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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER: 0-19922
THE BISYS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3532663
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 PARK AVENUE, NEW YORK, NEW YORK
10016
(Address of principal executive offices)
(Zip Code)
212-907-6000
(Registrant's telephone number, including area code)
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 MAY 31, 2004, THERE WERE 120,674,987 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 85 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 and nine
months ended March 31, 2004 and 2003 3
Condensed Consolidated Balance Sheets as of March 31, 2004 and June
30, 2003 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities 26
Item 3. Defaults upon Senior Securities 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
EXHIBIT INDEX 29
EXPLANATORY NOTE
The Company has determined that it is appropriate to restate previously issued
financial statements to record adjustments for correction of errors resulting
from various accounting matters described herein (see Note 11). The Company
intends to restate its financial results for the fiscal years ended June 30,
2003, 2002 and 2001 and the quarters ended December 31 and September 30, 2003.
The adjustments fall into three general categories: adjustments to commissions
receivable in the Life Insurance division, adjustments relating to goodwill and
deferred taxes established in acquisition accounting for certain acquired
entities in the Life Insurance division, and adjustments to agent commissions
payable in the Life Insurance division. Additionally, as a result of the
restatement adjustments, adjustments to the computation of deferred tax assets
and liabilities were also recorded.
The restatement principally arose from the Company's continuing review and
analysis of estimates used in determining the level of commissions receivable in
the Life Insurance Services division. Based upon this review and analysis, the
Company determined that an adjustment of $80.0 million to reduce commissions
receivable in its Life Insurance division, together with corresponding
adjustments to revenues and expenses, should be recorded and be reflected in a
restatement of its financial results for the affected periods, as described
above. The adjustment to commissions receivable of $80.0 million is primarily
attributable to the over accrual of revenue, based on assumptions underlying the
estimates that were subsequently determined to be incorrect. The assumptions
were used to compute certain first year, bonus and renewal commissions
receivable during the period July 1999 through December 2003. In connection with
the aforementioned review, the Company also identified adjustments relating to
acquisition accounting for certain acquired entities in the Life Insurance
business, resulting in an adjustment to goodwill, deferred taxes and revenue
over the affected periods of $21.0 million. This adjustment reflects the
recording of commissions receivable as of the date of acquisition to convert the
acquired entity from the cash basis to the accrual basis of accounting,
resulting in a corresponding downward adjustment to revenue incorrectly accrued
following each such acquisition. Additionally, adjustments to commissions
payable of $2.6 million, together with corresponding adjustments to net
revenues, were identified as a result of an understatement in agent commissions
payable.
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 Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2004 2003 2004 2003
As Restated As Restated
----------- ----------- ----------- -----------
Revenues $ 272,332 $ 238,074 $ 770,147 $ 686,227
----------- ----------- ----------- -----------
Operating costs and expenses:
Service and operating 171,786 139,746 488,019 409,863
Selling, general and
administrative 48,673 43,892 144,199 131,071
Amortization of intangible assets 7,235 4,809 19,734 13,474
Restructuring, impairment and
other charges 10,815 - 25,590 12,079
----------- ----------- ----------- -----------
Total operating costs and expenses 238,509 188,447 677,542 566,487
----------- ----------- ----------- -----------
Operating earnings 33,823 49,627 92,605 119,740
Interest income 391 270 998 1,178
Interest expense (4,741) (4,475) (14,140) (13,428)
----------- ----------- ----------- -----------
Income before income taxes 29,473 45,422 79,463 107,490
Income taxes 10,079 16,435 33,912 40,287
----------- ----------- ----------- -----------
Net income $ 19,394 $ 28,987 $ 45,551 $ 67,203
=========== =========== =========== ===========
Basic earnings per share $ 0.16 $ 0.24 $ 0.38 $ 0.56
=========== =========== =========== ===========
Diluted earnings per share $ 0.16 $ 0.24 $ 0.38 $ 0.55
=========== =========== =========== ===========
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)
March 31, June 30,
2004 2003
As Restated
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 88,962 $ 79,558
Restricted cash 61,995 26,603
Accounts receivable, net 99,202 96,237
Insurance premiums and commissions receivable, net 81,479 87,535
Deferred tax asset 10,865 45,202
Other current assets 47,767 34,806
------------ ------------
Total current assets 390,270 369,941
Property and equipment, net 112,757 107,152
Goodwill 803,613 731,174
Intangible assets, net 218,100 206,036
Other assets 33,859 43,839
------------ ------------
Total assets $ 1,558,599 $ 1,458,142
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 170,000 $ 172,000
Accounts payable 20,330 21,518
Insurance premiums and commissions payable 110,395 81,840
Other current liabilities 131,176 128,645
------------ ------------
Total current liabilities 431,901 404,003
Long-term debt 300,000 300,000
Deferred tax liability 56,229 34,184
Other liabilities 4,743 4,026
------------ ------------
Total liabilities 792,873 742,213
------------ ------------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares
authorized, 120,855,235 and 120,274,571 shares issued 2,417 2,405
Additional paid-in capital 389,557 378,986
Retained earnings 386,933 348,401
Notes receivable from stockholders (8,172) (10,776)
Employee benefit trust, 345,230 and 344,207 shares (5,550) (5,676)
Deferred compensation 5,335 5,752
Unearned compensation - restricted stock (7,177) -
Accumulated other comprehensive income (loss) 5,437 (340)
Treasury stock at cost, 169,822 and 141,118 shares (3,054) (2,823)
------------ ------------
Total stockholders' equity 765,726 715,929
------------ ------------
Total liabilities and stockholders' equity $ 1,558,599 $ 1,458,142
============ ============
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)
Nine Months Ended
March 31,
----------------------------
2004 2003
As Restated
------------ ------------
Cash flows from operating activities:
Net income $ 45,551 $ 67,203
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring, impairment and other charges 25,590 12,079
Depreciation and amortization 45,172 36,223
Deferred income tax provision 8,389 (1,805)
Change in operating assets and liabilities, net of effects from acquisitions 14,594 4,812
------------ ------------
Net cash provided by operating activities 139,296 118,512
------------ ------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (56,926) (126,396)
Purchase of intangible assets - (23,925)
Capital expenditures (27,763) (33,821)
Change in other investments 1,486 (2,203)
------------ ------------
Net cash used in investing activities (83,203) (186,345)
------------ ------------
Cash flows from financing activities:
Proceeds from short-term borrowings 212,000 248,000
Repayment of short-term borrowings (314,000) (143,000)
Proceeds from long-term debt 100,000 -
Issuance of common stock 5,021 4,581
Proceeds from exercise of stock options 6,767 5,398
Repurchases of common stock (58,009) (33,410)
Other 1,532 (251)
------------ ------------
Net cash (used in) provided by financing activities (46,689) 81,318
------------ ------------
Net increase in cash and cash equivalents 9,404 13,485
Cash and cash equivalents at beginning of period 79,558 78,371
------------ ------------
Cash and cash equivalents at end of period $ 88,962 $ 91,856
============ ============
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)
Throughout these Notes to Condensed Consolidated Financial Statements, all
referenced amounts for prior periods and prior period comparisons reflect the
balance and amounts on a restated basis. The Company expects to file amended
Form 10-K and Form 10-Q reports to reflect its restated results of operations
for prior periods as soon as practicable. For information on the restatement,
see Note 11, Prior Year Restatements, to these financial statements.
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 of normal
recurring adjustments after considering restatement amounts) 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 net commissions receivable 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.
Net commission revenue from insurance distribution operations is
recognized when all placement services have been provided, protection is
afforded under the insurance policy, and the premium is known or can be
reasonably estimated and is billable.
RESTRICTED CASH
Unremitted insurance premiums are held in a fiduciary capacity and
approximated $62.0 million and $26.6 million at March 31, 2004 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 Nine Months Ended
March 31, March 31
---------------------------- ----------------------------
2004 2003 2004 2003
As Restated As Restated
------------ ------------ ------------ ------------
Net income, as reported $ 19,394 $ 28,987 $ 45,551 $ 67,203
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 454 - 917 -
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (4,352) (4,506) (12,449) (13,247)
------------ ------------ ------------ ------------
Pro forma net income $ 15,496 $ 24,481 $ 34,019 $ 53,956
============ ============ ============ ============
Earnings per share:
Basic, as reported $ 0.16 $ 0.24 $ 0.38 $ 0.56
============ ============ ============ ============
Basic, pro forma $ 0.13 $ 0.20 $ 0.28 $ 0.45
============ ============ ============ ============
Diluted, as reported $ 0.16 $ 0.24 $ 0.38 $ 0.55
============ ============ ============ ============
Diluted, pro forma $ 0.13 $ 0.20 $ 0.28 $ 0.44
============ ============ ============ ============
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 net commissions receivable, 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 Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
As Restated As Restated
------------ ------------ ------------ ------------
Net income $ 19,394 $ 28,987 $ 45,551 $ 67,203
Unrealized gain on investments, net of
deferred taxes 1,635 - 4,773 -
Foreign currency translation adjustment 387 (61) 1,004 134
------------ ------------ ------------ ------------
Total comprehensive income $ 21,416 $ 28,926 $ 51,328 $ 67,337
============ ============ ============ ============
7
4. EARNINGS PER SHARE
Basic and diluted EPS computations for the three and nine months ended
March 31, 2004 and 2003 are as follows (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
As Restated As Restated
------------ ------------ ------------ ------------
Basic EPS
Net income $ 19,394 $ 28,987 $ 45,551 $ 67,203
============ ============ ============ ============
Weighted average common shares
outstanding 120,217 119,565 119,774 119,501
============ ============ ============ ============
Basic earnings per share $ 0.16 $ 0.24 $ 0.38 $ 0.56
============ ============ ============ ============
Diluted EPS
Net income $ 19,394 $ 28,987 $ 45,551 $ 67,203
============ ============ ============ ============
Weighted average common shares
outstanding 120,217 119,565 119,774 119,501
Assumed conversion of common shares
issuable under stock-based compensation
plans 1,222 1,206 1,127 2,127
------------ ------------ ------------ ------------
Weighted average common and common
equivalent shares outstanding 121,439 120,771 120,901 121,628
============ ============ ============ ============
Diluted earnings per share $ 0.16 $ 0.24 $ 0.38 $ 0.55
============ ============ ============ ============
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 Nine Months Ended
March 31, March 31,
----------------------------------- ----------------------------------
2004 2003 2004 2003
As Restated As Restated
---------------- ---------------- ---------------- ----------------
Number of options excluded 7,269 8,267 7,396 5,858
Option price per share $16.89 to $35.30 $16.00 to $35.30 $16.70 to $35.30 $21.25 to $35.30
Average market price of common shares
for the period $ 16.83 $ 15.84 $ 16.28 $ 19.36
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
During the three and nine months ended March 31, 2004, the Company
recorded pre-tax restructuring, impairment and other charges of $10.8
million and $25.6 million, respectively. The charges relate to the
8
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
estimated amounts for litigation expenses and contractual disputes.
A summary of these items follows (in thousands):
Three Months Ended Nine Months Ended
March 31, 2004 March 31, 2004
------------------ -----------------
Restructuring charges $ 2,164 $ 9,577
Impairment charges 3,350 7,865
Litigation and other charges 5,301 8,148
------------------ -----------------
Total restructuring, impairment and other charges $ 10,815 $ 25,590
================== =================
Restructuring charges of $9.6 million during the nine months ended March
31, 2004 were comprised of severance totaling $7.4 million and lease
termination and other costs of $2.1 million. Severance charges resulted
from the termination or planned termination of approximately 330 employees
representing all levels of staffing.
The following summarizes activity with respect to the Company's
restructuring activities for the nine months ended March 31, 2004 (in
thousands):
Expense provision
Employee severance $ 7,434
Facility closure 2,143
--------
9,577
--------
Cash payments and other 5,821
--------
Remaining accrual at March 31, 2004
Employee severance 2,341
Facility closure 1,415
--------
$ 3,756
--------
In connection with the aforementioned restructuring plans, certain
severance costs approximating $1.8 million and lease termination costs of
approximately $1.2 million are expected to be recognized throughout the
remainder of fiscal 2004 and the first half of fiscal 2005 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 nine months ended March 31, 2003 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 March 31, 2004, an
accrual of $0.9 million remains from this prior year charge and relates to
lease costs for facility closures.
The Company recorded asset impairment charges of $7.9 million during the
nine months ended March 31, 2004, consisting primarily of the following
items:
- a $3.9 million charge in the Investment Services segment for
the 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;
- a $2.2 million charge in the Information Services segment for
write-downs of software licenses and obsolete inventory held
for resale, due to lack of sufficient demand;
- a $1.2 million charge in the Insurance and Education Services
segment for impairment of a customer-related intangible asset
deemed to be no longer recoverable from related future cash
flows.
9
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 analysis and discussions with counsel on the status of
various litigation matters and contract disputes, the Company recorded a
charge of approximately $3.1 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
nine months ended March 31, 2004. The Company intends to continue to
vigorously defend the claims asserted and has asserted a number of
counterclaims. Additionally, during the three months ended March 31, 2004,
the Company recorded a charge of $5.0 million in the Life Insurance
division related to estimated resolution amounts with certain third
parties arising from contractual disputes over the obligations of the
parties.
6. INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS
At March 31, 2004, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- -------------- --------------
Customer related $ 218,321 $ (46,193) $ 172,128
Noncompete agreements 45,862 (15,396) 30,466
Other 23,195 (7,689) 15,506
-------------- -------------- --------------
Total $ 287,378 $ (69,278) $ 218,100
============== ============== ==============
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 $7.2
million and $19.7 million for the three and nine months ended March 31,
2004 and $18.8 million for the year ended June 30, 2003. Estimated annual
amortization expense is $27.0 million in fiscal 2004, $28.1 million in
fiscal 2005, $27.0 million in fiscal 2006, $25.7 million in fiscal 2007,
and $24.9 million in fiscal 2008.
In connection with the Company's plan to reorganize its Life Insurance
division and restructure its European fund services operations by exiting
certain European locations during calendar year 2004, impairment losses of
$2.0 million were recognized during the nine months ended March 31, 2004
for customer-related intangibles. The amount of the impairment losses
represented the remaining net book value of the intangibles.
10
GOODWILL
The changes in the carrying amount of goodwill by business segment for the
nine months ended March 31, 2004 are as follows (in thousands):
Investment Insurance and Information
Services Education Services Services Total
---------- ------------------ ----------- ----------
Balance, July 1, 2003, as
restated $ 311,366 $ 384,418 $ 35,390 $ 731,174
Additions - 71,160 - 71,160
Adjustments to previous
acquisitions - 1,279 - 1,279
---------- ------------------ ----------- ----------
Balance, March 31, 2004 $ 311,366 $ 456,857 $ 35,390 $ 803,613
=== ==== ========== ================== =========== ==========
7. BORROWINGS
In March 2004, the Company entered into a new senior unsecured credit
facility. The $400 million facility contains a $300 million revolving line
of credit facility, of which $70 million is outstanding at March 31, 2004,
and a $100 million term loan. The facility, which expires March 31, 2008,
supports working capital requirements, repurchases of the Company's common
stock, and the funding of future acquisitions.
Outstanding borrowings under the credit facility bear interest at prime
or, at the Company's option, LIBOR plus a margin. The margin will not
exceed 1.45% on the revolving component and 1.75% on the term loan
component based upon the ratio of the Company's consolidated indebtedness
to consolidated earnings before interest expense, taxes, depreciation, and
amortization. The credit agreement requires the Company to pay an annual
agent fee of $25,000 and an annual facility fee on the $300 million
revolving credit, not to exceed 0.30% or $900,000. The facility is
guaranteed by certain subsidiaries of The BISYS Group, Inc.
The credit agreement requires, among other things, the Company to maintain
certain financial covenants and limits the Company's ability to incur
future indebtedness and to pay dividends. As of March 31, 2004, no amounts
were permitted for the payment of cash dividends.
The Company may borrow under the revolving credit facility through March
2008 up to $300 million, reduced by any outstanding letters of credit
($3.2 million at March 31, 2004). The $100 million term loan has quarterly
principal payments commencing on June 30, 2005 with a final maturity of
March 31, 2008. Interest is payable quarterly for prime rate borrowings or
at maturity for LIBOR borrowings, which range from 30 to 180 days. At
March 31, 2004, the weighted average interest rate of the credit facility
borrowings was 2.28%.
Long-term debt includes $300 million of 4% convertible subordinated notes
due March 2006.
As part of the Credit Agreement with lenders governing the senior
unsecured credit facility, the Company made certain representations about
its prior period financial statements. In light of the need for
adjustments to these prior period financial statements, the lenders
consider these representations to have been inaccurate when made, and
therefore, the lenders have asserted that there has been a breach under
the Credit Agreement causing the Company to be in default. Based on the
Company's expectation of the extent of such adjustment at that time, the
Company procured a waiver from the lenders which allow the Company to
continue to rollover certain LIBOR-based borrowings. However, until the
waiver becomes permanent, the terms of the waiver do not cure the asserted
default and preclude the Company from drawing down additional borrowings
under the credit facility. The waiver will become permanent if the Company
files its amended Form 10-K for the fiscal year ended June 30, 2003 prior
to the due date of the Company's Form 10-K for the fiscal year ended June
30, 2004, which the Company expects to do, and the other conditions of the
waiver are met. In addition, the lenders have informed the Company that,
based on the information contained in this report, an additional waiver
may be required. The lenders have asserted that they have the right to
accelerate payment of outstanding borrowings under the credit facility
until the waiver becomes permanent. Accordingly, all outstanding
borrowings under the revolving line of credit and the term loan portion of
the senior credit facility have been classified as a current obligation.
The Company is in discussions with its lenders and believes that it will
be successful in resolving these matters. However, in the unlikely event
that the Company is unable to successfully resolve these matters with its
lenders and the payment of outstanding borrowings under the credit
facility is accelerated, there could be a material adverse effect on the
Company's ability to meet its short-term working capital needs. Should
this occur the Company believes that alternative funding sources are
available to meet its working capital needs.
11
Debt outstanding at March 31, 2004 and June 30, 2003 is as follows (in
thousands):
March 31, 2004 June 30, 2003
---------------------------- ----------------------------
Due within Due within
Long-term One Year Long-term One Year
------------ ------------ ------------ ------------
Senior credit facility, term loan,
at a rate of 2.375% $ - $ 100,000 $ - $ -
Senior credit facility, revolving
line of credit, at a rate of 2.15%
and 2.00%, respectively - 70,000 - 172,000
Convertible subordinated 4% notes 300,000 - 300,000 -
------------ ------------ ------------ ------------
Total Debt $ 300,000 $ 170,000 $ 300,000 $ 172,000
============ ============ ============ ============
8. SEGMENT INFORMATION
The following table sets forth revenue and operating income by business
segment and for corporate operations for the three and nine months ended
March 31, 2004 and 2003. Restructuring, impairment and other charges are
excluded from the operating results of the segment as management does not
consider such charges in its assessment of segment performance, or in
allocating resources among segments.
(in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
As Restated As Restated
------------ ------------ ------------ ------------
Revenue:
Investment Services $ 148,295 $ 125,050 $ 414,677 $ 367,847
Insurance and Education Services 67,458 57,059 190,124 159,285
Information Services 56,579 55,965 165,346 159,095
------------ ------------ ------------ ------------
Total revenue $ 272,332 $ 238,074 $ 770,147 $ 686,227
============ ============ ============ ============
Operating income (loss):
Investment Services $ 18,034 $ 20,167 $ 50,904 $ 54,123
Insurance and Education Services 15,052 18,782 39,353 51,444
Information Services 16,900 15,779 44,626 42,009
Corporate (5,348) (5,101) (16,688) (15,757)
------------ ------------ ------------ ------------
Total operating income $ 44,638 $ 49,627 $ 118,195 $ 131,819
============ ============ ============ ============
Restructuring, impairment and
other charges:
Investment Services $ 1,709 $ - $ 8,115 $ 5,430
Insurance and Education Services 6,960 - 13,891 2,866
Information Services 2,133 - 2,631 1,494
Corporate 13 - 953 2,289
------------ ------------ ------------ ------------
Total restructuring, impairment
and other charges $ 10,815 $ - $ 25,590 $ 12,079
============ ============ ============ ============
Total consolidated operating
earnings $ 33,823 $ 49,627 $ 92,605 $ 119,740
============ ============ ============ ============
12
9. 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 505,284 restricted shares were
granted, net of forfeitures, during the first nine months of fiscal 2004
at fair values ranging from $13.15 to $18.71 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 $0.7 million and $1.5 million during the
three and nine months ended March 31, 2004.
10. BUSINESS COMBINATIONS
On January 12, 2004, the Company acquired Uhlemeyer Services, Inc.
("Uhlemeyer"), a St. Louis-based managing general agency ("MGA") serving
the commercial property and casualty insurance marketplace and
specializing in distributing and servicing workers' compensation insurance
programs. Pro forma information has not been presented due to lack of
materiality.
On November 10, 2003, the Company acquired USA Insurance Group, Inc.
("USAIG"), a Florida-based 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. Of this amount, $64.0 million was
allocated to goodwill and $28.7 million to other identifiable intangible
assets based on estimates of fair values and is being amortized on a
straight-line basis over periods ranging from 5 to 10 years. USAIG's fair
value of assets and liabilities, including transaction costs, were as
follows (in thousands):
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 Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
As Restated As Restated
------------ ------------ ------------ ------------
Revenues $ 272,332 $ 245,240 $ 780,493 $ 708,570
Net income $ 19,394 $ 30,130 $ 46,951 $ 70,398
Diluted earnings per share $ 0.16 $ 0.24 $ 0.38 $ 0.56
The operations of USAIG and Uhlemeyer are included in the consolidated
financial statements since the date of acquisition.
11. PRIOR YEAR RESTATEMENTS
Prior to the issuance of these March 31, 2004 interim financial
statements, the Company determined that it was appropriate to restate
previously issued financial statements to record adjustments for
correction of errors resulting from various accounting matters described
below. The Company intends to restate its financial results for the fiscal
years ended June 30, 2003, 2002 and 2001 and the quarters ended December
31 and September 30, 2003. The adjustments fall into three general
categories: adjustments to commissions receivable in the Life Insurance
division, adjustments relating to goodwill and deferred taxes established
in
13
acquisition accounting for certain acquired entities in the Life Insurance
division, and adjustments to agent commissions payable in the Life
Insurance division. Additionally, as a result of the restatement
adjustments, adjustments to the computation of deferred tax assets and
liabilities were also recorded. The net impact of the restatement on net
income for the each of the relevant periods for each such category is set
forth below (in thousands, except per share data):
SIX MONTHS
ENDED YEARS ENDED JUNE 30,
DECEMBER 31, ------------------------------------------------------------------
2003 2003 2002 2001 PRE-2001 TOTAL
------------ ---------- ---------- ---------- ---------- ----------
Net income, as reported $ 24,857 $ 111,823 $ 115,861 $ 85,120
------------ ---------- ---------- ----------
Pretax adjustments:
Commissions receivable 2,270 (11,738) (36,060) (23,880) (10,567) (79,975)
Goodwill and deferred taxes - (7,348) (6,486) (7,214) - (21,048)
Commissions payable (198) (1,221) (1,221) - - (2,640)
------------ ---------- ---------- ---------- ---------- ----------
Total pretax adjustments 2,072 (20,307) (43,767) (31,094) (10,567) (103,663)
Tax effect of restatement
adjustment 772 (6,727) (16,604) (13,044) (228) (35,831)
------------ ---------- ---------- ---------- ---------- ----------
Total net adjustments 1,300 (13,580) (27,163) (18,050) $ (10,339) $ (67,832)
------------ ---------- ---------- ---------- ---------- ----------
Net income, as restated $ 26,157 $ 98,243 $ 88,698 $ 67,070
============ ========== ========== ==========
Basic earnings per share, as
reported $ 0.21 $ 0.93 $ 0.98 $ 0.74
Effect of net adjustments 0.01 (0.11) (0.23) (0.16)
------------ ---------- ---------- ----------
Basic earnings per share, as
restated $ 0.22 $ 0.82 $ 0.75 $ 0.58
============ ========== ========== ==========
Diluted earnings per share, as
reported $ 0.21 $ 0.92 $ 0.94 $ 0.71
Effect of net adjustments 0.01 (0.11) (0.22) (0.15)
------------ ---------- ---------- ----------
Diluted earnings per share, as
restated $ 0.22 $ 0.81 $ 0.72 $ 0.56
============ ========== ========== ==========
The restatement principally arose from the Company's continuing review and
analysis of estimates used in determining the level of commissions
receivable in the Life Insurance Services division. Based upon this review
and analysis, the Company determined that an adjustment of $80.0 million
to reduce commissions receivable in its Life Insurance division, together
with corresponding adjustments to revenues and expenses, should be
recorded and be reflected in a restatement of its financial results for
the affected periods, as described above. The adjustment to commissions
receivable of $80.0 million is primarily attributable to the over accrual
of revenue, based on assumptions underlying the estimates that were
subsequently determined to be incorrect. The assumptions were used to
compute certain first year, bonus and renewal commissions receivable
during the period July 1999 through December 2003. In connection with the
aforementioned review, the Company also identified adjustments relating to
acquisition accounting for certain acquired entities in the Life Insurance
business, resulting in an adjustment to goodwill, deferred taxes and
revenue over the affected periods of $21.0 million. This adjustment
reflects the recording of commissions receivable as of the date of
acquisition to convert the acquired entity from the cash basis to the
accrual basis of accounting, resulting in a corresponding downward
adjustment to revenue incorrectly accrued following each such acquisition.
Additionally, adjustments to commissions payable of $2.6 million, together
with corresponding adjustments to net revenues, were identified as a
result of an understatement in agent commissions payable.
The Company intends to report revised financial statements reflecting the
impact of the restatement on the fiscal years ended June 30, 2003, 2002
and 2001 on Form 10-K/A for the fiscal year ended June 30, 2003, as well
as report revised financial statements reflecting the impact of the
restatement on the quarters ended December 31 and September 30, 2003 on
Forms 10-Q/A for each respective period, as soon as practicable. The
Company expects to make such filings prior to the due date of the
Company's Form 10K for the fiscal year ended June 30, 2004. The
14
restatement also affects periods prior to the fiscal year ended June 30,
2001. The net impact of the restatement on such prior periods will be
reflected as a reduction to beginning stockholders' equity as of July 1,
2000 in the amount of $10.3 million.
In connection with the process, the Company restated its financial
statements for the three and nine months ended March 31, 2003. The net
impact of the restatement on net income for the three and nine months
ended March 31, 2003 was a decrease in net income of $3.5 million and
$10.8 million, respectively.
The following table sets forth the effects of the restatement adjustments
discussed above on the Condensed Consolidated Statement of Income for the
three month period ended March 31, 2003 (in thousands, except per share
amounts):
Three Months Ended
March 31, 2003
--------------------------
As Reported As Restated
----------- -----------
Revenues $ 244,776 $ 238,074
----------- -----------
Operating costs and expenses:
Service and operating 141,076 139,746
Selling, general and
administrative 43,892 43,892
Amortization of intangible assets 4,809 4,809
Restructuring, impairment and
other charges - -
----------- -----------
Total operating costs and expenses 189,777 188,447
----------- -----------
Operating earnings 54,999 49,627
Interest income 270 270
Interest expense (4,475) (4,475)
----------- -----------
Income before income taxes 50,794 45,422
Income taxes 18,286 16,435
----------- -----------
Net income $ 32,508 $ 28,987
=========== ===========
Basic earnings per share $ 0.27 $ 0.24
=========== ===========
Diluted earnings per share $ 0.27 $ 0.24
=========== ===========
15
The following table sets forth the effects of the restatement adjustment
discussed above on the Condensed Consolidated Statement of Income for the
nine months ended March 31, 2003 (in thousands, except per share):
Nine Months Ended
March 31, 2003
--------------------------
As Reported As Restated
----------- -----------
Revenues $ 705,232 $ 686,227
----------- -----------
Operating costs and expenses:
Service and operating 412,751 409,863
Selling, general and
administrative 131,071 131,071
Amortization of intangible assets 13,474 13,474
Restructuring, impairment and
other charges 12,079 12,079
----------- -----------
Total operating costs and expenses 569,375 566,487
----------- -----------
Operating earnings 135,857 119,740
Interest income 1,178 1,178
Interest expense (13,428) (13,428)
----------- -----------
Income before income taxes 123,607 107,490
Income taxes 45,591 40,287
----------- -----------
Net income $ 78,016 $ 67,203
=========== ===========
Basic earnings per share $ 0.65 $ 0.56
=========== ===========
Diluted earnings per share $ 0.64 $ 0.55
=========== ===========
16
The following table sets forth the effects of the restatement adjustments
discussed above on the Condensed Consolidated Balance Sheet at June 30,
2003 (in thousands):
June 30, 2003 June 30, 2003
As Reported As Restated
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 79,558 $ 79,558
Restricted cash 26,603 26,603
Accounts receivable, net 96,237 96,237
Insurance premiums and commissions receivable, net 169,780 87,535
Deferred tax asset 13,655 45,202
Other current assets 34,806 34,806
------------- -------------
Total current assets 420,639 369,941
Property and equipment, net 107,152 107,152
Goodwill 749,227 731,174
Intangible assets, net 206,036 206,036
Other assets 43,839 43,839
------------- -------------
Total assets $ 1,526,893 $ 1,458,142
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 172,000 $ 172,000
Accounts payable 21,518 21,518
Insurance premiums and commissions payable 79,398 81,840
Other current liabilities 127,643 128,645
------------- -------------
Total current liabilities 400,559 404,003
Long-term debt 300,000 300,000
Deferred tax liability 37,247 34,184
Other liabilities 4,026 4,026
------------- -------------
Total liabilities 741,832 742,213
------------- -------------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares authorized,
120,274,571 shares issued 2,405 2,405
Additional paid-in capital 378,986 378,986
Retained earnings 417,533 348,401
Notes receivable from stockholders (10,776) (10,776)
Employee benefit trust, 344,207 shares (5,676) (5,676)
Deferred compensation 5,752 5,752
Accumulated other comprehensive income (loss) (340) (340)
Treasury stock at cost, 141,118 shares (2,823) (2,823)
------------- -------------
Total stockholders' equity 785,061 715,929
------------- -------------
Total liabilities and stockholders' equity $ 1,526,893 $ 1,458,142
============= =============
17
12. SUBSEQUENT EVENTS
On May 17, 2004, the Company announced that it would restate its financial
results for the fiscal years ended June 30, 2003, 2002, and 2001 and for
the quarters ended December 31 and September 30, 2003 as described in Note
11. The Company notified the Securities and Exchange Commission ("SEC") of
its intention to restate prior period financial results and that there
would be a delay in the filing of its Form 10Q for the quarter ended March
31, 2004. Subsequently, the SEC advised the Company that the SEC is
conducting an investigation into the facts and circumstances related to
the restatement. The Company is cooperating fully with the SEC.
Following the Company's May 17, 2004 announcement regarding the
restatement of its financial results, two putative class action lawsuits,
Rosen v The Bisys Group, Inc., et al. and Vogel v The Bisys Group, Inc, et
al., were filed against the Company and certain of its current and former
officers in the United States District Court for the Southern District of
New York. The complaints purport to be brought on behalf of all
shareholders who purchased the Company's securities between October 23,
2000 and May 17, 2004. The complaints generally assert that the Company
and certain of its officers allegedly violated the federal securities laws
in connection with the purported issuance of false and misleading
information concerning the Company's financial condition. The complaints
seek damages in an unspecified amount against the Company. The Company
intends to defend itself vigorously against these claims but is unable to
determine the ultimate outcome. In addition to these lawsuits, the Company
has seen public announcements by others purporting to file similar
lawsuits but the Company has not seen such other complaints.
The Audit Committee of the Company's Board of Directors is conducting an
independent investigation into the events and circumstances that resulted
in the restatement and has retained independent counsel to assist in such
investigation. The Company is fully cooperating with the independent
counsel in this ongoing investigation.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Throughout this discussion and analysis of financial condition and results of
operations, all referenced amounts for prior periods and prior period
comparisons reflect the balance and amounts on a restated basis.
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 Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2004 2003 2004 2003
As Restated As Restated
----------- ----------- ----------- -----------
Revenues 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Operating costs and expenses:
Service and operating 63.0 58.7 63.4 59.7
Selling, general and administrative 17.9 18.4 18.7 19.1
Amortization of intangible assets 2.7 2.0 2.6 2.0
Restructuring, impairment and other charges 4.0 - 3.3 1.8
----------- ----------- ----------- -----------
Total operating costs and expenses 87.6 79.1 88.0 82.6
----------- ----------- ----------- -----------
Operating earnings 12.4 20.9 12.0 17.4
Interest income 0.1 0.1 0.1 0.2
Interest expense (1.7) (1.9) (1.8) (1.9)
----------- ----------- ----------- -----------
Income before income taxes 10.8 19.1 10.3 15.7
Income taxes 3.7 6.9 4.4 5.9
----------- ----------- ----------- -----------
Net income 7.1% 12.2% 5.9% 9.8%
=========== =========== =========== ===========
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 WITH THE THREE MONTHS ENDED
MARCH 31, 2003.
Revenues increased 14.4% from $238.1 million for the three months ended
March 31, 2003 to $272.3 million for the three months ended March 31,
2004. 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 approximated 8% for the
three months ended March 31, 2004 over the same period last year.
Service and operating expenses increased 23.0% from $139.7 million for the
three months ended March 31, 2003 to $171.8 million for the three months
ended March 31, 2004 and increased as a percentage of revenues from 58.7%
to 63.0%. The dollar and percentage increase resulted from additional
costs associated with greater revenues, lower margins in the Investment
Services segment, principally in the 401(k) administration business, and
changes in the mix of the Company's business.
Selling, general and administrative expenses increased 10.9% from $43.9
million for the three months ended March 31, 2003 to $48.7 million for the
three months ended March 31, 2004 and decreased as a percentage of
revenues from 18.4% to 17.9%. 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 $2.4 million for the three
months ended March 31, 2004 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 March
31, 2004 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 $10.1 million for the three months ended March
31, 2004 decreased from $16.4 million for the three months ended March 31,
2003, due to lower taxable income. The provision represents an
19
effective tax rate, excluding the impact of restructuring, impairment and
other charges, of 35.0% and 36.2% for the periods ended March 31, 2004 and
2003, respectively. The decrease in the effective tax rate is primarily
due to a state tax valuation allowance adjustment taken during the quarter
ended March 31, 2004.
Operating earnings, before amortization of intangibles and restructuring,
impairment and other charges, resulted in margins of 19.0% and 22.9% for
the three months ended March 31, 2004 and 2003, 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 change in the mix of business.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2004 WITH THE NINE MONTHS ENDED
MARCH 31, 2003.
Revenues increased 12.2% from $686.2 million for the nine months ended
March 31, 2003 to $770.1 million for the nine months ended March 31, 2004.
This growth was derived largely from acquired businesses during the past
twelve months. Internal revenue growth approximated 6% for the nine months
ended March 31, 2004 over the same period last year.
Service and operating expenses increased 19.1% from $409.9 million for the
nine months ended March 31, 2003 to $488.0 million for the nine months
ended March 31, 2004 and increased as a percentage of revenues from 59.7%
to 63.4%. 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 10.0% from $131.1
million for the nine months ended March 31, 2003 to $144.2 million for the
nine months ended March 31, 2004 and decreased as a percentage of revenues
from 19.1% to 18.7%. 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 $6.3 million for the nine
months ended March 31, 2004 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 $0.7 million for the nine months ended March
31, 2004 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 $33.9 million for the nine months ended March
31, 2004 decreased from $40.3 million for the nine months ended March 31,
2003, due to lower taxable income. The tax provision for the nine months
ended March 31, 2004 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 36.4% and 37.5% for the nine months ended March 31,
2004 and 2003, respectively. The decrease in the effective tax rate is
primarily due to a state tax valuation allowance adjustment taken during
the third fiscal quarter of 2004.
Operating earnings, before amortization of intangibles and restructuring,
impairment and other charges, resulted in margins of 17.9% and 21.2% for
the nine months ended March 31, 2004 and 2003, 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 nine months ended March 31, 2004, the Company
recorded pre-tax restructuring, impairment and other charges of $10.8
million and $25.6 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
estimated amounts for litigation expenses and contractual disputes.
20
A summary of these items follows (in thousands):
Three Months Ended Nine Months Ended
March 31, 2004 March 31, 2004
------------------ -----------------
Restructuring charges $ 2,164 $ 9,577
Impairment charges 3,350 7,865
Litigation and other charges 5,301 8,148
------------------ -----------------
Total restructuring, impairment and other charges $ 10,815 $ 25,590
================== =================
Restructuring charges of $9.6 million during the nine months ended March
31, 2004 were comprised of severance totaling $7.4 million and lease
termination and other costs of $2.1 million. Severance charges resulted
from the termination or planned termination of approximately 330 employees
representing all levels of staffing.
The following summarizes activity with respect to the Company's
restructuring activities for the nine months ended March 31, 2004 (in
thousands):
Expense provision
Employee severance $ 7,434
Facility closure 2,143
----------
9,577
----------
Cash payments and other 5,821
----------
Remaining accrual at March 31, 2004
Employee severance 2,341
Facility closure 1,415
----------
$ 3,756
----------
In connection with the aforementioned restructuring plans, certain
severance costs approximating $1.8 million and lease termination costs of
approximately $1.2 million are expected to be recognized throughout the
remainder of fiscal 2004 and the first half of fiscal 2005 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 nine months ended March 31, 2003 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 March 31, 2004, an
accrual of $0.9 million remains from this prior year charge and relates to
lease costs for facility closures.
The Company recorded asset impairment charges of $7.9 million during the
nine months ended March 31, 2004, consisting primarily of the following
items:
- a $3.9 million charge in the Investment Services segment for
the 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;
- a $2.2 million charge in the Information Services segment for
write-downs of software licenses and obsolete inventory held
for resale, due to lack of sufficient demand;
- a $1.2 million charge in the Insurance and Education Services
segment for impairment of a customer-related intangible asset
deemed to be no longer recoverable from related future cash
flows.
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.
21
Based on internal analysis and discussions with counsel on the status of
various litigation matters and contract disputes, the Company recorded a
charge of approximately $3.1 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
nine months ended March 31, 2004. The Company intends to continue to
vigorously defend the claims asserted and has asserted a number of
counterclaims. Additionally, during the three months ended March 31, 2004,
the Company recorded a charge of $5.0 million in the Life Insurance
division related to estimated resolution amounts with certain third
parties arising from contractual disputes over the obligations of the
parties.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company had cash and cash equivalents of $89.0
million and negative working capital of $41.6 million. On March 31, 2004,
the Company entered into a new senior unsecured credit facility. The $400
million facility contains a $300 million revolving line of credit and a
$100 million term loan. The facility expires March 31, 2008 and replaced a
$300 million facility which was due to expire on June 30, 2004. At March
31, 2004, the Company had outstanding borrowings of $70 million against
its $300 million revolving credit facility and a $100 million term loan
under the credit facility. The revolver and term loan bear interest at
LIBOR plus a margin of 1.025% and 1.25%, respectively, resulting in a
weighted average interest rate of 2.28% on all outstanding borrowings
under the facility at March 31, 2004. The facility is used to support the
Company's working capital requirements, repurchase the Company's common
stock, and fund the Company's future acquisitions.
The Company's strategy includes the acquisition of complementary
businesses financed by a combination of internally generated funds,
borrowings from the revolving credit facility, long-term debt and common
stock. The Company's policy is to retain earnings to support future
business opportunities, rather than to pay dividends. The Company has
historically used a significant portion of its cash flow from operations
to fund acquisitions and capital expenditures with any remainder used to
reduce outstanding borrowings under the credit facility. The Company
believes that its cash flow from operations together with other available
sources of funds will be adequate to meet its funding requirements. In the
event that the Company makes significant future acquisitions, however, it
may raise funds through additional borrowings or the issuance of
securities.
At March 31, 2004, the Company had $3.2 million outstanding in letters of
credit and $300 million of outstanding 4% convertible subordinated notes
due March 2006 and $170 million of outstanding borrowings under the credit
facility. The Company's debt ratio (total debt/total debt plus equity) is
0.38 at March 31, 2004, and the Company's maximum debt ratio may not
exceed 0.50 under the terms of the revolving credit facility. At March 31,
2004, the Company was in compliance with all financial covenants required
by the credit facility. However, as part of the Credit Agreement with
lenders governing the senior unsecured credit facility, the Company made
certain representations about its prior period financial statements. In
light of the need for adjustments to these prior period financial
statements, the lenders consider these representations to have been
inaccurate when made, and therefore, the lenders have asserted that there
has been a breach under the Credit Agreement causing the Company to be in
default. Based on the Company's expectation of the extent of such
adjustment at that time, the Company procured a waiver from the lenders
which allow the Company to continue to rollover certain LIBOR-based
borrowings. However, until the waiver becomes permanent, the terms of the
waiver do not cure the asserted default and preclude the Company from
drawing down additional borrowings under the credit facility. The waiver
will become permanent if the Company files its amended Form 10-K for the
fiscal year ended June 30, 2003 prior to the due date of the Company's
Form 10-K for the fiscal year ended June 30, 2004, which the Company
expects to do, and the other conditions of the waiver are met. In
addition, the lenders have informed the Company that, based on the
information contained in this report, an additional waiver may be
required. The lenders have asserted that they have the right to accelerate
payment of outstanding borrowings under the credit facility until the
waiver becomes permanent. Accordingly, all outstanding borrowings under
the revolving line of credit and the term loan portion of the senior
credit facility have been classified as a current obligation. The Company
is in discussions with its lenders and believes that it will be successful
in resolving these matters.
Accounts receivable represented 42 and 44 days sales outstanding (DSO) at
March 31, 2004 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 nine months ended March 31, 2004, operating activities provided
cash of $139.3 million. Investing activities used cash of $83.2 million,
primarily for the acquisition of businesses of $56.9 million and for
capital expenditures of $27.8 million. Financing activities used cash of
$46.7 million, comprised of repurchases of Company stock of $58.0 million
and net payments of short-term borrowings of $102.0 million, offset by
proceeds from debt of $100 million, proceeds from exercises of stock
options of $6.8 million, and issuance of common stock of $5.0 million.
Approximately 2.8 million shares of treasury stock were issued in
connection with the acquisition of USAIG in November 2003.
The Board of Directors authorized a new stock buy-back program of up to
$100 million effective November 12, 2003. Through March 31, 2004, the
Company has purchased 0.8 million shares for $11.9 million under the stock
buy-back program, leaving $88.1 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
22
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 nine months ended
March 31, 2004 and 2003. Restructuring, impairment and other charges are
excluded from the operating results of the segment as management does not
consider such charges in its assessment of segment performance, or in
allocating resources among segments (see Note 8).
(in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2004 2003 2004 2003
As Restated As Restated
----------- ----------- ----------- -----------
Revenue:
Investment Services $ 148,295 $ 125,050 $ 414,677 $ 367,847
Insurance and Education Services 67,458 57,059 190,124 159,285
Information Services 56,579 55,965 165,346 159,095
----------- ----------- ----------- -----------
Total revenue $ 272,332 $ 238,074 $ 770,147 $ 686,227
=========== =========== =========== ===========
Operating income (loss):
Investment Services $ 18,034 $ 20,167 $ 50,904 $ 54,123
Insurance and Education Services 15,052 18,782 39,353 51,444
Information Services 16,900 15,779 44,626 42,009
Corporate (5,348) (5,101) (16,688) (15,757)
----------- ----------- ----------- -----------
Total operating income $ 44,638 $ 49,627 $ 118,195 $ 131,819
=========== =========== =========== ===========
Internal revenue growth (excluding acquisitions) for Investment Services,
Insurance and Education Services, and Information Services approximated
19%, -11%, and 1%, respectively, during the three months ended March 31,
2004 over the same period last year. A substantial portion of the
Company's revenues in the Investment and Information Services business
segments 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 positive annual internal growth rate
in fiscal 2004.
Revenue in the Investment Services business segment increased $23.2
million, or 18.6%, during the three months ended March 31, 2004, over the
same period last year. The revenue increase was primarily due to the
addition of several new clients and increased assets under administration.
Operating income in the Investment Services business segment decreased
$2.1 million, or 10.6%, during the fiscal third quarter. Operating margins
were 12.2% and 16.1% for the three months ended March 31, 2004 and 2003,
respectively. The margin decreased primarily due 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
Hedge Fund Services division.
Revenue in the Insurance and Education Services business segment increased
$10.4 million, or 18.2%, during the three months ended March 31, 2004,
over the same period last year. The revenue increase was primarily due to
acquisitions offset by a decline in internal revenue of -11%. The decrease
in internal revenue was primarily due to company declines in sales of life
and fixed annuity insurance products and lower sales productivity.
Operating income in the Insurance and Education Services business segment
decreased $3.7 million, or 19.9%, during the fiscal third quarter.
Operating margins were 22.3% and 32.9% for the three months ended March
31, 2004 and 2003, respectively. Margins decreased in the fiscal third
quarter primarily due to a decline in internal revenue and change in the
mix of business.
Revenue in the Information Services business segment increased $0.6
million, or 1.1%, during the three months ended March 31, 2004, 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 $1.1 million, or 7.1%, during the
fiscal third
23
quarter. Operating margins were 29.9% and 28.2% for the three months ended
March 31, 2004 and 2003, 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 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 programs and financial plans; general U.S. and non-U.S.
economic and political conditions, including the global economic
environment 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; the possible
acceleration of the amounts borrowed under the Company's bank credit
facility; 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.
24
ITEM 4. CONTROLS AND PROCEDURES
We have engaged in a continuing review and analysis of estimates used in
determining the level of commissions receivable in our Life Insurance Services
division. As a result of our efforts, we have determined that commissions
receivable should be adjusted as described below. In addition, in reviewing our
past practices, procedures and processes, we have determined that there needs to
be revisions to such practices, procedures and processes. In this regard, we
concluded there was a material weakness in our internal controls over financial
reporting relating to the validation and monitoring of assumptions underlying
the estimates used to compute certain first year, bonus and renewal commissions
receivable and deficiencies with respect to related documentation and review
processes for significant accounting entries, including entries relating to
acquisition accounting. We have taken, and continue to take, steps to rectify
these matters.
Based upon our review and analysis, we determined that an adjustment of $80.0
million to commissions receivable in our Life Insurance division, together with
corresponding adjustments to revenues and expenses, should be recorded. We also
determined that the adjustment requires a restatement of our financial results
for each of the fiscal years ended June 30, 2003, 2002 and 2001, as well as our
interim results for the quarters ended December 31 and September 30, 2003, to
reflect the impact of the adjustment on each of the periods presented.
In connection with the aforementioned review, we also identified adjustments
relating to acquisition accounting for certain acquired entities in the Life
Insurance business, resulting in a reduction in goodwill and deferred tax
liabilities over the affected periods of $21.0 million, and adjustments to
commissions payable of $2.6 million as a result of an understatement in agent
commissions payable. These adjustments will also be reflected in the restatement
of financial results described above.
To date, we have taken steps to improve our internal controls at our Life
Insurance Services division, including the following:
- Added personnel to the accounts receivable department to allow for
more timely reconciliation and adjustment of aged accounts
receivable and related agent payable accounts;
- Enhanced process for reviewing and monitoring reserves for
commissions receivable;
- Augmented review of commission revenue transactions to ensure
adherence to our revenue recognition policies;
- Initiated system enhancements to further automate processes
associated with accounts receivable and revenue recognition; and
- Implemented systematic review of data quality and control.
We intend to continue to monitor our internal controls, and if further
improvements or enhancements are identified, we will take steps to implement
such improvements or enhancements. Except as set forth above, there have been no
changes in our internal controls over financial reporting, which have materially
affected, or are reasonably likely to materially affect, such internal controls.
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 the end of the period covered by this report
of Form 10-Q, 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, other than
the weakness described above, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective. Subsequent to March 31, 2004, the Company has
implemented the steps described above and concluded that the disclosure controls
and procedures are effective as of the date of this report.
It should be noted that the design of any system of controls is based upon
certain assumptions about the likelihood of future events, and there can be no
assurance that such design will succeed in achieving its stated objective under
all potential future conditions, regardless of how remote. However, the
Company's Chief Executive Officer and the Company's Chief Financial Officer
believe the Company's disclosure controls and procedures provide reasonable
assurance that the disclosure controls and procedures are effective at the
reasonable assurance level.
25
PART II
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(e) Issuer Purchases of Equity Securities
(c) Total Number (d) Approximate
of Shares Dollar Value of
Purchased as Part Shares that May
of Publicly Yet Be Purchased
(a) Total Number (b) Average Price Announced Plans or Under the Plans or
Period of Shares Purchased Paid per Share Programs Programs
- ------------- ------------------- ------------------- -------------------- -------------------
January 2004 - - - $ 92,735,711
February 2004 255,304 $ 17.98 255,304 $ 88,145,345
March 2004 - - - $ 88,145,345
Total 255,304 $ 17.98 255,304 $ 88,145,345
Effective November 12, 2003, the Board of Directors authorized a new
stock buy-back program of up to $100 million. Purchases have occurred
and will continue to occur from time to time in the open market to
offset the possible dilutive effects of shares issued under employee
benefit plans, for possible use in future acquisitions, and for general
and other corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
For information regarding an asserted default to the Company's senior
unsecured credit facility, see Note 7 to the Company's financial
statements included in Part I, Item 1 of this Report.
ITEM 5. OTHER INFORMATION
Subsequent Events
Following the Company's May 17, 2004 announcement regarding the
restatement of our financial results, two putative class action
lawsuits, Rosen v The Bisys Group, Inc., et al. and Vogel v The Bisys
Group, Inc, et al., were filed against the Company and certain of its
current and former officers in the United States District Court for the
Southern District of New York. The complaints purport to be brought on
behalf of all shareholders who purchased the Company's securities
between October 23, 2000 and May 17, 2004. The complaints generally
assert that the Company and certain of its officers allegedly violated
the federal securities laws in connection with the purported issuance of
false and misleading information concerning the Company's financial
condition. The complaints seek damages in an unspecified amount against
the Company. The Company intends to defend itself vigorously against
these claims but is unable to determine the ultimate outcome. In
addition to these lawsuits, the Company has seen public announcements by
others purporting to file similar lawsuits but the Company has not seen
such other complaints.
The Company notified the SEC of its intention to restate prior period
financial results and that there would be a delay in the filing of its
Form 10Q for the quarter ended March 31, 2004. Subsequently, the SEC
advised the Company that the SEC is conducting an investigation into the
facts and circumstances related to the restatement. The Company is
cooperating fully with the SEC.
The Audit Committee of the Company's Board of Directors is conducting an
independent investigation into the events and circumstances that
resulted in the restatement and has retained independent counsel to
assist in such investigation. The Company is fully cooperating with the
independent counsel in this ongoing investigation.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 - Credit Agreement, dated as of March 31, 2004, by and
among the Registrant, the Lenders party thereto, Fleet National Bank,
JPMorgan Chase Bank, Suntrust Bank, and Wachovia Bank, National
Association, as Documentation Agents, and The Bank of New York, as
Administrative Agent.
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 March 31, 2004.
A Current Report on Form 8-K, dated April 22, 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 March 31, 2004
(Item 12).
A Current Report on Form 8-K, dated May 18, 2004, was furnished to the
Securities and Exchange Commission to update the Company's financial
results for the fiscal quarter ended March 31, 2004 (Item 12).
27
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: June 16, 2004 By: /s/ James L. Fox
----------------------------------------------------
James L. Fox
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer)
28
THE BISYS GROUP, INC.
EXHIBIT INDEX
Exhibit No.
(10.1) Credit Agreement, dated as of March 31, 2004, by and among
the Registrant, the Lenders party thereto, Fleet National
Bank, JPMorgan Chase Bank, Suntrust Bank, and Wachovia Bank,
National Association, as Documentation Agents, and The Bank
of New York, as Administrative Agent
(31.1) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
(31.2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
(32) Section 1350 Certifications
29