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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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: 001-31254
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 OCTOBER 29, 2004, THERE WERE 120,221,657 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 25 pages.
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THE BISYS GROUP, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three months ended September 30, 2004 and 2003 3
Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004 4
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 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 14
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity 22
Securities
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
2
PART I
ITEM 1. FINANCIAL STATEMENTS
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
September 30,
---------------------
2004 2003
--------- ---------
Revenues $ 268,129 $ 236,434
--------- ---------
Operating costs and expenses:
Service and operating 174,339 149,919
Selling, general and administrative 51,480 46,129
Amortization of intangible assets 7,150 5,806
Restructuring, impairment and other charges 488 12,624
--------- ---------
Total operating costs and expenses 233,457 214,478
--------- ---------
Operating earnings 34,672 21,956
Interest income 480 325
Interest expense (4,851) (4,664)
Investment gains 4,193 -
--------- ---------
Income before income taxes 34,494 17,617
Income taxes 12,763 11,774
--------- ---------
Net income $ 21,731 $ 5,843
========= =========
Basic earnings per share $ 0.18 $ 0.05
========= =========
Diluted earnings per share $ 0.18 $ 0.05
========= =========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
September 30, June 30,
2004 2004
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 95,509 $ 139,872
Restricted cash 56,986 67,125
Accounts receivable, net 101,506 96,385
Insurance premiums and commissions receivable, net 84,393 87,154
Deferred tax asset 11,696 13,484
Other current assets 41,426 49,747
----------- -----------
Total current assets 391,516 453,767
Property and equipment, net 111,346 112,074
Goodwill 802,178 802,178
Intangible assets, net 204,147 211,298
Other assets 30,835 32,923
----------- -----------
Total assets $ 1,540,022 $ 1,612,240
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 12,500 $ 6,250
Short-term borrowings 7,000 66,000
Accounts payable 16,157 17,397
Insurance premiums and commissions payable 111,158 126,173
Other current liabilities 135,333 158,459
----------- -----------
Total current liabilities 282,148 374,279
Long-term debt 387,500 393,750
Deferred tax liability 60,920 54,669
Other liabilities 6,282 4,560
----------- -----------
Total liabilities 736,850 827,258
----------- -----------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares authorized, 121,273,577 and
120,836,315 shares issued 2,425 2,417
Additional paid-in capital 395,657 389,484
Retained earnings 424,558 403,738
Notes receivable from stockholders (3,718) (8,116)
Employee benefit trust, 415,850 and 342,613 shares (6,567) (5,507)
Deferred compensation 6,715 5,292
Unearned compensation - restricted stock (11,349) (6,199)
Accumulated other comprehensive income 3,064 6,337
Treasury stock at cost, 556,341 and 158,559 shares (7,613) (2,464)
----------- -----------
Total stockholders' equity 803,172 784,982
----------- -----------
Total liabilities and stockholders' equity $ 1,540,022 $ 1,612,240
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
September 30,
----------------------
2004 2003
--------- --------
Cash flows from operating activities:
Net income $ 21,731 $ 5,843
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring, impairment and other charges 488 12,624
Depreciation and amortization 16,016 13,978
Deferred income tax provision 9,912 2,938
Investment gains (4,193) -
Change in operating assets and liabilities, net of effects from acquisitions (24,605) (8,951)
--------- --------
Net cash provided by operating activities 19,349 26,432
--------- --------
Cash flows from investing activities:
Payments related to businesses previously acquired (186) (1,943)
Capital expenditures (8,201) (9,487)
Proceeds from sale of investments 7,393 -
Change in other investments 510 1,708
--------- --------
Net cash used in investing activities (484) (9,722)
--------- --------
Cash flows from financing activities:
Short-term borrowings, net (59,000) (9,000)
Proceeds from exercise of stock options 128 2,970
Repurchases of common stock (8,754) (13,763)
Repayment of notes receivable from stockholders 4,398 -
--------- --------
Net cash used in financing activities (63,228) (19,793)
--------- --------
Net decrease in cash and cash equivalents (44,363) (3,083)
Cash and cash equivalents at beginning of period 139,872 79,558
--------- --------
Cash and cash equivalents at end of period $ 95,509 $ 76,475
========= ========
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
(UNLESS OTHERWISE NOTED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(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 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 2004 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) which are, in the opinion of management, necessary
to fairly state this information.
RECLASSIFICATION
Certain reclassifications have been made to the fiscal 2004 financial
statements to conform to the fiscal 2005 presentation.
RESTRICTED CASH
Unremitted insurance premiums are held in a fiduciary capacity and
approximated $57.0 million and $67.1 million at September 30, 2004 and
June 30, 2004, 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.
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 in the
Company's life insurance brokerage division. In its capacity as a
commercial property and casualty wholesale distributor, the Company
collects premiums from other agents and brokers and, after deducting its
commissions, remits the premiums to the respective insurers.
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 value 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. At September 30, 2004,
investments available for sale are recorded at their market value of $7.0
million, with an unrealized gain of $4.6 million. Net realized gains from
securities sold during the three months ended September 30, 2004 were $4.2
million.
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 FAS
No. 123, "Accounting for Stock-Based Compensation":
6
Three Months Ended
September 30,
------------------------
2004 2003
---------- ---------
Net income, as reported $ 21,731 $ 5,843
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 460 165
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (4,338) (4,096)
---------- ---------
Pro forma net income $ 17,853 $ 1,912
========== =========
Earnings per share:
Basic, as reported $ 0.18 $ 0.05
========== =========
Basic, pro forma $ 0.15 $ 0.02
========== =========
Diluted, as reported $ 0.18 $ 0.05
========== =========
Diluted, pro forma $ 0.15 $ 0.02
========== =========
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 insurance commissions receivable, goodwill, intangible assets,
income taxes, and revenue recognition.
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:
Three Months Ended
September 30,
-------------------
2004 2003
-------- ------
Net income $ 21,731 $5,843
Unrealized gain on investments, net of tax 27 12
Reclassification adjustment for gains
included in net income, net of tax (3,075) -
Foreign currency translation adjustment (225) 257
-------- ------
Total comprehensive income $ 18,458 $6,112
======== ======
7
4. EARNINGS PER SHARE
Basic and diluted EPS computations for the three months ended September
30, 2004 and 2003 are as follows:
Three Months Ended
September 30,
----------------------------
2004 2003
------------ ------------
Basic EPS
Net income $ 21,731 $ 5,843
============ ============
Weighted average common shares
outstanding 120,000 119,805
============ ============
Basic earnings per share $ 0.18 $ 0.05
============ ============
Diluted EPS
Net income $ 21,731 $ 5,843
============ ============
Weighted average common shares
outstanding 120,000 119,805
Assumed conversion of common shares
issuable under stock-based compensation
plans 575 1,662
------------ ------------
Weighted average common and common
equivalent shares outstanding 120,575 121,467
============ ============
Diluted earnings per share $ 0.18 $ 0.05
============ ============
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:
Three Months Ended
September 30,
-----------------------------------
2004 2003
---------------- ----------------
Number of options excluded 10,321 6,380
Option price per share $14.01 to $35.30 $18.02 to $35.30
Average market price of common shares
for the period $13.92 $17.83
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
During the three months ended September 30, 2004 and 2003, the Company
recorded pre-tax restructuring, impairment and other charges of $0.5
million and $12.6 million, respectively. The charges primarily relate to
the integration, consolidation, and reorganization of certain business
operations in the Company's European Fund Services division and the Life
Insurance Services division, and the recording of estimated amounts for
certain litigation expenses.
8
A summary of these items follows:
Three Months Ended
September 30,
------------------
2004 2003
----- ---------
Restructuring charges $107 $ 5,462
Impairment charges - 4,515
Litigation and other charges 381 2,647
---- -------
Total restructuring, impairment and other charges $488 $12,624
==== =======
The following summarizes activity with respect to the Company's
restructuring activities for the three months ended September 30, 2004:
Restructuring accrual at June 30, 2004 $ 3,849
-------
Expense provision:
Employee severance 263
Reversals (8)
Currency translation gain (148)
-------
Total 107
-------
Cash payments and other 1,858
-------
Remaining accrual at September 30, 2004:
Employee severance 1,212
Facility closure 886
-------
Total $ 2,098
=======
Restructuring charges of $0.1 million during the three months ended
September 30, 2004 were related to the ongoing restructuring of the
European mutual fund services operations and were comprised of severance
totaling $0.3 million, offset by currency translation gains of $0.1
million.
For the three months ended September 30, 2003, restructuring charges of
$5.5 million were comprised of severance totaling $4.2 million and lease
termination costs of $1.3 million. Severance charges resulted from the
termination of approximately 175 employees representing all levels of
staffing. In connection with its restructuring activities, the Company
recorded asset impairment charges of $4.5 million in the first quarter of
fiscal 2004. 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 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.
In connection with the aforementioned restructuring of the European mutual
fund services operations, additional contract termination costs of
approximately $1.0 million are expected to be recognized in the second
quarter of fiscal 2005 in accordance with FAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities."
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 $2.6 million during the three months ended
September 30, 2003 related to breach of contract claims in the life
insurance services business. The total amount of the charge includes an
estimated resolution amount and actual legal fees incurred. The Company
intends to continue to vigorously defend the claims asserted and has
asserted a number of counterclaims.
9
6. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The carrying amount of goodwill by business segment at September 30, 2004
was as follows:
Investment Insurance Information
Services Services Services Total
---------- --------- ----------- --------
Balance, September 30, 2004 $311,191 $455,597 $35,390 $802,178
-------- -------- ------- --------
INTANGIBLE ASSETS
At September 30, 2004, acquired intangible assets were comprised of the
following:
Gross Carrying Accumulated
Amount Amortization Net Book Value
-------------- ------------ --------------
Customer related $218,621 $(56,867) $161,754
Noncompete agreements 46,504 (18,437) 28,067
Other 22,695 (8,369) 14,326
-------- -------- --------
Total $287,820 $(83,673) $204,147
======== ======== ========
At June 30, 2004, acquired intangible assets were comprised of the
following:
Gross Carrying Accumulated
Amount Amortization Net Book Value
-------------- ------------ --------------
Customer related $218,621 $(51,571) $167,050
Noncompete agreements 46,504 (17,066) 29,438
Other 22,695 (7,885) 14,810
-------- -------- --------
Total $287,820 $(76,522) $211,298
======== ======== ========
All of the Company's acquired intangible assets are subject to
amortization. Amortization expense for acquired intangible assets was $7.2
million for the three months ended September 30, 2004 and $27.0 million
for the year ended June 30, 2004. Estimated annual amortization expense is
$28.2 million in fiscal 2005, $27.1 million in fiscal 2006, $25.7 million
in fiscal 2007, $24.9 million in fiscal 2008, and $22.9 million in fiscal
2009.
7. BORROWINGS
In March 2004, the Company entered into a senior unsecured credit
facility. The $400 million facility contains a $300 million revolving line
of credit facility, of which $7 million is outstanding at September 30,
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
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 the Company to maintain certain financial
covenants and limits the Company's ability to incur future indebtedness
and to pay dividends. As of September 30, 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
($3.0 million at September 30, 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 September 30, 2004, the weighted average interest rate of the
credit facility borrowings was 3.11%.
Long-term debt also includes $300 million of 4% convertible subordinated
notes due March 2006.
10
Debt outstanding at September 30, 2004 and June 30, 2004 is as follows:
September 30, 2004 June 30, 2004
------------------ -------------
Senior credit facility, term loan, at a
rate of 3.125% and 2.625%, respectively $100,000 $100,000
Senior credit facility, revolving line
of credit, at a rate of 2.9% and 2.275%,
respectively 7,000 66,000
Convertible subordinated 4% notes 300,000 300,000
-------- --------
407,000 466,000
Less amounts due within one year 19,500 72,250
-------- --------
Long-term debt $387,500 $393,750
======== ========
Long-term debt repayments at September 30, 2004 are due as follows:
2006 $318,750
2007 31,250
2008 37,500
--------
$387,500
========
8. SEGMENT INFORMATION
The following table sets forth revenue and operating income by business
segment and for corporate operations for the three months ended September
30, 2004 and 2003. Measures used to assess segment performance include
revenues and operating earnings, exclusive of restructuring, impairment
and other charges. Segment operating earnings exclude restructuring,
impairment and other charges since they are not allocated to the segments
for internal evaluation purposes. While these items are identifiable to
the business segments, they are not included in the measurement of segment
operating earnings provided to the chief operating decision maker for
purposes of assessing segment performance and decision making with respect
to resource allocation.
11
Three Months Ended
September 30,
--------------------
2004 2003
--------- ---------
Revenue:
Investment Services $ 149,435 $ 128,171
Insurance Services 66,636 56,178
Information Services 52,058 52,085
--------- ---------
Total revenue $ 268,129 $ 236,434
========= =========
Operating income (loss):
Investment Services $ 18,268 $ 16,413
Insurance Services 11,991 10,460
Information Services 11,574 12,887
Corporate (6,673) (5,180)
--------- ---------
Total operating income $ 35,160 $ 34,580
========= =========
Restructuring, impairment and
other charges:
Investment Services $ 112 $ 5,438
Insurance Services 381 6,176
Information Services - 145
Corporate (5) 865
--------- ---------
Total restructuring,
impairment and other
charges $ 488 $ 12,624
========= =========
Total consolidated operating
earnings $ 34,672 $ 21,956
========= =========
9. SEC INVESTIGATION
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 in order to record
adjustments for correction of errors resulting from various accounting
matters in the Life Insurance Services division. An amended Annual Report
on Form 10-K for the fiscal year ended June 30, 2003 was filed with the
Securities and Exchange Commission ("SEC") on August 10, 2004 along with
amended Quarterly Reports on Form 10-Q for the quarters ended December 31
and September 30, 2003 to reflect the restated financial results. All
referenced amounts and comparisons in the accompanying condensed
consolidated financial statements, notes and management's discussion and
analysis reflect the balances and amounts on a restated basis. The Audit
Committee of the Company's Board of Directors conducted an independent
investigation into the events and circumstances that resulted in the
restatement and retained independent counsel to assist in such
investigation. The Company notified the SEC in May 2004 of its intention
to restate prior period financial results. Subsequently, the SEC advised
the Company that the SEC is conducting an investigation into the facts and
circumstances related to the restatement. The Company has cooperated and
intends to continue to cooperate with the SEC's investigation.
10. LEGAL PROCEEDINGS
Following the Company's May 17, 2004 announcement regarding the
restatement of its financial results, seven putative class action and two
derivative lawsuits 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. By order of the Court, all but one of the
putative class actions have been consolidated into a single action, and on
October 25, 2004, plaintiffs filed a consolidated amended complaint. The
complaint purports to be brought on behalf of all shareholders who
purchased the Company's securities between October 23, 2000 and May 17,
2004 and generally asserts that the Company, certain of its officers, and
its auditor, PricewaterhouseCoopers LLP, allegedly violated the federal
securities laws in connection with the purported issuance of false and
misleading information concerning the Company's financial condition. The
complaint seeks damages in an unspecified amount as well as unspecified
equitable/injunctive relief.
12
The remaining putative class action purports to be brought on behalf of
all persons who acquired non-publicly traded BISYS securities from the
Company as part of private equity transactions during the period October
23, 2000 to May 17, 2004. The complaint generally asserts 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, and seeks
damages in an unspecified amount. Plaintiffs have not yet filed an amended
complaint.
The derivative complaints purport to be brought on behalf of the Company
and generally assert that certain officers and directors are liable for
alleged breaches of fiduciary duties, abuse of control, gross
mismanagement, waste, and unjust enrichment that purportedly occurred
between October 23, 2000 and the present. The derivative complaints seek
disgorgement, constructive trust, and damages in an unspecified amount.
The Court has ordered that the derivative actions be consolidated with one
another; plaintiffs have not yet filed a consolidated amended complaint.
The Company intends to defend itself vigorously against these claims but
is unable to determine the ultimate outcome.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
We provide outsourcing solutions that enable investment firms, insurance
companies, and banks to more efficiently serve their customers, grow their
businesses, and respond to evolving regulatory requirements. We currently
support over 1,000 clients in the financial services industry through
three business segments: Investment Services, Insurance Services, and
Information Services.
Our segments are separately managed strategic business units that offer
different products and services. The Investment Services segment provides
outsourcing services, including administration and distribution, to
domestic and offshore mutual fund complexes, hedge funds and private
equity funds and retirement plan services to small to mid-size retirement
plans. The Insurance Services segment provides distribution solutions for
commercial property and casualty, annuities, life, long-term care,
disability and special risk insurance products; offers certification and
continuing education training for insurance and investment professionals;
and provides licensing-related software products and services. The
Information Services segment provides information processing, imaging, and
asset retention solutions to banks, insurance companies and corporate
clients.
Our growth strategy emphasizes internal revenue growth, supplemented by
acquisitions of complementary businesses. Our objectives in the near term
are to focus on internal revenue growth and margin expansion, improve
customer service performance to achieve higher retention, and further
invest in the development of our associates. We endeavor to expand the
scope of our services through focused account management, emphasizing
services with recurring revenues and long-term contracts. We achieve
internal revenue growth and expand our business base through organic
growth of our clients, sales of additional products and services to
existing clients, and direct sales to new clients.
RESULTS OF OPERATIONS
The following table presents the percentage of revenues represented by
each item in our condensed consolidated statements of income for the
periods indicated:
Three Months Ended
September 30,
--------------------
2004 2003
----- -----
Revenues 100.0% 100.0%
----- -----
Operating costs and expenses:
Service and operating 65.0 63.4
Selling, general and administrative 19.2 19.5
Amortization of intangible assets 2.7 2.5
Restructuring, impairment and other charges 0.2 5.3
----- -----
Total operating costs and expenses 87.1 90.7
----- -----
Operating earnings 12.9 9.3
Interest income 0.2 0.2
Interest expense (1.8) (2.0)
Investment gains 1.6 -
----- -----
Income before income taxes 12.9 7.5
Income taxes 4.8 5.0
----- -----
Net income 8.1% 2.5%
===== =====
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 2003.
Revenues increased 13% from $236.4 million for the three months ended
September 30, 2003 to $268.1 million for the three months ended September
30, 2004. This growth was derived from recently acquired businesses, sales
to new clients, existing client growth, and cross sales to existing
clients. Internal revenue growth approximated 10% for the three months
ended September 30, 2004 over the same period last year.
14
Service and operating expenses increased 16% from $149.9 million for the
three months ended September 30, 2003 to $174.3 million for the three
months ended September 30, 2004 and increased as a percentage of revenues
from 63.4% to 65.0%. The dollar and percentage increases resulted from
additional costs associated with greater revenues, lower margins in the
Information Services segment, expenses associated with adding new clients,
and changes in the mix of the business.
Selling, general and administrative expenses increased 12% from $46.1
million for the three months ended September 30, 2003 to $51.5 million for
the three months ended September 30, 2004 and decreased as a percentage of
revenues from 19.5% to 19.2%. The dollar increase resulted from additional
costs associated with greater revenues. The decrease as a percentage of
revenues resulted from further utilization of existing general and
administrative support resources.
Amortization of intangible assets increased $1.3 million for the three
months ended September 30, 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 $0.2 million for the three months ended
September 30, 2004 over the same period last year primarily due to higher
interest rates on borrowings under our revolving credit facility.
Investment gains of $4.2 million were realized during the three months
ended September 30, 2004 from the sale of a portion of an investment we
held in the common stock of another publicly traded company. The remainder
of the investment was sold in October 2004 and an additional gain of more
than $4 million is expected to be recognized in the fiscal second quarter
of 2005.
The income tax provision of $12.8 million for the three months ended
September 30, 2004 increased from $11.8 million for the three months ended
September 30, 2003, due to higher taxable income. The provision represents
an effective tax rate, excluding the impact of restructuring, impairment
and other charges, of 37.0% and 37.25% for the periods ended September 30,
2004 and 2003, respectively. The decrease in the effective tax rate is
primarily due to the mix of business in foreign tax jurisdictions, which
have lower tax rates.
Operating earnings, before restructuring, impairment and other charges,
resulted in margins of 13.1% and 14.6% for the three months ended
September 30, 2004 and 2003, respectively. The margin decrease was
primarily due to a margin decline in the Investment Services group for
expenses associated with adding new clients and a margin decline in the
Information Services group due to flat revenues and ongoing investments in
several new products.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
During the three months ended September 30, 2004 and 2003, we recorded
pre-tax restructuring, impairment and other charges of $0.5 million and
$12.6 million, respectively. The charges primarily relate to the
integration, consolidation, and reorganization of certain business
operations in the Company's European Fund Services division and the Life
Insurance Services division, and the recording of estimated amounts for
certain litigation expenses.
A summary of these items follows:
Three Months Ended
September 30,
-------------------
2004 2003
---- -------
Restructuring charges $107 $ 5,462
Impairment charges - 4,515
Litigation and other charges 381 2,647
---- -------
Total restructuring, impairment and other charges $488 $12,624
==== =======
15
The following summarizes activity with respect to restructurings for the
three months ended September 30, 2004:
Restructuring accrual at June 30, 2004 $ 3,849
-------
Expense provision:
Employee severance 263
Reversals (8)
Currency translation gain (148)
-------
Total 107
-------
Cash payments and other 1,858
-------
Remaining accrual at September 30, 2004:
Employee severance 1,212
Facility closure 886
-------
Total $ 2,098
=======
Restructuring charges of $0.1 million during the three months ended
September 30, 2004 were related to the ongoing restructuring of the
European mutual fund services operations and were comprised of severance
totaling $0.3 million, offset by currency translation gains of $0.1
million.
For the three months ended September 30, 2003, restructuring charges of
$5.5 million were comprised of severance totaling $4.2 million and lease
termination costs of $1.3 million. Severance charges resulted from the
termination of approximately 175 employees representing all levels of
staffing. In connection with our restructuring activities, we recorded
asset impairment charges of $4.5 million in the first quarter of fiscal
2004. Of these charges, $3.9 million relates to impairment of an
intangible asset and other long-lived assets as a result of our plan to
restructure our European mutual fund services operations and to exit
certain European locations following the acquisition of two of our
significant customers by acquirers with existing fund services
capabilities. We 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
we believe the deferred tax assets will not be realized.
In connection with the aforementioned restructuring of the European mutual
fund services operations, additional contract termination costs of
approximately $1.0 million are expected to be recognized in the second
quarter of fiscal 2005 in accordance with FAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities."
Based on internal analysis and discussions with counsel on the status of
various litigation matters and contract disputes, we recorded a charge of
approximately $2.6 million during the three months ended September 30,
2003 related to breach of contract claims in the life insurance services
business. The total amount of the charge includes an estimated resolution
amount and actual legal fees incurred. We intend to continue to vigorously
defend the claims asserted and have asserted a number of counterclaims.
SEGMENT INFORMATION
The following table sets forth revenue and operating income by business
segment and for corporate operations for the three months ended September
30, 2004 and 2003. Measures used to assess segment performance include
revenues and operating earnings, exclusive of restructuring, impairment
and other charges. Segment operating earnings exclude restructuring,
impairment and other charges since they are not allocated to the segments
for internal evaluation purposes. While these items are identifiable to
the business segments, they are not included in the measurement of segment
operating earnings provided to the chief operating decision maker for
purposes of assessing segment performance and decision making with respect
to resource allocation.
16
(in thousands)
Three Months Ended
September 30,
---------------------------
2004 2003
--------- ---------
Revenue:
Investment Services $ 149,435 $ 128,171
Insurance Services 66,636 56,178
Information Services 52,058 52,085
--------- ---------
Total revenue $ 268,129 $ 236,434
========= =========
Operating income (loss):
Investment Services $ 18,268 $ 16,413
Insurance Services 11,991 10,460
Information Services 11,574 12,887
Corporate (6,673) (5,180)
--------- ---------
Total operating income $ 35,160 $ 34,580
========= =========
Restructuring, impairment
and other charges:
Investment Services $ 112 $ 5,438
Insurance Services 381 6,176
Information Services - 145
Corporate (5) 865
--------- ---------
Total restructuring,
impairment and other
charges $ 488 $ 12,624
========= =========
Total consolidated
operating earnings $ 34,672 $ 21,956
========= =========
Internal revenue growth (excluding acquisitions) for Investment Services,
Insurance Services, and Information Services approximated 17%, 3%, and 0%,
respectively, during the three months ended September 30, 2004 over the
same period last year. A substantial portion of our revenues, especially
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.
Revenue in the Investment Services business segment increased $21.3
million, or 16.6%, during the three months ended September 30, 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 increased
$1.9 million, or 11.3%, during the fiscal first quarter. Operating margins
were 12.2% and 12.8% for the three months ended September 30, 2004 and
2003, respectively. The margin decreased primarily due to expenses
associated with adding new clients to our Fund and Retirement Services
platforms and additional investments in both our Hedge Fund and Private
Equity businesses. For fiscal year 2005, margins in the Investment
Services segment are expected to expand modestly and internal revenue
growth is expected to be in the range of 6% to 9%. The projected rate of
internal revenue growth reflects the loss of a significant Fund Services
client in the second half of the fiscal year representing approximately
$25 to $30 million of annualized revenue. The loss of the customer was the
result of the acquiring entity's decision to use its in-house solution to
service the acquired client.
Revenue in the Insurance Services business segment increased $10.5
million, or 18.6%, during the three months ended September 30, 2004, over
the same period last year. The revenue increase was primarily from the
acquisition of USA Insurance Group in November 2003. Operating income in
the Insurance Services business segment increased $1.5 million, or 14.6%,
during the fiscal first quarter. Operating margins were 18.0% and 18.6%
for the three months ended September 30, 2004 and 2003, respectively. The
margin decrease was primarily due to additional investments in sales
support, customer service, finance, and IT resources. For fiscal year
2005, internal revenue growth is expected to be positive and margins in
the Insurance Services business segment are expected to be in the range
of 17% to 19%.
Revenue in the Information Services business segment decreased $0.03
million, or 0.1%, during the three months ended September 30, 2004, over
the same period last year. The revenue decrease was due to the loss of a
major customer in the latter half of 2004, offset by existing client
growth, cross sales of ancillary products
17
and services to existing clients, and sales to new clients. Operating
income in the Information Services business segment decreased $1.3
million, or 10.2%, during the fiscal first quarter. Operating margins were
22.2% and 24.7% for the three months ended September 30, 2004 and 2003,
respectively. The margin decrease was primarily due to flat revenue and
ongoing investments in the growth of several new products. For fiscal year
2005, margins in the Information Services business segment are expected to
decline by approximately 400 basis points, and revenue is expected to be
lower than fiscal 2004 due to the loss of a major customer that was
acquired and deconverted in the latter half of fiscal 2004.
Corporate operations represent charges for our human resources, legal,
accounting and finance functions, and various other unallocated overhead
charges. Corporate expenses of $6.7 million for the three months ended
September 30, 2004 increased from $5.2 million in the same period last
year primarily due to additional expenses of more than $1 million related
to the restatement process, Sarbanes Oxley implementation, and other legal
and accounting fees.
FINANCIAL CONDITION
At September 30, 2004 and June 30, 2004, we had cash and cash equivalents
of $95.5 million and $139.9 million, respectively. Cash and cash
equivalents held outside the U.S. at September 30, 2004 and June 30, 2004
amounted to $54.1 million and $50.9 million, respectively. Stockholders'
equity was $803.2 million and $785.0 million at September 30, 2004 and
June 30, 2004, respectively.
Capital expenditures were $8.2 million in fiscal first quarter of 2005 and
are expected to approximate $30 to $35 million for fiscal year 2005.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had outstanding borrowings of $7 million against
our $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 3.11% on all outstanding borrowings
under the facility at September 30, 2004. The facility is used to support
our working capital requirements, repurchase our common stock, and fund
our future acquisitions. At September 30, 2004, we had $2.7 million
outstanding in letters of credit and $300 million of outstanding 4%
convertible subordinated notes due March 2006. Our debt ratio (total
debt/total debt plus equity) is 0.34 at September 30, 2004, and our
maximum debt ratio may not exceed 0.50 under the terms of the revolving
credit facility. At September 30, 2004, we were in compliance with all
financial covenants required by the credit facility.
We manage our debt structure and interest rate risk through the use of
fixed- and floating-rate debt. While changes in interest rates could
decrease interest income or increase interest expense, we do not believe
that it has a material exposure to changes in interest rates based on the
relative size of our interest bearing assets and liabilities. We do not
undertake any specific actions concerning exposure to interest rate risk,
and we are not party to any interest rate management transactions.
Our 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. Our policy is
to retain earnings to support future business opportunities, rather than
to pay dividends. We have historically used a significant portion of our
cash flow from operations to fund acquisitions and capital expenditures,
with any remainder used to reduce outstanding borrowings under the credit
facility or repurchase our own common stock. We believe that our cash flow
from operations, together with other available sources of funds, will be
adequate to meet our funding requirements. In the event that we make
significant future acquisitions, however, we may raise funds through
additional borrowings or the issuance of securities.
Accounts receivable represented 44 and 45 days sales outstanding (DSO) at
September 30, 2004 and 2003, respectively, based on quarterly revenues.
The calculation of DSO for accounts receivable excludes insurance premiums
and commissions receivable arising from our 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
insurance carriers have customary payment terms of up to twelve months. We
regularly evaluate our accounts receivable position relative to our
revenues and monitor our accounts receivable aging as part of managing our
receivable portfolio. Credit risk is generally mitigated by reasonably
short payment terms, the nature of our customers
18
(i.e., commercial banks, mutual funds, and insurance carriers) and our
large and diverse customer base. We generally do not require collateral
for accounts receivable.
For the three months ended September 30, 2004, operating activities
provided cash of $19.3 million, primarily as a result of net income of
$21.7 million, depreciation and amortization of $16.0 million, and
deferred income taxes of $9.9 million offset by changes in working capital
items of $24.6 million. Investing activities used cash of $0.5 million,
primarily for capital expenditures of $8.2 million, offset by $7.4 million
of proceeds from the sale of investments. Financing activities used cash
of $63.2 million, comprised of repurchases of our stock of $8.7 million
and net payments of short-term borrowings of $59.0 million, offset by
proceeds from repayment of notes receivable from shareholders of $4.4
million.
Repurchases of the Company's common stock 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. The following table presents stock repurchase activity
during the three months ended September 30, 2004 and the year ended June
30, 2004 under programs authorized by the Board of Directors, disclosing
total shares repurchased under each program and the associated cost. Upon
authorization of each new stock repurchase program, the former program is
superseded and replaced.
Three Months Ended Year Ended
September 30, 2004 June 30, 2004
------------------- ---------------------
Shares Cost Shares Cost
------ ------ ------ -------
Share Repurchase Programs:
$100 million, authorized August 2002 - $ - 3,158 $46,153
$100 million, authorized November 2003 636 8,754 869 13,565
--- ------ ----- -------
Total Stock Repurchases 636 $8,754 4,027 $59,718
=== ====== ===== =======
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), we do 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 we believe 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 our business units; renewal of material
contracts in our business units consistent with past experience;
successful and timely integration of significant businesses acquired by us
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 our 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 our processing systems; absence of
consolidation among client financial institutions or other client groups;
timely conversion of new customer data to our platforms; attracting and
retaining qualified key employees; no material breach of security of any
of our systems; control of costs and expenses; continued availability of
financing, and financial resources on the terms required to support our
future business endeavors; the mix of products and services; compliance
with the covenants and restrictions of our bank credit facility and
convertible subordinated notes indenture; and the outcome of pending and
future litigation and governmental or regulatory proceedings.
19
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.
20
ITEM 4. CONTROLS AND PROCEDURES
As previously disclosed, we engaged in a 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 determined that an adjustment
to commissions receivable in our Life Insurance division, together with
corresponding adjustments to revenues and expenses, should be recorded and
reflected in a restatement of our prior period financial results. 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, and adjustments to commissions payable as a result of an
understatement in agent commissions payable. These adjustments were also
reflected in the restatement of our prior period financial results. 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 with respect to related documentation and
review processes for significant accounting entries, including entries relating
to acquisition accounting.
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;
- Added senior management personnel to the finance staff focused on
financial accounting, financial reporting and financial controls;
- Enhanced processes for reviewing and monitoring reserves for
commissions receivable;
- Augmented review of commission revenue transactions to ensure
adherence to our revenue recognition policies;
- Improved process for documentation and review of significant
accounting entries and balance sheet account reconciliations;
- Initiated system enhancements to further automate processes
associated with cash receipts, 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
on 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 and upon
taking into consideration the steps described above to remediate the noted
material weakness, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.
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.
21
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
(a) Total Number (b) Average Price of Publicly Yet Be Purchased
of Shares Paid per Share Announced Plans Under the Plans or
Period Purchased or Programs Programs
- -------------- ---------------- ----------------- ----------------- ------------------
July 2004 - - - $ 86,435,340
August 2004 550,630 $ 13.67 550,630 $ 78,910,598
September 2004 85,000 $ 14.46 85,000 $ 77,681,477
Total 635,630 $ 13.77 635,630 $ 77,681,477
Effective November 12, 2003, the Board of Directors authorized a 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 5. OTHER INFORMATION
Legal Proceedings
Our Insurance Services division is involved in litigation with a West
Coast-based distributor of life insurance products, with which we had a
former business relationship. We intend to continue to vigorously
defend the claims asserted and have asserted a number of counterclaims.
We believe that we have adequate defenses against claims arising in
such litigation and that the outcome of this matter will not have a
material adverse effect upon our financial position, results of
operations or cash flows.
Following the Company's May 17, 2004 announcement regarding the
restatement of its financial results, seven putative class action and
two derivative lawsuits 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. By order of the Court, all but one
of the putative class actions have been consolidated into a single
action, and on October 25, 2004, plaintiffs filed a consolidated
amended complaint. The complaint purports to be brought on behalf of
all shareholders who purchased the Company's securities between October
23, 2000 and May 17, 2004 and generally asserts that the Company,
certain of its officers, and its auditor, PricewaterhouseCoopers LLP,
allegedly violated the federal securities laws in connection with the
purported issuance of false and misleading information concerning the
Company's financial condition. The complaint seeks damages in an
unspecified amount as well as unspecified equitable/injunctive relief.
The remaining putative class action purports to be brought on behalf of
all persons who acquired non-publicly traded BISYS securities from the
Company as part of private equity transactions during the period
October 23, 2000 to May 17, 2004. The complaint generally asserts 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,
and seeks damages in an unspecified amount. Plaintiffs have not yet
filed an amended complaint.
The derivative complaints purport to be brought on behalf of the
Company and generally assert that certain officers and directors are
liable for alleged breaches of fiduciary duties, abuse of control,
gross mismanagement, waste, and unjust enrichment that purportedly
occurred between October 23, 2000 and the present. The derivative
complaints seek disgorgement, constructive trust, and damages in an
22
unspecified amount. The Court has ordered that the derivative actions
be consolidated with one another; plaintiffs have not yet filed a
consolidated amended complaint.
The Company intends to defend itself vigorously against these claims
but is unable to determine the ultimate outcome.
SEC Investigation
We notified the SEC in May 2004 of our intention to restate prior
period financial results. Subsequently, the SEC commenced an
investigation into the facts and circumstances related to the
restatement. We have cooperated and intend to continue to cooperate
with the SEC's investigation. We cannot predict when the SEC will
conclude its investigation or the outcome or impact thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 - Form of Incentive Stock Option Agreement
Exhibit 10.2 - Form of Non-Qualified Stock Option Agreement
Exhibit 10.3 - Form of Restricted Stock Agreement
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
A Current Report on Form 8-K, dated September 27, 2004, was filed with
the Securities and Exchange Commission to report on the announcement of
the Company's filing of its previously delayed Annual Report on Form
10-K (Item 8).
A Current Report on Form 8-K, dated August 31, 2004, was filed with the
Securities and Exchange Commission to report on the resignation of Lynn
Mangum, Chairman and Director of the Company, and appointment of his
replacement as well as a newly elected Director and member of the Audit
Committee (Item 5).
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE BISYS GROUP, INC.
Date: November 8, 2004 By: /s/ James L. Fox
----------------------------------
James L. Fox
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
24
THE BISYS GROUP, INC.
EXHIBIT INDEX
Exhibit No.
(10.1) Form of Incentive Stock Option Agreement
(10.2) Form of Non-Qualified Stock Option Agreement
(10.3) Form of Restricted Stock Agreement
(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
25