1
THE BISYS GROUP, INC. AND SUBSIDIARIES
Selected Financial Data
(in thousands, except per shore 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
results of operations and financial condition included elsewhere in this annual
report.
STATEMENT OF OPERATIONS DATA:
--------
FOR YEARS ENDED JUNE 30, 1999 1998 1997 1996 1995
Revenues $472,676 $386,344 $318,988 $247,061 $200,527
- -------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Service and operating 266,800 221,767 170,717 131,708 105,163
General and administrative 69,696 58,061 54,638 39,980 46,953
Selling and conversion 22,509 17,064 12,410 9,248 8,988
Research and development 11,523 11,731 10,408 10,176 9,392
Amortization of intangibles 7,756 3,819 3,613 3,811 5,095
Merger expenses and other charges 400 11,998 1,500 22,250 28,340
Acquired in-process research
and development 19,000 -- -- -- --
- -------------------------------------------------------------------------------------------------------
Operating earnings (loss) 74,992 61,904 65,702 29,888 (3,404)
Interest (income) expense (1,200) (4,849) (2,216) (372) 649
- -------------------------------------------------------------------------------------------------------
Income (loss) before income tax provision 76,192 66,753 67,918 30,260 (4,053)
Income tax provision 38,076 26,729 27,167 12,236 2,431
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ 38,116 $ 40,024 $ 40,751 $ 18,024 $ (6,484)
=======================================================================================================
Basic earnings (loss) per share $ 1.43 $ 1.52 $ 1.63 $ 0.76 $ (0.28)
Diluted earnings (loss) per shore $ 1.36 $ 1.46 $ 1.55 $ 0.72 $ (0.28)
=======================================================================================================
BALANCE SHEET DATA:
JUNE 30,
Working capital $ 22,084 $ 97,822 $ 87,641 $ 40,448 $ 5,326
Total assets 459,661 334,101 265,085 214,625 165,338
Long-term debt, including current maturities -- 1,702 1,668 1,974 8,405
Stockholders' equity 288,506 238,290 191,919 143,172 114,627
=======================================================================================================
--------
18
2
THE BISYS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
The BISYS Group, Inc. and subsidiaries (the "Company") provides outsourcing
solutions to and through financial organizations. The following table presents
the percentage of revenues represented by each item in the Company's
consolidated statement of operations for the periods indicated:
------
FOR YEARS ENDED JUNE 30, 1999 1998 1997
Revenues 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Operating costs and expenses:
Service and operating 56.4 57.4 53.5
General and administrative 14.8 15.0 17.1
Selling and conversion 4.8 4.5 3.9
Research and development 2.4 3.0 3.3
Amortization of intangibles 1.6 1.0 1.1
Merger expenses and other charges 0.1 3.1 0.5
Acquired in-process research and development 4.0 -- --
- --------------------------------------------------------------------------------
Operating earnings 15.9 16.0 20.6
Interest income 0.3 1.3 0.7
- --------------------------------------------------------------------------------
Income before income tax provision 16.2 17.3 21.3
Income tax provision 8.1 6.9 8.5
- --------------------------------------------------------------------------------
Net income 8.1% 10.4% 12.8%
================================================================================
------
Revenues increased $86.3 million in fiscal 1999 and $67.4 million in fiscal
1998, representing increases of 22.4% and 21.1%, respectively. Growth in fiscal
1999 and 1998 was derived from sales to new clients, existing client growth,
cross-sales to existing clients and revenues from acquired businesses, partially
offset by lost business. Revenue growth from acquired businesses approximated
$34.7 million in fiscal 1999 and $23.4 million in fiscal 1998.
Service and operating expenses increased $45.0 million in fiscal 1999 and $51.1
million in fiscal 1998, representing increases of 20.3% and 29.9%, respectively.
Service and operating expenses decreased as a percentage of revenues in fiscal
1999 by 1.0% to 56.4%, and increased by 3.9% to 57.4% in fiscal 1998. The dollar
increases resulted from additional costs associated with greater revenues.
General and administrative expenses increased $11.6 million, or 20.0%, and
decreased as a percentage of revenues by 0.2% to 14.8% in fiscal 1999 and
increased $3.4 million, or 6.3%, and decreased as a percentage of revenues by
2.1% to 15.0% in fiscal 1998. The dollar increase in fiscal 1999 and 1998
resulted from additional casts associated with greater revenues. The decrease as
a percentage of revenues resulted from further utilization of existing general
and administrative support resources.
Selling and conversion expenses increased $5.4 million, or 31.9%, and increased
as a percentage of revenues by 0.3% to 4.8% in fiscal 1999, and increased $4.7
million, or 37.5%, and increased as a percentage of revenues by 0.6% to 4.5% in
fiscal 1998. The increases in fiscal 1999 and 1998 resulted from added costs
associated with higher selling and conversion activities.
Research and development expenses decreased $0.2 million to $11.5 million, or
1.8%, in fiscal 1999 and decreased as a percentage of revenues by 0.6% to 2.4%.
In fiscal 1998 such expenses increased $1.3 million to $11.7 million, or 12.7%,
and decreased as percentage of revenues by 0.3% to 3.0%. The reduction in
percentage of revenues in both fiscal years was a result of acquiring and
merging with businesses which do not require substantial research and
development.
Amortization of intangible assets was $7.8 million in fiscal 1999, compared to
$3.8 million in fiscal 1998 and $3.6 million in fiscal 1997. The increase in
fiscal 1999 amortization was due to the higher level of intangible assets
associated with acquired businesses.
In fiscal 1999, the Company wrote off $19.0 million of acquired in-process
research and development associated with the acquisition of Greenway and
incurred $0.4 million of merger-related expenses.
In fiscal 1998, the Company recorded transaction-related charges of $5.3 million
related to the acquisitions of Charter Systems, Inc. (Charter), Dascit/White &
Winston and affiliated companies (DWW), and Benefit Services, Inc. (BSI).
Additionally, a one-time charge of $6.7 million was incurred to realign
operations primarily in connection with a client of the Company's Fund Services
division terminating its distribution and administration agreements.
19
3
THE BISYS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
In fiscal 1997, $1.5 million of additional commission charges were incurred as a
result of increased mutual fund assets serviced pursuant to the outsourcing
alliance with the mutual fund division of Furman Selz, LLC.
Operating earnings increased by $13.1 million to $75.0 million in fiscal 1999
and decreased as a percentage of revenues from 16.0% to 15.9%. The dollar
increase was primarily due to revenue gains and the synergies realized from
consolidation of acquired businesses. Operating earnings decreased by $3.8
million to $61.9 million in fiscal 1998, and decreased as a percentage of
revenues from 20.6% to 16.0%. The decreases were due to merger expenses and
other charges.
Interest income decreased $3.6 million to $1.2 million in fiscal 1999 and
increased $2.6 million to $4.8 million in fiscal 1998. The fiscal 1999 decrease
was due to lower levels of invested cash and higher interest expense associated
with short-term borrowings. The fiscal 1998 increase was due to higher average
invested balances of cash and cash equivalents.
The provision for income taxes increased to $38.1 million in fiscal 1999 from
$26.7 million in fiscal 1998 and decreased from $27.2 million in fiscal 1997.
Exclusive of the nonrecurring, nondeductible charge in fiscal 1999 of $19.0
million related to acquired in-process research and development, the fiscal 1999
provision for income taxes reflects an effective tax rate of 40%. The effective
tax rate was also 40% for both fiscal 1998 and 1997.
-------------------
Segment Information
The following table sets forth operating revenue and operating income by
business segment and for corporate operations for the years ended June 30, 1999,
1998, and 1997. Merger expenses and other charges and acquired in-process
research and development are separated from the operating results of the segment
for a better understanding of the underlying performance of each segment.
(in thousands)
1999 1998 1997
Operating revenue:
Information Services $178,296 $151,372 $126,154
Investment Services 237,909 211,714 181,665
Insurance and
Education Services 56,471 23,258 11,169
- --------------------------------------------------------------------------------
Total operating
revenue $472,676 $386,344 $318,988
================================================================================
Operating income (loss):
Information Services $44,389 $34,320 $33,958
Investment Services 42,499 42,764 36,299
Insurance and
Education Services 19,353 7,502 4,197
Corporate (11,849) (10,684) (7,252)
- --------------------------------------------------------------------------------
Total operating
income $94,392 $73,902 $67,202
================================================================================
Revenue in the Information Services business segment increased $26.9 million in
fiscal 1999 and $25.2 million in fiscal 1998, representing increases of 17.8%
and 20.0%, respectively. The revenue increase in fiscal 1999 was due to internal
growth and the acquisition of Greenway Corporation, while the increase in fiscal
1998 was due to internal growth and the acquisition of Charter Systems, Inc.
(Charter). Operating income in the Information Services business segment
increased $10.1 million in fiscal 1999 and $0.4 million in fiscal 1998,
resulting in operating margins of 24.9%, 22.7%, and 26.9% for fiscal 1999, 1998,
and 1997, respectively. Margins improved in fiscal 1999 primarily due to
accelerated growth within the Information Solutions division, while margins
decreased in fiscal 1998 due to lower margins in the Marketing Solutions
division and lower margins associated with the acquisition of Charter. The
Marketing Solutions division was sold in June 1999.
Revenue in the Investment Services business segment increased $26.2 million in
fiscal 1999 and $30.0 million in fiscal 1998, representing increases of 12.4%
and 16.5%, respectively. The revenue increase in fiscal 1999 was due to internal
growth and the acquisition of Brokerage Services, while the increase in fiscal
1998 was due to continued internal growth and a strong increase in the number of
plans administered by the Plan Services division. Operating income in the
Investment Services business segment decreased $0.3 million in fiscal 1999 and
increased $6.5 million in fiscal 1998, resulting in margins of 17.9%, 20.2%, and
20.0% in fiscal 1999, 1998, and 1997, respectively. Margins declined in fiscal
1999 primarily due to the acquisition of Brokerage Services and lower margins in
the Fund Services division as a result of costs incurred for the international
20
4
expansion of outsourcing services, expansion of the business development sales
force and the full-year impact of the loss of a major client in September 1997.
Margins remained relatively constant in fiscal 1998 compared to fiscal 1997 as a
result of lower margins in the Fund Services division due to the loss of a
significant client, offset by higher margins within the Plan Services division.
Revenue in the Insurance and Education Services business segment increased $33.2
million in fiscal 1999 and $12.1 million in fiscal 1998, representing increases
of 142.8% and 108.2%, respectively. Revenue growth in fiscal 1999 and fiscal
1998 was attributable to internal growth and revenue from acquired businesses.
Operating income in the Insurance and Education Services business segment
increased $11.9 million in fiscal 1999 and $3.3 million in fiscal 1998,
resulting in margins of 34.3%, 32.3%, and 37.6% in fiscal 1999, 1998, and 1997,
respectively. Margins increased slightly in fiscal 1999 due to strong internal
growth combined with efficient integration of acquired businesses. Margins
declined in fiscal 1998 as the Company invested in the marketing and sales areas
to position the Insurance Services division for sustained growth.
Corporate operations represent charges for the Company's human resources, legal,
accounting and finance functions, and various other unallocated overhead
charges. Increased expenses of $1.2 million in fiscal 1999 were in line with the
Company's overall growth. Increased expenses of $3.4 million in fiscal 1998 were
due to additional staffing, office space, and computer equipment and software
required to expand the infrastructure in response to overall growth in the
business.
-------------------------------
Liquidity and Capital Resources
At June 30, 1999, the Company had cash and cash equivalents of $49.6
million and working capital of approximately $22.1 million. At June 30, 1999,
the Company had outstanding borrowings of $52.0 million against its revolving
credit facility to support working capital requirements. The credit facility
bears interest at LIBOR plus a margin of 0.625%, or 5.625% at June 30, 1999. At
June 30, 1999, the Company had $0.7 million outstanding in the form of letters
of credit.
Other current assets included in the accompanying balance sheet consist
primarily of prepaid expenses, inventory, and customer funds required to be
segregated that are held by the Company's Brokerage Services division that was
acquired in July 1998. Customer funds required to be segregated may vary
significantly from period to period and approximated $3.4 million at June 30,
1999.
For the year ended June 30, 1999, operating activities provided cash of $52.3
million, primarily as a result of net income of $38.1 million plus several
non-cash items including depreciation and amortization of $23.6 million,
deferred income taxes of $3.7 million and the write-off of acquired in-process
research and development of $19.0 million, offset by changes in net operating
assets and liabilities, net of effects from acquisitions, of $32.0 million.
These changes are a result of increases in accounts receivable due to revenue
growth and reduction in accrued liabilities due largely to payments associated
with client marketing programs that are administered by the Company's Fund
Services division. Investing activities used cash of $91.1 million, primarily
for the acquisition of businesses of $64.8 million, and capital expenditures of
$27.7 million, offset by cash acquired in acquisitions of $9.5 million.
Financing activities used cash of $5.0 million primarily for the repurchase of
common stock of $70.4 million offset by net borrowings of $52.0 million and
$11.3 million of proceeds from the exercise of stock options.
For the years ended June 30, 1998 and 1997, operating activities provided cash
of $62.6 million and $46.3 million, respectively. Investing activities used cash
of $50.3 million and $11.8 million in fiscal years 1998 and 1997, respectively,
and financing activities provided cash of $1.2 million and $6.2 million,
respectively.
The Company's strategy includes the acquisition of complementary businesses
financed by a combination of internally generated funds, borrowings from the
revolving credit facility and common stock. The Company's policy is to retain
earnings to support future business opportunities, rather than to pay dividends.
In January 1999, the Company's Board of Directors authorized a new stock
buy-back program of up to $100 million of its outstanding common stock.
Purchases will occur from time to time in the open market to offset the possible
dilutive effect of shares to be issued under employee benefit plans, for
possible use in future acquisitions, and for general and other corporate
purposes. This new program supercedes and replaces the share repurchase program
previously authorized by the Board of Directors.
Under the Company's stock buy-back programs, the Company has purchased
approximately 1.6 million shares of its common stock during fiscal year 1999 for
approximately $70.4 million in order to effect the acquisitions of Greenway
Corporation (Greenway), EXAMCO, Inc. (EXAMCO), and Dover International (Dover),
and for issuance of stock in connection with the exercise of stock options.
Since January 1999, the Company has purchased 358,000 shares of its common stock
under the new stock buy-back program for approximately $19.4 million.
-------------------
Acquired In-Process
Research and Development
In September 1998, the Company acquired Greenway through the issuance of
common stock
21
5
THE BISYS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
valued at approximately $43.8 million. Of the total purchase price, $19.0
million was allocated to acquired in-process research and development, which was
charged to operations at the time of acquisition.
The amount allocated to acquired in-process research and development was based
on an independent appraisal, employing a discounted cash flow approach, and
relates to the development of enhanced check imaging software. At the
acquisition date, the products were estimated to be between 50% and 75%
complete, and were determined to have no future alternative uses.
Significant assumptions used in the valuation of the acquired in-process
research and development were as follows:
Estimated costs to complete $2.1 million
Anticipated completion date January 2000
Projected annual revenues $30 million
Discount rate 20%
Discount period 9 years
Currently, the development efforts are proceeding ahead of schedule.
Technological feasibility was attained in the third quarter of fiscal 1999, and
it is anticipated that development efforts will be completed by the end of the
first quarter of fiscal 2000.
Research and development expenditures related to this product development
effort, prior to attaining technological feasibility, approximated $500,000 for
the year ended June 30, 1999, and are included in the consolidated statement of
operations.
---------
Year 2000
The Company is addressing the Year 2000 issues associated with its
existing computer systems and software applications utilizing both internal and
external resources to identify and remediate these matters throughout the
organization. The Company has completed its risk assessment and testing plans
for internal mission critical information systems and continues to remediate
other systems that are not currently Year 2000 ready. The Company has tested
substantially all of its internal mission critical information systems and
believes such systems are Year 2000 ready. In the event such systems are not
Year 2000 ready by December 31, 1999, it could have a material adverse impact on
the Company's business and results of operation.
The Company uses third-party provided software and systems in certain of its
businesses for such tasks as account and information statement processing, fund
accounting, and 401(k) plan record-keeping. If third parties upon which the
Company depends, including telecommunications and electrical power providers,
ore unable to address their Year 2000 issues in a timely manner, it could result
in a material adverse financial risk to the Company. In order to minimize this
risk, the Company has devoted resources necessary to develop appropriate
business continuity plans. These contingency plans include alternative systems
and vendors, disaster recovery hot sites, alternative power sources, and manual
processes. Such contingency plans have been substantially completed.
The Company's Year 2000 progress, the testing of remediated software, and
contingency plans have been and will continue to be the subject of independent
verification and validation by the Company's Internal Audit function. Internal
Audit reports on Year 2000 are reviewed by senior management and the Company's
Board of Directors.
The Company believes it has developed an effective plan to address the Year 2000
issues and that, based on available information, its Year 2000 transition will
not have a material effect on its businesses, operations, or financial results.
The Company has incurred expenditures for Year 2000 testing and remediation of
approximately $3.0 million in fiscal 1999 and $3.0 million in fiscal 1998. The
Company anticipates expenditures for Year 2000 of approximately $1.2 million in
the first half of fiscal 2000.
---------------------------------------
Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the matters
discussed in this annual report are forward-looking statements which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, services and related products, prices, and other factors discussed in
the Company's prior filings with the Securities and Exchange Commission.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that the
forward-looking statements included in this annual report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
22
6
THE BISYS GROUP, INC. AND SUBSIDIARIES
Management's Statement of Responsibility
The management of the Company assumes responsibility for the integrity and
objectivity of the information in the fiscal 1999 Annual Report. The information
was prepared in conformity with generally accepted accounting principles and
reflects the best judgment of management.
To provide reasonable assurance that transactions authorized by management are
recorded and reported properly and that assets are safeguarded, the Company
maintains a system of internal controls. The concept of reasonable assurance
implies that the cost of such a system is weighed against the benefits to be
derived therefrom.
PricewaterhouseCoopers LLP, independent accountants, audits the financial
statements of the Company in accordance with generally accepted auditing
standards. Such audit considers the Company's internal control structure and
includes a communication of recommendations for improvements in the Company's
internal control structure.
The Audit Committee of the Board of Directors ensures that management is
properly discharging its financial reporting responsibilities. In performing
this function, the Committee meets with management and the independent
accountants throughout the year. Additional access to the Committee is provided
to the independent accountants on an unrestricted basis, allowing discussion of
audit results, internal accounting controls, and financial reporting.
/s/ Lynn J. Mangum
LYNN J. MANGUM
Chairman and
Chief Executive Officer
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE BISYS GROUP, INC.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of The BISYS
Group, Inc. and its subsidiaries at June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.
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
generally accepted auditing standards which 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
August 6, 1999
23
7
THE BISYS GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(in thousands, except per share data)
--------
FOR YEARS ENDED JUNE 30, 1999 1998 1997
Revenues $472,676 $386,344 $318,988
- --------------------------------------------------------------------------------
Operating costs and expenses:
Service and operating 266,800 221,767 170,717
General and administrative 69,696 58,061 54,638
Selling and conversion 22,509 17,064 12,410
Research and development 11,523 11,731 10,408
Amortization of intangibles 7,756 3,819 3,613
Merger expenses and other charges 400 11,998 1,500
Acquired in-process research and development 19,000 -- --
- --------------------------------------------------------------------------------
Operating earnings 74,992 61,904 65,702
Interest income 1,200 4,849 2,216
- --------------------------------------------------------------------------------
Income before income tax provision 76,192 66,753 67,918
Income tax provision 38,076 26,729 27,167
- --------------------------------------------------------------------------------
Net income 38,116 $ 40,024 $ 40,751
================================================================================
Basic earnings per share $ 1.43 $ 1.52 $ 1.63
Diluted earnings per share $ 1.36 $ 1.46 $ 1.55
================================================================================
--------
The accompanying notes are an integral part of the consolidated financial
statements.
24
8
THE BISYS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands, except share data)
--------
JUNE 30, 1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 49,589 $ 93,403
Accounts receivable, net 104,608 73,693
Deferred tax asset 9,241 4,660
Other current assets 14,243 8,484
- -----------------------------------------------------------------------------------
Total current assets 177,681 180,240
Property and equipment, net 54,855 37,478
Intangible assets, net 194,852 102,663
Other assets 32,273 13,720
- -----------------------------------------------------------------------------------
Total assets $459,661 $334,101
===================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 124
Short-term borrowings 52,000 --
Accounts payable 21,303 11,626
Accrued liabilities 82,294 70,668
- -----------------------------------------------------------------------------------
Total current liabilities 155,597 82,418
Long-term debt -- 1,578
Deferred tax liability 9,774 10,451
Other liabilities 5,784 1,364
- -----------------------------------------------------------------------------------
Total liabilities 171,155 95,811
- -----------------------------------------------------------------------------------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $0.02 par value, 80,000,000 shares authorized,
27,091,270 and 26,670,388 shares issued at June 30, 1999
and 1998, respectively 542 533
Additional paid-in capital 193,500 173,683
Retained earnings 94,550 66,229
Less treasury stock at cost, 1,575 shares and 57,895 shares
at June 30, 1999 and 1998, respectively (86) (2,155)
- -----------------------------------------------------------------------------------
Total stockholders' equity 288,506 238,290
- -----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $459,661 $334,101
===================================================================================
--------
The accompanying notes are an integral part of the consolidated financial
statements.
25
9
THE BISYS GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(in thousands)
--------
FOR YEARS ENDED JUNE 30, 1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,116 $ 40,024 $ 40,751
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,558 14,836 11,759
Loss on disposition or write-down of property and equipment -- 2,684 --
Write-off of acquired in-process research and development 19,000 -- --
Deferred income tax provision 3,673 4,515 8,511
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net (26,457) (8,103) (11,801)
Other current assets (2,799) (1,477) (2,411)
Other assets (6,800) (1,813) (1,158)
Accounts payable 5,140 148 617
Accrued liabilities and other (1,131) 11,805 73
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 52,300 62,619 46,341
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses (64,803) (29,250) --
Net cash acquired in acquisitions and dispositions 9,455 2,683 3,827
Capital expenditures (27,740) (16,930) (15,974)
Change in other investments (6,871) (6,571) (3,000)
Proceeds from sales and maturities of investments -- 1,365 3,523
Purchase of intangible assets (1,183) (1,621) (208)
- ------------------------------------------------------------------------------------------------------
Net cash used by investing activities (91,142) (50,324) (11,832)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 77,000 -- --
Repayment of short-term borrowings (25,000) -- --
Repayment of debt (1,093) (2,150) (306)
Exercise of stock options 11,316 12,229 5,385
Issuance of common stock 3,218 1,369 1,079
Repurchases of common stock (70,413) (10,291) --
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (4,972) 1,157 6,158
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (43,814) 13,452 40,667
Cash and cash equivalents at beginning of year 93,403 79,951 39,284
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 49,589 $ 93,403 $ 79,951
======================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest $ 1,158 $ 338 $ 335
Income taxes $ 27,172 $ 19,432 $ 14,249
======================================================================================================
--------
The accompanying notes are an integral part of the consolidated financial
statements.
26
10
THE BISYS GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of
Stockholders' Equity
(in thousands)
RETAINED
ADDITIONAL EARNINGS
FOR YEARS ENDED JUNE 30, 1997, COMMON STOCK PAID-IN (ACCUMULATED TREASURY STOCK
1998 AND 1999 SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT
BALANCE, JUNE 30, 1996 24,782 $ 496 $145,788 $ (3,112) -- $ --
=============================================================================================================
Exercise of stock options 412 8 5,377 -- -- --
Tax benefit of stock options exercised -- -- 1,532 -- -- --
Issuance of common stock 41 1 1,078 -- -- --
Net income -- -- -- 40,751 -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 25,235 505 153,775 37,639 -- --
=============================================================================================================
Exercise of stock options 592 12 9,391 (4,965) (217) 8,136
Tax benefit of stock options exercised -- -- 4,607 -- -- --
Issuance of common stock 48 1 1,368 -- -- --
Common stock issued in acquisitions 795 15 4,542 (6,469) -- --
Repurchases of common stock -- -- -- -- 275 (10,291)
Net income -- -- -- 40,024 -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 26,670 533 173,683 66,229 58 (2,155)
=============================================================================================================
Exercise of stock options 361 7 5,729 (7,135) (297) 12,787
Tax benefit of stock options exercised -- -- 5,458 -- -- --
Issuance of common stock 60 2 3,216 -- -- --
Common stock issued in acquisitions -- -- 5,414 (2,660) (1,314) 59,695
Repurchases of common stock -- -- -- -- 1,555 (70,413)
Net income -- -- -- 38,116 -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 27,091 $ 542 $193,500 $ 94,550 2 $ (86)
=============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
27
11
THE BISYS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 national provider of outsourcing solutions to and through financial
organizations.
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.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments purchased
with original maturities of three months or less, including $9.9 million and
$42.3 million of overnight repurchase agreements at June 30, 1999 and 1998,
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.
Short-term Investments
Management determines the appropriate classification of investments in
debt and equity securities at the time of purchase. Marketable debt and equity
securities available for sale are carried at market based upon quoted market
prices. Unrealized gains or losses on available for sale securities are
accumulated as an adjustment to stockholders' equity, net of related deferred
income taxes. Realized gains or losses are computed based on specific
identification of the securities sold. Realized and gross unrealized gains and
losses on short-term investments were not significant for the years ended June
30, 1999, 1998 and 1997.
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 5 - 40
Data processing equipment and systems 2 - 5
Furniture and fixtures 3 - 12
Software development costs 3 - 5
================================================================================
Depreciation expense for the years ended June 30, 1999, 1998 and 1997 was
$15,804,000, $11,092,000 and $8,146,000, 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.
Intangible Assets
Intangible assets are amortized on a straight line basis over the
estimated useful lives as follows:
ESTIMATED
USEFUL LIVES
(YEARS)
Cast in excess of net assets acquired 10 - 40
Customer relationships 25 - 30
Other 3 - 10
================================================================================
The Company evaluates, for impairment, the carrying value of intangible assets
by comparing the carrying value of intangible assets including goodwill, to the
anticipated future undiscounted cash flows from the businesses whose acquisition
gave rise to the 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 to
ensure that the carrying value of these intangible assets is recoverable.
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 purchased intangibles.
28
12
Software Costs
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. For the years ended June 30, 1998
and 1997, the Company did not capitalize any internal costs related to the
development of new software. For the year ended June 30, 1999, the Company
adopted the provisions of SOP 98-1 and capitalized certain internal costs
related to the development of internal use software. Year 2000 costs are
expensed as incurred and approximated $3.0 million in both fiscal 1999 and 1998.
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 is generally not subject to
returns in its businesses. Revenues from the sales of software are recognized in
accordance with the AICPA's Statement of Position 97-2, "Software Revenue
Recognition." Maintenance fee revenue is recognized ratably over the term of the
related support period, generally twelve months. Consulting revenue is
recognized principally on a percentage of completion basis and training revenue
is recognized upon delivery of the related service.
Accounts Receivable
A majority of the Company's receivables are from financial institutions
and investment companies which approximated $51.3 million and $22.6 million,
respectively, at June 30, 1999. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral for accounts
receivable. Bad debt expense for the years ended June 30, 1999, 1998 and 1997
approximated $2,331,000, $1,642,000, and $1,494,000, respectively. At June 30,
1999 and 1998, the Company's allowance for doubtful accounts was approximately
$5,477,000 and $2,969,000, respectively.
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 stock options and are computed using the treasury stock
method.
Amounts utilized in per share computations are as follows (in thousands):
YEAR ENDED JUNE 30 1999 1998 1997
Weighted average common
shares outstanding 26,696 26,313 25,038
Assumed conversion of
common shares issuable
under stock option plan 1,240 1,034 1,319
- --------------------------------------------------------------------------------
Weighted average common
and common equivalent
shares outstanding 27,936 27,347 26,357
================================================================================
Options to purchase 394,279 shares of common stock at various prices ranging
from $52.17 to $58.94 were outstanding at June 30, 1999, but were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of common shares.
Stock-Based Compensation
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock-based
compensation plans.
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.
Reclassification
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates are related to the allowance for doubtful
accounts, intangible assets, merger expenses and other charges, acquired
in-process research and development, income taxes and contingencies. It is
reasonably possible that actual results could differ from these estimates in the
near term.
29
13
THE BISYS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Disclosure Regarding Financial Instruments
For all financial instruments, including cash and cash equivalents,
receivables and accounts payable, the carrying value is considered to
approximate fair value.
New Accounting Standards
In fiscal 1999, the Company adopted the provisions of FAS 131 "Disclosures
about Segments of an Enterprise and Related Information." FAS 131 specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed.
The American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998 with earlier
application permitted. The provisions of SOP 98-1 require the Company to
capitalize certain internal costs related to development of internal use
software that have previously been expensed as incurred. The Company adopted the
SOP in the first quarter of fiscal 1999, the impact of which was not material to
the Company's financial position or results of operations.
2. Business Combinations
On September 16, 1998, the Company completed its acquisition of Greenway
Corporation (Greenway) through the issuance of 968,202 shares of BISYS common
stock held in treasury and issuance of 148,795 equivalent stock options for all
of the outstanding shares and stock options of Greenway. The acquisition, valued
at approximately $43.8 million, was treated as a purchase for accounting
purposes, and, accordingly, the assets and liabilities were recorded based on
their fair values at the date of the acquisition. Of the total purchase price,
$15.6 million was allocated to goodwill, $7.4 million to other identifiable
intangible assets, and $1.8 million to net tangible assets. In addition, $19.0
million was allocated to acquired in-process research and development, which was
charged to operations at the time of the acquisition.
In addition to Greenway, the Company also completed the following purchase
acquisitions of businesses and assets in fiscal years 1999 and 1998. The
acquisitions set forth below have been accounted for as purchases and,
accordingly, the operations of the acquired companies are included in the
consolidated financial statements since the dates of acquisition. Pro forma
information has not been presented due to lack of materiality.
BUSINESS DATE ACQUIRED NATURE OF BUSINESS CONSIDERATION
===================================================================================================
Underwriters Service Agency May 1998 Life insurance distribution Cash for stock
and affiliates (USA)
CoreLink Resources, Inc. July 1998 Brokerage services Cash for stock
(CoreLink)
Potomac Insurance Marketing August 1998 Life insurance distribution Cash for stock
Group, Inc. (Potomac)
EXAMCO, Inc. (EXAMCO) April 1999 Education services Cash and stock
for stock
Poage Insurance Services April 1999 Life insurance distribution Cash for stock
(Poage)
Dover International (Dover) May 1999 Education and Cash and stock
support service for stock
Retained Asset Account Services June 1999 Financial processing Cash for assets
(RAA) services
- ---------------------------------------------------------------------------------------------------
30
14
On September 16, 1997, the Company merged with Benefit Services, Inc. (BSI) by
exchanging 71,448 shares of BISYS common stock for all the outstanding shares of
BSI.
On August 29, 1997, the Company merged with Dascit/White & Winston and
affiliated companies (DWW) by exchanging 134,396 shares of BISYS common stock
for all the outstanding stock of DWW.
On August 15, 1997, the Company merged with Charter Systems, Inc. (Charter), now
known as BISYS Networking Services, by exchanging 588,945 shares of BISYS common
stock and 258,605 BISYS equivalent stock options for all the outstanding shares
and stock options of Charter.
The acquisitions of Charter, DWW and BSI have been accounted for as poolings of
interests, although historical financial statements have not been restated due
to immateriality. The acquired companies' results of operations have been
included in BISYS' results of operations effective July 1, 1997. The Company
incurred a pre-tax charge of $5,263,000 for the year ended June 30, 1998 for
costs associated with these mergers (see Note 9).
3. Detail of Certain Financial Statement Accounts
(in thousands):
1999 1998
Property and equipment, net:
Land $ 120 $ 271
Buildings and leasehold improvements 8,201 7,441
Data processing equipment
and systems 43,390 31,848
Furniture and fixtures 20,520 14,952
Software development costs 33,450 20,798
- --------------------------------------------------------------------------------
105,681 75,310
Less: accumulated depreciation
and amortization (50,826) (37,832)
- --------------------------------------------------------------------------------
$ 54,855 $ 37,478
================================================================================
Intangible assets, net:
Cost in excess of net
assets acquired $171,833 $ 87,991
Customer relationships 31,675 31,725
Other 17,384 1,426
- --------------------------------------------------------------------------------
220,892 121,142
Less: accumulated amortization (26,040) (18,479)
- --------------------------------------------------------------------------------
$194,852 $102,663
================================================================================
Accrued liabilities:
Compensation $ 15,556 $ 11,266
Deferred income 12,523 10,593
Income taxes 3,809 1,600
Marketing 17,868 27,429
Other 32,538 19,780
- --------------------------------------------------------------------------------
$ 82,294 $ 70,668
================================================================================
4. Borrowings
The Company has a $200 million senior unsecured revolving credit facility
(including a $20 million letter of credit subfacility) with its banks to support
working capital requirements and fund the Company's future acquisitions. The
facility expires June 30, 2004.
Outstanding borrowings under the credit facility bear interest at prime or, at
the company's option, LIBOR plus a margin not to exceed 1.325% based upon the
ratio of the Company's consolidated indebtedness to consolidated earnings before
interest, taxes, depreciation, and amortization (the "Pricing Formula"). The
credit agreement requires the Company to pay an agent fee of $25,000 per year
and an annual facility fee of 0.20%, or $400,000. The facility is guaranteed by
all subsidiaries of The BISYS Group, Inc. (except for broker/dealer, insurance,
foreign, and non-operating affiliates).
The credit agreement requires, among other things, the Company to maintain
certain financial covenants and limits the Company's ability to incur additional
indebtedness and to pay dividends. As of June 30, 1999, no amounts were
permitted for the payment of cash dividends.
The Company can borrow under the facility through June 2004 up to $200 million,
reduced by any outstanding letters of credit ($678,000 at June 30, 1999).
Interest is payable quarterly for prime rate borrowings or at maturity for LIBOR
borrowings, which range from 30-180 days. At June 30, 1999, the Company had
outstanding borrowings of $52 million bearing interest at LIBOR plus a margin of
0.625% (5.625% at June 30, 1999).
At June 30, 1998, long-term debt consisted primarily of mortgage notes payable
collateralized by real estate. During fiscal year 1999, the real estate was
sold, and the mortgage notes were assumed by the buyer.
5. Income Taxes
The significant components of the Company's net deferred tax asset (liability)
as of June 30, 1999 and 1998 are as follows (in thousands):
1999 1998
Tax effects of:
Property and equipment $ (4,106) $ (724)
Accrued liabilities 7,687 4,541
Accounts receivable 1,324 118
Tax carryforwards 4,061 962
Other 450 327
- --------------------------------------------------------------------------------
Deferred tax asset 9,416 5,224
Less valuation allowance (648) (857)
- --------------------------------------------------------------------------------
Net deferred tax asset 8,768 4,367
Deferred tax liability - identifiable
intangible assets (9,301) (10,158)
- --------------------------------------------------------------------------------
Deferred income taxes,
net (liability) asset $ (533) $ (5,791)
================================================================================
31
15
THE BISYS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At June 30, 1999 the Company had $4,061,000 of federal and state net operating
loss carryforwards available, expiring in fiscal 2003 to fiscal 2018.
The Company periodically evaluates the deferred tax asset and adjusts the
related valuation allowance on the deferred tax asset to an amount which is more
likely than not to be realized through future taxable income.
The components of the income tax provision for the years ended June 30, 1999,
1998, and 1997 are as follows (in thousands):
1999 1998 1997
Deferred federal
tax expense $ 3,156 $ 3,867 $ 7,428
Current federal tax expense 29,044 17,988 15,731
Deferred state tax expense 517 648 1,083
Current state tax expense 4,926 4,226 2,925
Foreign tax expense 433 -- --
- --------------------------------------------------------------------------------
$38,076 $26,729 $27,167
================================================================================
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 tax
provision for the years ended June 30, 1999, 1998 and 1997 is as follows (in
thousands):
1999 1998 1997
Federal income tax
at statutory rate $26,667 $23,364 $23,772
Amortization and charge-off of non-deductible
intangible assets 8,620 781 1,195
Change in valuation allowance (209) (462) --
State taxes 2,985 3,091 2,532
Other, net 13 (45) (332)
- -------------------------------------------------------------------------------
$38,076 $26,729 $27,167
===============================================================================
6. Commitments and Contingencies
The Company leases various office space under noncancellable operating leases
with remaining terms of up to nine years. The Company also leases certain office
and computer equipment and software under operating leases expiring through
2004. Rental expense associated with these operating leases for the years ended
June 30, 1999, 1998 and 1997 were $20,164,000, $16,434,000, and $15,096,000,
respectively.
The future minimum rental payments under non-cancellable operating leases for
the years ending after June 30, 1999 are as follows (in thousands):
OPERATING
FISCAL YEAR LEASES
2000 $18,239
2001 13,460
2002 9,961
2003 5,748
2004 4,392
Thereafter 9,488
- --------------------------------------------------------------------------------
$61,288
================================================================================
The Company's broker/dealer subsidiaries are subject to the Uniform Net Capital
Rule of the Securities and Exchange Commission. At June 30, 1999, the aggregate
net capital of such subsidiaries was $9,533,000, exceeding the net capital
requirement by $6,974,000.
The Company is involved in litigation arising in the ordinary course of
business. Management believes that the Company has adequate defenses and/or
insurance coverage against litigation and that the outcome of these proceedings,
individually or in the aggregate, will not have a material adverse effect upon
the Company's financial position, results of operations, or cash flows.
7. Supplemental Cash Flow Information
In fiscal 1999, 1998 and 1997, the Company recorded a reduction to taxes
currently payable related to tax benefits associated with stock options of
approximately $5,458,000, $4,607,000, and $1,532,000 respectively, with a
corresponding increase to additional paid-in capital. These noncash transactions
have been excluded from the consolidated statement of cash flows.
During the years ended June 30, 1999, 1998 and 1997, the Company received
proceeds of $11,316,000, $12,229,000, and $5,385,000, respectively, and recorded
a deduction to deferred compensation of $72,000 in 1999 and $345,000 in 1998,
with offsetting increases in additional paid-in capital relating to the exercise
of stock options.
Net cash paid for acquisiton of businesses was comprised of the following for
the years ended June 30, 1999 and 1998 (in thousands):
1999 1998
Fair value of
assets acquired $151,980 $ 30,454
Less: issuance of common
stock and stock options
pursuant to acquisitions (62,449) --
Liabilities assumed (24,728) (1,204)
- --------------------------------------------------------------------------------
Net cash paid $ 64,803 $ 29,250
================================================================================
32
16
8. Retirement Savings Plan
The Company has a contributory retirement and savings plan which covers all
employees and meets the requirements of Section 401(k) of the Internal Revenue
Code. Employees may contribute up to 15% of their compensation to the plan which
is matched 50% by the Company up to 6% of the employee's compensation not to
exceed $5,000.
The Company may, at the discretion of the Board of Directors, make additional
contributions to the plan. The Company's matching contribution vests 40% with
the employee after two years and 20% per year thereafter. The Company's expense
to match employee contributions for the years ended June 30, 1999, 1998 and
1997, was approximately $2,788,000, $2,253,000, and $1,511,000, respectively.
9. Merger Expenses and Other Charges
As discussed in Note 2, the Company wrote off $19.0 million of acquired
in-process research and development associated with the acquisition of Greenway
and incurred $0.4 million of merger-related expenses during fiscal 1999.
During fiscal 1998, the Company incurred a charge of $6,735,000 to realign
operations in conjunction with the termination of distribution and
administrative agreements with a client of the Company's Fund Services division.
As discussed in Note 2, the Company recorded a charge of $5,263,000 during
fiscal 1998 for costs associated with the mergers of Charter, DWW, and BSI.
In fiscal 1997, the Company incurred a commission charge of $1,500,000 as a
result of servicing additional mutual fund assets pursuant to an outsourcing
agreement with the mutual fund division of Furman Selz, LLC.
Total merger expenses and other charges recorded for the years ended June 30,
1999, 1998 and 1997 consisted of the following (in thousands):
1999 1998 1997
Merger transaction expenses
(legal and financial) $ -- $ 1,805 $ --
Costs to combine or realign operations:
Compensation related 400 3,722 --
Facilities or systems related -- 4,868 --
Other -- 1,603 --
Commissions incurred in
connection with
outsourcing alliance -- -- 1,500
- --------------------------------------------------------------------------------
$ 400 $11,998 $ 1,500
================================================================================
During the years ended June 30, 1999 and 1998, the following costs were paid or
charged against the merger related accruals (in thousands):
1999 1998
Merger transaction expenses $ -- $ 2,030
Commissions -- 1,315
Compensation related costs 741 3,801
Facilities or systems related costs 1,273 5,114
Other 1,393 484
- --------------------------------------------------------------------------------
$ 3,407 $12,744
================================================================================
At June 30, 1999, $83,000 of estimated costs for merger expenses, and costs to
combine or realign operations are unpaid and included in accrued liabilities on
the accompanying balance sheet.
10. Shareholder Rights Plan
On May 7, 1997, the Board of Directors 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 one share of common stock of
the Company at an exercise price of $175.00. 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 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; (iii)
were declared by the Board to be an Adverse Person (as defined in the Plan) if
such person or group beneficially owns 10% 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 $0.0025 per
Right at any time. The Rights will expire at the close of business on May 16,
2007.
11. Stock Based Compensation Plans
The Company has stock option and restricted stock purchase plans which provide
for granting of options and/or restricted stock to certain employees and outside
directors. The options vest primarily over a five-year period at each
anniversary date of the grant. These options expire following termination of
employment or within ten years of the date of the grant, whichever comes first.
Pro forma disclosures are provided for fiscal 1999, 1998 and 1997 as if the
Company had adopted the cost recognition requirements of FAS 123
33
17
THE BISYS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
"Accounting for Stock-based Compensation." At June 30, 1999, options to purchase
1,810,535 shares are available for grant under the plans.
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 1999, 1998 and 1997:
1) expected dividend yields of 0%, 2) risk-free interest rates ranging from
4.72% to 6.78%, 3) expected volatility of 35% in fiscal 1999 and 30% in fiscal
years 1998 and 1997, and 4) an expected option life of 5 years, 4 years and 5
years in fiscal 1999, 1998 and 1997, respectively. For the purpose of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period of 5 years for employees. Using these
assumptions, the weighted average fair value per option at date of grant for
options granted during fiscal 1999, 1998 and 1997 was $17.02, $10.25, and
$14.31, respectively.
Had compensation expense been recognized for the Company's stock-based
compensation plans in accordance with FAS 123, the pro forma net income and
earnings per share for the years ended June 30, 1999, 1998 and 1997 would have
been as follows (in thousands, except per share data):
1999 1998 1997
Pro Forma Pro Forma Pro Forma
Net income $31,023 $36,129 $38,072
Basic earnings
per share $ 1.18 $ 1.40 $ 1.54
Diluted earnings
per share $ 1.13 $ 1.34 $ 1.46
================================================================================
The effect of applying FAS 123 for only option grants since fiscal 1996 may not
be representative of the pro forma impact in future years.
The following is a summary of stock option activity for the years ended June 30,
1999, 1998, and 1997:
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 3,735,717 $28.00 3,441,628 $24.40 3,175,692 $20.10
Options assumed in acquisitions 164,570 $ 4.57 258,605 $ 3.24 -- --
Options granted 1,311,614 $47.39 1,542,994 $34.09 839,300 $35.82
Options exercised (658,499) $19.19 (808,985) $15.09 (411,931) $13.05
Options cancelled (348,881) $34.75 (698,525) $29.45 (161,433) $28.20
- -----------------------------------------------------------------------------------------------------
Outstanding at end of year 4,204,521 $33.96 3,735,717 $28.00 3,441,628 $24.40
=====================================================================================================
Exercisable at end of year 1,467,711 $23.27 1,196,740 $19.22 1,112,182 $15.70
=====================================================================================================
The following summarizes information about the Company's stock options
outstanding at June 30, 1999:
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Life Exercise Price
Range of Exercise Prices Options Outstanding Price (in years) Exercisable of Exercisable
$ 0.01-$10.00 294,507 $ 2.71 3.7 283,096 $ 2.61
$10.01-$20.00 319,184 $19.08 4.2 319,184 $19.09
$20.01-$30.00 509,200 $24.33 6.0 296,700 $24.12
$30.01-$40.00 1,874,016 $35.01 7.9 556,016 $35.19
$40.01-$50.00 813,335 $43.76 9.0 8,000 $44.50
$50.01-$60.00 394,279 $56.61 9.8 4,715 $52.17
===========================================================================================================
34
18
12. Business Segment Information
The Company is a leading provider of growth-enabling outsourcing solutions to
financial institutions and other financial organizations. In accordance with FAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
the Company's operations have been classified into three business segments:
Information Services, Investment Services, and Insurance and Education Services.
Summarized financial information by business segment and for corporate
operations for the years ended June 30, 1999, 1998 and 1997 is as follows (in
thousands):
--------
1999 1998 1997
Revenues:
Information Services $178,296 $151,372 $126,154
Investment Services 237,909 211,714 181,665
Insurance and Education Services 56,471 23,258 11,169
- -------------------------------------------------------------------------------
Total $472,676 $386,344 $318,988
===============================================================================
Operating earnings (loss):
Information Services $ 44,389 $ 34,320 $ 33,958
Investment Services 42,499 42,764 36,299
Insurance and Education Services 19,353 7,502 4,197
Corporate (11,849) (10,684) (7,252)
- -------------------------------------------------------------------------------
Total $ 94,392 $ 73,902 $ 67,202
===============================================================================
Assets:
Information Services $132,271 $151,213 $120,507
Investment Services 179,084 125,227 126,244
Insurance and Education Services 110,092 43,598 8,001
Corporate 38,214 15,467 10,782
Elimination of intercompany receivables -- (1,404) (449)
- -------------------------------------------------------------------------------
Total $459,661 $334,101 $265,085
===============================================================================
Depreciation and amortization expense:
Information Services $ 11,404 $ 8,273 $ 6,471
Investment Services 7,930 5,542 4,940
Insurance and Education Services 3,702 665 268
Corporate 522 356 80
- -------------------------------------------------------------------------------
Total $ 23,558 $ 14,836 $ 11,759
===============================================================================
Capital expenditures:
Information Services $ 10,063 $ 8,789 $ 11,554
Investment Services 14,006 5,415 3,097
Insurance and Education Services 3,444 2,631 263
Corporate 1,784 757 1,209
- -------------------------------------------------------------------------------
Total $ 29,297 $ 17,592 $ 16,123
===============================================================================
--------
The following is a reconciliation of operating earnings to the Company's
consolidated total (in thousands):
--------
1999 1998 1997
Total operating earnings for reportable segments $ 94,392 $ 73,902 $ 67,202
Merger expenses and other charges (400) (11,998) (1,500)
Acquired in-process research and development (19,000) -- --
- -----------------------------------------------------------------------------------
Total operating earnings $ 74,992 $ 61,904 $ 65,702
===================================================================================
--------
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, 1999, 1998, and 1997.
35
19
THE BISYS GROUP, INC. AND SUBSIDIARIES
Market Price Information
(unaudited)
The following information relates to the Company's $0.02 par value common stock
which trades in the over-the-counter market and is quoted in the NASDAQ National
Market System under the symbol BSYS. Price information on the Company's common
stock is presented below:
FISCAL 1999 -------------------
QUARTER ENDED HIGH LOW
September 30, 1998 $45 1/4 $36 3/4
December 31, 1998 51 5/8 38 3/8
March 31, 1999 58 1/2 47 1/8
June 30, 1999 59 19/32 50
================================================================================
-------------------
FISCAL 1998
QUARTER ENDED HIGH LOW
September 30, 1997 $42 $30 3/8
December 31, 1997 34 3/8 29 1/4
March 31, 1998 38 32 1/2
June 30, 1998 42 34 1/16
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At June 30, 1999, the Company's common stock was held by 817 stockholders of
record. It is estimated that an additional 4,500 stockholders own the Company's
common stock through nominee or street name accounts with brokers.
Consolidated Quarterly Results
(unaudited, in thousands, except per share data)
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FISCAL 1999
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QUARTER ENDED SEP 30 DEC 31 MAR 31 JUN 30
Revenues $101,924 $111,958 $121,302 $137,492
Operating earnings (loss) (3,461) 20,108 27,014 31,331
Income (loss) before income tax provision (2,664) 20,351 27,331 31,174
Net income (loss) (9,199) 12,209 16,400 18,706
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Basic earnings (loss) per share $ (0.35) $ 0.46 $ 0.61 $ 0.69
Diluted earnings (loss) per share $ (0.35) $ 0.44 $ 0.58 $ 0.66
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FISCAL 1998
- ----------------------------------------------------------------------------------------
QUARTER ENDED SEP 30 DEC 31 MAR 31 JUN 30
Revenues $ 91,462 $ 91,431 $ 98,951 $104,500
Operating earnings 1,725 15,665 20,792 23,722
Income before income tax provision 2,750 16,690 22,220 25,093
Net income 1,623 10,014 13,332 15,055
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Basic earnings per share $ 0.06 $ 0.38 $ 0.51 $ 0.57
Diluted earnings per share $ 0.06 $ 0.37 $ 0.49 $ 0.55
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36