- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER: 0-19922
THE BISYS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3532663
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
90 PARK AVENUE, NEW YORK, NEW YORK
10016
(Address of principal executive offices)
(Zip Code)
212-907-6000
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORT(S), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
AS OF APRIL 30, 2002, THERE WERE 119,333,877 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 16 pages.
- --------------------------------------------------------------------------------
THE BISYS GROUP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2002
and June 30, 2001 3
Condensed Consolidated Statement of Operations for the three and nine months
ended March 31, 2002 and 2001 4
Condensed Consolidated Statement of Cash Flows for the nine months
ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and 11
Financial Condition
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I
ITEM 1. FINANCIAL STATEMENTS
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
March 31, June 30,
2002 2001
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 82,281 $ 159,399
Accounts receivable, net 188,613 148,068
Deferred tax asset 17,080 13,530
Other current assets 37,938 26,794
----------------- ----------------
Total current assets 325,912 347,791
Property and equipment, net 86,580 76,831
Goodwill 529,058 404,223
Intangible assets, net 158,039 123,002
Other assets 54,824 51,354
----------------- ----------------
Total assets $ 1,154,413 $ 1,003,201
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ - $ 145
Short-term borrowings 35,000 -
Accounts payable 18,547 13,354
Other current liabilities 136,560 140,189
----------------- ----------------
Total current liabilities 190,107 153,688
Long-term debt 300,000 300,433
Deferred tax liability 17,561 12,205
Other liabilities 11,890 8,925
----------------- ----------------
Total liabilities 519,558 475,251
----------------- ----------------
Stockholders' equity:
Common stock, $.02 par value, 320,000,000 and 160,000,000 shares authorized,
119,142,965 and 58,422,269 shares issued and outstanding $ 2,383 $ 1,168
Additional paid-in capital 358,983 318,958
Retained earnings 285,072 219,406
Less notes receivable from stockholders (10,776) (10,776)
Accumulated other comprehensive income (loss) (807) (806)
----------------- ----------------
Total stockholders' equity 634,855 527,950
----------------- ----------------
Total liabilities and stockholders' equity $ 1,154,413 $ 1,003,201
================= ================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------------- --------------------------------------
As Adjusted* As Adjusted*
2002 2001 2001 2002 2001 2001
---- ---- ---- ---- ---- ----
Revenues $ 220,539 $ 177,359 $ 177,359 $ 626,978 $ 507,103 $ 507,103
------------ ----------- ------------- ------------ ------------ -------------
Operating costs and expenses:
Service and operating 122,986 98,276 98,276 357,032 292,574 292,574
Selling, general and administrative 37,612 32,077 32,077 118,255 97,544 97,544
Amortization of goodwill - 2,791 - - 8,369 -
Amortization of intangible assets 3,178 2,329 2,329 9,164 6,270 6,270
Restructuring charges - - - 6,475 4,245 4,245
------------ ----------- ------------- ------------ ------------ -------------
163,776 135,473 132,682 490,926 409,002 400,633
------------ ----------- ------------- ------------ ------------ -------------
Operating earnings 56,763 41,886 44,677 136,052 98,101 106,470
Interest expense, net 3,142 1,133 1,133 8,344 4,763 4,763
------------ ----------- ------------- ------------ ------------ -------------
Income before income taxes 53,621 40,753 43,544 127,708 93,338 101,707
Income taxes 20,427 16,098 16,873 49,136 36,869 39,411
------------ ----------- ------------- ------------ ------------ -------------
Net income $ 33,194 $ 24,655 $ 26,671 $ 78,572 $ 56,469 $ 62,296
============ =========== ============= ============ ============ =============
Basic earnings per share $ 0.28 $ 0.21 $ 0.23 $ 0.66 $ 0.50 $ 0.55
============ =========== ============= ============ ============ =============
Diluted earnings per share $ 0.27 $ 0.20 $ 0.22 $ 0.64 $ 0.47 $ 0.52
============ =========== ============= ============ ============ =============
* As adjusted amounts exclude goodwill amortization and related tax effects.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
March 31,
----------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 78,572 $ 56,469
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring charge 6,475 4,245
Depreciation and amortization 29,249 30,925
Deferred income tax provision 10,168 9,021
Change in operating assets and liabilities, net of effects from acquisitions (35,472) (22,354)
--------------- ---------------
Net cash provided by operating activities 88,992 78,306
--------------- ---------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (172,142) (64,738)
Proceeds from dispositions, net of expenses paid (521) (1,682)
Capital expenditures, net (24,740) (21,212)
Change in other investments (4,419) (3,684)
Purchase of intangible assets, net (6,593) (2,027)
--------------- ---------------
Net cash used in investing activities (208,415) (93,343)
--------------- ---------------
Cash flows from financing activities:
Repayment of debt (578) -
Proceeds from short-term borrowings 35,000 52,800
Repayment of short-term borrowings - (167,800)
Proceeds from convertible debt offering, net of expenses paid - 292,050
Issuance of common stock 4,226 3,065
Proceeds from exercise of stock options, net of taxes paid 6,341 20,970
Repurchases of common stock (2,684) -
Other - 292
--------------- ---------------
Net cash provided by financing activities 42,305 201,377
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (77,118) 186,340
Cash and cash equivalents at beginning of period 159,399 70,177
--------------- ---------------
Cash and cash equivalents at end of period $ 82,281 $ 256,517
=============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
THE BISYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
The BISYS(R) Group, Inc. and subsidiaries (the "Company") is a leading
national provider of outsourcing solutions to and through financial
organizations.
The condensed consolidated financial statements include the accounts of
The BISYS Group, Inc. and its subsidiaries and have been prepared
consistent with the accounting policies reflected in the 2001 Annual
Report on Form 10-K filed with the Securities and Exchange Commission
and should be read in conjunction therewith. The condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management,
necessary to present fairly this information.
Certain reclassifications have been made to the 2001 condensed
consolidated financial statements to conform to the 2002 presentation.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. The most significant
estimates are related to the allowance for doubtful accounts, goodwill,
intangible assets, merger expenses and other charges, income taxes and
contingencies.
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
judgements about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from
these estimates in the near term.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 33,194 $ 24,655 $ 78,572 $ 54,469
Foreign currency translation adjustment (80) (367) (1) (578)
-------------- ------------- --------------- -------------
Total comprehensive income $ 33,114 $ 24,288 $ 78,571 $ 53,891
============== ============= =============== =============
4. STOCK SPLIT
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. Accordingly, all
historical weighted average share and per share amounts have been
restated to reflect the stock split.
6
5. EARNINGS PER SHARE
Basic and diluted EPS computations for the three and nine months ended
March 31, 2002 and 2001 are as follows (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------ --------------------------------------------
As Adjusted* As Adjusted*
2002 2001 2001 2002 2001 2001
---- ---- ---- ---- ---- ----
BASIC EPS
Net income $ 33,194 $ 24,655 $ 26,671 $ 78,572 $ 56,469 $ 62,296
============= ============= ============= ============= ============= ==============
Weighted average common shares
outstanding 118,945 114,735 114,735 118,224 113,931 113,931
============= ============= ============= ============= ============= ==============
Basic earnings per share $ 0.28 $ 0.21 $ 0.23 $ 0.66 $ 0.50 $ 0.55
============= ============= ============= ============= ============= ==============
DILUTED EPS
Net income $ 33,194 $ 24,655 $ 26,671 $ 78,572 $ 56,469 $ 62,296
============= ============= ============= ============= ============= ==============
Weighted average common shares
outstanding 118,945 114,735 114,735 118,224 113,931 113,931
Assumed conversion of common
shares issuable under stock
option plans 5,226 5,911 5,911 5,202 5,621 5,621
------------- ------------- ------------- ------------- ------------- --------------
Weighted average common and
common equivalent shares
outstanding 124,171 120,646 120,646 123,426 119,552 119,552
============= ============= ============= ============= ============= ==============
Diluted earnings per share $ 0.27 $ 0.20 $ 0.22 $ 0.64 $ 0.47 $ 0.52
============= ============= ============= ============= ============= ==============
* As adjusted amounts exclude goodwill amortization and related tax effects.
The effect of the assumed conversion of the convertible subordinated
Notes into common stock would be antidilutive and therefore is excluded
from the computation of diluted earnings per share.
Certain stock options were not included in the computation of diluted
EPS because the options' exercise prices were greater than the average
market price of common shares during the period, as follows (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
-----------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Number of options excluded 157 275 553 358
Option price per share $33.02 to $33.15 $25.53 to $28.03 $29.44 to $33.15 $21.50 to $28.03
Average market price of
common shares for the period $32.17 $24.97 $29.12 $21.42
7
6. RESTRUCTURING CHARGES
During the fiscal first quarter, the Company recorded a pre-tax
restructuring charge of $6.5 million in connection with the
integration, consolidation and relocation of certain business
operations. The restructuring and integration activities are primarily
due to the acquisitions consummated by the Company in the fourth
quarter of fiscal 2001. The restructuring charge includes a provision
of $4.2 million for severance-related costs for approximately 200
employees and $2.3 million for facility closure and related costs.
Additionally, goodwill initially recorded in connection with the
acquisitions of Boston Institutional Group, Inc. (BIG) and Universal
Pensions, Inc. (UPI) was increased by $3.2 million, after related tax
effects, to reflect additional severance-related costs and facility
closure costs identified in those business units.
At March 31, 2002 the remaining accrual approximates $1.3 million, and
it is anticipated that all amounts will be expended by the end of the
current fiscal year.
7. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued FAS 141,
"Business Combinations" and FAS 142, "Goodwill and Other Intangible
Assets." FAS 141 addresses the financial accounting and reporting for
business combinations. This new standard requires that all business
combinations be accounted for by the purchase method and intangible
assets be recognized as assets apart from goodwill. The provisions of
FAS 141 are effective for all business combinations initiated after
June 30, 2001 and for all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001 or
later.
FAS 142 addresses financial accounting for goodwill and other
intangible assets subsequent to their acquisition. FAS 142 requires
that a recognized intangible asset be amortized over its useful life
unless that life is determined to be indefinite. FAS 142 also requires
that goodwill not be amortized but tested for impairment on an annual
basis and between annual tests in certain circumstances. The provisions
of FAS 142 are effective for fiscal years beginning after December 15,
2001. Earlier application is permitted for entities with fiscal years
beginning after March 15, 2001.
The Company adopted both FAS 141 and 142 as of July 1, 2001, the
beginning of its new fiscal year. The Company completed testing of
goodwill impairment for each of its reporting units as required by FAS
142 and determined there were no goodwill impairment losses that should
be recognized. The Company also determined that no reclassifications
between goodwill and intangible assets were required based upon the
guidance in FAS 142. Information pertaining to intangible assets and
goodwill and the effects of adopting FAS 142 are presented below.
INTANGIBLE ASSETS
At March 31, 2002, acquired intangible assets were comprised of the
following:
Gross Carrying Accumulated
Amount Amortization Net Book Value
-------------------- ------------------- ----------------
Customer related $ 126,977 $ (17,262) $ 109,715
Noncompete Agreements 36,909 (6,841) 30,068
Other 22,070 (3,814) 18,256
---------------- ---------------- ---------------
Total $ 185,956 $ (27,917) $ 158,039
================ ================ ===============
All of the Company's acquired intangible assets are subject to
amortization. Amortization expense for acquired intangible assets was
$3.2 million and $9.2 million for the three and nine months ended March
31, 2002.
8
Estimated amortization expense for the current fiscal year and the
succeeding four years is as follows:
Fiscal Year Ended
June 30, Amount
------------------------------ ------------------
2002 13,342
2003 16,353
2004 16,353
2005 15,533
2006 14,462
GOODWILL
The changes in the carrying amount of goodwill by business segment for
the nine months ended March 31, 2002 are as follows:
Investment Insurance & Information
Services Education Services Services Total
---------------- -------------------- ---------------- ---------------
Balance, July 1, 2001 $ 150,322 $ 218,511 $ 35,390 $ 404,223
Additions 93,273 31,928 - 125,201
Reductions attributable to tax
benefits from stock option
exercises (366) - - (366)
---------------- -------------------- ---------------- ---------------
Balance, March 31, 2002 $ 243,229 $ 250,439 $ 35,390 $ 529,058
================ ==================== ================ ===============
The following information reflects adjustments to exclude goodwill
amortization expense and related tax effects:
For the Three Months For the Nine Months Ended
Ended March 31, March 31,
2002 2001 2002 2001
------------- -------------- ------------- -------------
Net income:
Reported net income $ 33,194 $ 24,655 $ 78,572 $ 56,469
Add back: Goodwill amortization, net of taxes - 2,016 - 5,827
------------- -------------- ------------- -------------
Adjusted net income $ 33,194 $ 26,671 $ 78,572 $ 62,296
============= ============== ============= =============
Basic earnings per share:
Reported net income $ 0.28 $ 0.21 $ 0.66 $ 0.50
Add back: Goodwill amortization, net of taxes - 0.02 - 0.05
------------- -------------- ------------- -------------
Adjusted net income $ 0.28 $ 0.23 $ 0.66 $ 0.55
============= ============== ============= =============
Diluted earnings per share:
Reported net income $ 0.27 $ 0.20 $ 0.64 $ 0.47
Add back: Goodwill amortization, net of taxes - 0.02 - 0.05
------------- -------------- ------------- -------------
Adjusted net income $ 0.27 $ 0.22 $ 0.64 $ 0.52
============= ============== ============= =============
8. BUSINESS COMBINATIONS
On March 21, 2002, the Company acquired a majority interest in the
Hemisphere Group of Companies (Hemisphere) in a cash for equity
transaction approximating $124 million. Hemisphere is a Bermuda-based
hedge fund administrator and primarily conducts operations in Bermuda,
Europe, and the United States. Pro forma information has not been
presented due to a lack of materiality. The acquisition was recorded
under the purchase method of accounting. The excess purchase price over
the fair value of the net tangible assets acquired
9
approximates $124 million and was allocated to intangible assets and
goodwill based upon preliminary estimates of fair values. The Company
has engaged a valuation consultant to determine the values associated
with certain identifiable intangible assets in connection with the
purchase price allocation. The Company does not believe that the final
purchase price allocations, which should be completed by the end of the
current fiscal year, will differ significantly from the preliminary
purchase price allocation. Hemisphere's fair value of assets and
liabilities, including transaction costs, were as follows (in
thousands):
Estimated fair value of assets acquired $ 136,497
Liabilities assumed 12,978
----------------
Net cash paid $ 123,519
================
The Company has agreed to acquire the remaining nominal minority
interests of Hemisphere in June 2002 for approximately $6.8 million.
On February 7, 2002, the Company completed its acquisition of The
Hanleigh Companies (Hanleigh) in a cash for equity transaction that was
accounted for by the purchase method of accounting. Hanleigh,
headquartered in Montvale, New Jersey, is an insurance brokerage firm
specializing in high-end disability products. Pro forma information has
not been presented due to a lack of materiality.
9. SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by business segment and for corporate operations for the three and nine
months ended March 31, 2002 and 2001. Restructuring charges are
excluded from the operating results of the segment for a better
understanding of the underlying performance of each segment.
Additionally, adjusted information has been presented for the three and
nine months ended March 31, 2002 to exclude goodwill amortization for
comparison purposes.
(in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------------- ------------------------------------
As As
Adjusted Adjusted
2002 2001 2001 2002 2001 2001
---- ---- ---- ---- ---- ----
Operating revenue:
Investment Services $ 112,060 $ 89,027 $ 89,027 $ 325,143 $ 259,643 $ 259,643
Insurance and Education Services 57,072 42,244 42,244 156,072 117,433 117,433
Information Services 51,407 46,088 46,088 145,763 130,027 130,027
------------ ----------- ------------ ----------- ----------- -----------
Total operating revenue $ 220,539 $ 177,359 $ 177,359 $ 626,978 $ 507,103 $ 507,103
============ =========== ============ =========== =========== ===========
Operating income:
Investment Services $ 20,029 $ 16,412 $ 16,970 $ 52,954 $ 41,244 $ 42,919
Insurance and Education Services 26,770 17,435 19,021 66,285 42,005 46,783
Information Services 14,681 12,215 12,862 38,506 31,601 33,517
Corporate (4,717) (4,176) (4,176) (15,218) (12,504) (12,504)
------------ ----------- ------------ ----------- ----------- -----------
Total operating income $ 56,763 $ 41,886 $ 44,677 $ 142,527 $ 102,346 $ 110,715
============ =========== ============ =========== =========== ===========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company provides outsourcing solutions to and through financial
organizations. The following table presents the percentage of revenues
represented by each item in the Company's condensed consolidated statement of
operations for the periods indicated:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------- ---------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
--------------- -------------- -------------- ---------------
Operating costs and expenses:
Service and operating 55.8 55.4 56.9 57.7
Selling, general and administrative 17.1 18.1 18.9 19.3
Amortization of goodwill - 1.6 - 1.7
Amortization of intangible assets 1.4 1.3 1.5 1.2
Restructuring charges - - 1.0 0.8
--------------- -------------- -------------- ---------------
74.3 76.4 78.3 80.7
--------------- -------------- -------------- ---------------
Operating earnings 25.7 23.6 21.7 19.3
Interest expense, net 1.4 0.6 1.3 0.9
--------------- -------------- -------------- ---------------
Income before income taxes 24.3 23.0 20.4 18.4
Income taxes 9.3 9.1 7.9 7.3
--------------- -------------- -------------- ---------------
Net income 15.0% 13.9% 12.5% 11.1%
=============== ============== ============== ===============
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 WITH THE THREE MONTHS ENDED
MARCH 31, 2001.
Revenues increased 24.4% from $177.4 million for the three months ended
March 31, 2001 to $220.5 million for the three months ended March 31,
2002. This growth 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. Internal
revenue growth approximated 13% for the three months ended March 31,
2002.
Service and operating expenses increased 25.1% from $98.3 million for
the three months ended March 31, 2001 to $123.0 million for the three
months ended March 31, 2002 and increased as a percentage of revenues
from 55.4% to 55.8%. The dollar increase resulted from additional costs
associated with greater revenues.
Selling, general and administrative expenses increased 17.3% from $32.1
million during the three months ended March 31, 2001 to $37.6 million
for the three months ended March 31, 2002 and decreased as a percentage
of revenues from 18.1% to 17.1%. The dollar increase resulted from
additional costs associated with greater revenues.
The Company adopted FAS 142, "Goodwill and Other Intangible Assets,"
effective July 1, 2001, which requires that goodwill not be amortized.
See note 7 to the financial statements.
Amortization of intangible assets increased $0.8 million for the three
months ended March 31, 2002 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses.
The income tax provision of $20.4 million for the three months ended
March 31, 2002 increased from $16.1 million for the three months ended
March 31, 2001 due to higher taxable income. The provision represents
an effective tax rate of 38.1% and 39.5% for periods ended March 31,
2002 and 2001, respectively. The reduced effective tax rate is
attributable to the tax effects associated with the discontinuance of
goodwill amortization and the impact of lower tax rates in foreign tax
jurisdictions for recently acquired businesses.
11
Operating results, before amortization of intangibles and restructuring
charges, resulted in margins of 27.2% and 26.5% for the three months
ended March 31, 2002 and 2001, respectively. The margin expansion was
due to moderate internal growth, improved operating leverage through
cost efficiencies and increased volumes, and faster growth from the
higher-margin Insurance and Education Services Group.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2002 WITH THE NINE MONTHS ENDED
MARCH 31, 2001.
Revenues increased 23.6% from $507.1 million for the nine months ended
March 31, 2001 to $627.0 million for the nine months ended March 31,
2002. This growth 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.
Service and operating expenses increased 22.0% from $292.6 million for
the nine months ended March 31, 2001 to $357.0 million for the nine
months ended March 31, 2002 and decreased as a percentage of revenues
from 57.7% to 56.9%. The dollar increase resulted from additional costs
associated with greater revenues. The percentage decrease resulted from
implementation of an expense reduction plan that slowed discretionary
spending.
Selling, general and administrative expenses increased 21.2% from $97.5
million during the nine months ended March 31, 2001 to $118.3 million
for the nine months ended March 31, 2002 and decreased as a percentage
of revenues from 19.3% to 18.9%. The decrease as a percentage of
revenues resulted from further utilization of existing general and
administrative support resources.
The Company adopted FAS 142, "Goodwill and Other Intangible Assets,"
effective July 1, 2001, which requires that goodwill not be amortized.
See note 7 to the financial statements.
Amortization of intangible assets increased $2.9 million for the nine
months ended March 31, 2002 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses.
The income tax provision of $49.1 million for the nine months ended
March 31, 2002 increased from $36.9 million for the nine months ended
March 31, 2001 due to higher taxable income. The provision represents
an effective tax rate of 38.5% and 39.5% for periods ended March 31,
2002 and 2001, respectively. The reduced effective tax rate is
primarily attributable to the tax effects associated with the
discontinuance of goodwill amortization and the impact of lower tax
rates in foreign tax jurisdictions for recently acquired businesses.
Operating results, before amortization of intangibles and restructuring
charges, resulted in margins of 24.2% and 23.1% for the nine months
ended March 31, 2002 and 2001, respectively. The margin expansion was
due to moderate internal growth, improved operating leverage through
cost efficiencies and increased volumes, and faster growth from the
higher-margin Insurance and Education Services Group.
The Company recorded a pre-tax restructuring charge of $6.5 million and
$4.2 million during the nine months ended March 31, 2002 and 2001,
respectively. The restructuring charges relate to the integration,
consolidation, and relocation of certain business operations, primarily
as a result of acquisition activity. The restructuring charge in the
fiscal first quarter of 2002 includes a provision of $4.2 million for
severance-related costs for approximately 200 employees and $2.3
million for facility closure and related costs. At March 31, 2002, the
remaining accrual approximates $1.3 million, and it is anticipated that
all amounts will be expended by the end of the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had cash and cash equivalents of $82.3
million and working capital of $135.8 million. At March 31, 2002, the
Company had outstanding borrowings of $35.0 million against its
revolving credit facility to fund acquisitions and had $2.6 million
outstanding in letters of credit. The credit facility bears interest at
LIBOR plus a margin of 0.65%
In March 2001, the Company issued $300 million of convertible
subordinated Notes due March 2006. The Notes bear interest at 4% and
require semiannual interest payments in the months of March and
September. The Notes
12
are convertible at any time at the option of the holder into shares of
the Company's common stock at a conversion price of $33.40 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.
Accounts receivable represented 77 and 69 days sales outstanding (DSO)
at March 31, 2002 and June 30, 2001, respectively, based on quarterly
revenues. The increase in DSO is primarily due to certain annual
billings that occur in the first quarter of the calendar year and a
higher DSO associated with commission receivables in the Insurance and
Education Services business segment. Due to this segment's faster
growth, its receivables represent a greater percentage of outstanding
receivables at March 31, 2002 compared to June 30, 2001.
For the nine months ended March 31, 2002, operating activities provided
cash of $89.0 million. Investing activities used cash of $208.4
million, primarily for acquisition-related payments of $172.1 million,
capital expenditures of $24.7 million, and purchases of intangibles of
$6.6 million. Financing activities provided cash of $42.3 million
comprised of proceeds from short-term borrowings of $35.0 million, net
proceeds from the exercise of stock options of $6.3 million, and the
issuance of common stock of $4.2 million, offset by the repurchase of
common stock of $2.7 million.
In January 1999, the Company's Board of Directors authorized a stock
buy-back program of up to $100 million of its outstanding common stock.
Purchases have occurred and are expected to continue to occur from
time-to-time in the open market to offset the possible dilutive effect
of shares issued under employee benefit plans, for possible use in
future acquisitions and for general and other corporate purposes.
Since January 1999, the Company has purchased 1,611,000 shares (split
adjusted) of its common stock under the stock buy-back program for
approximately $41.8 million, leaving $58.2 million available for future
purchases.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by business segment and for corporate operations for the three and nine
months ended March 31, 2002 and 2001. Restructuring charges are
excluded from the operating results of the segment for a better
understanding of the underlying performance of each segment.
Additionally, adjusted information has been presented for the three and
nine months ended March 31, 2001 to exclude goodwill amortization for
comparison purposes. The ensuing discussion of operating income and
margins compares fiscal 2002 actual results with fiscal 2001 pro forma
results excluding goodwill amortization.
(in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------- ----------------------------------------
As As
Adjusted Adjusted
2002 2001 2001 2002 2001 2001
---- ---- ---- ---- ---- ----
Operating revenue:
Investment Services $ 112,060 $ 89,027 $ 89,027 $ 325,143 $ 259,643 $ 259,643
Insurance and Education Services 57,072 42,244 42,244 156,072 117,433 117,433
Information Services 51,407 46,088 46,088 145,763 130,027 130,027
------------ ------------ ------------ ------------ ------------ ------------
Total operating revenue $ 220,539 $ 177,359 $ 177,359 $ 626,978 $ 507,103 $ 507,103
============ ============ ============ ============ ============ ============
Operating income:
Investment Services $ 20,029 $ 16,412 $ 16,970 $ 52,954 $ 41,244 $ 42,919
Insurance and Education Services 26,770 17,435 19,021 66,285 42,005 46,783
Information Services 14,681 12,215 12,862 38,506 31,601 33,517
Corporate (4,717) (4,176) (4,176) (15,218) (12,504) (12,504)
------------ ------------ ------------ ------------ ------------ ------------
Total operating income $ 56,763 $ 41,886 $ 44,677 $ 142,527 $ 102,346 $ 110,715
============ ============ ============ ============ ============ ============
Revenue in the Investment Services business segment increased $23.0
million, or 25.9%, during the three months ended March 31, 2002,
compared to the same period last year. The revenue increase was due to
recent
13
acquisitions and internal growth. Internal revenue growth approximated
10% for the three months ended March 31, 2002. Operating income in the
Investment Services business segment increased $3.1 million, or 18.0%,
during the fiscal third quarter, resulting in operating margins of
17.9% and 19.1% for the three months ended March 31, 2002 and 2001,
respectively. The margin declined due to lower margins in the
international mutual fund business.
Revenue in the Insurance and Education Services business segment
increased $14.8 million, or 35.1%, during the three months ended March
31, 2002, compared to the same period last year. The revenue increase
was due to acquisitions and internal growth. Internal revenue growth
approximated 20% for the three months ended March 31, 2002. Operating
income in the Insurance and Education Services business segment
increased $7.7 million, or 40.7%, during the fiscal third quarter,
resulting in operating margins of 46.9% and 45.0% for the three months
ended March 31, 2002 and 2001, respectively. Margins increased in the
fiscal third quarter due to continued growth in renewal revenue and
leverage gained from higher volumes.
Revenue in the Information Services business segment increased $5.3
million, or 11.5%, during the three months ended March 31, 2002,
compared to the same period last year. The revenue increase was due to
sales to new clients, existing client growth, and cross sales to
existing clients. Operating income in the Information Services business
segment increased $1.8 million, or 14.1%, during the fiscal third
quarter, resulting in operating margins of 28.6% and 27.9% for the
three months ended March 31, 2002 and 2001, respectively. The margin
increase in the fiscal third quarter was primarily due to continued
revenue growth and operational efficiencies.
Corporate operations represent charges for the Company's human
resources, legal, accounting and finance functions, and various other
unallocated overhead charges. Increased expenses of $0.5 million in the
three months ended March 31, 2002 were in line with the Company's
overall growth.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this quarterly 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 quarterly 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.
14
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 19, 2002, the Company issued 32,000 shares of its
common stock, $0.02 par value ("Company Common Stock"), as
contingent merger consideration in the acquisition of P.J.
Robb Variable Corp. on February 28, 2001. Said shares of
Company Common Stock were not registered under the Securities
Act of 1933, as amended ("the Securities Act"). There was no
underwriter or placement agent.
In connection with the issuance of the shares, the Company
relied on exemptions from registration under Section 4(2) of
the Securities Act, based upon, among other things, the small
number of investors, the nature of the investors, and certain
information provided to the investor with respect to the
Company and the transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
A current report on 8-K, dated March 26, 2002, was filed with
the Securities and Exchange Commission on March 26, 2002
(Items 5 and 7) to report the acquisition by the registrant of
Hemisphere Management Limited, Hemisphere Financial Services,
LLC, Hemisphere Financial Group, LLC, and Hemisphere (Ireland)
Limited.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE BISYS GROUP, INC.
Date: May 10, 2002 By: /s/ Andrew C. Corbin
-------------- --------------------------------------------
Andrew C. Corbin
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer)
16