash and cash equivalents in highly liquid financial
instruments with original maturities of three months or less. As of June 30,
2002, we had approximately $78.4 million of cash and cash equivalents invested
in highly-liquid debt instruments purchased with original maturities of three
months or less, including $6.4 million of overnight repurchase agreements. We
believe that potential near-term losses in future earnings, fair values and cash
flows from reasonably possible near-term changes in the market rates for such
instruments are not material to us.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item 8 is incorporated herein by
reference to pages 24 through 39 of the Annual Report, included in this report
as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required by
Items 10 through 13 of this report is incorporated by reference from our
definitive proxy statement, which is expected to be filed with the SEC pursuant
to Regulation 14A within 120 days after the end of our fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Our consolidated financial statements as of June 30, 2002 and 2001, and
for each of the three years in the period ended June 30, 2002, together with the
report of PricewaterhouseCoopers LLP dated July 26, 2002, are incorporated
herein by reference to pages 24 through 39 of the Annual Report, included in
this report as Exhibit 13.
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted for the reason that they
are either not applicable or not required, or because the information required
is contained in the consolidated financial statements or notes thereto.
15
(a)(3) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of The BISYS
Group, Inc., as amended by Certificates of Amendment to Amended and
Restated Certificate of Incorporation of The BISYS Group, Inc.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2001.)
3.2* Amended and Restated By-Laws of The BISYS Group, Inc.
4.1 Rights Agreement, dated as of May 8, 1997 (the "Rights Agreement"),
by and between The BISYS Group, Inc. and The Bank of New York, as
Rights Agent (including the form of Rights Certificate as Exhibit
A). (Incorporated by reference to Exhibit 2.1 of Form 8-A filed on
May 8, 1997 with the SEC.)
4.2 Amendment to the Rights Agreement, dated as of August 15, 2002.
(Incorporated by reference to Exhibit 4.2 of Form 8-A/A filed on
September 26, 2002 with the SEC.)
4.3 Indenture, dated as of March 13, 2001, between The BISYS Group, Inc.
and Chase Manhattan Trust Company, National Association, as trustee
(Incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K dated March 15, 2001, Commission File No.
0-19922.)
10.1 Letter Agreement dated May 12, 1995 between the Registrant and Lynn
J. Mangum. (Incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995, Commission File No. 0-19922.)
10.2* Amended and Restated Deferred Compensation Plan, dated as of June
14, 2002.
10.3 Executive Life Insurance Plan (Incorporated by reference to Exhibit
10.3 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998, Commission File No. 0-19922.)
10.4 The BISYS Group, Inc. Executive Officer Annual Incentive Plan.
(Incorporated by reference to Exhibit C to Registrant's proxy
statement for its 1999 annual meeting of stockholders, Commission
File No. 0-19922.)
10.5 The BISYS Group, Inc. 1999 Equity Participation Plan. (Incorporated
by reference to Exhibit B to Registrant's proxy statement for its
1999 annual meeting of stockholders, Commission File No. 0-19922.)
10.6 BISYS 401(k) Savings Plan. (Incorporated by reference to Exhibit
10.7 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999, Commission File No. 0-19922.)
10.7 The BISYS Group, Inc. Non-Employee Directors' Stock Option Plan, as
amended (Incorporated by reference to Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998, Commission File No. 0-19922.)
10.8 Executive Loan Agreement (Incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, Commission File No. 0-19922.)
10.9 Credit Agreement (the "Credit Agreement") by and among The BISYS
Group, Inc., the Lenders party thereto, The Chase Manhattan Bank,
The First National Bank of Chicago, First Union National Bank and
Fleet Bank, National Association, as co-Agents, and The Bank of New
York, as Administrative Agent, with BNY Capital Markets, Inc., as
Arranger, dated as of June 30, 1999, without exhibits. (Incorporated
by reference to Exhibit 10.17 to the Registrant's
16
Annual Report on Form 10-K for the fiscal year ended June 30, 1999,
Commission File No. 0-19922.)
10.10 Amendment No. 1 to the Credit Agreement, dated as of September 28,
2000 (Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, Commission File No. 0-19922.)
10.11* Amendment No. 2 to the Credit Agreement, dated as of September 24,
2002.
13* Pages 19 - 40 of the Registrant's 2002 Annual Report to
Shareholders.
21* List of significant subsidiaries of The BISYS Group, Inc.
23* Consent of PricewaterhouseCoopers LLP.
* Filed herewith.
(b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The BISYS Group, Inc.
Date: September 27, 2002 By: /s/ Andrew C. Corbin
-----------------------
Andrew C. Corbin
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 27th day of September, 2002.
Signature Title
/s/ Lynn J. Mangum Director, Chairman of the Board, and Chief
- ----------------------------------- Executive Officer (Principal Executive Officer)
(Lynn J. Mangum)
/s/ Andrew C. Corbin Executive Vice President and Chief Financial Officer
- ----------------------------------- (Principal Financial and Accounting Officer)
(Andrew C. Corbin)
/s/ Denis A. Bovin Director
- -----------------------------------
(Denis A. Bovin)
/s/ Robert J. Casale Director
- -----------------------------------
(Robert J. Casale)
/s/ Thomas A. Cooper Director
- -----------------------------------
(Thomas A. Cooper)
/s/ Jay W. DeDapper Director
- -----------------------------------
(Jay W. DeDapper)
/s/ John J. Lyons Director
- -----------------------------------
(John J. Lyons)
/s/ Thomas E. McInerney Director
- -----------------------------------
(Thomas E. McInerney)
/s/ Joseph J. Melone Director
- -----------------------------------
(Joseph J. Melone)
18
CERTIFICATIONS
I, Lynn J. Mangum, certify that:
1. I have reviewed this annual report on Form 10-K of The BISYS Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Date: September 27, 2002
/s/ Lynn J. Mangum
----------------------------
Lynn J. Mangum
Chief Executive Officer
19
I, Andrew C. Corbin, certify that:
1. I have reviewed this annual report on Form 10-K of The BISYS Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Date: September 27, 2002
/s/ Andrew C. Corbin
-------------------------
Andrew C. Corbin
Executive Vice President and
Chief Financial Officer
20
INDEX TO EXHIBITS FILED HEREWITH
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.2 Amended and Restated By-Laws of The BISYS Group, Inc.
10.2 Amended and Restated Deferred Compensation Plan, dated as of June 14,
2002.
10.11 Amendment No. 2 to the Credit Agreement, dated as of September 24,
2002.
13 Pages 19 - 40 of the Registrant's 2002 Annual Report to Shareholders.
21 List of significant subsidiaries of The BISYS Group, Inc.
23 Consent of PricewaterhouseCoopers LLP.
21