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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 SEPTEMBER 30, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
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 OCTOBER 31, 2003, THERE WERE 118,197,631 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 27 pages.
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THE BISYS GROUP, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three months
ended September 30, 2003 and 2002 3
Condensed Consolidated Balance Sheets as of September 30, 2003 and
June 30, 2003 4
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 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 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
2
PART I
ITEM 1. FINANCIAL STATEMENTS
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
September 30,
----------------------
2003 2002
--------- ---------
Revenues $ 237,382 $ 227,344
--------- ---------
Operating costs and expenses:
Service and operating 152,512 135,549
Selling, general and 46,129 44,586
administrative
Amortization of intangible assets 5,806 4,272
Restructuring, impairment and
other charges 12,624 12,079
--------- ---------
Total operating costs and expenses 217,071 196,486
--------- ---------
Operating earnings 20,311 30,858
Interest income 325 373
Interest expense (4,664) (4,385)
--------- ---------
Income before income taxes 15,972 26,846
Income taxes 11,161 10,067
--------- ---------
Net income $ 4,811 $ 16,779
========= =========
Basic earnings per share $ 0.04 $ 0.14
========= =========
Diluted earnings per share $ 0.04 $ 0.14
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
September 30, June 30,
2003 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 76,475 $ 79,558
Restricted cash 23,745 26,603
Accounts receivable, net 94,532 96,237
Insurance premiums and commissions receivable 149,999 169,780
Deferred tax asset 13,655 13,655
Other current assets 31,813 34,806
----------- -----------
Total current assets 390,219 420,639
Property and equipment, net 106,642 107,152
Goodwill 750,537 749,227
Intangible assets, net 199,376 206,036
Other assets 40,517 43,839
----------- -----------
Total assets $ 1,487,291 $ 1,526,893
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 163,000 $ 172,000
Accounts payable 25,759 21,518
Insurance premiums and commissions payable 53,407 79,398
Other current liabilities 127,199 127,643
----------- -----------
Total current liabilities 369,365 400,559
Long-term debt 300,000 300,000
Deferred tax liability 40,785 37,247
Other liabilities 3,227 4,026
----------- -----------
Total liabilities 713,377 741,832
----------- -----------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares authorized, 120,743,385 and
120,274,571 shares issued 2,415 2,405
Additional paid-in capital 387,637 378,986
Retained earnings 420,212 417,533
Notes receivable from stockholders (10,776) (10,776)
Employee benefit trust, 369,207 and 344,207 shares (6,007) (5,676)
Deferred compensation 6,078 5,752
Unearned compensation - restricted stock (7,799) --
Accumulated other comprehensive loss (71) (340)
Treasury stock at cost, 1,141,056 and 141,118 shares (17,775) (2,823)
----------- -----------
Total stockholders' equity 773,914 785,061
----------- -----------
Total liabilities and stockholders' equity $ 1,487,291 $ 1,526,893
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
September 30,
--------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 4,811 $ 16,779
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring, impairment and other charges 12,624 12,079
Depreciation and amortization 13,978 11,922
Deferred income tax provision 2,325 --
Change in operating assets and liabilities, net of effects from acquisitions (7,306) (23,976)
-------- --------
Net cash provided by operating activities 26,432 16,804
-------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (1,943) (9,961)
Purchase of intangible assets -- (7,255)
Capital expenditures (9,487) (13,901)
Change in other investments 1,708 (906)
-------- --------
Net cash used in investing activities (9,722) (32,023)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings 16,000 81,000
Repayment of short-term borrowings (25,000) (45,000)
Proceeds from exercise of stock options 2,970 2,891
Repurchases of common stock (13,763) (33,410)
-------- --------
Net cash (used in) provided by financing activities (19,793) 5,481
-------- --------
Net decrease in cash and cash equivalents (3,083) (9,738)
Cash and cash equivalents at beginning of period 79,558 78,371
-------- --------
Cash and cash equivalents at end of period $ 76,475 $ 68,633
======== ========
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 2003 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 2003 financial
statements to conform to the 2004 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 sheets. The captions "insurance premiums and
commissions receivable" and "insurance premiums and commissions
payable" include insurance premiums and commissions in the Company's
property and casualty brokerage division and commissions 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.
RESTRICTED CASH
Unremitted insurance premiums are held in a fiduciary capacity and
approximated $23.7 million and $26.6 million at September 30, 2003 and
June 30, 2003, respectively. 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, restricted stock and stock
purchase plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense has been recorded for restricted
stock awards, and no expense has been recorded for the Company's other
stock-based plans. 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
September 30,
-----------------------
2003 2002
--------- ----------
Net income, as reported $ 4,811 $ 16,779
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 165 --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (4,096) (4,762)
--------- ----------
Pro forma net income $ 880 $ 12,017
========= ==========
Earnings per share:
Basic, as reported $ 0.04 $ 0.14
========= ==========
Basic, pro forma $ 0.01 $ 0.10
========= ==========
Diluted, as reported $ 0.04 $ 0.14
========= ==========
Diluted, pro forma $ 0.01 $ 0.10
========= ==========
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, revenue recognition, income taxes,
contingencies, and restructuring, impairment and other charges.
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.
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three Months Ended
September 30,
-----------------
2003 2002
------- -------
Net income $ 4,811 $16,779
Unrealized gain on investments 12 --
Foreign currency translation adjustment 257 69
------- -------
Total comprehensive income $ 5,080 $16,848
======= =======
7
4. EARNINGS PER SHARE
Basic and diluted EPS computations for the three months ended September
30, 2003 and 2002 are as follows (in thousands, except per share
amounts):
Three Months Ended
September 30,
-------------------
2003 2002
-------- --------
Basic EPS
Net income $ 4,811 $ 16,779
======== ========
Weighted average common shares
outstanding 119,805 119,535
======== ========
Basic earnings per share $ 0.04 $ 0.14
======== ========
Diluted EPS
Net income $ 4,811 $ 16,779
======== ========
Weighted average common shares
outstanding 119,805 119,535
Assumed conversion of common shares
issuable under stock-based compensation
plans 1,662 3,112
-------- --------
Weighted average common and common
equivalent shares outstanding 121,467 122,647
======== ========
Diluted earnings per share $ 0.04 $ 0.14
======== ========
The effect of the assumed conversion of the convertible subordinated
notes into common stock would be antidilutive and therefore is excluded
from the computation of diluted earnings per share.
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
September 30,
-----------------------------------
2003 2002
---------------- ----------------
Number of options excluded 6,380 5,704
Option price per share $18.02 to $35.30 $25.15 to $35.30
Average market price of common shares
for the period $17.83 $24.45
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
For the three months ended September 30, 2003, the Company recorded
pre-tax restructuring, impairment and other charges of $12.6 million.
The charges relate to the integration, consolidation, and
reorganization of certain business operations, particularly in the
Company's European Fund Services division and the Insurance and
Education Services group, and the recording of an estimated charge for
litigation expenses.
8
A summary of these items follows (in thousands):
Restructuring charges $ 5,462
Impairment charges 4,515
Litigation charges 2,647
-------
Total pre-tax charges $12,624
=======
Restructuring charges of $5.5 million were comprised of severance
totaling $4.2 million and lease termination costs of $1.3 million.
Severance charges resulted from the termination of approximately 175
employees representing all levels of staffing.
In connection with its restructuring activities, the Company recorded
asset impairment charges of $4.5 million. Of these charges, $3.9
million relates to impairment of an intangible asset and other
long-lived assets as a result of the Company's plan to restructure its
European mutual fund services operations and to exit certain European
locations during the calendar year 2004 following the acquisition of
two of the Company's significant customers by acquirers with existing
fund services capabilities. The Company also recorded an additional tax
valuation allowance of $5.2 million for deferred tax assets associated
with tax loss carryforwards arising from the European mutual fund
services operations as the Company believes the deferred tax assets
will not be realized.
Based on recent internal Company analysis and discussions with counsel
on the status of litigation matters, the Company recorded a charge of
approximately $2.6 million related to breach of contract claims made by
a former distributor of life insurance products. The amount of the
charge includes an estimated resolution amount and actual legal fees
incurred during the quarter. The Company, however, intends to continue
to vigorously defend the claims asserted and has asserted a number of
counterclaims.
The following summarizes activity with respect to the Company's
restructuring activities for the three months ended September 30, 2003
(in thousands):
Expense provision
Employee severance $4,189
Facility closure 1,273
------
5,462
------
Cash payments and other 1,554
------
Remaining accrual at September 30, 2003
Employee severance 2,896
Facility closure 1,012
------
$3,908
------
Additionally, an accrual of $1.3 million remains at September 30, 2003
from prior year's restructuring charge and relates to lease costs for
facility closures.
In connection with the aforementioned restructuring plans, certain
severance costs approximating $3.5 million for an estimated 165
additional employees and contract termination costs of approximately
$2.5 million are expected to be recognized throughout the remainder of
fiscal 2004 in accordance with FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities."
9
6. INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS
At September 30, 2003, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------- ------------ --------
Customer related $189,555 $(36,229) $153,326
Noncompete agreements 42,451 (12,798) 29,653
Other 23,070 (6,673) 16,397
-------- -------- --------
Total $255,076 $(55,700) $199,376
======== ======== ========
At June 30, 2003, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------- ------------ --------
Customer related $190,917 $(32,618) $158,299
Noncompete agreements 42,451 (11,629) 30,822
Other 23,070 (6,155) 16,915
-------- -------- --------
Total $256,438 $(50,402) $206,036
======== ======== ========
All of the Company's acquired intangible assets are subject to
amortization. Amortization expense for acquired intangible assets was
$5.8 million for the three months ended September 30, 2003 and $18.8
million for the year ended June 30, 2003. Estimated annual amortization
expense is $24.7 million in fiscal 2004, $24.4 million in fiscal 2005,
$23.3 million in fiscal 2006, $22.1 million in fiscal 2007, and $21.3
million in fiscal 2008.
In connection with the Company's plan to restructure its European fund
services operations and exit certain European locations during the
calendar year 2004, an impairment loss of $0.8 million was recognized
during the three months ended September 30, 2003 for a customer-related
intangible. The amount of the impairment loss represented the remaining
net book value of the intangible at September 30, 2003. See Note 5.
GOODWILL
The changes in the carrying amount of goodwill by business segment for
the three months ended September 30, 2003 are as follows (in
thousands):
Investment Insurance and Information
Services Education Services Services Total
-------- ------------------ -------- --------
Balance, July 1, 2003 $311,366 $402,471 $ 35,390 $749,227
Adjustments to previous
acquisitions -- 1,310 -- 1,310
-------- -------- -------- --------
Balance, September 30, 2003 $311,366 $403,781 $ 35,390 $750,537
======== ======== ======== ========
7. SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by business segment and for corporate operations for the three months
ended September 30, 2003 and 2002. Additionally, restructuring,
impairment and other charges are excluded from the operating results of
the segment and presented separately for a better understanding of the
underlying performance of each segment.
10
(in thousands)
Three Months Ended
September 30,
-------------------------
2003 2002
--------- ---------
Operating revenue:
Investment Services $ 128,171 $ 120,944
Insurance and Education Services 57,126 55,699
Information Services 52,085 50,701
--------- ---------
Total operating revenue $ 237,382 $ 227,344
========= =========
Operating income (loss):
Investment Services $ 16,413 $ 16,084
Insurance and Education Services 8,815 19,669
Information Services 12,887 12,405
Corporate (5,180) (5,221)
--------- ---------
Total operating income $ 32,935 $ 42,937
========= =========
Restructuring, impairment and other charges:
Investment Services $ 5,438 $ 5,430
Insurance and Education Services 6,176 2,866
Information Services 145 1,494
Corporate 865 2,289
--------- ---------
Total restructuring, impairment
and other charges $ 12,624 $ 12,079
========= =========
8. RESTRICTED STOCK
Pursuant to the 1999 Equity Participation Plan, the Company provides
for awards of restricted shares of the Company's common stock to key
management employees. Restricted shares awarded under the plan are
subject to certain transfer and forfeiture restrictions that lapse over
a four-year vesting period. Awards for 468,814 restricted shares were
granted during the first quarter of fiscal 2004 at a fair value of
$17.13 per share. Unearned compensation expense related to the issuance
of restricted shares is reported as a reduction of stockholders' equity
on the accompanying condensed consolidated financial statements and
compensation expense is recorded ratably over the four-year vesting
period, during which the shares are subject to transfer and forfeiture
restrictions, based on the fair value on the award date. Compensation
expense related to the issuance of restricted shares approximated $0.3
million during the three months ended September 30, 2003.
9. SUBSEQUENT EVENT
On November 10, 2003, the Company acquired USA Insurance Group, Inc.
(USAIG), a Florida-based managing general agency (MGA) serving the
commercial property and casualty insurance marketplace. The acquisition
of USAIG broadens the product and geographic reach of the Company's
commercial property and casualty line of business and complements and
significantly expands its MGA platform.
The Company completed its acquisition of USAIG through the exchange of
approximately 2.8 million shares of BISYS common stock held in treasury
and $49.7 million cash for all of the equity interests of USAIG.
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 statements of
income for the periods indicated:
Three Months Ended
September 30,
-------------------
2003 2002
------ ------
Revenues 100.0% 100.0%
----- -----
Operating costs and expenses:
Service and operating 64.3 59.6
Selling, general and administrative 19.4 19.6
Amortization of intangible assets 2.4 1.9
Restructuring, impairment and other charges 5.3 5.3
---- ----
Total operating costs and expenses 91.4 86.4
---- ----
Operating earnings 8.6 13.6
Interest income 0.1 0.1
Interest expense (2.0) (1.9)
---- ----
Income before income taxes 6.7 11.8
Income taxes 4.7 4.4
---- ----
Net income 2.0% 7.4%
=== ===
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 2002.
Revenues increased 4.4% from $227.3 million for the three months ended
September 30, 2002 to $237.4 million for the three months ended
September 30, 2003. This growth was derived largely from acquired
businesses during the past twelve months. Internal revenue growth
decreased approximately 2% for the three months ended September 30,
2003 over the same period last year primarily due to lower internal
growth in the Life Insurance Services division.
Service and operating expenses increased 12.5% from $135.5 million for
the three months ended September 30, 2002 to $152.5 million for the
three months ended September 30, 2003 and increased as a percentage of
revenues from 59.6% to 64.3%. The dollar and percentage increase
resulted from additional costs associated with greater revenues, a
higher cost base in certain areas of the Life Insurance Services
division and changes in the mix of the Company's business.
Selling, general and administrative expenses increased 3.5% from $44.6
million during the three months ended September 30, 2002 to $46.1
million for the three months ended September 30, 2003 and decreased as
a percentage of revenues from 19.6% to 19.4%. The dollar increase
resulted from additional costs associated with greater revenues. The
decrease as a percentage of revenues resulted from further utilization
of existing general and administrative support resources.
Amortization of intangible assets increased $1.5 million for the three
months ended September 30, 2003 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses and customer contracts.
Interest expense increased $0.3 million for the three months ended
September 30, 2003 over the same period last year primarily due to the
interest costs associated with higher average borrowings under the
Company's revolving credit facility.
The income tax provision of $11.2 million for the three months ended
September 30, 2003 increased from $10.1 million for the three months
ended September 30, 2002, despite lower taxable income, due to
recognition of an additional tax valuation allowance of $5.2 million
for deferred tax assets associated with tax loss carryforwards from the
European mutual fund services operations that are not expected to be
realized. The provision represents an effective tax rate, excluding the
impact of restructuring, impairment and other charges,
12
of 37.25% and 37.5% for the periods ended September 30, 2003 and 2002,
respectively. The decrease in the effective tax rate is primarily due
to the mix of business in foreign tax jurisdictions.
Operating earnings, before amortization of intangibles and
restructuring, impairment and other charges, resulted in margins of
16.3% and 20.8% for the three months ended September 30, 2003 and 2002,
respectively. The margin decrease was primarily due to a significant
margin decline in the Insurance and Education Services segment as a
result of a decline in internal revenue and a higher cost base in
certain areas of the Life Insurance Services division.
The Company recorded pre-tax restructuring, impairment and other
charges of $12.6 million and $12.1 million during the three months
ended September 30, 2003 and 2002, respectively. The fiscal 2004
restructuring charges relate to the integration, consolidation and
reorganization of certain business operations, particularly in the
Company's European Fund Services division and the Insurance and
Education Services group.
A summary of these items follows (in thousands):
Restructuring charges $ 5,462
Impairment charges 4,515
Litigation charges 2,647
---------
Total pre-tax charges $ 12,624
=========
Restructuring charges of $5.5 million were comprised of severance
totaling $4.2 million and lease termination costs of $1.3 million.
Severance charges resulted from the termination of approximately 175
employees representing all levels of staffing.
In connection with its restructuring activities, the Company recorded
asset impairment charges of $4.5 million. Of these charges, $3.9
million relates to impairment of an intangible asset and other
long-lived assets as a result of the Company's plan to restructure its
European mutual fund services operations and to exit certain European
locations during the calendar year 2004 following the acquisition of
two of the Company's significant customers by acquirers with existing
fund services capabilities. The Company also recorded an additional tax
valuation allowance of $5.2 million for deferred tax assets associated
with tax loss carryforwards arising from the European mutual fund
services operations as the Company believes the deferred tax assets
will not be realized.
Based on recent internal Company analysis and discussions with counsel
on the status of litigation matters, the Company recorded a charge of
approximately $2.6 million related to breach of contract claims made by
a former distributor of life insurance products. The amount of the
charge includes an estimated resolution amount and actual legal fees
incurred during the quarter. The Company, however, intends to continue
to vigorously defend the claims asserted and has asserted a number of
counterclaims.
The following summarizes activity with respect to the Company's
restructuring activities for the three months ended September 30, 2003
(in thousands):
Expense provision
Employee severance $4,189
Facility closure 1,273
------
5,462
------
Cash payments and other 1,554
------
Remaining accrual at September 30, 2003
Employee severance 2,896
Facility closure 1,012
------
$3,908
------
Additionally, an accrual of $1.3 million remains at September 30, 2003
from prior year's restructuring charge and relates to lease costs for
facility closures.
In connection with the aforementioned restructuring plans, certain
severance costs approximating $3.5 million for an estimated 165
additional employees and contract termination costs of approximately
$2.5 million are
13
expected to be recognized throughout the remainder of fiscal 2004 and
the first quarter of fiscal 2005 in accordance with FAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities."
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Company had cash and cash equivalents of
$76.5 million and working capital of $20.9 million. At September 30,
2003, the Company had outstanding borrowings of $163.0 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 September 30, 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, and the Company
expects to renew the facility prior to its expiration.
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 September 30, 2003, the Company had $3.1 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 0.37 at September 30, 2003, and the
Company's maximum debt ratio may not exceed .50 under the terms of the
revolving credit facility, as amended. At September 30, 2003, the
Company is in compliance with all financial covenants required by the
debt facility.
Accounts receivable represented 45 and 44 days sales outstanding (DSO)
at September 30, 2003 and June 30, 2003, respectively, based on
quarterly revenues. 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 three months ended September 30, 2003, operating activities
provided cash of $26.4 million. Investing activities used cash of $9.7
million, primarily for capital expenditures of $9.5 million. Financing
activities used cash of $19.8 million, primarily comprised of
repurchases of Company stock of $13.8 million, net repayments of
short-term borrowings of $9.0 million, offset by exercises of stock
options of $3.0 million.
The Board of Directors has authorized a stock buy-back program of up to
$100 million effective September 2002. Through September 30, 2003, the
Company has purchased 1.6 million shares for $25.2 million under the
stock buy-back program, leaving $74.8 million available for future
purchases. 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 months
ended September 30, 2003 and 2002. Restructuring, impairment and other
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
September 30,
-------------------------
2003 2002
--------- ---------
Operating revenue:
Investment Services $ 128,171 $ 120,944
Insurance and Education Services 57,126 55,699
Information Services 52,085 50,701
--------- ---------
Total operating revenue $ 237,382 $ 227,344
========= =========
Operating income (loss):
Investment Services $ 16,413 $ 16,084
Insurance and Education Services 8,815 19,669
Information Services 12,887 12,405
Corporate (5,180) (5,221)
--------- ---------
Total operating income $ 32,935 $ 42,937
========= =========
Internal revenue growth (excluding acquisitions) for Investment
Services, Insurance and Education Services, and Information Services
approximated 6%, (22)%, and 3%, respectively, during the three months
ended September 30, 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 expects to achieve an
overall annual internal growth rate of 3% to 5% in fiscal 2004.
Revenue in the Investment Services business segment increased $7.2
million, or 6%, during the three months ended September 30, 2003, over
the same period last year. The revenue increase was primarily due to
the acquisition of several new clients and increased assets under
administration. Operating income in the Investment Services business
segment increased $0.3 million, or 2%, during the fiscal first quarter.
Operating margins were 12.8% and 13.3% for the three months ended
September 30, 2003 and 2002, respectively. The margin decreased due
primarily to lower margins in the 401(k) administration business which
resulted, in part, from a delay in 401(k) conversions.
Revenue in the Insurance and Education Services business segment
increased $1.4 million, or 2.6%, during the three months ended
September 30, 2003, over the same period last year. The revenue
increase was primarily due to acquisitions offset by a decline in
internal revenue of 22%. The decrease in internal revenue was primarily
due to an industry-wide decline in life insurance applications, a
decline in revenue from fixed annuity products, a decline in revenue
from term life products, and lower productivity due to distractions
associated with organization restructuring activities. Operating income
in the Insurance and Education Services business segment decreased
$10.9 million, or 55.2%, during the fiscal first quarter. Operating
margins were 15.4% and 35.3% for the three months ended September 30,
2003 and 2002, respectively. Margins decreased in the fiscal first
quarter primarily due to a decline in internal revenue and a higher
cost base in certain areas of the life insurance division.
Revenue in the Information Services business segment increased $1.4
million, or 2.7%, during the three months ended September 30, 2003,
over the same period last year. The revenue increase was due to
existing client growth, cross sales of ancillary products and services
to existing clients, and sales to new clients. Operating income in the
Information Services business segment increased $0.5 million, or 3.9%,
during the fiscal first quarter. Operating margins were 24.7% and 24.5%
for the three months ended September 30, 2003 and 2002, respectively.
Corporate operations represent charges for the Company's human
resources, legal, accounting and finance functions, and various other
unallocated overhead charges.
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
15
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
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our 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 our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
We carried out an evaluation as of September 30, 2003, 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 substantial changes in the
Company's internal control over financial reporting during the fiscal quarter
ended September 30, 2003 that has materially affected, or is reasonably likely
to affect, our internal control over financial reporting.
17
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 - Transition Services Agreement, dated as of
October 6, 2003, by and between The BISYS
Group, Inc. and Dennis R. Sheehan
Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
Exhibit 32 - Section 1350 Certifications
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed with the Securities
and Exchange Commission during the fiscal quarter ended
September 30, 2003.
A Current Report on Form 8-K, dated September 24, 2003, was
furnished to the Securities and Exchange Commission to report
on the announcement of updated earnings guidance for the
fiscal quarter ending September 30, 2003 and the fiscal year
ending June 30, 2004, and to report on the announcement of a
new Chief Financial Officer (Item 9).
A Current Report on Form 8-K, dated October 21, 2003, was
furnished to the Securities and Exchange Commission to report
on the announcement of the Company's financial results for the
fiscal quarter ended September 30, 2003 (Item 12).
18
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: November 12, 2003 By: /s/ James L. Fox
---------------- -------------------------------
James L. Fox
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
19
THE BISYS GROUP, INC.
EXHIBIT INDEX
Exhibit No. Page
----------- ----
(10.1) Transition Services Agreement, dated as of October 6, 2003, by and between The
BISYS Group, Inc. and Dennis R. Sheehan.................................................21
(31.1) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.......................22
(31.2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.......................23
(32) Section 1350 Certifications.............................................................24
20