Back to GetFilings.com
================================================================================
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 DECEMBER 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 (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 JANUARY 22, 2004, THERE WERE 120,361,155 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 27 pages.
================================================================================
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 and six
months ended December 31, 2003 and 2002 3
Condensed Consolidated Balance Sheets as of December 31, 2003 and
June 30, 2003 4
Condensed Consolidated Statements of Cash Flows for the six months
ended December 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 13
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
EXHIBIT INDEX 23
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 Six Months Ended
December 31, December 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 263,331 $ 233,112 $ 500,713 $ 460,456
--------- --------- --------- ---------
Operating costs and expenses:
Service and operating 168,691 136,126 321,203 271,675
Selling, general and administrative 49,397 42,593 95,526 87,179
Amortization of intangible assets 6,693 4,393 12,499 8,665
Restructuring, impairment and other charges 2,151 - 14,775 12,079
--------- --------- --------- ---------
Total operating costs and expenses 226,932 183,112 444,003 379,598
--------- --------- --------- ---------
Operating earnings 36,399 50,000 56,710 80,858
Interest income 282 535 607 908
Interest expense (4,735) (4,568) (9,399) (8,953)
--------- --------- --------- ---------
Income before income taxes 31,946 45,967 47,918 72,813
Income taxes 11,900 17,238 23,061 27,305
--------- --------- --------- ---------
Net income $ 20,046 $ 28,729 $ 24,857 $ 45,508
========= ========= ========= =========
Basic earnings per share $ 0.17 $ 0.24 $ 0.21 $ 0.38
========= ========= ========= =========
Diluted earnings per share $ 0.17 $ 0.24 $ 0.21 $ 0.37
========= ========= ========= =========
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)
December 31, June 30,
2003 2003
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 85,054 $ 79,558
Restricted cash 56,324 26,603
Accounts receivable, net 95,055 96,237
Insurance premiums and commissions receivable 189,000 169,780
Deferred tax asset 10,701 13,655
Other current assets 44,791 34,806
----------- -----------
Total current assets 480,925 420,639
Property and equipment, net 110,391 107,152
Goodwill 814,725 749,227
Intangible assets, net 222,879 206,036
Other assets 34,875 43,839
----------- -----------
Total assets $ 1,663,795 $ 1,526,893
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 200,000 $ 172,000
Accounts payable 21,422 21,518
Insurance premiums and commissions payable 129,666 79,398
Other current liabilities 142,934 127,643
----------- -----------
Total current liabilities 494,022 400,559
Long-term debt 300,000 300,000
Deferred tax liability 58,407 37,247
Other liabilities 4,492 4,026
----------- -----------
Total liabilities 856,921 741,832
----------- -----------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares authorized, 120,790,185
and 120,274,571 shares issued 2,416 2,405
Additional paid-in capital 388,285 378,986
Retained earnings 437,093 417,533
Notes receivable from stockholders (10,776) (10,776)
Employee benefit trust, 350,209 and 344,207 shares (5,632) (5,676)
Deferred compensation 5,418 5,752
Unearned compensation - restricted stock (7,006) -
Accumulated other comprehensive income (loss) 3,414 (340)
Treasury stock at cost, 432,158 and 141,118 shares (6,338) (2,823)
----------- -----------
Total stockholders' equity 806,874 785,061
----------- -----------
Total liabilities and stockholders' equity $ 1,663,795 $ 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)
Six Months Ended
December 31,
----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 24,857 $ 45,508
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring, impairment and other charges 14,775 12,079
Depreciation and amortization 29,251 23,581
Deferred income tax provision 7,196 2,272
Change in operating assets and liabilities, net of effects from acquisitions 9,128 (21,218)
--------- ---------
Net cash provided by operating activities 85,207 62,222
--------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (44,560) (46,286)
Purchase of intangible assets - (7,715)
Capital expenditures (16,802) (25,178)
Change in other investments 1,348 (1,516)
--------- ---------
Net cash used in investing activities (60,014) (80,695)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings 113,000 149,000
Repayment of short-term borrowings (85,000) (99,000)
Proceeds from exercise of stock options 5,547 4,334
Repurchases of common stock (53,244) (33,410)
Other - (242)
--------- ---------
Net cash (used in) provided by financing activities (19,697) 20,682
--------- ---------
Net increase in cash and cash equivalents 5,496 2,209
Cash and cash equivalents at beginning of period 79,558 78,371
--------- ---------
Cash and cash equivalents at end of period $ 85,054 $ 80,580
========= =========
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 fiscal year 2003
financial statements to conform to the fiscal year 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
commercial insurance services division and commissions from the
Company's life insurance brokerage division. In its capacity as a
commercial 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 $56.3 million and $26.6 million at December 31, 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.
INVESTMENTS
Management determines the appropriate classification of investments in
equity securities at the time of purchase. Marketable equity securities
available for sale are carried at market based upon quoted market
prices. Unrealized gains or losses on available for sale securities are
accumulated as an adjustment to stockholders' equity, net of related
deferred income taxes. Realized gains or losses are computed based on
specific identification of the securities sold.
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," (in thousands, except for per share
amounts).
6
Three Months Ended Six Months Ended
December 31, December 31
----------------------- ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported $ 20,046 $ 28,729 $ 24,857 $ 45,508
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 298 - 463 -
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (4,000) (4,405) (8,096) (9,167)
---------- ---------- ---------- ----------
Pro forma net income $ 16,344 $ 24,324 $ 17,224 $ 36,341
========== ========== ========== ==========
Earnings per share:
Basic, as reported $ 0.17 $ 0.24 $ 0.21 $ 0.38
========== ========== ========== ==========
Basic, pro forma $ 0.14 $ 0.20 $ 0.14 $ 0.30
========== ========== ========== ==========
Diluted, as reported $ 0.17 $ 0.24 $ 0.21 $ 0.37
========== ========== ========== ==========
Diluted, pro forma $ 0.14 $ 0.20 $ 0.14 $ 0.30
========== ========== ========== ==========
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 Six Months Ended
December 31, December 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income $ 20,046 $ 28,729 $ 24,857 $ 45,508
Unrealized gain on investments, net of
deferred taxes 3,126 - 3,138 -
Foreign currency translation adjustment 360 126 617 195
--------- --------- --------- ---------
Total comprehensive income $ 23,532 $ 28,855 $ 28,612 $ 45,703
========= ========= ========= =========
7
4. EARNINGS PER SHARE
Basic and diluted EPS computations for the three and six months ended
December 31, 2003 and 2002 are as follows (in thousands, except per
share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Basic EPS
Net income $ 20,046 $ 28,729 $ 24,857 $ 45,508
============ ============ ============ ============
Weighted average common shares
outstanding 119,350 119,273 119,578 119,393
============ ============ ============ ============
Basic earnings per share $ 0.17 $ 0.24 $ 0.21 $ 0.38
============ ============ ============ ============
Diluted EPS
Net income $ 20,046 $ 28,729 $ 24,857 $ 45,508
============ ============ ============ ============
Weighted average common shares outstanding 119,350 119,273 119,578 119,393
Assumed conversion of common shares
issuable under stock-based compensation
plans 741 1,694 1,152 2,493
------------ ------------ ------------ ------------
Weighted average common and common
equivalent shares outstanding 120,091 120,967 120,730 121,886
============ ============ ============ ============
Diluted earnings per share $ 0.17 $ 0.24 $ 0.21 $ 0.37
============ ============ ============ ============
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 Six Months Ended
December 31, December 31,
------------------------------------- -------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Number of options excluded 10,365 6,306 8,922 5,910
Option price per share $14.21 to $35.30 $18.02 to $35.30 $16.22 to $35.30 $21.25 to $35.30
Average market price of common
shares for the period $14.21 $17.61 $16.02 $21.03
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
During the three and six months ended December 31, 2003, the Company
recorded pre-tax restructuring, impairment and other charges of $2.2
million and $14.8 million, respectively. 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):
Three Months Ended Six Months Ended
December 31, 2003 December 31, 2003
------------------ -----------------
Restructuring charges $ 1,950 $ 7,413
Impairment charges - 4,515
Litigation charges 201 2,847
------------------ ------------------
Total pre-tax charges $ 2,151 $ 14,775
================== ==================
Restructuring charges of $7.4 million were comprised of severance
totaling $6.1 million and lease termination costs of $1.3 million.
Severance charges resulted from the termination or planned termination
of approximately 330 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 internal Company analysis and discussions with counsel on the
status of litigation matters, the Company recorded a charge of
approximately $2.8 million related to breach of contract claims in the
life insurance services business. The amount of the charge includes an
estimated resolution amount and actual legal fees incurred during the
six months ended December 31, 2003. 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 six months ended December 31, 2003 (in
thousands):
Expense provision
Employee severance $ 6,140
Facility closure 1,273
--------
7,413
--------
Cash payments and other 3,186
--------
Remaining accrual at December 31, 2003
Employee severance 3,275
Facility closure 952
--------
$ 4,227
--------
In connection with the aforementioned restructuring plans, certain
severance costs approximating $2.0 million and lease termination costs
of approximately $2.0 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."
The Company recorded pre-tax restructuring charges of $12.1 million
during the six months ended December 31, 2002 related 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
included 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 December 31, 2003, an accrual of $1.1 million remains
from this prior year charge and relates to lease costs for facility
closures.
9
6. INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS
At December 31, 2003, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- ------------ ------------
Customer related $ 216,231 $ (41,159) $ 175,072
Noncompete agreements 45,846 (14,053) 31,793
Other 23,195 (7,181) 16,014
-------------- ------------ ------------
Total $ 285,272 $ (62,393) $ 222,879
============== ============ ============
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
$6.7 million and $12.5 million for the three and six months ended
December 31, 2003 and $18.8 million for the year ended June 30, 2003.
Estimated annual amortization expense is $26.8 million in fiscal 2004,
$27.8 million in fiscal 2005, $26.7 million in fiscal 2006, $25.4
million in fiscal 2007, and $24.6 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 six months ended December 31, 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 six months ended December 31, 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
Additions - 64,188 - 64,188
Adjustments to previous
acquisitions - 1,310 - 1,310
---------- ------------------ ----------- -----------
Balance, December 31, 2003 $ 311,366 $ 467,969 $ 35,390 $ 814,725
========== ================== =========== ===========
7. SEGMENT INFORMATION
The following table sets forth revenue and operating income by business
segment and for corporate operations for the three and six months ended
December 31, 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 Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Investment Services $ 138,211 $ 121,853 $ 266,382 $ 242,797
Insurance and Education Services 68,438 58,830 125,564 114,529
Information Services 56,682 52,429 108,767 103,130
------------ ------------ ------------ ------------
Total revenue $ 263,331 $ 233,112 $ 500,713 $ 460,456
============ ============ ============ ============
Operating income (loss):
Investment Services $ 16,457 $ 17,872 $ 32,870 $ 33,956
Insurance and Education Services 13,414 23,738 22,229 43,407
Information Services 14,839 13,825 27,726 26,230
Corporate (6,160) (5,435) (11,340) (10,656)
------------ ------------ ------------ ------------
Total operating income $ 38,550 $ 50,000 $ 71,485 $ 92,937
============ ============ ============ ============
Restructuring, impairment and other
charges:
Investment Services $ 968 $ - $ 6,406 $ 5,430
Insurance and Education Services 755 - 6,931 2,866
Information Services 353 - 498 1,494
Corporate 75 - 940 2,289
------------ ------------ ------------ ------------
Total restructuring, impairment and
other charges $ 2,151 $ - $ 14,775 $ 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 450,234 restricted shares were
granted, net of forfeitures, during the first six months 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 $0.4 million and $0.7 million during the three and
six months ended December 31, 2003.
9. BUSINESS COMBINATIONS
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. The
excess purchase price over the fair value of the net tangible assets
acquired approximates $92.7 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
third fiscal quarter, will differ significantly from the preliminary
purchase price allocation. USAIG's fair value of assets and
liabilities, including transaction costs, were as follows (in
thousands):
11
Estimated fair value of assets acquired $ 141,246
Liabilities assumed (52,746)
Common stock issued (38,823)
----------
Net cash paid $ 49,677
==========
The following unaudited pro forma consolidated results of operations
has been prepared as if the acquisition of USAIG had occurred at the
beginning of each period (in thousands, except per share data):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 265,940 $ 241,023 $ 511,059 $ 475,633
Net income $ 20,100 $ 29,259 $ 26,238 $ 47,542
Diluted earnings per share $ 0.17 $ 0.24 $ 0.21 $ 0.38
The operations of USAIG are included in the consolidated financial
statements since the date of acquisition.
12
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 Six Months Ended
December 31, December 31,
------------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating costs and expenses:
Service and operating 64.1 58.4 64.1 59.0
Selling, general and administrative 18.8 18.3 19.1 18.9
Amortization of intangible assets 2.5 1.9 2.5 1.9
Restructuring, impairment and other charges 0.8 - 3.0 2.6
------ ------ ------ ------
Total operating costs and expenses 86.2 78.6 88.7 82.4
------ ------ ------ ------
Operating earnings 13.8 21.4 11.3 17.6
Interest income 0.1 0.2 0.1 0.2
Interest expense (1.8) (1.9) (1.8) (2.0)
------ ------ ------ ------
Income before income taxes 12.1 19.7 9.6 15.8
Income taxes 4.5 7.4 4.6 5.9
------ ------ ------ ------
Net income 7.6% 12.3% 5.0% 9.9%
====== ====== ====== ======
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2003 WITH THE THREE MONTHS
ENDED DECEMBER 31, 2002.
Revenues increased 13.0% from $233.1 million for the three months ended
December 31, 2002 to $263.3 million for the three months ended December
31, 2003. This growth was derived from acquired businesses during the
past twelve months, sales to new clients, existing client growth, and
cross sales to existing clients. Internal revenue growth increased
approximately 5% for the three months ended December 31, 2003 over the
same period last year.
Service and operating expenses increased 23.9% from $136.1 million for
the three months ended December 31, 2002 to $168.7 million for the
three months ended December 31, 2003 and increased as a percentage of
revenues from 58.4% to 64.1%. 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, lower margins in the 401(k) administration business, and
changes in the mix of the Company's business.
Selling, general and administrative expenses increased 16.0% from $42.6
million during the three months ended December 31, 2002 to $49.4
million for the three months ended December 31, 2003 and increased as a
percentage of revenues from 18.3% to 18.8%. The dollar and percentage
increases resulted from additional costs associated with greater
revenues.
Amortization of intangible assets increased $2.3 million for the three
months ended December 31, 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 $0.2 million for the three months ended
December 31, 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 $11.9 million for the three months ended
December 31, 2003 decreased from $17.2 million for the three months
ended December 31, 2002, due to lower taxable income. The provision
represents an effective tax rate, excluding the impact of
restructuring, impairment and other charges, of 37.25% and 37.5% for
the periods ended December 31, 2003 and 2002, respectively. The
decrease in the effective tax rate is primarily due to the mix of
business in foreign tax jurisdictions.
13
Operating earnings, before amortization of intangibles and
restructuring, impairment and other charges, resulted in margins of
17.2% and 23.3% for the three months ended December 31, 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.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2003 WITH THE SIX MONTHS ENDED
DECEMBER 31, 2002.
Revenues increased 8.7% from $460.5 million for the six months ended
December 31, 2002 to $500.7 million for the six months ended December
31, 2003. This growth was derived largely from acquired businesses
during the past twelve months. Internal revenue growth increased
approximately 2% for the six months ended December 31, 2003 over the
same period last year. The rate of internal growth was negatively
impacted by a decline in internal revenue in the Life Insurance and
Education Services divisions.
Service and operating expenses increased 18.2% from $271.7 million for
the six months ended December 31, 2002 to $321.2 million for the six
months ended December 31, 2003 and increased as a percentage of
revenues from 59.0% to 64.1%. 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 9.6% from $87.2
million during the six months ended December 31, 2002 to $95.5 million
for the six months ended December 31, 2003 and increased as a
percentage of revenues from 18.9% to 19.1%. The dollar and percentage
increases resulted from additional costs associated with greater
revenues.
Amortization of intangible assets increased $3.8 million for the six
months ended December 31, 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 $0.4 million for the six months ended
December 31, 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 $23.1 million for the six months ended
December 31, 2003 decreased from $27.3 million for the six months ended
December 31, 2002, due to lower taxable income. The tax provision for
the six months ended December 31, 2003 also includes 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, of 37.25% and 37.5% for
the six months ended December 31, 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
16.8% and 22.1% for the six months ended December 31, 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.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
During the three and six months ended December 31, 2003, the Company
recorded pre-tax restructuring, impairment and other charges of $2.2
million and $14.8 million, respectively. 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.
14
A summary of these items follows (in thousands):
Three Months Ended Six Months Ended
December 31, 2003 December 31, 2003
----------------- -----------------
Restructuring charges $ 1,950 $ 7,413
Impairment charges - 4,515
Litigation charges 201 2,847
-------- --------
Total pre-tax charges $ 2,151 $ 14,775
======== ========
Restructuring charges of $7.4 million were comprised of severance
totaling $6.1 million and lease termination costs of $1.3 million.
Severance charges resulted from the termination or planned termination
of approximately 330 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 internal Company analysis and discussions with counsel on the
status of litigation matters, the Company recorded a charge of
approximately $2.8 million related to breach of contract claims in the
life insurance services business. The amount of the charge includes an
estimated resolution amount and actual legal fees incurred during the
six months ended December 31, 2003. 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 six months ended December 31, 2003 (in
thousands):
Expense provision
Employee severance $ 6,140
Facility closure 1,273
--------
7,413
--------
Cash payments and other 3,186
--------
Remaining accrual at December 31, 2003
Employee severance 3,275
Facility closure 952
--------
$ 4,227
--------
In connection with the aforementioned restructuring plans, certain severance
costs approximating $2.0 million and lease termination costs of approximately
$2.0 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."
The Company recorded pre-tax restructuring charges of $12.1 million during the
six months ended December 31, 2002 related 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
included 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 December 31, 2003, an accrual of $1.1 million remains from this prior
year charge and relates to lease costs for facility closures.
15
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, the Company had cash and cash equivalents of
$85.1 million and negative working capital of $13.1 million. At
December 31, 2003, the Company had outstanding borrowings of $200
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 1.8% on all outstanding borrowings
under the facility at December 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, and
the Company expects to renew or replace 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 December 31, 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 0.38 at December 31, 2003, and the
Company's maximum debt ratio may not exceed .50 under the terms of the
revolving credit facility, as amended. At December 31, 2003, the
Company is in compliance with all financial covenants required by the
credit facility.
Accounts receivable represented 42 and 44 days sales outstanding (DSO)
at December 31, 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 payment terms of up to twelve months.
For the six months ended December 31, 2003, operating activities
provided cash of $85.2 million. Investing activities used cash of $60.0
million, primarily for the acquisition of businesses of $44.6 million
and for capital expenditures of $16.8 million. Financing activities
used cash of $19.7 million, comprised of repurchases of Company stock
of $53.2 million, offset by net proceeds from short-term borrowings of
$28.0 million and proceeds from exercises of stock options of $5.5
million. Approximately 2.8 million shares of treasury stock acquired
during the six months ended December 31, 2003 were issued in connection
with the acquisition of USAIG in November 2003.
The Board of Directors has authorized a new stock buy-back program of
up to $100 million effective November 2003. Through December 31, 2003,
the Company has purchased 0.5 million shares for $7.3 million under the
stock buy-back program, leaving $92.7 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 revenue and operating income by business
segment and for corporate operations for the three and six months ended
December 31, 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.
16
(in thousands)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ---------------------------
2003 2002 2003 2002
---------- ----------- ----------- ----------
Revenue:
Investment Services $ 138,211 $ 121,853 $ 266,382 $ 242,797
Insurance and Education Services 68,438 58,830 125,564 114,529
Information Services 56,682 52,429 108,767 103,130
---------- ----------- ----------- ----------
Total revenue $ 263,331 $ 233,112 $ 500,713 $ 460,456
========== =========== =========== ==========
Operating income (loss):
Investment Services $ 16,457 $ 17,872 $ 32,870 $ 33,956
Insurance and Education Services 13,414 23,738 22,229 43,407
Information Services 14,839 13,825 27,726 26,230
Corporate (6,160) (5,435) (11,340) (10,656)
---------- ----------- ----------- ----------
Total operating income $ 38,550 $ 50,000 $ 71,485 $ 92,937
========== =========== =========== ==========
Internal revenue growth (excluding acquisitions) for Investment
Services, Insurance and Education Services, and Information Services
approximated 13%, (14)%, and 8%, respectively, during the three months
ended December 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 expects to achieve an
overall annual internal growth rate of 3% to 5% in fiscal 2004.
Revenue in the Investment Services business segment increased $16.3
million, or 13.4%, during the three months ended December 31, 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 decreased $1.4 million, or 7.9%, during the fiscal second
quarter. Operating margins were 11.9% and 14.7% for the three months
ended December 31, 2003 and 2002, respectively. The margin decreased
due primarily to lower margins in the 401(k) administration business
and, to a lesser extent, increased expenses in the Fund Services
business and investments in the infrastructure of the Alternative
Investment business.
Revenue in the Insurance and Education Services business segment
increased $9.6 million, or 16.3%, during the three months ended
December 31, 2003, over the same period last year. The revenue increase
was primarily due to acquisitions offset by a decline in internal
revenue of 14%. The decrease in internal revenue was primarily due to
company- and industry-wide declines in sales of term life and fixed
annuity insurance products and lower sales productivity. Operating
income in the Insurance and Education Services business segment
decreased $10.3 million, or 43.5%, during the fiscal second quarter.
Operating margins were 19.6% and 40.4% for the three months ended
December 31, 2003 and 2002, respectively. Margins decreased in the
fiscal second 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 $4.3
million, or 8.1%, during the three months ended December 31, 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 $1.0 million, or 7.3%,
during the fiscal second quarter. Operating margins were 26.2% and
26.4% for the three months ended December 31, 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
17
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.
18
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 December 31, 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 December 31, 2003 that have materially affected, or are reasonably likely
to affect, our internal control over financial reporting.
19
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 10, 2003, the Company issued 2,797,753 shares of its common
stock, $0.02 par value ("Company Common Stock"), to the stockholders of
USA Insurance Group, Inc. ("USAIG"). Said shares of Company Common
Stock were not registered under the Securities Act of 1933, as amended
(the "Securities Act"). There was no underwriter or placement agency.
In connection with the issuance of shares of Company Common Stock to
the shareholders of USAIG, the Company relied on exemptions from
registration under Section 4(2) of the Securities Act, based upon,
among other things, certain representations and warranties of the
investors, the small number of investors, the nature of the investors
and certain information provided to the investors with respect to the
Company and the transaction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held on November
13, 2003, the Stockholders approved the following matters:
1. Election of the eight Directors named below to hold office
until the next Annual Meeting of Stockholders and until their
successors have been duly elected and qualified:
Number of
Name of Director Votes in Favor
---------------- --------------
Denis A. Bovin 79,521,742
Robert J. Casale 106,348,991
Thomas A. Cooper 106,586,688
Lynn J. Mangum 105,824,443
Paula G. McInerney 107,528,266
Thomas E. McInerney 107,589,081
Joseph J. Melone 104,644,364
Dennis R. Sheehan 108,118,856
For Against Abstain
--- ------- -------
2. Approval of the 2004 Employee Stock
Purchase Plan 91,798,947 2,007,229 80,242
For Against Abstain
--- ------- -------
3. Appointment of PricewaterhouseCoopers
LLP as independent accountants for
fiscal year 2004 103,381,790 6,657,639 66,924
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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
20
(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
December 31, 2003.
A Current Report on Form 8-K, dated January 21, 2004, was
furnished to the Securities and Exchange Commission to report
on the announcement of the Company's financial results for the
fiscal quarter ended December 31, 2003 (Item 12).
21
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: January 28, 2004 By: /s/ James L. Fox
--------------------------
James L. Fox
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
22
THE BISYS GROUP, INC.
EXHIBIT INDEX
Exhibit No. Page
(31.1) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.............. 24
(31.2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.............. 25
(32) Section 1350 Certifications.................................................... 26
23