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EXHIBIT 13
2004 Financials
19 Selected Financial Data
20 Management's Discussion and Analysis of Financial Condition and Results
of Operations
29 Management's Statement of Responsibility
29 Report of Independent Registered Public Accounting Firm
30 Consolidated Statements of Income
31 Consolidated Balance Sheets
32 Consolidated Statement of Stockholders' Equity
34 Consolidated Statements of Cash Flows
35 Notes to Consolidated Financial Statements
48 Market Price Information
49 Board of Directors
18
Selected Financial Data
(in thousands, except per share data)
The following data should be read in conjunction with the consolidated financial
statements and related notes thereto and management's discussion and analysis of
financial condition and results of operations included elsewhere in this annual
report.
The notes to the consolidated financial statements contain additional
information about various acquisitions, dispositions and certain charges
resulting from restructurings, impairments and litigation, which affect the
comparability of information presented.
INCOME STATEMENT DATA: (1)(2)
For Years Ended June 30, 2004 2003 2002 2001 2000
Revenues $ 1,037,302 $ 933,639 $ 821,175 $ 668,639 $ 561,896
----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Service and operating 657,981 554,351 487,648 396,600 326,315
Selling, general and administrative 197,346 176,728 157,743 132,001 118,172
Amortization of goodwill - - - 11,273 7,540
Amortization of intangible assets 26,978 18,822 13,125 9,018 3,904
Restructuring, impairment and other
charges 29,099 12,079 6,475 4,245 (520)
----------- ----------- ----------- ----------- -----------
Total operating costs and expenses 911,404 761,980 664,991 553,137 455,411
----------- ----------- ----------- ----------- -----------
Operating earnings 125,898 171,659 156,184 115,502 106,485
Interest income 1,345 1,475 3,599 5,646 3,183
Interest expense (19,049) (18,146) (15,701) (11,548) (3,134)
----------- ----------- ----------- ----------- -----------
Income before income taxes 108,194 154,988 144,082 109,600 106,534
Income taxes 44,614 56,745 55,384 42,530 45,607
----------- ----------- ----------- ----------- -----------
Net income $ 63,580 $ 98,243 $ 88,698 $ 67,070 $ 60,927
=========== =========== =========== =========== ===========
Basic earnings per share $ 0.53 $ 0.82 $ 0.75 $ 0.58 $ 0.55
Diluted earnings per share $ 0.53 $ 0.81 $ 0.72 $ 0.56 $ 0.53
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
June 30,
Total assets $ 1,612,240 $ 1,458,142 $ 1,191,342 $ 975,808 $ 591,714
Short-term borrowings 66,000 172,000 93,000 - 115,000
Long-term debt, including
current maturities 400,000 300,000 300,000 300,578 -
Total stockholders' equity 784,982 715,929 627,066 499,561 351,198
=========== =========== =========== =========== ===========
(1) Per share amounts restated for stock splits.
(2) Includes amortization of goodwill, net of tax, of $7.9 million and $5.5
million in fiscal 2001 and 2000, respectively ($0.07 and $0.04 per diluted
share, respectively). See Note 1 to Consolidated Financial Statements.
19
Management's Discussion
and Analysis of Financial Condition and Results of Operation
BUSINESS OVERVIEW
The BISYS Group, Inc. and subsidiaries (the "Company"), with headquarters in New
York City, provides business process outsourcing solutions that enable
investment firms, insurance companies, and banks to enter new segments of the
financial services industry. BISYS currently supports more than 22,000 domestic
and international financial institutions and corporate clients through three
business segments: Investment Services, Insurance and Education Services, and
Information Services.
The Company's segments are separately managed strategic business units
that offer different products and services. The Investment Services segment
provides business process 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 and Education 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 and imaging
solutions to financial services companies, asset retention solutions to
insurance companies, and corporate banking services to support
corporate-sponsored cash management programs.
The Company's growth strategy emphasizes internal revenue growth,
supplemented by acquisitions of complementary businesses. Management's
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 the Company's associates. The Company
endeavors to expand the scope of its services through focused account
management, emphasizing services with recurring revenues and long-term
contracts. The Company achieves internal revenue growth and expands its business
base through organic growth of its 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 the Company's consolidated income statements for the periods indicated.
For Years Ended June 30, 2004 2003 2002
------ ------ ------
Revenues 100.0% 100.0% 100.0%
----- ----- -----
Operating costs and expenses:
Service and operating 63.4 59.4 59.4
Selling, general and administrative 19.0 18.9 19.2
Amortization of intangible assets 2.6 2.0 1.6
Restructuring, impairment and other charges 2.9 1.3 0.8
----- ----- -----
Total operating costs and expenses 87.9 81.6 81.0
----- ----- -----
Operating earnings 12.1 18.4 19.0
Interest income 0.1 0.1 0.4
Interest expense (1.8) (1.9) (1.9)
----- ----- -----
Income before income taxes 10.4 16.6 17.5
Income taxes 4.3 6.1 6.7
----- ----- -----
Net income 6.1% 10.5% 10.8%
===== ===== =====
20
Revenues increased $103.7 million in fiscal 2004 and $112.5 million in fiscal
2003, representing increases of 11.1% and 13.7%, respectively. Growth in fiscal
2004 and 2003 was derived from existing client growth, cross-sales to existing
clients, sales to new clients and revenues from acquired businesses. Revenue
growth from acquired businesses approximated $41.4 million in fiscal 2004 and
$70.8 million in fiscal 2003. The Company's internal revenue growth approximated
5% in both fiscal 2004 and 2003, and is expected to be positive in fiscal 2005.
Service and operating expenses increased $103.6 million in fiscal 2004 and
$66.7 million in fiscal 2003, representing increases of 18.7% and 13.7%,
respectively. Service and operating expenses increased as a percentage of
revenues in fiscal 2004 by 4.0% to 63.4%, and was flat as a percentage of
revenues in fiscal 2003. The dollar increases in fiscal 2004 and 2003 resulted
from additional costs associated with greater revenues. The fiscal 2004 increase
as a percentage of revenues resulted from changes in the mix of the Company's
revenues across business segments and lower margins in the Insurance and
Education Services segment and in the Retirement Services division.
Selling, general and administrative expenses increased $20.6 million, or
11.7%, and increased as a percentage of revenues by 0.1% to 19.0% in fiscal 2004
and increased $19.0 million, or 12.0%, and decreased as a percentage of revenues
by 0.3% to 18.9% in fiscal 2003. The dollar increases in fiscal 2004 and 2003
resulted from additional costs associated with greater revenues. The decrease as
a percentage of revenues in fiscal 2003 resulted principally from further
utilization of existing general and administrative support resources.
Amortization of intangible assets was $27.0 million in fiscal 2004,
compared to $18.8 million in fiscal 2003 and $13.1 million in fiscal 2002. The
increases in fiscal 2004 and fiscal 2003 were due to the higher level of
intangible assets associated with recently acquired businesses and customer
contracts.
Operating earnings decreased by $45.8 million to $125.9 million in fiscal
2004 and decreased as a percentage of revenues from 18.4% to 12.1%. The decrease
was primarily due to greater restructuring, impairment and other charges in
fiscal 2004 and a significant margin decline in the Insurance and Education
Services segment as a result of a decline in internal revenue and additional
investments in sales support, customer service and training. Operating earnings
increased by $15.5 million to $171.7 million in fiscal 2003, and decreased as a
percentage of revenues from 19.0% to 18.4%. The dollar increase was primarily
due to revenue increases while the percentage decrease was principally due to a
larger restructuring charge in fiscal 2003.
Operating margins, excluding restructuring, impairment and other charges,
were 14.9%, 19.7%, and 19.8% for fiscal 2004, 2003, and 2002, respectively. The
margin decrease in fiscal 2004 was primarily due to significant margin decline
in the Insurance and Education Services segment as a result of a decline in
internal revenue and additional investments in sales support, customer service
and training.
Interest income was $1.3 million in fiscal 2004 compared to $1.5 million
in fiscal 2003 and $3.6 million in fiscal 2002. The decreases in fiscal 2004 and
2003 were due to lower interest rates and reduced levels of interest-bearing
assets.
Interest expense was $19.0 million in fiscal 2004 compared to $18.1
million in fiscal 2003 and $15.7 million in fiscal 2002. The increase in fiscal
2004 and 2003 was due to the interest costs associated with additional
borrowings for acquisitions under the Company's revolving credit facility.
The provision for income taxes reflects an effective tax rate of 41.2%,
36.6%, and 38.4% for fiscal 2004, 2003 and 2002, respectively. The increase in
the effective tax rate in fiscal 2004 is primarily due to the write-off of $5.2
million of deferred tax assets associated with tax loss carryforwards from the
European mutual fund services operations that are not expected to be realized.
Excluding the impact of restructuring charges, the effective tax rate in fiscal
2004 was 36.6%. The decrease in the effective tax rate in fiscal 2003 is
primarily due to the impact of lower tax rates in foreign tax jurisdictions for
acquired businesses and to enacted tax law changes. The Company's effective tax
rate in fiscal 2005 is expected to approximate 37%. The Company anticipates that
the undistributed earnings of foreign subsidiaries will continue to be
reinvested in the foreseeable future.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
In fiscal 2004, the Company recorded pre-tax restructuring, impairment and other
charges of $29.1 million. The charges consist of restructuring charges of $11.6
million that 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, impairment
charges of $7.9 million, and $9.6 million of estimated amounts for certain
litigation expenses and contractual disputes.
Restructuring charges of $11.6 million during the year ended June 30, 2004
were comprised of severance totaling $9.4 million and lease termination and
other costs of $2.2 million. Severance charges resulted from the termination or
planned termination of approximately 380 employees representing all levels of
staffing. The objectives of the fiscal 2004 restructuring plan were to close
down or consolidate certain European Fund Services processing platforms located
in Luxembourg, London and Guernsey; reduce costs by downsizing certain product
development, marketing and sales support services in various business units; and
relocate a call center in the Retirement Services
21
Management's Discussion
and Analysis of Financial Condition and Results of Operations
division. Annualized pretax cost savings as a result of these restructuring
activities are expected to approximate $26 million to $31 million.
The following summarizes activity with respect to the Company's
restructuring activities for the year ended June 30, 2004 (in thousands):
Expense provision:
Employee severance $ 9,410
Facility closure 2,222
-------
11,632
-------
Cash payments and other 8,414
-------
Remaining accrual at June 30, 2004:
Employee severance 2,624
Facility closure 594
-------
$ 3,218
=======
In connection with the aforementioned restructuring plan, certain severance
costs approximating $0.2 million and lease termination costs of approximately
$1.0 million are expected to be recognized during the first half of fiscal 2005
in accordance with FAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities."
The Company recorded asset impairment charges of $7.9 million during the
year ended June 30, 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 in those European locations 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 wrote off $5.2 million of 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 $3.6 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 year ended June 30,
2004. The Company intends to continue to vigorously defend the claims asserted
and has asserted a number of counterclaims. Additionally, during the year ended
June 30, 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
and $1.0 million for costs associated with securities litigation.
The Company recorded a pre-tax restructuring charge of $12.1 million in
fiscal 2003, relating 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. The restructuring charge includes a provision of $7.2
million for severance-related costs for approximately 300 employees,
representing all levels of employees, and $4.9 million for facility closure and
related costs. At June 30, 2004, the remaining accrual amounts to $0.6 million
and primarily relates to lease costs for facility closures. The objective of the
fiscal 2003 restructuring plan was to reduce costs by consolidating, relocating,
and downsizing certain operations in the investment, insurance, education, and
check imaging businesses. Reductions in force affected business operations such
as data processing, software development, marketing, and various support
services, and facility space reduction or closure occurred in several locations
including Philadelphia, Pennsylvania and Columbus, Ohio. Annualized pretax cost
savings as a result of these restructuring activities were expected to
approximate $16 million to $18 million.
The Company recorded a pre-tax restructuring charge of $6.5 million in
fiscal 2002 relating to the integration, consolidation, and relocation of
certain business operations, primarily as a result of acquisition activity. The
restructuring charge included a provision of $4.2 million for severance-related
costs for approximately 200 employees and $2.3 million for facility
consolidation and related costs. All restructuring activities in connection with
this charge were completed by the end of the first quarter of fiscal 2003. The
objective of the 2002 restructuring plan was to reduce costs by consolidating
certain operations, primarily in connection with the integration of the Boston
Institutional Group, Universal Pension, Inc., and TONER acquisitions. Back
office operations, sales offices and corporate services located in Boston,
Massachusetts; New York, New York; Atlanta, Georgia; Little Falls, New Jersey;
and Dublin, Ireland were downsized or relocated. Annualized pretax cost savings
were expected to approximate $20 million to $25 million.
22
SEGMENT INFORMATION
The following table sets forth revenues and operating earnings by business
segment and for corporate operations for the years ended June 30, 2004, 2003,
and 2002. 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.
(in thousands)
2004 2003 2002
Revenues:
Investment Services $ 562,192 $ 498,531 $ 449,930
Insurance and Education Services 255,125 220,055 173,655
Information Services 219,985 215,053 197,590
----------- ----------- -----------
Total revenues $ 1,037,302 $ 933,639 $ 821,175
=========== =========== ===========
Operating earnings (loss):
Investment Services $ 69,621 $ 77,556 $ 77,449
Insurance and Education Services 49,163 68,225 51,080
Information Services 60,183 59,387 54,895
Corporate (23,970) (21,430) (20,765)
----------- ----------- -----------
Total operating earnings $ 154,997 $ 183,738 $ 162,659
=========== =========== ===========
Restructuring, impairment and
other charges:
Investment Services $ 9,275 $ 5,430 $ 2,955
Insurance and Education Services 15,312 2,866 1,085
Information Services 2,609 1,494 843
Corporate 1,903 2,289 1,592
----------- ----------- -----------
Total restructuring, impairment
and other charges 29,099 12,079 6,475
=========== =========== ===========
Total consolidated operating earnings $ 125,898 $ 171,659 $ 156,184
=========== =========== ===========
Internal revenue growth in fiscal 2004 for Investment Services, Insurance and
Education Services, and Information Services approximated 13%, (10)% and 2%,
respectively. A substantial portion of the Company's revenues, especially in the
Investment Services 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 $63.7
million in fiscal 2004 and $48.6 million in fiscal 2003, representing increases
of 12.8% and 10.8%, respectively. The revenue increase in fiscal 2004 was due to
increased sales to new clients by all divisions in this segment and increased
assets under administration. The revenue increase in fiscal 2003 was due to
acquisitions and internal growth of 3% including the acquisition of several new
clients, primarily in the Retirement Services division. Operating earnings in
the Investment Services business segment decreased $7.9 million in fiscal 2004
and increased $0.1 million in fiscal 2003, resulting in margins of 12.4%, 15.6%
and 17.2% in fiscal 2004, 2003, and 2002, respectively. Margins declined in
fiscal 2004 primarily as a result of lower margins in the Retirement Services
division and, to a lesser extent, increased expenses in the Fund Services
division and investments in the infrastructure of the Hedge Fund Services
division. Margins declined in fiscal 2003 primarily as a result of lower revenue
growth
23
Management's Discussion
and Analysis of Financial Condition and Results of Operations
and changes in revenue mix. For fiscal 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
contemplates the loss of a significant Fund Services client in the second half
of the fiscal year representing a significant portion of total assets under
administration and approximately $25 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 and Education Services business segment increased
$35.1 million in fiscal 2004 and $46.4 million in fiscal 2003, representing
increases of 15.9% and 26.7%, respectively. Revenue growth in fiscal 2004 was
due to acquisitions, offset by a decline in internal revenue of 10%. The
decrease in internal revenue was primarily due to declines in the sales of life
and fixed annuity products and lower sales productivity. Revenue growth in
fiscal 2003 was attributable to recent acquisitions and internal growth.
Operating earnings in the Insurance and Education Services business segment
decreased $19.1 million in fiscal 2004 and increased $17.1 million in fiscal
2003, resulting in margins of 19.3%, 31.0%, and 29.4% in fiscal 2004, 2003, and
2002, respectively. Margins declined in fiscal 2004 primarily due to the decline
in internal revenue and additional investments in sales support and customer
service. Margins increased in fiscal 2003 primarily due to leverage gained from
higher volumes and changes in revenue mix. For fiscal 2005, margins in the
Insurance and Education Services business segment are expected to be flat to
down modestly and internal revenue growth is expected to be positive.
Revenue in the Information Services business segment increased $4.9
million in fiscal 2004 and $17.5 million in fiscal 2003, representing increases
of 2.3% and 8.8%, respectively. The revenue increases were due to existing
client growth, cross sales of ancillary products and services to existing
clients, and sales to new clients. Operating earnings in the Information
Services business segment increased $0.1 million in fiscal 2004 and $4.5 million
in fiscal 2003, resulting in operating margins of 27.4%, 27.6% and 27.8% for
fiscal 2004, 2003, and 2002, respectively. For fiscal 2005, margins in the
Information Services business segment are expected to decline by approximately
400 basis points and internal revenue growth 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 the Company's executive, human
resources, legal, accounting and finance functions, and various other
unallocated overhead charges.
FINANCIAL CONDITION
At June 30, 2004 and 2003, the Company had cash and cash equivalents of $139.9
million and $79.6 million, respectively. Cash and cash equivalents held outside
the U.S. at June 30, 2004 and 2003 amounted to $50.9 million and $34.9 million,
respectively. Stockholders' equity was $785.0 million and $715.9 million at June
30, 2004 and 2003, respectively.
In November 2003, the Company purchased USA Insurance Group, Inc. through
the issuance of 2.8 million shares of BISYS common stock held in treasury and
cash of $40.8 million, net of cash acquired. The Company also acquired two other
businesses during fiscal 2004 for approximately $12.2 million, net of cash
acquired. The acquisition of these three businesses, all within the Insurance
and Education Services segment, was the principal reason for the significant
increases in restricted cash, goodwill, intangible assets, and insurance
premiums and commissions payable at June 30, 2004 compared to the balances at
June 30, 2003, as reflected on the accompanying consolidated balance sheets.
Capital expenditures were $36.2 million, $43.1 million and $39.3 million
in fiscal 2004, 2003, and 2002, respectively, and are expected to be in the
range of $30 million to $40 million in fiscal 2005.
The following provides a summary of contractual obligations as of June 30,
2004 (in thousands):
Payments by Period
--------------------------------------------------------------
Less than More than
Contractual obligations 1 year 1-3 years 3-5 years 5 years Total
- ------------------------- --------- --------- ---------- --------- ---------
Long-term debt (1) $ 6,250 $ 393,750 $ - $ - $ 400,000
Short-term borrowings (1) 66,000 - - - 66,000
Operating leases (2) 37,013 67,321 $ 49,281 132,161 285,776
Purchase obligations (3) 33,418 41,941 6,101 23 81,483
-------- --------- ---------- --------- ---------
Total $142,681 $ 503,012 $ 55,382 $ 132,184 $ 833,259
======== ========= ========== ========= =========
(1) These amounts are included in the Consolidated Balance Sheets. See Note 5 to
the Consolidated Financial Statements for additional information about debt and
related matters.
(2) Included in these amounts are various facilities and equipment leases, and
software license agreements. The Company enters into operating leases in the
normal course of business relating to facilities and equipment. The majority of
lease agreements have fixed payment terms based on the passage of time. Certain
leases require payment of maintenance and real estate taxes and contain
escalation provisions based on future adjustments in price indices. Future
operating lease obligations could change if the Company exits certain contracts
or enters into additional operating lease agreements.
(3) Purchase obligations primarily relate to maintenance agreements on software,
equipment and other assets.
LIQUIDITY AND CAPITAL RESOURCES
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 new facility expires March 31, 2008
and replaces the $300 million facility which was due to
24
expire on June 30, 2004. At June 30, 2004, the Company had outstanding
borrowings of $66 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 2.49% on all outstanding
borrowings under the facility at June 30, 2004. The facility is used to support
the Company's working capital requirements, fund the Company's future
acquisitions and repurchase the Company's own common stock. At June 30, 2004,
the Company had $2.4 million outstanding in the form of letters of credit and
$300 million of outstanding 4% convertible subordinated notes due March 2006.
The Company's debt ratio (total debt/total debt plus equity) is 0.37 at June 30,
2004, and the Company's maximum debt ratio may not exceed 0.50 under the terms
of the revolving credit facility.
The Company manages its debt structure and interest rate risk through the
use of fixed- and floating-rate debt. While changes in interest rates could
decrease the Company's interest income or increase its interest expense, the
Company does not believe that it has a material exposure to changes in interest
rates based on the relative size of its interest bearing assets and liabilities.
The Company does not undertake any specific actions concerning exposure to
interest rate risk and is not party to any interest rate management
transactions.
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 or repurchase the Company's own common stock. 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.
Accounts receivable represented 41 and 44 days sales outstanding (DSO) at
June 30, 2004 and 2003, respectively, based on quarterly revenues. The
improvement in DSO is attributable to the Company's ongoing efforts to actively
pursue collection of aged receivables and to establish billing and payment terms
that are more favorable to the Company. The calculation of DSO for accounts
receivable excludes insurance premiums and commissions receivable arising from
the Company's insurance-related business. 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 collection terms of up to
twelve months. The Company performs credit evaluations of its customers in
conjunction with its new business development processes. The customers are
assessed for credit worthiness based on their financial position, and payment
terms are generally negotiated at the time contracts are signed. The Company
regularly evaluates its accounts receivable position relative to its revenues
and monitors its accounts receivable aging as part of managing its receivable
portfolio. Credit risk is generally mitigated by reasonably short payment terms,
the nature of our customers (i.e., commercial banks, mutual funds, and insurance
carriers) and the Company's large and diverse customer base. The Company
generally does not require collateral for accounts receivable.
For the year ended June 30, 2004, operating activities provided cash of
$204.3 million, primarily as a result of net income of $63.6 million,
depreciation and amortization of $61.2 million, deferred income taxes of $36.7
million and changes in working capital items of $13.8 million. Investing
activities used cash of $92.7 million, primarily for the acquisition of
businesses of $57.6 million and capital expenditures of $36.2 million. Financing
activities used cash of $51.3 million, primarily for net payments of short-term
borrowings of $106.0 million, for the repurchases of common stock of $59.7
million, offset by $100.0 million of proceeds from long-term debt, $7.8 million
of proceeds from the exercise of stock options, and $5.0 million from the
issuance of common stock in connection with the Company's annual employee stock
purchase plan. Approximately 2.8 million shares of treasury stock were issued in
connection with the acquisition of USA Insurance Group, Inc. in November 2003.
For the years ended June 30, 2003 and 2002, operating activities provided
cash of $171.2 million and $128.9 million, respectively. Investing activities
used cash of $229.6 million and $315.5 million in fiscal 2003 and 2002,
respectively. Financing activities provided cash of $59.6 million and $105.6
million in fiscal 2003 and fiscal 2002, respectively.
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,
25
Management's Discussion
and Analysis of Financial Condition and Results of Operations
for possible use in future acquisitions, and for general and other corporate
purposes. The following table presents stock repurchase activity during the last
three fiscal years under programs authorized by the Board of Directors between
fiscal 1999 and fiscal 2004, 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.
(in thousands)
Year Ended June 30, 2004 2003 2002
SHARES COST Shares Cost Shares(1) Cost
------ -------- ------ -------- --------- ------
Share Repurchase
Programs:
$100 million, authorized
January 1999 - $ - 1,150 $ 28,626 $ 118 $2,684
$100 million, authorized
August 2002 3,158 46,153 301 4,793 - -
$100 million, authorized
November 2003 869 13,565 - - - -
----- -------- ----- -------- ----- ------
Total Stock Repurchases 4,027 $ 59,718 1,451 $ 33,419 $ 118 $2,684
===== ======== ===== ======== ===== ======
(1) Share amounts have been retroactively restated for the period to reflect the
impact of the two-for-one stock split.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and may result in materially different
results under different assumptions and conditions. 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 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.
Certain accounting policies that require significant management estimates
and are deemed critical to our results of operations or financial position are
discussed below.
INSURANCE COMMISSIONS RECEIVABLE - Insurance commissions in the Life Insurance
Services division are generally based on a percentage of the premium that the
policyholder pays to the insurance carrier. First year commissions are
calculated based on a contractual percentage of the first year's premium. The
Company also receives renewal and bonus commission payments. Renewal commissions
relate to the period following the first year and are paid at a contractual rate
if the policy remains in force. Bonus commissions are paid by the insurance
carrier in situations in which certain volume, persistency or profitability
targets are met. The Company recognizes all commission-related revenue and
related receivables from life insurance distribution operations when all
placement services have been provided, protection is afforded under the
insurance policy, the premium is known or can be reasonably estimated and is
billable, when the policy renews and when incentive-based targets are achieved.
Commission revenue in the Life Insurance Services division is recorded net of an
allowance for commission adjustments due to lapses, policy cancellations, and
revisions in coverage. The actual amount of commission adjustments may differ
from management's estimates.
GOODWILL - The Company has recorded goodwill that was initially recognized as a
result of business combinations. In accordance with FAS 142, "Goodwill and Other
Intangible Assets," the Company periodically evaluates goodwill for impairment
no less than annually by comparing the carrying value of each reporting unit to
its fair value using a two-step impairment test. If the carrying amount of
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. The estimate of
a reporting unit's fair value requires the use of assumptions and estimates
regarding the reporting unit's future cash flows, growth rates and weighted
average cost of capital. Assumed growth rates generally ranged from 10% to 15%
and varied by reporting unit based upon near and medium term growth
opportunities. The assumed weighted average cost of capital approximated 12%.
Any significant adverse changes in key assumptions about these businesses and
their prospects or an adverse change in market conditions may cause a change in
the estimation of fair value and could result in an impairment charge. The
Company has approximately $802 million of goodwill as of June 30, 2004, none of
which is considered impaired, based on recent impairment testing. Given the
significance of goodwill, an adverse change to the estimated fair value could
result in an impairment charge that could be material to the financial
statements.
INTANGIBLE ASSETS - The Company has recorded intangible assets that were
initially recognized as a result of business combinations or acquired customer
relationships. The intangible assets are amortized on a straight-line method
over their estimated useful lives. The Company evaluates,
26
for impairment, the carrying value of acquired intangible assets by comparing
the carrying value to the anticipated future undiscounted cash flows expected to
be generated from the use of the intangible asset. If an intangible asset is
impaired, the asset is written down to fair value. Intangible assets resulting
from acquired customer relationships are evaluated in light of actual customer
attrition rates and related cash flows to ensure that the carrying value of
these intangible assets is recoverable. Significant changes in these customer
relationships could result in an impairment charge. The Company has
approximately $211 million of intangible assets as of June 30, 2004. Given the
significance of intangibles, adverse changes to these relationships could result
in an impairment charge that could be material to the financial statements.
INCOME TAXES - The Company accounts for income taxes in accordance with FAS 109,
"Accounting for Income Taxes," which establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Judgment is required in addressing the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Fluctuations in the actual outcome of these future
tax consequences could materially impact the financial statements.
The Company also records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. The Company
has considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance. In the
event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
REVENUE RECOGNITION - The Company records revenue as earned as evidenced by
contracts or invoices for its services at prices established by contract, price
list and/or fee schedule less applicable discounts. The Company's principal
sources of service revenues include information processing and software
services, administration and distribution of mutual funds, hedge funds, and
private equity funds, brokerage and consulting services, administration and
record keeping of retirement plans, and training. Revenues from these services
are recognized in the periods in which the services are performed. Cash received
by the Company in advance of the performance of services is deferred and
recognized as revenue when earned. Reimbursements received for out-of-pocket
expenses incurred are recorded as revenue.
Net commission revenue from insurance distribution operations is
recognized when all placement services have been provided, protection is
afforded under the insurance policy, the premium is known or can be reasonably
estimated and is billable, when the policy renews and when incentive-based
targets are achieved.
Revenue from software sales is recognized in accordance with the AlCPA's
Statement of Position (SOP) 97-2, "Software Revenue Recognition." Under the SOP,
revenue is recognized at the time of sale, or licensing if the Company has no
continuing obligation. When the Company has a continuing obligation, revenue is
recognized over the period of continuing obligation. Maintenance fee revenue is
recognized ratably over the term of the related support period, generally twelve
months.
The Company recognizes revenue in accordance with the provisions of the
Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" (SAB 104). SAB 104 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Future interpretations of existing accounting standards or changes in the
Company's business practices could result in changes in the Company's revenue
recognition accounting policies that could have a material effect on the
Company's results of operations and business.
27
Management's Discussion
and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition 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," "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.
Factors that could cause actual results to differ materially from those
contemplated by the forward-looking statements include: achieving planned
revenue growth in each of the Company's business units; renewal of material
contracts in the Company's business units consistent with past experience;
successful and timely integration of significant businesses acquired by the
Company and realization of anticipated synergies; increasing price, products and
services competition by U.S. and non-U.S. competitors, including new entrants;
changes in U.S. and non-U.S. governmental regulations; the timely implementation
of the Company's restructuring program and financial plans; general U.S. and
non-U.S. economic and political conditions, including interest rate and currency
exchange rate fluctuations; changes in technology; 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; attracting and retaining qualified key employees; no
material breech 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 facilities; 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.
28
Management's Statement of Responsibility
Management of the Company is responsible for the preparation and fair
presentation of the accompanying financial statements. The financial statements
have been prepared in conformity with generally accepted accounting principles
and include amounts based on the best judgment of management.
In recognition of its responsibility for the integrity and objectivity of
data in the financial statements, the Company maintains a system of internal
controls over financial reporting. The system is designed to provide reasonable
assurance that transactions are executed and recorded in accordance with
management authorization and that assets are safeguarded.
The internal control system is supported by written policies and
procedures, including a Code of Conduct to foster an ethical climate, that are
developed and disseminated to employees. The control environment is regularly
evaluated by the Company's internal auditors and their findings are reported to
management and the Audit Committee of the Board of Directors throughout the
year. The Company's independent registered public accounting firm,
Pricewaterhouse Coopers LLP has reviewed the Company's system of internal
controls over financial reporting in connection with their audit of our
consolidated financial statements, as described in their report.
The Audit Committee of the Board of Directors is comprised of three
outside directors. The Audit Committee meets regularly with the internal
auditors, management and independent auditors to review their work and discuss
the Company's financial controls, reporting practices and audit results. The
independent auditors and internal auditors have full and free access to the
Audit Committee, without the presence of management, to discuss any matters
which they feel require attention.
/s/ RUSSELL P. FRADIN
RUSSELL P. FRADIN
President and Chief Executive Officer
/s/ JAMES L. FOX
JAMES L. FOX
Executive Vice President and Chief Financial Officer
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE BISYS GROUP, INC.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of The BISYS Group,
Inc. and its subsidiaries (the "Company") at June 30, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSE COOPERS LLP
New York, New York
September 3, 2004
29
Consolidated Statements of Income
(in thousands, except per share data)
For Years Ended June 30, 2004 2003 2002
Revenues $1,037,302 $ 933,639 $ 821,175
---------- --------- ---------
Operating costs and expenses:
Service and operating 657,981 554,351 487,648
Selling, general and administrative 197,346 176,728 157,743
Amortization of intangible assets 26,978 18,822 13,125
Restructuring, impairment and other charges 29,099 12,079 6,475
---------- --------- ---------
Total operating costs and expenses 911,404 761,980 664,991
---------- --------- ---------
Operating earnings 125,898 171,659 156,184
Interest income 1,345 1,475 3,599
Interest expense (19,049) (18,146) (15,701)
---------- --------- ---------
Income before income taxes 108,194 154,988 144,082
Income taxes 44,614 56,745 55,384
---------- --------- ---------
Net income $ 63,580 $ 98,243 $ 88,698
========== ========= =========
Basic earnings per share $ 0.53 $ 0.82 $ 0.75
========== ========= =========
Diluted earnings per share $ 0.53 $ 0.81 $ 0.72
========== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
30
Consolidated Balance Sheets
(in thousands, except share data)
June 30, 2004 2003
- -------- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 139,872 $ 79,558
Restricted cash 67,125 26,603
Accounts receivable, net 96,385 96,237
Insurance premiums and commissions receivable 87,154 87,535
Deferred tax asset 13,484 45,202
Other current assets 49,747 34,806
----------- -----------
Total current assets 453,767 369,941
Property and equipment, net 112,074 107,152
Goodwill 802,178 731,174
Intangible assets, net 211,298 206,036
Other assets 32,923 43,839
----------- -----------
Total assets $ 1,612,240 $ 1,458,142
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,250 $ -
Short-term borrowings 66,000 172,000
Accounts payable 17,397 21,518
Insurance premiums and commissions payable 126,173 81,840
Other current liabilities 158,459 128,645
----------- -----------
Total current liabilities 374,279 404,003
Long-term debt 393,750 300,000
Deferred tax liability 54,669 34,184
Other liabilities 4,560 4,026
----------- -----------
Total liabilities 827,258 742,213
=========== ===========
Commitments and contingencies (see Note 7)
STOCKHOLDERS' EQUITY
Common stock, $.02 par value; 320,000,000 shares authorized;
120,836,315 and 120,274,571 shares issued 2,417 2,405
Additional paid-in capital 389,484 378,986
Retained earnings 403,738 348,401
Notes receivable from stockholders (8,116) (10,776)
Employee benefit trust, 342,613 and 344,207 shares (5,507) (5,676)
Deferred compensation 5,292 5,752
Unearned compensation - restricted stock (6,199) -
Accumulated other comprehensive income (loss) 6,337 (340)
Treasury stock at cost, 158,559 and 141,118 shares (2,464) (2,823)
----------- -----------
Total stockholders' equity 784,982 715,929
----------- -----------
Total liabilities and stockholders' equity $ 1,612,240 $ 1,458,142
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
31
Consolidated Statements of Stockholders' Equity
(in thousands)
Common Stock Additional
----------------------- Paid-in
For Years ended June 30, 2002, 2003, and 2004 Shares Amount Capital
- --------------------------------------------- ------- --------- ----------
BALANCE, JUNE 30, 2001 58,422 $ 1,168 $ 318,958
======= ========= =========
Net income - - -
Foreign currency translation adjustment - - -
Comprehensive income
Exercise of stock options 1,868 38 28,074
Tax benefit of stock options exercised - - 19,688
Issuance of common stock 94 2 4,224
Common stock options issued in acquisitions 32 1 1,099
Repurchases of common stock - - -
Two-for-one stock split 59,464 1,189 (1,189)
------- --------- ---------
BALANCE, JUNE 30, 2002 119,880 2,398 370,854
======= ========= =========
Net income - - -
Foreign currency translation adjustment - - -
Comprehensive income
Exercise of stock options 395 7 4,443
Tax benefit of stock options exercised - - 3,689
Issuance of common stock - - -
Repurchases of common stock - - -
Employee benefit trust - - -
Deferred compensation - - -
------- --------- ---------
BALANCE, JUNE 30, 2003 120,275 2,405 378,986
======= ========= =========
NET INCOME - - -
FOREIGN CURRENCY TRANSLATION ADJUSTMENT - - -
UNREALIZED GAIN ON INVESTMENTS, NET OF TAX - - -
COMPREHENSIVE INCOME
EXERCISE OF STOCK OPTIONS 75 2 484
TAX BENEFIT OF STOCK OPTIONS EXERCISED - - 1,734
ISSUANCE OF COMMON STOCK 486 10 8,280
COMMON STOCK ISSUED IN ACQUISITION - - -
REPURCHASES OF COMMON STOCK - - -
EMPLOYEE BENEFIT TRUST - - -
DEFERRED COMPENSATION - - -
COMPENSATION EXPENSE-RESTRICTED STOCK - - -
------- --------- ---------
BALANCE, JUNE 30, 2004 120,836 $ 2,417 $ 389,484
======= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
32
Notes Unearned Accumulated
Receivable Employee Benefit Trust Compensation Other Treasury Stock
Retained from ---------------------- Deferred -Restricted Comprehensive Comprehensive -------------------
Earnings Stockholders Shares Amount Compensation Stock Income Income (Loss) Shares Amount
- --------- ------------ -------- ------------- ------------ ------------ ------------- ------------- ------ ---------
$ 191,017 $ (10,776) - $ - $ - $ - $ (806) - $ -
========= ========= === ========= ========= ========= ========= ========= ====== =========
88,698 - - - - - $ 88,698 - - -
- - - - - - 158 158 - -
---------
$ 88,856
=========
(14,477) - - - - - - (72) 2,684
- - - - - - - - -
- - - - - - - - -
- - - - - - - - -
- - - - - - - 59 (2,684)
- - - - - - - 13 -
- --------- --------- --- --------- --------- --------- --------- --------- ------ ---------
265,238 (10,776) - - - - (648) - -
========= ========= === ========= ========= ========= ========= ========= ====== =========
98,243 - - - - - $ 98,243 - - -
- - - - - - 308 308 - -
---------
$ 98,551
=========
(10,532) - - - - - - (625) 15,762
- - - - - - - - -
(4,548) - (2) 29 (29) - - (339) 9,129
- - - - - - - 1,451 (33,419)
- - 346 (5,705) - - - (346) 5,705
- - - - 5,781 - - - -
- --------- --------- --- --------- --------- --------- --------- --------- ------ ---------
348,401 (10,776) 344 (5,676) 5,752 - (340) 141 (2,823)
========= ========= === ========= ========= ========= ========= ========= ====== =========
63,580 - - - - - $ 63,580 - - -
- - - - - - 884 884 - -
- - - - - - 5,793 5,793 - -
---------
$ 70,257
=========
(5,833) 2,660 - - - - - (769) 13,205
- - - - - - - -
(805) - (46) 776 (786) (8,291) - (397) 5,837
(1,605) - - - - - - (2,798) 40,428
- - - - - - - 4,027 (59,718)
- - 45 (607) - - - (45) 607
- - - - 326 - - -
- - - - - 2,092 - - -
- --------- --------- --- --------- --------- --------- --------- ------ ---------
$ 403,738 $ (8,116) 343 $ (5,507) $ 5,292 $ (6,199) $ 6,337 159 $ (2,464)
========= ========= === ========= ========= ========= ========= ====== =========
33
Consolidated Statements of Cash Flows
(in thousands)
For Years Ended June 30, 2004 2003 2002
------------------------ --------- --------- ---------
Cash flows from operating activities:
Net income $ 63,580 $ 98,243 $ 88,698
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 61,151 49,704 40,600
Restructuring, impairment and other charges 29,099 12,079 6,475
Deferred income tax provision 36,676 10,086 722
Change in operating assets and liabilities, net of effects
from acquisitions and divestitures:
Restricted cash (20,547) (8,570)
Account receivable, net 929 5,540 3,655
Insurance premiums and commissions receivable 11,124 (21,950) (4,471)
Other current assets (4,691) 2,350 (4,765)
Other assets 5,931 7,631 6,472
Accounts payable (2,312) 4,223 1,720
Insurance premiums and commissions payable 9,450 22,414 1,221
Accrued liabilities and other 13,959 (10,510) (11,381)
--------- --------- ---------
Net cash provided by operating activities 204,349 171,240 128,946
--------- --------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (57,579) (155,872) (269,948)
Proceeds (expenses paid) from dispositions - 235 (521)
Capital expenditures (36,199) (43,106) (39,310)
Change in other investments 1,358 (3,102) 2,110
Purchase of intangible assets (300) (27,763) (7,862)
--------- --------- ---------
Net cash used in investing activities (92,720) (229,608) (315,531)
--------- --------- ---------
Cash flows from financing activities:
Short-term borrowings, net (106,000) 79,000 93,000
Proceeds from long-term debt 100,000 - -
Exercise of stock options 7,842 9,646 11,593
Issuance of common stock 5,021 4,581 4,226
Repurchases of common stock (59,718) (33,419) (2,684)
Other 1,540 (253) (578)
--------- --------- ---------
Net cash (used in) provided by financing activities (51,315) 59,555 105,557
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 60,314 1,187 (81,028)
Cash and cash equivalents at beginning of year 79,558 78,371 159,399
--------- --------- ---------
Cash and cash equivalents at end of year $ 139,872 $ 79,558 $ 78,371
========= ========= =========
Supplemental cash flow disclosures:
Cash paid for:
Interest $ 16,577 $ 15,876 $ 13,137
Income taxes $ 20,027 $ 42,277 $ 32,218
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
34
Notes to Consolidated Financial Statements
(Unless otherwise noted, amounts in thousands, except per share data)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The BISYS Group, Inc. and subsidiaries ("BISYS" or the "Company") is a leading
global provider of business process outsourcing solutions to the financial
services industry.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The BISYS Group,
Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts reported in
fiscal 2002 and 2003 have been reclassified to conform to the fiscal 2004
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
original maturities of three months or less, including $26.0 million and $2.3
million of overnight repurchase agreements at June 30, 2004 and 2003,
respectively. The Company maintains cash deposits in banks which from time to
time exceed the amount of deposit insurance available. Management periodically
assesses the financial condition of the institutions and believes that any
potential credit loss is minimal.
RESTRICTED CASH
Unremitted insurance premiums are held in a fiduciary capacity and approximated
$67.1 million and $26.6 million at June 30, 2004 and 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.
RECEIVABLES
A majority of the Company's receivables are from banks, investment firms,
insurance companies and retail insurance brokers which approximated $35.2
million, $46.4 million, $34.4 million, and $56.8 million, respectively, at June
30, 2004.
The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its accounts receivable portfolio. In establishing the
required allowance, management considers historical losses, current receivable
agings and existing economic conditions. Bad debt expense for the years ended
June 30, 2004, 2003 and 2002 approximated $5.3 million, $6.2 million, and $2.4
million, respectively. Write-offs for the years ended June 2004, 2003 and 2002
approximated $4.2 million, $6.5 million, and $3.6 million, respectively. At June
30, 2004 and 2003, the Company's allowance for doubtful accounts was
approximately $5.2 million and $4.9 million, respectively.
The Company has separately reflected receivables and payables arising from
its insurance-related businesses on the accompanying consolidated balance
sheets. The captions "insurance premiums and commissions receivable" and
"insurance premiums and commissions payable" include insurance premiums and
commissions arising from the Company's property and casualty brokerage division
and net commissions arising from the Company's life insurance services division.
In its capacity as a property and casualty wholesale broker, the Company
collects premiums from other agents and brokers and, after deducting its
commissions, remits the premiums to the respective insurers.
Commission revenue in the life insurance services division is recorded net
of an allowance for commission adjustments due to lapses, policy cancellations
and revisions in coverage. At June 30, 2004 and 2003, the allowance for
commission adjustments approximated $6.2 million and $5.0 million, respectively,
and is netted against insurance premiums and commissions receivable on the
accompanying consolidated balance sheet.
INVESTMENTS
Management determines the appropriate classification of investments in equity
securities at the time of purchase. Marketable equity securities available for
sale, included in other current assets, are carried at market based upon quoted
market prices. Unrealized gains or losses on available for sale securities are
recorded in other comprehensive income 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 June 30, 2004,
investments available for sale are recorded at their market value of $14.4
million, with an unrealized gain of $9.4 million.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight line method over the estimated useful lives of the
assets as follows:
estimated useful
lives (years)
Buildings and leasehold improvements 8 - 40
Data processing equipment and systems 3 - 10
Furniture and fixtures 3 - 12
Software development costs 2 - 7
======
35
Notes to Consolidated Financial Statements
(Unless otherwise noted, amounts in thousands, except per share data)
Depreciation expense for the years ended June 30, 2004, 2003 and 2002 was $34.2
million, $30.9 million and $27.5 million, respectively.
Expenditures for major renewals and improvements are capitalized, while
minor replacements, maintenance and repairs which do not improve or extend the
life of such assets are charged to expense as incurred. Disposals are removed at
cost less accumulated depreciation with the resulting gain or loss being
reflected in operations.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquired entity over the net
amounts assigned to tangible and identifiable intangible assets acquired and
liabilities assumed. The Company periodically evaluates goodwill for impairment
no less than annually by comparing the carrying value of each reporting unit to
its fair value using a two-step impairment test set forth in FAS 142, "Goodwill
and Other Intangible Assets." If the carrying amount of reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
Intangible assets are amortized on a straight-line method over their
estimated useful lives. The Company evaluates, for impairment, the carrying
value of acquired intangible assets by comparing the carrying value to the
anticipated future undiscounted cash flows expected to be generated from the use
of the intangible asset. If an intangible asset is impaired, the asset is
written down to fair value. Intangible assets resulting from acquired customer
relationships are evaluated in light of actual customer attrition rates and
related cash flows to ensure that the carrying value of these intangible assets
is recoverable.
Additional information pertaining to goodwill and intangible assets is
presented in Note 4.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the likelihood of recovering the cost of
long-lived assets based on its expectations of future profitability and
undiscounted cash flows of the related business operations. These factors, along
with management's plans with respect to the operations, are considered in
assessing the recoverability of property, equipment and other long-lived assets.
SOFTWARE COSTS
The Company capitalizes certain costs incurred to develop new software or
enhance existing software which is utilized by the Company to process customer
transactions or marketed externally. The Company charges to operations routine
maintenance of software, design costs and development costs incurred prior to
the establishment of a product's technological feasibility. Costs incurred
subsequent to the establishment of a product's technological feasibility are
capitalized and amortized over the expected useful life of the related product.
Capitalized software costs for fiscal years 2004, 2003 and 2002 approximated
$26.4 million, $23.2 million, and $19.6 million, respectively. Software
amortization for the years ended June 2004, 2003 and 2002 approximated $20.0
million, $16.7 million, and $15.5 million, respectively.
REVENUE RECOGNITION
The Company records revenue as earned as evidenced by contracts or invoices for
its services at prices established by contract, price list and/or fee schedule
less applicable discounts. The Company's principal sources of service revenues
include information processing and software services, administration and
distribution of mutual funds, hedge funds, and private equity funds, brokerage
and consulting services, administration and record keeping of retirement plans,
and training. Revenues from these services are recognized in the periods in
which the services are performed. Cash received by the Company in advance of the
performance of services is deferred and recognized as revenue when earned.
Reimbursements received for out-of-pocket expenses incurred are recorded as
revenue.
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. Commission revenue in the life insurance
services division is recorded net of an allowance for commission adjustments due
to lapses, policy cancellations, and revisions in coverage.
Revenue from software sales is recognized in accordance with the AICPA's
Statement of Position (SOP) 97-2, "Software Revenue Recognition." Under the SOP,
revenue is recognized at the time of sale, or licensing if the Company has no
continuing obligation. When the Company has a continuing obligation, revenue is
recognized over the period of continuing obligation. Maintenance fee revenue is
recognized ratably over the term of the related support period, generally twelve
months.
The Company recognizes revenue in accordance with the provisions of the
Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" (SAB 104). SAB 104 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
PER SHARE DATA
Basic earnings per share is computed using the weighted average number of common
shares outstanding during each year presented. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during each year presented. Common equivalent
shares consist of shares issuable under stock-based compensation plans and are
computed using the treasury stock method. The effect of the assumed conversion
of the convertible notes
36
into common stock would be anti-dilutive and therefore is excluded from the
computation of diluted earnings per share.
Amounts utilized in per share computations are as follows:
Year Ended June 30, 2004 2003 2002
------------------- ---- ---- ----
Weighted average common shares outstanding 119,872 119,597 118,623
Assumed conversion of common shares issuable under stock-based compensation plans 1,018 2,124 5,236
Weighted average common and common equivalent shares outstanding 120,890 121,721 123,859
On January 24, 2002, the Board of Directors of the Company approved a
two-for-one stock split effected in the form of a dividend, payable to
shareholders of record as of February 8, 2002. All historical weighted average
shares and per share amounts have been restated to reflect the stock split.
Options to purchase 8.8 million shares of common stock at various prices
ranging from $15.83 to $35.30 were outstanding at June 30, 2004, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of common shares.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency for all company businesses except
operations in England, Guernsey, Ireland and Luxembourg. Foreign currency
denominated assets and liabilities for these units are translated into U.S.
dollars based on exchange rates prevailing at the end of each year, and
revenues, expenses and cash flows are translated at average exchange rates
during the year. Translation adjustments are included as a component of
accumulated other comprehensive income (loss) in stockholders' equity.
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 compensation 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 123, "Accounting for
Stock-Based Compensation." See Note 15.
Year Ended June 30, 2004 2003 2002
------------------- ---- ---- ----
Net income, as reported $63,580 $98,243 $88,698
Add: Stock-based employee
compensation expense
included in reported net
income, net of related
tax effects 1,313 - -
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects (13,697) (17,944) (24,897)
------- ------- -------
Pro forma net income $51,196 $80,299 $63,801
====== ======= =======
Earnings per share:
Basic, as reported $ 0.53 $ 0.82 $ 0.75
Basic, pro forma $ 0.43 $ 0.67 $ 0.54
======= ======= =======
Diluted, as reported $ 0.53 $ 0.81 $ 0.72
Diluted, pro forma $ 0.43 $ 0.66 $ 0.52
======= ======= =======
The Company presently intends to continue to account for stock options under the
provisions of APB 25.
INCOME TAXES
The liability method is used in accounting for income taxes whereby deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws. A valuation allowance is provided when the Company
determines that it is more likely than not that a portion of the deferred tax
asset balance will not be realized.
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.
37
Notes to Consolidated Financial Statements
(Unless otherwise noted, amounts in thousands, except per share date)
DISCLOSURE REGARDING FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, receivables, accounts payable,
short-term borrowings and accrued expenses approximate the carrying values due
to the short period of time to maturity. The fair value of investments is
determined based upon quoted market prices. The fair value of long-term debt is
estimated using discounted cash flows based on the Company's incremental
borrowing rate.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the initial recognition and measurement provisions of FIN
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," for guarantees issued
or modified after December 31, 2002. Based upon our review of the nature and
type of obligations contained in the Company's limited number of guarantee
contracts for which the Company is guarantor, the adoption of FIN 45 did not
have a material impact on the Company's financial position or results of
operations. The Company has provided information regarding commitments and
contingencies relating to guarantees in Note 7. There have been no material
commitments and contingencies relating to guarantees requiring recognition in
the consolidated financial statements since December 31, 2002.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on determining whether a
multi-deliverable revenue arrangement contains more than one unit of accounting
and, if so, how to measure and allocate the arrangement consideration to the
separate units of accounting. The guidance in this issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company adopted EITF Issue No. 00-21 effective July 1, 2003. Based on
our review of revenue arrangements with multiple deliverables entered into on or
after July 1, 2003, we have determined that the adoption of Issue 00-21 did not
have a material impact on the Company's financial position or results of
operations.
2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
2004 2003
---- ----
Other current assets:
Prepaids $ 31,981 $ 26,565
Other 17,766 8,241
--------- ---------
$ 49,747 $ 34,806
========= =========
Property and equipment, net:
Land $ 893 $ 74
Buildings and leasehold improvements 26,119 22,891
Data processing equipment and systems 73,548 73,935
Furniture and fixtures 35,770 35,189
Software development costs 104,816 89,659
--------- ---------
241,146 221,748
Less accumulated depreciation
and amortization (129,072) (114,596)
--------- ---------
$ 112,074 $ 107,152
========= =========
Other current liabilities:
Compensation $ 45,703 $ 30,355
Deferred revenues 28,258 24,634
Income taxes 156 13,640
Other 84,342 60,016
--------- ---------
$ 158,459 $ 128,645
========= =========
3. BUSINESS COMBINATIONS
FISCAL 2004 ACQUISITIONS
Business Date Acquired Nature of Business Consideration
Workers' compensation
Uhlemeyer Services, Inc. January 2004 insurance distribution Cash for stock
Commercial property and
USA Insurance Group, Inc. November 2003 casualty insurance distribution Cash and stock for stock
Lifesource October 2003 Life insurance distribution Cash for stock
In November 2003, the Company acquired USA Insurance Group, Inc. ("USAIG"), a
Florida-based managing general agency ("MGA") serving the commercial property
and casualty insurance marketplace. The acquisition of USAIG broadens the
product and geographic reach of the Company's commercial property and casualty
line of business, and complements and significantly expands its MGA platform.
The Company completed its acquisition of USAIG through the exchange of
approximately 2.8 million shares of BISYS common stock held in treasury and cash
of $40.8 million, net of cash acquired, for all of the equity interests of
USAIG.
38
The fair value of assets acquired and liabilities assumed, including
transaction fees and expenses, for fiscal 2004 acquisitions were as follows:
USA Insurance Group All Others Total
------------------- ---------- -----
Estimated fair value of assets acquired:
Goodwill $ 62,866 $ 7,123 $ 69,989
Intangible assets 28,700 4,993 33,693
Other assets 36,538 3,010 39,548
Issuance of stock in acquisition (38,823) - (38,823)
Liabilities assumed (48,529) (2,961) (51,490)
------------------- ---------- --------
Net cash paid $ 40,752 $ 12,165 $ 52,917
=================== ========== ========
The acquired intangible assets of $33.7 million have a weighted average useful
life of approximately 9 years. The intangible assets that make up that amount
include customer-related intangibles of $30.1 million (10-year weighted average
useful life) and non-compete agreements of $3.6 million (5-year weighted average
useful life). Of the total amount of goodwill assigned of $70.0 million,
approximately $8.5 million is expected to be deductible for tax purposes.
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisitions of all the companies set forth above had
occurred at the beginning of fiscal 2004 and 2003:
2004 2003
---- ----
Revenues $ 1,051,312 $ 970,608
Net income $ 64,830 $ 102,832
Diluted earnings per share $ 0.53 $ 0.82
----------- ---------
FISCAL 2003 ACQUISITIONS
Business Date Acquired Nature of Business Consideration
- -------- ------------- ------------------ -------------
Life insurance brokerage
Landau Financial Services, Inc. May 2003 and distribution Cash for stock
Commercial property
and casualty insurance
Tri-City Brokerage March 2003 distribution Cash for stock
Life insurance brokerage
Capital Synergies, Inc. March 2003 and distribution Cash for stock
Feingold & Scott, Ltd. Life insurance brokerage
(dba Career Brokerage, Inc.) December 2002 and distribution Cash for stock
Long-term care and life
Select Insurance Marketing Corporation December 2002 insurance distribution Cash for stock
First Northern Financial Resources, Inc. September 2002 Life insurance distribution Cash for stock
In March 2003, the Company acquired all the equity interests in Tri-City
Brokerage (Tri-City), a San Francisco based insurance brokerage firm
specializing in the wholesale distribution of commercial property and casualty
insurance products. The acquisition of Tri-City represents the Company's
strategic entrance into the commercial property and casualty insurance market.
The fair value of assets acquired and liabilities assumed, including
transaction fees and expenses, for fiscal 2003 acquisitions were as follows:
Tri-City All Others Total
-------- ---------- -----
Estimated fair value of assets acquired:
Goodwill $ 66,281 $ 51,661 $ 117,942
Intangible assets 27,100 8,734 35,834
Other assets 55,224 12,839 68,063
Liabilities assumed (68,410) (6,172) (74,582)
-------- ---------- ---------
Net cash paid $ 80,195 $ 67,062 $ 147,257
======== ========== =========
The acquired intangible assets of $35.8 million have a weighted average useful
life of approximately 9 years. The intangible assets that make up that amount
include customer-related intangibles of $32.2 million (9-year weighted average
useful life) and non-compete agreements of $3.6 million (5-year weighted average
useful life). Of the total amount of goodwill assigned of $117.9 million,
approximately $44.7 million is expected to be deductible for tax purposes.
The above transactions in fiscal 2004 and 2003 have been accounted for by
the purchase method of accounting, and, accordingly, the operations of the
acquired companies are included in the consolidated financial statements since
the dates of acquisition.
39
Notes to Consolidated Financial Statements
(Unless otherwise noted, amounts in thousands, except per share data)
4. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The changes in the carrying amounts of goodwill by business segment for the
years ended June 30, 2003 and 2004 are as follows:
INVESTMENT INSURANCE AND INFORMATION
SERVICES EDUCATION SERVICES SERVICES TOTAL
---------- ------------------ ----------- ----------
Balance, June 30, 2002 $ 311,802 $ 265,122 $ 35,390 $ 612,314
------- ------- ------ -------
2003 Acquisitions - 117,942 - 117,942
2003 Dispositions (70) - - (70)
Adjustments to previous
acquisitions (366) 1,354 - 988
---------- ---------- ---------- ----------
Balance, June 30, 2003 311,366 384,418 35,390 731,174
---------- ---------- ---------- ----------
2004 Acquisitions - 69,989 - 69,989
Adjustments to previous
acquisitions (175) 1,190 - 1,015
---------- ---------- ---------- ----------
Balance, June 30, 2004 $ 311,191 $ 455,597 $ 35,390 $ 802,178
========== ========== ========== ==========
The adjustments to previous acquisitions primarily relate to differences in
amounts recorded for deferred taxes as compared to amounts originally estimated
at time of acquisition.
INTANGIBLE ASSETS
At June 30, 2004 and 2003, acquired intangible assets were comprised of the
following:
ESTIMATED
USEFUL GROSS
LIVES CARRYING ACCUMULATED NET BOOK
2004 (YEARS) AMOUNT AMORTIZATION VALUE
- --------------------- --------- ---------- ------------ ----------
Customer related 5-30 $ 218,621 $ (51,571) $ 167,050
Noncompete agreements 5-15 46,504 (17,066) 29,438
Other 5-23 22,695 (7,885) 14,810
---------- ---------- ----------
$ 287,820 $ (76,522) $ 211,298
========== ========== ==========
2003
Customer related 5-30 $ 190,917 $ (32,618) $ 158,299
Noncompete agreements 5-15 42,451 (11,629) 30,822
Other 5-23 23,070 (6,155) 16,915
---------- ---------- ----------
$ 256,438 $ (50,402) $ 206,036
========== ========== ==========
All of the Company's intangible assets are subject to amortization. Amortization
expense for acquired intangible assets was approximately $27.0 million, $18.8
million, and $13.1 million for the years ended June 30, 2004, 2003, and 2002,
respectively. Estimated amortization expense for the succeeding five years 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.
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 year ended June 30, 2004 for customer-related
intangibles. The amount of the impairment losses represented the remaining net
book value of the intangibles.
5. 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 $66 million is outstanding at June 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 $0.9 million 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 June 30, 2004, no amounts were
permitted for the payment of cash dividends.
40
The Company may borrow under the revolving credit facility through March
2008 up to $300 million, reduced by any outstanding letters of credit ($2.4
million at June 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 June 30, 2004, the weighted
average interest rate of the credit facility borrowings was 2.49%.
In March 2001, the Company issued $300 million of convertible subordinated
notes (the "Notes") due March 2006. The Notes bear interest at 4% and require
semi-annual interest payments. The Notes are convertible at any time at the
option of the holder into shares of the Company's common stock at a conversion
price of $33.39 per share, subject to adjustment under certain conditions. At
the Company's option, subject to the terms of its existing revolving credit
facility agreement, the Notes are redeemable on or after March 2004 at a premium
price of 101% declining to par in March 2005 and thereafter.
Annual interest expense on long-term debt amounted to $12.6 million in
fiscal 2004 and $12.0 million in fiscal 2003.
As part of the credit agreement governing the new senior unsecured credit
facility that was entered into on March 31, 2004, the Company made certain
representations about its prior period financial statements. In light of the
need for adjustments to these prior period financial statements (see Note 7),
the lenders considered these representations to have been inaccurate when made,
and therefore, the lenders asserted that there was a breach under the credit
agreement causing the Company to be in default. The Company subsequently
procured a waiver from the lenders which allowed the Company to continue to
rollover certain LIBOR-based borrowings. The lenders asserted that they had the
right to accelerate payment of outstanding borrowings under the credit facility
until the waiver became permanent. Effective with the filing of the amended
Annual Report on Form 10-K for the fiscal year ended June 30, 2003 on August 10,
2004, the waiver became permanent for all purposes.
Debt outstanding at June 30, 2004 and 2003 is as follows:
June 30, 2004 June 30, 2003
------------- -------------
Estimated Estimated
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Senior credit facility, term loan, at a rate of
2.625% $ 100,000 $ 100,000 $ - $ -
Senior credit facility, revolving line of
credit, at a rate of 2.275% and 2.00%,
respectively 66,000 66,000 172,000 172,000
Convertible subordinated 4% notes 300,000 287,000 300,000 282,500
--------- --------- --------- ---------
466,000 $ 453,000 472,000 $ 454,500
--------- ========= --------- =========
Less amounts due within one year 72,250 172,000
--------- ---------
Long-term debt $ 393,750 $ 300,000
========= =========
Long-term debt repayments at June 30, 2004 are due as follows:
2006 $ 325,000
2007 31,250
2008 37,500
---------
$ 393,750
=========
41
Notes to Consolidated Financial Statements
(Unless otherwise noted, amounts in thousands, except per share data)
6. INCOME TAXES
The significant components of the Company's net deferred tax assets and
liabilities as of June 30, 2004 and 2003 are as follows:
2004 2003
---------- ----------
Deferred tax assets related to:
Accrued liabilities $ 17,961 $ 15,076
Receivables 4,258 35,169
Tax carryforwards 22,085 19,635
Other 245 139
---------- ----------
Deferred tax assets 44,549 70,019
Less valuation allowance (500) (1,100)
---------- ----------
Net deferred tax assets 44,049 68,919
---------- ----------
Deferred tax liabilities related to:
Property and equipment (23,899) (18,036)
Investments (3,426) -
Intangible assets (30,879) (20,164)
Goodwill (26,744) (19,169)
Other (286) (532)
---------- ----------
Deferred tax liabilities (85,234) (57,901)
---------- ----------
Net deferred tax (liability) asset $ (41,185) $ 11,018
========== ==========
The Company periodically evaluates deferred tax assets and adjusts the related
valuation allowance on deferred tax assets to an amount which is more likely
than not to be realized through future taxable income.
A valuation allowance for deferred tax assets associated with certain loss
carryforwards has been established as the Company currently believes that a
portion of the deferred tax assets will not be realized. At June 30, 2004, the
Company had $37.3 million of federal net operating loss carryforwards expiring
in years after 2015 and $106.1 million of state and foreign net operating losses
of which $102.9 million expire in years after 2010. The Company has $0.4 million
of federal tax credit carryforwards expiring in fiscal 2009.
The components of income before income taxes are as follows:
2004 2003 2002
---------- ---------- ----------
Domestic $ 97,001 $ 146,876 $ 145,746
Foreign 11,193 8,112 (1,664)
---------- ---------- ----------
Income before income taxes $ 108,194 $ 154,988 $ 144,082
========== ========== ==========
The components of the income tax provision for the years ended June 30, 2004,
2003 and 2002 are as follows:
2004 2003 2002
---------- ---------- ----------
Deferred federal tax expense $ 31,974 $ 8,993 $ 1,533
Current federal tax expense 3,195 36,786 46,593
Deferred state tax expense
(benefit) 1,278 425 (177)
Current state tax expense 4,270 11,083 9,064
Deferred foreign tax
expense (benefit) 3,424 (945) (1,873)
Current foreign tax expense 473 403 244
---------- ---------- ----------
$ 44,614 $ 56,745 $ 55,384
========== ========== ==========
Deferred income taxes of $5.2 million have not been provided on the
undistributed earnings of foreign subsidiaries as such earnings will continue to
be reinvested in the foreseeable future.
A reconciliation of the Company's income tax provision and the amount
computed by applying the statutory federal income tax rate to income before
income taxes for the years ended June 30, 2004, 2003 and 2002 is as follows:
2004 2003 2002
---------- ---------- ----------
Federal income tax at
statutory rate $ 37,868 $ 54,246 $ 50,429
Change in reserve for
contingent tax liabilities 1,917 (731) (23)
Change in valuation
allowance (600) 497 -
State taxes 4,404 7,480 5,777
Foreign taxes (18) (3,381) (1,046)
Tax credits (599) (559) (732)
Other, net 1,642 (807) 979
---------- ---------- ----------
$ 44,614 $ 56,745 $ 55,384
========== ========== ==========
Tax expense allocated to unrealized gains on investments, included in
comprehensive income but excluded from net income, approximated $3.6 million for
the year ended June 30, 2004.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancellable operating leases with
remaining terms of up to fourteen years. The Company also leases certain office
and computer equipment and software under operating leases expiring through
2009. Rental expense associated with these operating leases for the years ended
June 30, 2004, 2003 and 2002 were $39.9 million, $36.7 million and $32.3
million, respectively.
The future minimum rental payments under non cancellable operating leases for
the years ending after June 30, 2004 are as follows:
Operating
Fiscal year leases
2005 $ 37,013
2006 34,771
2007 32,550
2008 26,025
2009 23,256
Thereafter 132,161
---------
$ 285,776
=========
The Company's broker-dealer subsidiaries are subject to the Uniform Net
Capital Rule of the Securities and Exchange Commission. At June 30, 2004, the
aggregate net capital of such subsidiaries was $9.8 million, exceeding the net
capital requirement by $8.4 million.
At June 30, 2004, the Company has an outstanding purchase commitment
through May 2006 to acquire $21.8 million of software licenses related to
banking service products.
42
It is not the Company's business practice to enter into off-balance sheet
arrangements. However, in the normal course of business, the Company does enter
into contracts in which it makes representations and warranties that guarantee
the performance of the Company's products and services as well as other
indemnifications entered into in the normal course of business. During fiscal
2004, 2003, and 2002, there were no material losses related to such guarantees
and indemnifications.
The Company is involved in litigation arising in the ordinary course of
business. The life insurance services division is involved in litigation with a
West Coast-based distributor of life insurance products, with which the Company
had a former business relationship. The Company intends to continue to
vigorously defend the claims asserted and has asserted a number of counter
claims. Management believes that the Company has adequate defenses against
claims arising in such litigation and that the outcome of this and other matters
will not have a material adverse effect upon the Company's financial position,
results of operations, or cash flows.
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 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.
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. The class action complaints purport to be brought on
behalf of all shareholders who purchased the Company's securities between
October 23, 2000 and May 17, 2004 and 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 class action complaints seek
damages in an unspecified amount against the Company. The derivative complaints
purport to be 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 Company intends to defend itself vigorously against these claims but
is unable to determine the ultimate outcome.
8. SUPPLEMENTAL CASH FLOW INFORMATION
In fiscal 2004, 2003 and 2002, the Company recorded a reduction to taxes
currently payable related to tax benefits associated with stock options of
approximately $1.7 million, $3.7 million and $19.7 million, respectively, with a
corresponding increase to additional paid-in capital.
Net cash paid for acquisition of businesses was comprised of the following
for the years ended June 30, 2004, 2003 and 2002:
2004 2003 2002
---------- ---------- ----------
Fair value of assets acquired,
net of cash $ 147,892 $ 230,375 $ 299,230
Less: issuance of common
stock and stock options
pursuant to acquisitions (38,823) - (1,100)
Liabilities assumed (51,490) (74,503) (28,182)
---------- ---------- ----------
Net cash paid $ 57,579 $ 155,872 $ 269,948
========== ========== ==========
9. RETIREMENT SAVINGS PLANS
The Company and certain of its subsidiaries maintain retirement savings plans
that cover substantially all employees. These plans generally provide for
tax-deferred amounts for each participant and matching Company contributions,
subject to certain limitations. The aggregate amounts charged to expense in
connection with these plans were $6.1 million, $5.7 million and $4.7 million for
the years ended June 30, 2004, 2003 and 2002, respectively.
10. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
The Company recorded pre-tax restructuring, impairment and other charges of
$29.1 million in fiscal 2004. The charges consist of $11.6 million relating 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, impairment charges of $7.9 million,
and $9.6 million of estimated amounts for certain litigation expenses and
contractual disputes.
Restructuring charges of $11.6 million during the year ended June 30, 2004
were comprised of severance
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, amounts in thousands, except per share data)
totaling $9.4 million and lease termination and other costs of $2.2 million.
Severance charges resulted from the termination or planned termination of
approximately 380 employees representing all levels of staffing.
In connection with the 2004 restructuring plan, certain severance costs
approximating $0.2 million and lease termination costs of approximately $1.0
million are expected to be recognized during the first half of fiscal 2005 in
accordance with FAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities."
The Company recorded asset impairment charges of $7.9 million during the
year ended June 30, 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 wrote off $5.2 million of 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 $3.6 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 year ended June 30,
2004. The Company intends to continue to vigorously defend the claims asserted
and has asserted a number of counterclaims. Additionally, during the year ended
June 30, 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
and $1.0 million for costs associated with securities litigation.
The Company recorded a pre-tax restructuring charge of $12.1 million in
fiscal 2003, relating 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. The restructuring charge includes a provision of $7.2
million for severance-related costs for approximately 300 employees and $4.9
million for facility closure and related costs. At June 30, 2004, the remaining
accrual amounts to $0.6 million and primarily relates to lease costs for
facility closures.
The Company recorded a pre-tax restructuring charge of $6.5 million in
fiscal 2002 relating to the integration, consolidation, and relocation of
certain business operations, primarily as a result of acquisition activity. The
restructuring charge included a provision of $4.2 million for severance-related
costs for approximately 200 employees and $2.3 million for facility
consolidation and related costs. All restructuring activities in connection with
this charge were completed by the end of the first quarter of fiscal 2003.
Total restructuring, impairment and other charges recorded for the years ended
June 30, 2004, 2003 and 2002 consisted of the following:
2004 2003 2002
-------- -------- --------
Restructuring charges $ 11,632 $ 12,079 $ 6,475
Impairment charges 7,863 - -
Litigation and other charges 9,604 - -
-------- -------- --------
Total restructuring, impairment
and other charges $ 29,099 $ 12,079 $ 6,475
======== ======== ========
The following summarizes activity with respect to the Company's restructuring
activities for the years ended June 30, 2004, 2003 and 2002:
2004 2003 2002
-------- -------- --------
Expense provision:
Employee severance $ 9,410 $ 7,161 $ 4,185
Facility closure 2,222 4,918 2,290
-------- -------- --------
Total 11,632 12,079 6,475
-------- -------- --------
Cash payments and other:
2004 8,414 1,352 -
2003 - 10,096 197
2002 - - 6,278
-------- -------- --------
Total 8,414 11,448 6,475
-------- -------- --------
Remaining accrual at June 30, 2004:
Employee severance 2,624 - -
Facility closure 594 631 -
-------- -------- --------
Total $ 3,218 $ 631 $ -
======== ======== ========
11. SHAREHOLDER RIGHTS PLAN
The Company has adopted a Shareholder Rights Plan and declared a dividend
distribution at the rate of one Right for each share of common stock held of
record as of the close of business on May 16,1997 and for each share of common
stock issued thereafter up to the distribution date (defined below).
Each Right entitles holders of common stock to buy shares of common stock
of the Company at an exercise price of $175. The Rights would be exercisable,
and would detach from the common stock (the "Distribution Date") only if a
person or group (i) were to acquire 15 percent or more of the outstanding
shares of common stock of the Company; (ii) were to announce a tender or
44
exchange offer that, if consummated, would result in a person or group
beneficially owning 15 percent or more of the outstanding shares of common stock
of the Company; or (iii) were declared by the Board to be an Adverse Person (as
defined in the Plan) if such person or group beneficially owns 10 percent or
more of the outstanding shares of common stock in the Company. In the event of
any occurrence triggering the Distribution Date, each right would entitle the
holder (other than such an acquiring person or group) to purchase the
outstanding shares of common stock of the Company (or, in certain circumstances,
common stock of the acquiring person) with a value of twice the exercise price
of the Rights upon payment of the exercise price. The Company will be entitled
to redeem the Rights at $.000625 per Right at any time. The Rights will expire
at the close of business on May 16, 2012.
12. NOTES RECEIVABLE FROM STOCKHOLDERS
The Board of Directors approved and the Company made loans in fiscal 2000 to
certain executive officers to assist them in exercising non-qualified stock
options, retaining the underlying shares and paying the applicable taxes
resulting from such exercises. These loans bear interest at 2.48% as of June 30,
2004, are full recourse, and are secured by a pledge of certain shares of the
Company's Common Stock acquired pursuant to the exercise of the options. As of
June 30, 2004, the pledged shares represented approximately 53% of the
outstanding loan balances. The principal is repayable the later of five years
from the date of the loan or the expiration date of the options exercised using
such loan proceeds. The principal is also repayable within one year of the
employee's death or termination of employment due to disability and within 30
days of voluntary resignation. Interest is payable annually on the anniversary
date of each loan.
The notes receivable of $8.1 million and $10.8 million at June 30, 2004
and 2003, respectively, are reflected on the accompanying consolidated balance
sheets as a reduction in stockholders' equity.
13. DEFERRED COMPENSATION
The Company has a deferred compensation plan (the "Plan") whereby certain
compensation earned by a participant can be deferred and placed in an employee
benefit trust, also known as a "rabbi trust." Under the Plan, the participant
may choose from several investment designations, including shares of common
stock of the Company. During the first quarter of fiscal 2003, the Company
amended the Plan to make all participant deferrals that are designated in common
stock of the Company irrevocable and to require that all future distributions of
such designations be settled in shares of Company common stock. Accordingly, the
Company has applied the provisions of Emerging Issues Task Force (EITF) 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held
in a Rabbi Trust and the rabbi trust be classified as equity similar to the
manner of accounting for treasury stock. Additionally, the EITF requires that
the portion of the deferred compensation obligation that is required to be
settled by the delivery of shares of employer stock be classified in equity. At
June 30, 2004, 342,613 shares, valued at $5.5 million, were held by the employee
benefit trust and presented in the accompanying consolidated balance sheet as a
contra-equity account. Additionally, $5.3 million has been classified as equity
in the accompanying consolidated balance sheet and represents the deferred
compensation obligation under the Plan that is designated in shares of Company
common stock. Under the EITF, changes in the fair value of both the employer
stock held in the rabbi trust and the deferred compensation obligation,
representing amounts designated in shares of Company common stock, are not
recognized.
14. SHARE REPURCHASE PROGRAMS
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 last three fiscal
years under programs authorized by the Board of Directors between fiscal 1999
and fiscal 2004, 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.
Year Ended June 30, 2004 2003 2002
SHARES COST Shares Cost Shares(1) Cost
------ -------- ------ -------- -------- --------
Share Repurchase
Programs:
$100 million, authorized
January 1999 - $ - 1,150 $ 28,626 118 $ 2,684
$100 million, authorized
August 2002 3,158 46,153 301 4,793 - -
$100 million, authorized
November 2003 869 13,565 - - - -
----- -------- ----- -------- --- --------
Total Stock Repurchases 4,027 $ 59,718 1,451 $ 33,419 118 $ 2,684
===== ======== ===== ======== === ========
(1) Share amounts have been retroactively restated for the period to reflect the
impact of the two-for-one stock split.
15. STOCK-BASED COMPENSATION PLANS
The Company has stock option, restricted stock, and stock purchase plans which
provide for granting of options and/or restricted stock to certain employees and
outside directors. Stock option grants have exercise prices equal to the market
value of the underlying common stock on the date of grant. The stock options
vest primarily over a five-year period at each anniversary date of the grant and
expire following termination of employment or within ten years of the date of
the grant, whichever comes first. At June 30, 2004, options to purchase
approximately 9.0 million shares are available for grant under the plans.
Pursuant to the 1999 Equity Participation Plan, the Company provides for
awards of restricted shares of
45
Notes to Consolidated Financial Statements
(Unless otherwise noted, amounts in thousands, except per share data)
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 486,364
restricted shares were granted, net of forfeitures, during 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 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 $2.1 million during the year ended
June 30, 2004.
The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions for
grants in fiscal 2004, 2003 and 2002: 1) expected dividend yields of 0%, 2)
risk-free interest rates ranging from 2.10% to 4.67%, 3) expected volatility of
40% in fiscal 2004 and 2003 and 35% in 2002, and 4) an expected option life of
5.0 years, 4.8 years and 4.6 years in fiscal 2004, 2003 and 2002, respectively.
For the purpose of pro forma disclosures (see Note 1), the estimated fair value
of the options is amortized to expense over the options' vesting period of five
years for employees. Using these assumptions, the weighted average fair value
per option at date of grant for options granted during fiscal 2004, 2003 and
2002 was $6.52, $8.07 and $10.83, respectively.
The following is a summary of stock option activity for the years ended
June 30, 2004, 2003, and 2002. All share and price information has been adjusted
to reflect the stock splits:
2004 2003 2002
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- ------- -------- ------- --------
Outstanding at beginning of year 13,772 $ 19.70 13,403 $ 18.87 14,278 $ 13.93
Options granted - original 2,071 16.31 1,979 20.37 2,770 29.71
Options granted - reload 9 17.54 132 25.77 907 28.88
Options exercised (853) 9.38 (1,128) 11.06 (3,862) 11.17
Options cancelled (1,597) 22.39 (614) 22.08 (690) 15.98
------ ----- ------- ------ ------- -----
Outstanding at end of year 13,402 $ 19.48 13,772 $ 19.70 13,403 $ 18.87
------ ----- ------ ----- ------ -----
Exercisable at end of year 7,307 $ 19.00 6,238 $ 18.42 4,206 $ 16.68
====== ===== ===== ===== ===== =====
The following summarizes information about the Company's stock options
outstanding at June 30, 2004:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE REMAINING EXERCISE
EXERCISE LIFE PRICE OF
OPTIONS OUTSTANDING PRICE (IN YEARS) EXERCISABLE EXERCISABLE
------------------- -------- ---------- ----------- -----------
$0.01-$10.00 943 $ 8.53 3.0 943 $ 8.53
$10.01-$20.00 7,549 $ 15.18 6.8 3,477 $ 14.23
$20.01-$30.00 4,104 $ 27.15 6.1 2,421 $ 27.19
$30.01-$40.00 806 $ 33.55 6.5 466 $ 33.26
16. BUSINESS SEGMENT INFORMATION
The Company is a leading provider of business process outsourcing solutions to
financial institutions and other financial organizations. The Company's
operations have been classified into three business segments: Investment
Services, Insurance and Education Services, and Information Services.
The Company's reportable segments are separately managed strategic
business units that offer different products and services, and are based on the
Company's method of internal reporting. The Investment Services segment provides
business process 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 midsize 401 (k)
plans. The Insurance and Education 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 and check imaging solutions to
financial services companies, asset retention solutions to insurance companies,
and corporate banking services to support corporate-sponsored cash management
programs.
46
Summarized financial information by business segment and for corporate
operations for the years ended June 30, 2004, 2003 and 2002 is presented below.
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.
2004 2003 2002
Revenues:
Investment Services $ 562,192 $ 498,531 $ 449,930
Insurance and Education Services 255,125 220,055 173,655
Information Services 219,985 215,053 197,590
------------ ------------ ------------
Total $ 1,037,302 $ 933,639 $ 821,175
============ ============ ============
Operating earnings (loss):
Investment Services $ 69,621 $ 77,556 $ 77,449
Insurance and Education Services 49,163 68,225 51,080
Information Services 60,183 59,387 54,895
Corporate (23,970) (21,430) (20,765)
------------ ------------ ------------
Total $ 154,997 $ 183,738 $ 162,659
============ ============ ============
Assets:
Investment Services $ 612,236 $ 600,647 $ 567,604
Insurance and Education Services 774,580 645,790 406,801
Information Services 125,376 133,155 133,444
Corporate 100,048 78,550 83,493
------------ ------------ ------------
Total $ 1,612,240 $ 1,458,142 $ 1,191,342
============ ============ ============
Depreciation and amortization expense:
Investment Services $ 26,733 $ 22,633 $ 17,983
Insurance and Education Services 21,093 14,699 11,269
Information Services 12,309 11,355 10,334
Corporate 1,016 1,017 1,014
------------ ------------ ------------
Total $ 61,151 $ 49,704 $ 40,600
============ ============ ============
Capital expenditures:
Investment Services $ 16,484 $ 21,631 $ 18,863
Insurance and Education Services 6,939 6,621 7,107
Information Services 12,434 13,755 14,072
Corporate 422 1,208 989
------------ ------------ ------------
Total $ 36,279 $ 43,215 $ 41,031
============ ============ ============
The following is a reconciliation of operating earnings to the Company's
consolidated total:
2004 2003 2002
---------- ---------- ----------
Total operating earnings for reportable segments $ 154,997 $ 183,738 $ 162,659
Restructuring, impairment and other charges:
Investment Services (9,275) (5,430) (2,955)
Insurance and Education Services (15,312) (2,866) (1,085)
Information Services (2,609) (1,494) (843)
Corporate (1,903) (2,289) (1,592)
---------- ---------- ----------
Total restructuring, impairment and other charges (29,099) (12,079) (6,475)
---------- ---------- ----------
Total consolidated operating earnings $ 125,898 $ 171,659 $ 156,184
========== ========== ==========
47
Notes to Consolidated Financial Statements
(Unless otherwise noted, amounts in thousands, except per share data)
The net revenues of each segment are principally domestic, and no single
customer accounted for 10% or more of the consolidated revenues for the years
ended June 30, 2004, 2003 and 2002. Assets in the Insurance and Education
Services segment increased 20% and 59% in fiscal 2004 and 2003, respectively,
primarily as a result of the acquisitions consummated during those years.
Revenues from unaffiliated customers located outside the United States
approximated $81.9 million, 65.5 million and $36.5 million for the years ended
June 30, 2004, 2003 and 2002, respectively.
17. CONSOLIDATED QUARTERLY RESULTS
(unaudited)
FISCAL 2004
------------------------------------------------
Quarter Ended SEP 30 DEC 31 MAR 31 JUN 30
- ------------------------- --------- --------- --------- ---------
Revenues $ 236,434 $ 261,381 $ 272,332 $ 267,155
Operating earnings 21,956 36,826 33,823 33,293
Income before income taxes 17,617 32,373 29,473 28,731
Net income 5,843 20,314 19,394 18,029
========= ========= ========= =========
Basic earnings per share $ 0.05 $ 0.17 $ 0.16 $ 0.15
Diluted earnings per share $ 0.05 $ 0.17 $ 0.16 $ 0.15
========= ========= ========= =========
Fiscal 2003
------------------------------------------------
Quarter Ended Sep 30 Dec 31 Mar 31 Jun 30
- ------------------------- --------- --------- --------- ---------
Revenues $ 223,417 $ 224,736 $ 238,074 $ 247,412
Operating earnings 27,458 42,655 49,627 51,919
Income before income taxes 23,446 38,622 45,422 47,498
Net income 14,678 23,538 28,987 31,040
========= ========= ========= =========
Basic earnings per share $ 0.12 $ 0.20 $ 0.24 $ 0.26
Diluted earnings per share $ 0.12 $ 0.19 $ 0.24 $ 0.26
========= ========= ========= =========
MARKET PRICE INFORMATION
(Unaudited)
The following information relates to the Company's $0.02 par value common stock
which is traded on the New York Stock Exchange under the symbol BSG. Price
information on the Company's common stock is presented below.
FISCAL 2004 Fiscal 2003
-------------------- ----------------------
Quarter Ended HIGH LOW High Low
- ------------- -------- -------- -------- --------
September 30 $ 19.98 $ 12.95 $ 32.20 $ 16.00
December 31 15.27 13.20 20.86 13.32
March 31 18.40 14.09 17.87 14.21
June 30 17.17 12.20 20.70 14.50
At June 30, 2004, the Company's common stock was held by 1,081 stockholders of
record. It is estimated that an additional 14,201 stockholders own the Company's
common stock through nominee or street name accounts with brokers.
48