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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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
incorporation or organization) (I.R.S. Employer 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)
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 REPORT(S), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES _X_ NO ___
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
AS OF APRIL 30, 2003, THERE WERE 119,824,711 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 25 pages.
THE BISYS GROUP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2003 and June
30, 2002 3
Condensed Consolidated Statement of Operations for the three and nine
months ended March 31, 2003 and 2002 4
Condensed Consolidated Statement of Cash Flows for the nine months
ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21
EXHIBIT INDEX 23
PART I
ITEM 1. FINANCIAL STATEMENTS
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
March 31, June 30,
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 91,856 $ 78,371
Accounts receivable, net 99,714 101,851
Insurance premiums and commissions receivable 150,683 95,146
Deferred tax asset 9,612 9,466
Other current assets 36,294 35,401
----------- -----------
Total current assets 388,159 320,235
Property and equipment, net 106,172 94,711
Goodwill 745,032 623,250
Intangible assets, net 204,797 159,391
Other assets 44,482 48,564
----------- -----------
Total assets $ 1,488,642 $ 1,246,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 198,000 $ 93,000
Accounts payable 16,187 16,492
Insurance premiums and commissions payable 53,542 --
Other current liabilities 142,698 125,012
----------- -----------
Total current liabilities 410,427 234,504
Long-term debt 300,000 300,000
Deferred tax liability 28,468 16,670
Other liabilities 3,839 12,359
----------- -----------
Total liabilities 742,734 563,533
----------- -----------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares authorized, 120,274,571 and
119,880,003 shares issued, respectively 2,405 2,398
Additional paid-in capital 378,056 370,854
Retained earnings 387,710 320,790
Notes receivable from stockholders (10,776) (10,776)
Treasury stock at cost, 498,060 shares (11,049) --
Employee benefit trust, 345,212 shares (5,692) --
Deferred compensation 5,768 --
Accumulated other comprehensive loss (514) (648)
----------- -----------
Total stockholders' equity 745,908 682,618
----------- -----------
Total liabilities and stockholders' equity $ 1,488,642 $ 1,246,151
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 244,776 $ 220,539 $ 705,232 $ 626,978
--------- --------- --------- ---------
Operating costs and expenses:
Service and operating 141,076 122,986 412,751 357,032
Selling, general and
administrative 43,892 37,612 131,071 118,255
Amortization of intangible assets 4,809 3,178 13,474 9,164
Restructuring charges -- -- 12,079 6,475
--------- --------- --------- ---------
Total operating costs and expenses 189,777 163,776 569,375 490,926
--------- --------- --------- ---------
Operating earnings 54,999 56,763 135,857 136,052
Interest income 270 711 1,178 3,203
Interest expense (4,475) (3,853) (13,428) (11,547)
--------- --------- --------- ---------
Income before income taxes 50,794 53,621 123,607 127,708
Income taxes 18,286 20,427 45,591 49,136
--------- --------- --------- ---------
Net income $ 32,508 $ 33,194 $ 78,016 $ 78,572
========= ========= ========= =========
Basic earnings per share $ 0.27 $ 0.28 $ 0.65 $ 0.66
========= ========= ========= =========
Diluted earnings per share $ 0.27 $ 0.27 $ 0.64 $ 0.64
========= ========= ========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
March 31,
---------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 78,016 $ 78,572
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring charge 12,079 6,475
Depreciation and amortization 36,223 29,249
Deferred income tax provision 3,499 10,168
Change in operating assets and liabilities, net of effects from acquisitions (11,305) (35,472)
--------- ---------
Net cash provided by operating activities 118,512 88,992
--------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (126,396) (172,142)
Purchase of intangible assets (23,925) (6,593)
Proceeds from dispositions, net of expenses paid -- (521)
Capital expenditures (33,821) (24,740)
Change in other investments (2,203) (4,419)
--------- ---------
Net cash used in investing activities (186,345) (208,415)
--------- ---------
Cash flows from financing activities:
Repayment of debt -- (578)
Proceeds from short-term borrowings 248,000 35,000
Repayment of short-term borrowings (143,000) --
Issuance of common stock 4,581 4,226
Proceeds from exercise of stock options 5,398 6,341
Repurchases of common stock (33,410) (2,684)
Other (251) --
--------- ---------
Net cash provided by financing activities 81,318 42,305
--------- ---------
Net increase (decrease) in cash and cash equivalents 13,485 (77,118)
Cash and cash equivalents at beginning of period 78,371 159,399
--------- ---------
Cash and cash equivalents at end of period $ 91,856 $ 82,281
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
THE BISYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The BISYS Group, Inc. and subsidiaries (the "Company") is a leading
provider of business process outsourcing solutions for the financial
services sector.
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
The BISYS Group, Inc. and its subsidiaries and have been prepared
consistent with the accounting policies reflected in the 2002 Annual
Report on Form 10-K filed with the Securities and Exchange Commission
and should be read in conjunction therewith. The condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management,
necessary to fairly state this information.
RECLASSIFICATION
Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 presentation.
INSURANCE PREMIUMS AND COMMISSIONS RECEIVABLE AND PAYABLE
The Company has separately reflected receivables and payables arising
from its insurance-related businesses on the accompanying condensed
consolidated balance sheet. The captions "insurance premiums and
commissions receivable" and "insurance premiums and commissions
payable" include insurance premiums and commissions arising from the
Company's property and casualty brokerage division and commissions
arising from the Company's life insurance brokerage division. In its
capacity as a property and casualty wholesale broker, the Company
collects premiums from other agents and brokers and, after deducting
its commissions, remits the premiums to the respective insurers.
Unremitted insurance premiums, included in cash and cash equivalents,
are held in a fiduciary capacity and approximated $24.2 million at
March 31, 2003. The period for which the Company holds such funds is
dependent upon the date the agent or broker remits the payment of the
premium to the Company and the date the Company is required to forward
such payment to the insurer.
STOCK-BASED COMPENSATION
The Company accounts for its stock option and restricted stock purchase
plans under the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees." No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The
following table presents the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123, "Accounting for Stock-Based Compensation."
6
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $32,508 $33,194 $78,016 $78,572
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (4,506) (6,439) (13,247) (19,106)
------- ------- ------- -------
Pro forma net income $28,002 $26,755 $64,769 $59,466
======= ======= ======= =======
Earnings per share:
Basic, as reported $ 0.27 $0.28 $ 0.65 $ 0.66
======= ======= ======= =======
Basic, pro forma $ 0.24 $0.23 $ 0.55 $ 0.51
======= ======= ======= =======
Diluted, as reported $ 0.27 $0.27 0.64 $ 0.64
======= ======= ======= =======
Diluted, pro forma $ 0.24 $0.22 $ 0.54 $ 0.49
======= ======= ======= =======
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB)
issued FAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure." FAS 148 amends FAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the
disclosure requirements of FAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company is currently evaluating
the possibility of changing its method of accounting for stock-based
employee compensation from the intrinsic value method to the fair value
based method in fiscal 2004.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on determining
whether a multi-deliverable revenue arrangement contains more than one
unit of accounting and, if so, how to measure and allocate the
arrangement consideration to the separate units of accounting. The
guidance in this issue is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is
currently evaluating the impact that this guidance may have on its
financial statements and plans to adopt EITF Issue No. 00-21 in fiscal
2004.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. The most significant
estimates are related to the allowance for doubtful accounts, goodwill
and intangible assets, restructuring charges, income taxes, and
contingencies.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates in the near term.
7
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 32,508 $ 33,194 $ 78,016 $ 78,572
Foreign currency translation adjustment (61) (80) 134 (1)
-------- -------- -------- --------
Total comprehensive income $ 32,447 $ 33,114 $ 78,150 $ 78,571
======== ======== ======== ========
4. EARNINGS PER SHARE
Basic and diluted EPS computations for the three and nine months ended
March 31, 2003 and 2002 are as follows (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Basic EPS
---------
Net income $ 32,508 $ 33,194 $ 78,016 $ 78,572
======== ======== ======== ========
Weighted average common shares
outstanding 119,565 118,945 119,501 118,224
======== ======== ======== ========
Basic earnings per share $ 0.27 $ 0.28 $ 0.65 $ 0.66
======== ======== ======== ========
Diluted EPS
-----------
Net income $ 32,508 $ 33,194 $ 78,016 $ 78,572
======== ======== ======== ========
Weighted average common shares
outstanding 119,565 118,945 119,501 118,224
Assumed conversion of common shares
issuable under stock option plans 1,206 5,226 2,127 5,202
-------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding 120,771 124,171 121,628 123,426
======== ======== ======== ========
Diluted earnings per share $ 0.27 $ 0.27 $ 0.64 $ 0.64
======== ======== ======== ========
The effect of the assumed conversion of the convertible subordinated
notes into common stock is not dilutive and therefore is excluded from
the computation of diluted earnings per share.
8
Certain stock options were not included in the computation of diluted
EPS because the options' exercise prices were greater than the average
market price of common shares during the period, as follows (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------- -----------------------------------
2003 2002 2003 2002
------------------------------------- -----------------------------------
Number of options excluded 8,267 157 5,858 553
Option price per share $16.00 to $35.30 $33.02 to $33.15 $21.25 to $35.30 $29.44 to $33.15
Average market price of common shares
for the period $15.84 $32.17 $19.36 $29.12
5. RESTRUCTURING CHARGES
During the first quarter of fiscal 2003, the Company recorded a pre-tax
restructuring charge of $12.1 million in connection with the
integration, consolidation and relocation of certain business
operations. The restructuring and integration activities are primarily
due to acquisitions consummated by the Company in fiscal 2002 and the
downsizing of certain areas in the investment, insurance, education and
check imaging businesses. The restructuring charge includes a provision
of $7.2 million for severance-related costs for approximately 300
employees and $4.9 million for facility closure and related costs.
A summary of the restructuring charge activity for the nine months
ended March 31, 2003 is as follows (in thousands):
Compensation- Facilities-
Related Related Total
------------- ----------- -----------
Establishment of initial restructuring charge $ 7,161 $ 4,918 $12,079
accrual
Payments 5,984 2,555 8,539
------- ------- -------
Balance at March 31, 2003 $ 1,177 $ 2,363 $ 3,540
======= ======= =======
It is anticipated that all severance-related amounts and a substantial
portion of the facility-related amounts will be expended by the end of
the current fiscal year.
6. INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS
At March 31, 2003, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- ------------ --------
Customer related $184,268 $(28,857) $155,411
Noncompete agreements 43,495 (10,492) 33,003
Other 22,070 (5,687) 16,383
-------- -------- --------
Total $249,833 $(45,036) $204,797
======== ======== ========
9
At June 30, 2002, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- ------------ --------
Customer related $129,740 $(19,846) $109,894
Noncompete agreements 39,132 (7,423) 31,709
Other 22,070 (4,282) 17,788
-------- -------- --------
Total $190,942 $(31,551) $159,391
======== ======== ========
All of the Company's acquired intangible assets are subject to
amortization. Amortization expense for acquired intangible assets was
$4.8 million and $13.5 million for the three and nine months ended
March 31, 2003 and $13.1 million for the year ended June 30, 2002.
Estimated annual amortization expense is $19.1 million in fiscal 2003,
$24.6 million in fiscal 2004, $24.0 million in fiscal 2005, $22.9
million in fiscal 2006, and $21.5 million in fiscal 2007.
GOODWILL
The changes in the carrying amount of goodwill by business segment for
the nine months ended March 31, 2003 are as follows (in thousands):
Investment Insurance and Information Total
Services Education Services Services
---------- ------------------ ----------- -----
Balance, July 1, 2002 $311,802 $276,058 $ 35,390 $623,250
Additions 817 120,965 -- 121,782
-------- -------- -------- --------
Balance, March 31, 2003 $312,619 $397,023 $ 35,390 $745,032
======== ======== ======== ========
7. BUSINESS COMBINATIONS
On March 11, 2003, the Company acquired Capital Synergies, Inc. in a
cash for assets transaction. Capital Synergies, Inc. is an insurance
brokerage firm specializing in the wholesale distribution of
traditional and variable life insurance, long-term care insurance and
annuities. Pro forma information has not been presented due to a lack
of materiality.
On March 14, 2003, the Company acquired all of the equity interests of
Tri-City Brokerage (Tri-City) in a cash for equity transaction,
approximating $80.5 million. Tri-City is a San Francisco-based
insurance brokerage firm specializing in the wholesale distribution of
commercial property and casualty insurance products. The acquisition of
Tri-City represents the Company's strategic entrance into the
commercial property and casualty insurance market. The excess purchase
price over the fair value of the net tangible assets acquired
approximates $80.5 million and was allocated to intangible assets and
goodwill based upon preliminary estimates of fair values. The Company
has engaged a valuation consultant to determine the values associated
with certain identifiable assets in connection with the purchase price
allocation. The Company does not believe that the final purchase price
allocation, which should be completed by the end of the current fiscal
year, will differ significantly from the preliminary purchase price
allocation. Tri-City's fair value of assets and liabilities, including
transaction costs, were as follows (in thousands):
Estimated fair value of assets acquired $150,428
Liabilities assumed 69,920
--------
Net cash paid $ 80,508
========
10
The following unaudited pro forma consolidated results of operations
has been prepared as if the acquisition of Tri-City had occurred at the
beginning of each period (in thousands, except per share data):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $253,660 $229,795 $734,127 $651,397
Net income $ 32,771 $ 33,806 $ 78,153 $ 77,854
Diluted earnings per share $ 0.27 $ 0.27 $ 0.64 $ 0.63
The operations of the acquired companies are included in the
consolidated financial statements since the dates of acquisition.
8. SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by business segment and for corporate operations for the three and nine
months ended March 31, 2003 and 2002. Restructuring charges are
excluded from the operating results of the segment for a better
understanding of the underlying performance of each segment.
(in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Operating revenue:
Investment Services $ 125,050 $ 112,060 $ 367,847 $ 325,143
Insurance and Education Services 63,761 57,072 178,290 156,072
Information Services 55,965 51,407 159,095 145,763
--------- --------- --------- ---------
Total operating revenue $ 244,776 $ 220,539 $ 705,232 $ 626,978
========= ========= ========= =========
Operating income (loss):
Investment Services $ 20,167 $ 20,029 $ 54,123 $ 52,954
Insurance and Education Services 24,154 26,770 67,561 66,285
Information Services 15,779 14,681 42,009 38,506
Corporate (5,101) (4,717) (15,757) (15,218)
--------- --------- --------- ---------
Total operating income $ 54,999 $ 56,763 $ 147,936 $ 142,527
========= ========= ========= =========
9. DEFERRED COMPENSATION
The Company has a deferred compensation plan (the "Plan") whereby
certain compensation earned by a participant can be deferred and placed
in an employee benefit trust, also known as a "rabbi trust." Under the
Plan, the participant may choose from several investment designations,
including shares of common stock of the Company. During the first
quarter of fiscal 2003, the Company amended the Plan to make all
participant deferrals that are designated in common stock of the
Company irrevocable and to require that all future distributions of
such designations be settled in shares of Company common stock.
Accordingly, the Company has applied the provisions of Emerging Issues
Task Force (EITF) 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and
Invested." The EITF requires that employer stock held by the rabbi
trust be classified as equity similar to the manner of accounting for
treasury stock. Additionally, the EITF requires that the portion of the
deferred compensation obligation that is required to be settled by the
delivery of shares of employer stock be classified in equity. At March
31, 2003, 345,212 shares, valued at $5.7 million, were held by the
employee benefit trust and presented in the accompanying consolidated
balance sheet as a contra-equity account. Additionally, $5.8 million
has been classified as equity in the accompanying consolidated balance
sheet and represents the deferred compensation obligation under the
Plan that is designated in shares of Company common stock. Under the
EITF, subsequent changes in the fair value of both the employer stock
held in the rabbi trust and the deferred compensation obligation,
representing amounts designated in shares of Company common stock, are
not recognized.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company provides outsourcing solutions to and through financial
organizations. The following table presents the percentage of revenues
represented by each item in the Company's condensed consolidated statement of
operations for the periods indicated:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues 100% 100% 100% 100%
---- ---- ---- ----
Operating costs and expenses:
Service and operating 57.6 55.8 58.5 56.9
Selling, general and administrative 17.9 17.1 18.6 18.9
Amortization of intangible assets 2.0 1.4 1.9 1.5
Restructuring charges -- -- 1.7 1.0
---- ---- ---- ----
Total operating costs and expenses 77.5 74.3 80.7 78.3
---- ---- ---- ----
Operating earnings 22.5 25.7 19.3 21.7
Interest income 0.1 0.3 0.2 0.5
Interest expense (1.8) (1.7) (1.9) (1.8)
---- ---- ---- ----
Income before income taxes 20.8 24.3 17.6 20.4
Income taxes 7.5 9.3 6.5 7.9
---- ---- ---- ----
Net income 13.3% 15.0% 11.1% 12.5%
==== ==== ==== ====
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 WITH THE THREE MONTHS ENDED
MARCH 31, 2002.
Revenues increased 11.0% from $220.5 million for the three months ended
March 31, 2002 to $244.8 million for the three months ended March 31,
2003. This growth was derived from sales to new clients, existing
client growth, cross sales to existing clients and revenues from
acquired businesses. Internal revenue growth approximated 2% for the
three months ended March 31, 2003 over the same period last year.
Service and operating expenses increased 14.7% from $123.0 million for
the three months ended March 31, 2002 to $141.1 million for the three
months ended March 31, 2003 and increased as a percentage of revenues
from 55.8% to 57.6%. The dollar increase resulted from additional costs
associated with greater revenues. The increase as a percentage of
revenues resulted from business acquisitions and changes in the mix of
the Company's business.
Selling, general and administrative expenses increased 16.7% from $37.6
million during the three months ended March 31, 2002 to $43.9 million
for the three months ended March 31, 2003 and increased as a percentage
of revenues from 17.1% to 17.9%. The dollar increase resulted from
additional costs associated with greater revenues.
Amortization of intangible assets increased $1.6 million for the three
months ended March 31, 2003 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses.
Interest income decreased $0.4 million for the three months ended March
31, 2003 over the same period last year due to lower interest rates and
reduced levels of interest-bearing assets.
Interest expense increased $0.6 million for the three months ended
March 31, 2003 over the same period last year primarily due to the
interest costs associated with a higher level of outstanding borrowings
under the Company's revolving credit facility.
The income tax provision of $18.3 million for the three months ended
March 31, 2003 decreased from $20.4 million for the three months ended
March 31, 2002 due to lower taxable income and lower effective tax
rate. The provision represents an effective tax rate of 36.0% and 38.1%
for the periods ended March 31, 2003 and 2002, respectively. The
reduced effective tax rate is primarily attributable to the impact of
lower tax rates in
12
foreign tax jurisdictions for recently acquired businesses and to
recently enacted tax law changes that caused the Company to lower its
estimate of the annual effective tax rate for fiscal 2003 from 37.5% to
37.0%.
Operating earnings, before amortization of intangibles, resulted in
margins of 24.4% and 27.2% for the three months ended March 31, 2003
and 2002, respectively. The margin decline was generally due to changes
in the mix of business, the overall economic downturn that adversely
impacted the Company's Investment Services segment, and the decline in
sales of high-end insurance products and securities-related educational
materials in the Insurance and Education Services segment.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2003 WITH THE NINE MONTHS ENDED
MARCH 31, 2002.
Revenues increased 12.5% from $627.0 million for the nine months ended
March 31, 2002 to $705.2 million for the nine months ended March 31,
2003. This growth was derived from sales to new clients, existing
client growth, cross sales to existing clients and revenues from
acquired businesses.
Service and operating expenses increased 15.6% from $357.0 million for
the nine months ended March 31, 2002 to $412.8 million for the nine
months ended March 31, 2003 and increased as a percentage of revenues
from 56.9% to 58.5%. The dollar increase resulted from additional costs
associated with greater revenues. The increase as a percentage of
revenues resulted from business acquisitions and changes in the mix of
the Company's business.
Selling, general and administrative expenses increased 10.8% from
$118.3 million during the nine months ended March 31, 2002 to $131.1
million for the nine months ended March 31, 2003 and decreased as a
percentage of revenues from 18.9% to 18.6%. The dollar increase
resulted from additional costs associated with greater revenues.
Amortization of intangible assets increased $4.3 million for the nine
months ended March 31, 2003 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses.
Interest income decreased $2.0 million for the nine months ended March
31, 2003 over the same period last year due to lower interest rates and
reduced levels of interest-bearing assets.
Interest expense increased $1.9 million for the nine months ended March
31, 2003 over the same period last year primarily due to the interest
costs associated with a higher level of outstanding borrowings under
the Company's revolving credit facility.
The income tax provision of $45.6 million for the nine months ended
March 31, 2003 decreased from $49.1 million for the nine months ended
March 31, 2002 due to lower taxable income and a lower effective tax
rate. The provision represents an effective tax rate of 36.9% and 38.5%
for the periods ended March 31, 2003 and 2002, respectively. The
reduced effective tax rate is primarily attributable to the impact of
lower tax rates in foreign tax jurisdictions for recently acquired
businesses and to recently enacted tax law changes that caused the
Company to lower its estimate of the annual effective tax rate for
fiscal 2003 from 37.5% to 37.0%.
Operating earnings, before amortization of intangibles and
restructuring charges, resulted in margins of 22.9% and 24.2% for the
nine months ended March 31, 2003 and 2002, respectively. The margin
decline was generally due to changes in the mix of business, the
overall economic downturn that adversely impacted the Company's
Investment Services segment, and the decline in sales of high-end
insurance products and securities-related educational materials in the
Insurance and Education Services segment.
The Company recorded pre-tax restructuring charges of $12.1 million and
$6.5 million during the nine months ended March 31, 2003 and 2002,
respectively. The restructuring charges relate to the integration,
consolidation and relocation of certain business operations, primarily
as a result of acquisition activity and the downsizing of certain areas
in the investment, insurance, education, and check imaging businesses
in fiscal 2003. The restructuring charge in the fiscal first quarter of
2003 includes a provision of $7.2 million for severance-related costs
for approximately 300 employees and $4.9 million for facility closure
and related costs. At March 31, 2003, the remaining accrual amounts to
$3.5 million and it is anticipated that all severance-related amounts
and a substantial portion of the facility-related amounts will be
expended by the end of the current fiscal year.
13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had cash and cash equivalents of $91.9
million and negative working capital of $22.3 million. At March 31,
2003, the Company had outstanding borrowings of $198.0 million against
its $300 million revolving credit facility. The credit facility bears
interest at LIBOR plus a margin of 0.65%, resulting in a weighted
average interest rate of 2.0% on all outstanding borrowings under the
facility at March 31, 2003. The facility is used to support the
Company's working capital requirements and fund the Company's future
acquisitions. The facility expires June 30, 2004.
The Company's strategy includes the acquisition of complementary
businesses financed by a combination of internally generated funds,
borrowings from the revolving credit facility, long-term debt and
common stock. The Company's policy is to retain earnings to support
future business opportunities, rather than to pay dividends. The
Company has historically used a significant portion of its cash flow
from operations to fund acquisitions and capital expenditures with any
remainder used to reduce outstanding borrowings under the credit
facility. The Company believes that its cash flow from operations
together with other available sources of funds will be adequate to meet
its funding requirements. In the event that the Company makes
significant future acquisitions, however, it may raise funds through
additional borrowings or the issuance of securities.
At March 31, 2003, the Company had $2.3 million outstanding in letters
of credit and $300 million of outstanding 4% convertible subordinated
notes due March 2006. The Company's debt ratio (total debt/total debt
plus equity) is 0.40 to 1.00 at March 31, 2003, and the Company's
maximum debt ratio may not exceed .50 to 1.00 under the terms of the
revolving credit facility, as amended.
Accounts receivable represented 46 and 50 days sales outstanding (DSO)
at March 31, 2003 and June 30, 2002, respectively, based on quarterly
revenues. The improvement in DSO is attributable to the Company's
ongoing efforts to actively pursue collection of aged receivables and
to establish billing and payment terms that are more favorable to the
Company. The calculation of DSO for accounts receivable excludes
insurance premiums and commissions receivable arising from the
Company's insurance-related businesses. DSO is less relevant for this
type of receivable because it includes premiums that are ultimately
remitted to the insurer and not recognized as revenue. Additionally,
certain life insurance commissions due from the insurance carriers have
customary collection terms of up to twelve months.
For the nine months ended March 31, 2003, operating activities provided
cash of $118.5 million. Investing activities used cash of $186.3
million, primarily for acquisition-related payments of $126.4 million,
capital expenditures of $33.8 million, and purchases of intangibles of
$23.9 million. Financing activities provided cash of $81.3 million,
primarily comprised of net proceeds from short-term borrowings of
$105.0 million, offset by repurchases of common stock of $33.4 million.
At its August 15, 2002 meeting, the Board of Directors authorized a new
stock buy-back program of up to $100 million to supersede and replace
the prior program effective upon completion of an amendment to the
Company's revolving credit facility modifying certain stock buy-back
provisions. The amendment to the credit facility became effective on
September 24, 2002. Through that date, the Company had purchased a
total of approximately 4.25 million shares of its common stock under
the prior stock buy-back program for $70.4 million. Between September
24, 2002 and March 31, 2003, the Company purchased an additional 0.3
million shares for $4.8 million under the new stock buy-back program.
Purchases have occurred and are expected to continue to occur from
time-to-time in the open market to offset the possible dilutive effect
of shares issued under employee benefit plans, for possible use in
future acquisitions, and for general and other corporate purposes.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by business segment and for corporate operations for the three and nine
months ended March 31, 2003 and 2002. Restructuring charges are
excluded from the operating results of the segment for a better
understanding of the underlying performance of each segment.
14
(in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Operating revenue:
Investment Services $ 125,050 $ 112,060 $ 367,847 $ 325,143
Insurance and Education Services 63,761 57,072 178,290 156,072
Information Services 55,965 51,407 159,095 145,763
--------- --------- --------- ---------
Total operating revenue $ 244,776 $ 220,539 $ 705,232 $ 626,978
========= ========= ========= =========
Operating income (loss):
Investment Services $ 20,167 $ 20,029 $ 54,123 $ 52,954
Insurance and Education Services 24,154 26,770 67,561 66,285
Information Services 15,779 14,681 42,009 38,506
Corporate (5,101) (4,717) (15,757) (15,218)
--------- --------- --------- ---------
Total operating income $ 54,999 $ 56,763 $ 147,936 $ 142,527
========= ========= ========= =========
Internal revenue growth (excluding acquisitions) for Investment
Services, Insurance and Education Services, and Information Services
approximated 2%, (6)%, and 9%, respectively, during the three months
ended March 31, 2003 over the same period last year. A substantial
portion of the Company's revenues are recurring in nature and are
derived from long-term customer contracts with terms that generally
average from three to five years. The Company believes the contractual
nature of its business and its historical contract renewal experience
generally provide a high level of stability and predictability to the
amount and timing of its recurring revenue stream. The Company's
internal revenue growth approximated 4% for the nine months ended March
31, 2003 over the same period last year. The Company expects to achieve
an overall annual internal growth rate of 3% to 5% in fiscal 2003 and
8% to 10% in fiscal 2004, subject to continuing stability and moderate
improvement in the capital markets. The annual internal growth rate, by
segment, in fiscal 2004 is expected to be approximately 5% to 9% for
Investment Services, 8% to 12% for Insurance and Education Services,
and 8% to 10% for Information Services. Factors that are expected to
contribute to the improved growth in the Investment Services and
Insurance and Education Services business segments include recently
signed new business in both segments and the anniversary of comparisons
to the strong sales of high-end insurance products that occurred in
fiscal 2002 in the Insurance Services division.
Revenue in the Investment Services business segment increased $13.0
million, or 11.6%, during the three months ended March 31, 2003, over
the same period last year. The revenue increase was due to recent
acquisitions and internal growth of approximately 2%. Operating income
in the Investment Services business segment increased $0.1 million, or
0.7%, during the fiscal third quarter. Operating margins were 16.1% and
17.9% for the three months ended March 31, 2003 and 2002, respectively.
The margin primarily decreased due to the adverse impact that the
overall market decline had on revenue derived from equity-based funds
under administration in the Fund Services division.
Revenue in the Insurance and Education Services business segment
increased $6.7 million, or 11.7%, during the three months ended March
31, 2003, over the same period last year. The revenue increase was due
to acquisitions offset by a decline in internal revenue of 6%. The
decrease in internal revenue was due to the decline in sales of
high-end products in the Insurance Services division and the adverse
impact of the overall economic downturn on sales of securities-related
educational materials in the Education Services division. Operating
income in the Insurance and Education Services business segment
decreased $2.6 million, or 9.8%, during the fiscal third quarter.
Operating margins were 37.9% and 46.9% for the three months ended March
31, 2003 and 2002, respectively. Margins decreased in the fiscal third
quarter primarily due to the same factors that resulted in the decline
in internal revenue.
Revenue in the Information Services business segment increased $4.6
million, or 8.9%, during the three months ended March 31, 2003, over
the same period last year. The revenue increase was due to sales to new
clients, existing client growth, and cross sales of ancillary products
and services to existing clients. Operating income in the Information
Services business segment increased $1.1 million, or 7.5%, during the
fiscal third quarter. Operating margins were 28.2% and 28.6% for the
three months ended March 31, 2003 and 2002, respectively.
15
Corporate operations represent charges for the Company's human
resources, legal, accounting and finance functions, and various other
unallocated overhead charges.
Assets by business segment and for corporate operations at March 31,
2003 and June 30, 2002 are presented below (in thousands):
March 31, June 30,
2003 2002
---------- ----------
Investment Services $ 597,182 $ 567,604
Insurance and Education Services 713,738 488,244
Information Services 136,882 133,444
Corporate 40,840 56,859
---------- ----------
Total assets $1,488,642 $1,246,151
========== ==========
Assets increased approximately 46% in the Insurance and Education
Services segment primarily as a result of the five acquisitions
consummated during the nine months ended March 31, 2003.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain
forward-looking statements that are based on management's current
expectations, estimates, forecasts and assumptions concerning future
events. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of management.
These statements are subject to numerous known and unknown risks,
uncertainties and assumptions that could cause actual events or results
to differ materially from those projected. Words such as "believes,"
"anticipates," "expects," "intends," "estimates, "projects," "plans,"
"targets," and variations of such words and similar expressions are
intended to identify such forward-looking statements. Except as
required under the federal securities laws and the rules and
regulations of the Securities and Exchange Commission (SEC), the
Company does not undertake any obligation to update or revise publicly
any forward-looking statements, whether as a result of new information,
future events, changes in assumptions or otherwise. Although the
Company believes that its plans, intentions, and expectations reflected
in or suggested by the forward-looking statements made in this report
are reasonable, there can be no assurance that such plans, intentions
or expectations will be achieved.
The risks, uncertainties and assumptions include: achieving planned
revenue growth in each of the Company's business units; renewal of
material contracts in the Company's business units consistent with past
experience; successful and timely integration of significant businesses
acquired by the Company and realization of anticipated synergies;
increasing price, products, and services competition by U.S. and
non-U.S. competitors, including new entrants; changes in U.S. and
non-U.S. governmental regulations; the timely implementation of the
Company's restructuring program and financial plans; general U.S. and
non-U.S. economic and political conditions, including the global
economic slowdown and interest rate and currency exchange rate
fluctuation; continuing development and maintenance of appropriate
business continuity plans for the Company's processing systems; absence
of consolidation among client financial institutions or other client
groups; timely conversion of new customer data to the Company's
platforms; attracting and retaining qualified key employees; no
material breach of security of any of the Company's systems; control of
costs and expenses; continued availability of financing, and financial
resources on the terms required to support the Company's future
business endeavors; the mix of products and services; compliance with
the covenants and restrictions of the Company's bank credit facility
and convertible subordinated notes indenture; and the outcome of
pending and future litigation and governmental or regulatory
proceedings.
These are representative of the risks, uncertainties and assumptions
that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and
market conditions and growth rates, and other future events.
16
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB)
issued FAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure." FAS 148 amends FAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the
disclosure requirements of FAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company is currently evaluating
the possibility of changing its method of accounting for stock-based
employee compensation from the intrinsic value method to the fair value
based method in fiscal 2004. The additional information required by FAS
148 has been included in footnote 1 to the condensed consolidated
financial statements.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on determining
whether a multi-deliverable revenue arrangement contains more than one
unit of accounting and, if so, how to measure and allocate the
arrangement consideration to the separate units of accounting. The
guidance in this issue is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is
currently evaluating the impact that this guidance may have on its
financial statements and plans to adopt EITF Issue No. 00-21 in fiscal
2004.
17
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports, filed
pursuant to the Securities Exchange Act of 1934, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the internal controls subsequent to the date the
Company completed its evaluation.
18
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 99 - Certifications Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
(B) REPORTS ON FORM 8-K
A current report on Form 8-K, dated April 8, 2003, was filed
with the Securities and Exchange Commission on April 8, 2003
(Item 7 and information required by Item 12 furnished under
Item 9 pursuant to SEC interim filing guidance dated March 27,
2003) to report on the announcement of updated earnings
guidance for the fiscal quarter ended March 31, 2003 and the
fiscal year ended June 30, 2003.
A current report on Form 8-K, dated April 22, 2003, was filed
with the Securities and Exchange Commission on April 22, 2003
(Item 7 and information required by Item 12 furnished under
Item 9 pursuant to SEC interim filing guidance dated March 27,
2003) to report on the announcement of the Company's financial
results for the fiscal quarter ended March 31, 2003.
19
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 the
undersigned, thereunto duly authorized.
THE BISYS GROUP, INC.
Date: May 13, 2003 By: /s/ Andrew C. Corbin
--------------- -------------------------------------
Andrew C. Corbin
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
20
CERTIFICATIONS
I, Dennis R. Sheehan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The BISYS Group,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ Dennis R. Sheehan
--------------------------------------
Dennis R. Sheehan
President and Chief Executive Officer
21
CERTIFICATIONS
I, Andrew C. Corbin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The BISYS Group,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ Andrew C. Corbin
---------------------------------
Andrew C. Corbin
Executive Vice President
and Chief Financial Officer
22
THE BISYS GROUP, INC.
EXHIBIT INDEX
Exhibit No. Page
(99) Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of Sarbanes-Oxley Act of 2002............................................24
23