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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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
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COMMISSION FILE NUMBER: 0-19922
THE BISYS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3532663
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 JANUARY 31, 2003, THERE WERE 119,717,723 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 25 pages.
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THE BISYS GROUP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 2002
and June 30, 2002 3
Condensed Consolidated Statement of Operations for the three and six
months ended December 31, 2002 and 2001 4
Condensed Consolidated Statement of Cash Flows for the six months
ended December 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
CERTIFICATIONS 19
EXHIBIT INDEX 21
PART I
ITEM 1. FINANCIAL STATEMENTS
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
December 31, June 30,
2002 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 80,580 $ 78,371
Accounts receivable, net 208,274 196,997
Deferred tax asset 11,670 9,466
Other current assets 36,454 35,401
----------- -----------
Total current assets 336,978 320,235
Property and equipment, net 104,823 94,711
Goodwill 662,266 623,250
Intangible assets, net 164,948 159,391
Other assets 43,318 48,564
----------- -----------
Total assets $ 1,312,333 $ 1,246,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 143,000 $ 93,000
Accounts payable 20,286 16,492
Other current liabilities 116,620 125,012
----------- -----------
Total current liabilities 279,906 234,504
Long-term debt 300,000 300,000
Deferred tax liability 21,154 16,670
Other liabilities 3,630 12,359
----------- -----------
Total liabilities 604,690 563,533
----------- -----------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares
authorized, 120,274,571 and
119,880,003 shares issued, respectively 2,405 2,398
Additional paid-in capital 377,882 370,854
Retained earnings 361,616 320,790
Notes receivable from stockholders (10,776) (10,776)
Treasury stock at cost, 947,780 shares (23,108) --
Employee benefit trust, 346,000 shares (5,705) --
Deferred compensation 5,782 --
Accumulated other comprehensive loss (453) (648)
----------- -----------
Total stockholders' equity 707,643 682,618
----------- -----------
Total liabilities and stockholders' equity $ 1,312,333 $ 1,246,151
=========== ===========
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 Six Months Ended
December 31, December 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $233,112 $209,908 $460,456 $406,439
-------- -------- -------- --------
Operating costs and expenses:
Service and operating 136,126 120,698 271,675 234,046
Selling, general and 42,593 40,075 87,179 80,643
administrative
Amortization of intangible assets 4,393 3,090 8,665 5,986
Restructuring charges -- -- 12,079 6,475
-------- -------- -------- --------
Total operating costs and expenses $183,112 $163,863 $379,598 $327,150
-------- -------- -------- --------
Operating earnings 50,000 46,045 80,858 79,289
Interest expense, net 4,033 2,887 8,045 5,202
-------- -------- -------- --------
Income before income taxes 45,967 43,158 72,813 74,087
Income taxes 17,238 16,723 27,305 28,709
-------- -------- -------- --------
Net income $ 28,729 $ 26,435 $ 45,508 $ 45,378
======== ======== ======== ========
Basic earnings per share $ 0.24 $ 0.22 $ 0.38 $ 0.39
======== ======== ======== ========
Diluted earnings per share $ 0.24 $ 0.22 $ 0.37 $ 0.37
======== ======== ======== ========
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)
Six Months Ended
December 31,
------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 45,508 $ 45,378
Adjustments to reconcile net income to net cash provided by
operating activities:
Restructuring charge 12,079 6,475
Depreciation and amortization 23,581 19,223
Deferred income tax provision 2,272 5,384
Change in operating assets and liabilities, net of effects
from acquisitions (21,218) (26,296)
--------- ---------
Net cash provided by operating activities 62,222 50,164
--------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (46,286) (30,813)
Proceeds from dispositions, net of expenses paid -- (521)
Capital expenditures (25,178) (13,381)
Change in other investments (1,516) (1,853)
Purchase of intangible assets (7,715) (6,139)
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Net cash used in investing activities (80,695) (52,707)
--------- ---------
Cash flows from financing activities:
Repayment of debt -- (578)
Proceeds from short-term borrowings 149,000 --
Repayment of short-term borrowings (99,000) --
Proceeds from exercise of stock options 4,334 2,675
Repurchases of common stock (33,410) (2,684)
Other (242) --
--------- ---------
Net cash provided (used) by financing activities 20,682 (587)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,209 (3,130)
Cash and cash equivalents at beginning of period 78,371 159,399
--------- ---------
Cash and cash equivalents at end of period $ 80,580 $ 156,269
========= =========
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. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The BISYS Group, Inc. and subsidiaries (the "Company") is a leading
provider of business process outsourcing solutions for the financial
services sector.
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
The BISYS Group, Inc. and its subsidiaries and have been prepared
consistent with the accounting policies reflected in the 2002 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 fairly state this information.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB)
issued FAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure." FAS 148 amends FAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the
disclosure requirements of FAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company presently does not
anticipate changing its method of accounting for stock-based employee
compensation from the intrinsic value method to the fair value based
method. However, the additional information required by FAS 148 will be
included in the Company's interim and annual financial statements
beginning with the period ending March 31, 2003.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on determining
whether a multi-deliverable revenue arrangement contains more than one
unit of accounting and, if so, how to measure and allocate the
arrangement consideration to the separate units of accounting. The
guidance in this issue is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is
currently evaluating the impact that this guidance may have on its
financial statements and plans to adopt EITF Issue No. 00-21 in fiscal
2004.
In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. FAS 146 supersedes previous accounting
guidance, principally EITF Issue No. 94-3. FAS 146 requires that the
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF Issue No. 94-3, a
liability for an exit cost was recognized at the date of a company's
commitment to an exit plan. FAS 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly,
FAS 146 may affect the timing of recognizing any future restructuring
costs as well as the amount recognized. The provisions of FAS 146 are
effective for restructuring activities initiated after December 31,
2002.
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
and intangible assets, restructuring 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 judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates in the near term.
6
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ----------------------
2002 2001 2002 2001
------- -------- ------- -------
Net income $28,729 $ 26,435 $45,508 $45,378
Foreign currency translation adjustment 126 (41) 195 79
------- -------- ------- -------
Total comprehensive income $28,855 $ 26,394 $45,703 $45,457
======= ======== ======= =======
4. EARNINGS PER SHARE
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.
Basic and diluted EPS computations for the three and six months ended
December 31, 2002 and 2001 are as follows (in thousands, except per
share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Basic EPS
Net income $ 28,729 $ 26,435 $ 45,508 $ 45,378
======== ======== ======== ========
Weighted average common shares
outstanding 119,273 118,100 119,393 117,746
======== ======== ======== ========
Basic earnings per share $ 0.24 $ 0.22 $ 0.38 $ 0.39
======== ======== ======== ========
Diluted EPS
Net income $ 28,729 $ 26,435 $ 45,508 $ 45,378
======== ======== ======== ========
Weighted average common shares
outstanding 119,273 118,100 119,393 117,746
Assumed conversion of common shares
issuable under stock option plans 1,694 4,843 2,493 5,191
-------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding 120,967 122,943 121,886 122,937
======== ======== ======== ========
Diluted earnings per share $ 0.24 $ 0.22 $ 0.37 $ 0.37
======== ======== ======== ========
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.
7
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 Six Months Ended
December 31, December 31,
----------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Number of options excluded 6,306 2,734 5,910 1,963
Option price per share $18.02 to $35.30 $27.55 to $30.85 $21.25 to $35.30 $27.68 to $30.85
Average market price of common shares
for the period $17.61 $27.45 $21.03 $27.63
5. RESTRUCTURING CHARGES
During the first quarter of fiscal 2003, the Company recorded a pre-tax
restructuring charge of $12.1 million in connection with the
integration, consolidation and relocation of certain business
operations. The restructuring and integration activities are primarily
due to acquisitions consummated by the Company in fiscal 2002 and the
downsizing of certain areas in the investment, insurance, education and
check imaging businesses. The restructuring charge includes a provision
of $7.2 million for severance-related costs for approximately 300
employees and $4.9 million for facility closure and related costs.
A summary of the restructuring charge activity for the six months ended
December 31, 2002 is as follows (in thousands):
Compensation- Facilities-
Related Related Total
------------- ----------- -------
Establishment of initial restructuring charge $7,161 $4,918 $12,079
accrual
Payments 5,089 1,417 6,506
------ ------ -------
Balance at December 31, 2002 $2,072 $3,501 $ 5,573
====== ====== =======
It is anticipated that all severance-related amounts and a substantial
portion of the facility-related amounts will be expended by the end of
the current fiscal year.
6. INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS
At December 31, 2002, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- ------------ ---------
Customer related $141,120 $(25,571) $115,549
Noncompete agreements 41,993 (9,445) 32,548
Other 22,070 (5,219) 16,851
-------- -------- --------
Total $205,183 $(40,235) $164,948
======== ======== ========
8
At June 30, 2002, acquired intangible assets were comprised of the
following (in thousands):
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- ------------ --------
Customer related $129,740 $(19,846) $109,894
Noncompete agreements 39,132 (7,423) 31,709
Other 22,070 (4,282) 17,788
-------- -------- --------
Total $190,942 $(31,551) $159,391
======== ======== ========
All of the Company's acquired intangible assets are subject to
amortization. Amortization expense for acquired intangible assets was
$4.4 million and $8.7 million for the three and six months ended
December 31, 2002 and $13.1 million for its year ended June 30, 2002.
Estimated amortization expense for the current fiscal year and the
succeeding four years is as follows (in thousands):
Fiscal Year
Ending
June 30, Amount
---------- ---------
2003 $ 18,200
2004 19,100
2005 18,300
2006 17,200
2007 15,800
GOODWILL
The changes in the carrying amount of goodwill by business segment for
the six months ended December 31, 2002 are as follows (in thousands):
Investment Insurance and Information
Services Education Services Services Total
-------- ------------------ ----------- -----
Balance, July 1, 2002 $311,802 $276,058 $35,390 $623,250
Additions 567 38,449 -- 39,016
-------- -------- ------- --------
Balance, December 31, 2002 $312,369 $314,507 $35,390 $662,266
======== ======== ======= ========
7. BUSINESS COMBINATIONS
On December 18, 2002, the Company acquired Select Insurance Marketing
Corporation (SIMCO) in a cash for equity transaction. SIMCO is a
Washington-based insurance brokerage firm specializing in the wholesale
distribution of long-term care insurance.
On December 23, 2002, the Company acquired Feingold & Scott Ltd. (dba
Career Brokerage, Inc.) in a cash for equity transaction. Career
Brokerage is a New York-based insurance brokerage firm specializing in
the wholesale distribution of life, annuity, disability, and long-term
care insurance products.
Pro forma information has not been presented due to a lack of
materiality.
9
8. SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by business segment and for corporate operations for the three and six
months ended December 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.
(in thousands)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Operating revenue:
Investment Services $ 121,853 $ 108,167 $ 242,797 $ 213,083
Insurance and Education Services 58,830 53,654 114,529 99,000
Information Services 52,429 48,087 103,130 94,356
--------- --------- --------- ---------
Total operating revenue $ 233,112 $ 209,908 $ 460,456 $ 406,439
========= ========= ========= =========
Operating income (loss):
Investment Services $ 17,872 $ 16,772 $ 33,956 $ 32,925
Insurance and Education Services 23,738 22,165 43,407 39,515
Information Services 13,825 12,486 26,230 23,825
Corporate (5,435) (5,378) (10,656) (10,501)
--------- --------- --------- ---------
Total operating income $ 50,000 $ 46,045 $ 92,937 $ 85,764
========= ========= ========= =========
9. DEFERRED COMPENSATION
The Company has a deferred compensation plan (the "Plan") whereby
certain compensation earned by a participant can be deferred and placed
in an employee benefit trust, also known as a "rabbi trust." Under the
Plan, the participant may choose from several investment designations,
including shares of common stock of the Company. During the first
quarter of fiscal 2003, the Company amended the Plan to make all
participant deferrals that are designated in common stock of the
Company irrevocable and to require that all future distributions of
such designations be settled in shares of Company common stock.
Accordingly, the Company has applied the provisions of Emerging Issues
Task Force (EITF) 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and
Invested." The EITF requires that employer stock held by the rabbi
trust be classified as equity similar to the manner in which treasury
stock is accounted for. Additionally, the EITF requires that the
portion of the deferred compensation obligation that is required to be
settled by the delivery of shares of employer stock be classified in
equity. At December 31, 2002, 346,000 shares, valued at $5.7 million,
were held by the employee benefit trust and presented in the
accompanying consolidated balance sheet as a contra-equity account.
Additionally, $5.8 million has been classified as equity in the
accompanying consolidated balance sheet and represents the deferred
compensation obligation under the Plan that is designated in shares of
Company common stock. Under the EITF, subsequent changes in the fair
value of both the employer stock held in the rabbi trust and the
deferred compensation obligation, representing amounts designated in
shares of Company common stock, are not recognized.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Six Months Ended
December 31, December 31,
--------------------- ---------------------
2002 2001 2002 2001
------ ------ ------ -------
Revenues 100% 100% 100% 100%
---- ---- ---- ----
Operating costs and expenses:
Service and operating 58.4 57.5 59.0 57.6
Selling, general and administrative 18.3 19.1 18.9 19.8
Amortization of intangible assets 1.9 1.5 1.9 1.5
Restructuring charges - - 2.6 1.6
---- ---- --- ----
Total operating costs and expenses 78.6 78.1 82.4 80.5
---- ---- --- ----
Operating earnings 21.4 21.9 17.6 19.5
Interest expense, net 1.7 1.4 1.8 1.3
---- ---- --- ----
Income before income taxes 19.7 20.5 15.8 18.2
Income taxes 7.4 7.9 5.9 7.0
---- ---- --- ----
Net income 12.3% 12.6% 9.9% 11.2%
==== ==== === ====
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2002 WITH THE THREE MONTHS
ENDED DECEMBER 31, 2001.
Revenues increased 11.1% from $209.9 million for the three months ended
December 31, 2001 to $233.1 million for the three months ended December
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 3% for the three months ended December 31,
2002 over the same period last year.
Service and operating expenses increased 12.8% from $120.7 million for
the three months ended December 31, 2001 to $136.1 million for the
three months ended December 31, 2002 and increased as a percentage of
revenues from 57.5% to 58.4%. The dollar increase resulted from
additional costs associated with greater revenues. The increase as a
percentage of revenues resulted from business acquisitions and changes
in the mix of the Company's business.
Selling, general and administrative expenses increased 6.3% from $40.1
million during the three months ended December 31, 2001 to $42.6
million for the three months ended December 31, 2002 and decreased as a
percentage of revenues from 19.1% to 18.3%. The dollar increase
resulted from additional costs associated with greater revenues. The
decrease as a percentage of revenues resulted from improved leverage in
overhead costs through discretionary cost reductions and effective
expense management.
Amortization of intangible assets increased $1.3 million for the three
months ended December 31, 2002 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses.
Interest expense increased $1.1 million for the three months ended
December 31, 2002 over the same period last year primarily due to the
interest costs associated with a higher level of outstanding borrowings
under the Company's revolving credit facility.
The income tax provision of $17.2 million for the three months ended
December 31, 2002 increased from $16.7 million for the three months
ended December 31, 2001 due to higher taxable income. The provision
represents an effective tax rate of 37.5% and 38.7% for the periods
ended December 31, 2002 and 2001, respectively. The reduced effective
tax rate is attributable to the impact of lower tax rates in foreign
tax jurisdictions for recently acquired businesses.
11
Operating earnings, before amortization of intangibles, resulted in
margins of 23.3% and 23.4% for the three months ended December 31, 2002
and 2001, respectively.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2002 WITH THE SIX MONTHS ENDED
DECEMBER 31, 2001.
Revenues increased 13.3% from $406.4 million for the six months ended
December 31, 2001 to $460.5 million for the six months ended December
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 16.1% from $234.0 million for
the six months ended December 31, 2001 to $271.7 million for the six
months ended December 31, 2002 and increased as a percentage of
revenues from 57.6% to 59.0%. The dollar increase resulted from
additional costs associated with greater revenues. The increase as a
percentage of revenues resulted from business acquisitions and changes
in the mix of the Company's business.
Selling, general and administrative expenses increased 8.1% from $80.6
million during the six months ended December 31, 2001 to $87.2 million
for the six months ended December 31, 2002 and decreased as a
percentage of revenues from 19.8% to 18.9%. The dollar increase
resulted from additional costs associated with greater revenues. The
decrease as a percentage of revenues resulted from improved leverage in
overhead costs through discretionary cost reductions and effective
expense management.
Amortization of intangible assets increased $2.7 million for the six
months ended December 31, 2002 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses.
Interest expense increased $2.8 million for the six months ended
December 31, 2002 over the same period last year primarily due to the
interest costs associated with a higher level of outstanding borrowings
under the Company's revolving credit facility.
The income tax provision of $27.3 million for the six months ended
December 31, 2002 decreased from $28.7 million for the six months ended
December 31, 2001 due to lower taxable income and a lower effective tax
rate. The provision represents an effective tax rate of 37.5% and 38.8%
for the periods ended December 31, 2002 and 2001, respectively. The
reduced effective tax rate is attributable to the impact of lower tax
rates in foreign tax jurisdictions for recently acquired businesses.
Operating earnings, before amortization of intangibles and
restructuring charges, resulted in margins of 22.1% and 22.6% for the
six months ended December 31, 2002 and 2001, respectively. The margin
decline was generally due to the overall economic downturn that
adversely impacted the Company's Investment Services business and the
decline in sales of high-end insurance products in the Insurance
Services business.
The Company recorded pre-tax restructuring charges of $12.1 million and
$6.5 million during the six months ended December 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 and the downsizing of certain areas
in the investment, insurance, education, and check imaging businesses
in fiscal 2003. The restructuring charge in the fiscal first quarter of
2003 includes a provision of $7.2 million for severance-related costs
for approximately 300 employees and $4.9 million for facility closure
and related costs. At December 31, 2002, the remaining accrual amounts
to $5.6 million and it is anticipated that all severance-related
amounts and a substantial portion of the facility-related amounts will
be expended by the end of the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and cash equivalents of
$80.6 million and working capital of $57.1 million. At December 31,
2002, the Company had outstanding borrowings of $143.0 million against
its $300 million revolving credit facility. The credit facility bears
interest at LIBOR plus a margin of 0.65%, resulting in a weighted
average interest rate of 2.13% on all outstanding borrowings under the
facility at December 31, 2002. The facility is used to support the
Company's working capital requirements and fund the Company's future
acquisitions. The facility expires June 30, 2004.
12
The Company's strategy includes the acquisition of complementary
businesses financed by a combination of internally generated funds,
borrowings from the revolving credit facility, long-term debt and
common stock. The Company's policy is to retain earnings to support
future business opportunities, rather than to pay dividends. The
Company has historically used a significant portion of its cash flow
from operations to fund acquisitions and capital expenditures with any
remainder used to reduce outstanding borrowings under the credit
facility. The Company believes that its cash flow from operations
together with other available sources of funds will be adequate to meet
its funding requirements. In the event that the Company makes
significant future acquisitions, however, it may raise funds through
additional borrowings or the issuance of securities.
At December 31, 2002, the Company had $2.4 million outstanding in
letters of credit and $300 million of outstanding 4% convertible
subordinated notes due March 2006. The Company's debt ratio (total
debt/total debt plus equity) is .39 to 1.00 at December 31, 2002, and
the Company's maximum debt ratio may not exceed .50 to 1.00 under the
terms of the revolving credit facility, as amended.
Accounts receivable represented 82 and 75 days sales outstanding (DSO)
at December 31, 2002 and June 30, 2002, respectively, based on
quarterly revenues. The increase in DSO is primarily due to a higher
DSO associated with commission receivables in the Insurance Services
division due to the timing of certain commission-related payments from
insurance carriers. Additionally, due to Insurance Services' growth,
its receivables represent a greater percentage of outstanding
receivables at December 31, 2002 compared to June 30, 2002.
For the six months ended December 31, 2002, operating activities
provided cash of $62.2 million. Investing activities used cash of $80.7
million, primarily for acquisition-related payments of $46.3 million,
capital expenditures of $25.2 million, and purchases of intangibles of
$7.7 million. Financing activities provided cash of $20.7 million,
primarily comprised of net proceeds from short-term borrowings of $50.0
million and net proceeds from the exercise of stock options of $4.3
million, offset by repurchases of common stock of $33.4 million.
At its August 15, 2002 meeting, the Board of Directors authorized a new
stock buy-back program of up to $100 million to supersede and replace
the prior program effective upon completion of an amendment to the
Company's revolving credit facility modifying certain stock buy-back
provisions. The amendment to the credit facility became effective on
September 24, 2002. Through that date, the Company had purchased a
total of approximately 4.25 million shares of its common stock under
the prior stock buy-back program for $70.4 million. Between September
24, 2002 and September 30, 2002, the Company purchased an additional
0.3 million shares for $4.8 million under the new stock buy-back
program. There were no share repurchases during the three months ended
December 31, 2002. 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.
SEGMENT INFORMATION
The following table sets forth operating revenue and operating income
by business segment and for corporate operations for the three and six
months ended December 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.
13
(in thousands)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Operating revenue:
Investment Services $ 121,853 $ 108,167 $ 242,797 $ 213,083
Insurance and Education Services 58,830 53,654 114,529 99,000
Information Services 52,429 48,087 103,130 94,356
--------- --------- --------- ---------
Total operating revenue $ 233,112 $ 209,908 $ 460,456 $ 406,439
========= ========= ========= =========
Operating income (loss):
Investment Services $ 17,872 $ 16,772 $ 33,956 $ 32,925
Insurance and Education Services 23,738 22,165 43,407 39,515
Information Services 13,825 12,486 26,230 23,825
Corporate (5,435) (5,378) (10,656) (10,501)
--------- --------- --------- ---------
Total operating income $ 50,000 $ 46,045 $ 92,937 $ 85,764
========= ========= ========= =========
Internal revenue growth for Investment Services, Insurance and
Education Services, and Information Services approximated 2%, 1%, and
9%, respectively, during the three months ended December 31, 2002 over
the same period last year. A substantial portion of the Company's
revenues are recurring in nature and are derived from long-term
customer contracts with terms that generally average from three to five
years. The Company believes the contractual nature of its business and
its historical contract renewal experience provide a high level of
stability and predictability to the amount and timing of its recurring
revenue stream. The Company's internal revenue growth approximated 5%
for the six months ended December 31, 2002 over the same period last
year. The Company expects to achieve an overall annual internal growth
rate of 4% to 6% in fiscal 2003 and 8% to 10% in fiscal 2004, subject
to continuing stability and moderate improvement in the capital
markets.
Revenue in the Investment Services business segment increased $13.7
million, or 12.7%, during the three months ended December 31, 2002,
over the same period last year. The revenue increase was due to recent
acquisitions and internal growth of approximately 2%. Operating income
in the Investment Services business segment increased $1.1 million, or
6.6%, during the fiscal second quarter, resulting in operating margins
of 14.7% and 15.5% for the three months ended December 31, 2002 and
2001, respectively. The margin primarily decreased due to the adverse
impact that the overall market decline had on revenue derived from
equity-based funds under administration in the Fund Services division.
Revenue in the Insurance and Education Services business segment
increased $5.2 million, or 9.6%, during the three months ended December
31, 2002, over the same period last year. The revenue increase was
primarily due to acquisitions. Operating income in the Insurance and
Education Services business segment increased $1.6 million, or 7.1%,
during the fiscal second quarter, resulting in operating margins of
40.4% and 41.3% for the three months ended December 31, 2002 and 2001,
respectively. Margins decreased in the fiscal second quarter primarily
due to the decline in sales of high-end products in the Insurance
Services division and the adverse impact of the overall economic
downturn on sales in the Education Services division.
Revenue in the Information Services business segment increased $4.3
million, or 9.0%, during the three months ended December 31, 2002, over
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
$1.3 million, or 10.7%, during the fiscal second quarter, resulting in
operating margins of 26.4% and 26.0% for the three months ended
December 31, 2002 and 2001, respectively.
Corporate operations represent charges for the Company's human
resources, legal, accounting and finance functions, and various other
unallocated overhead charges.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain
forward-looking statements that are based on management's current
expectations, estimates, forecasts and assumptions concerning future
events. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of management.
These
14
statements are subject to numerous known and unknown risks,
uncertainties and assumptions that could cause actual events or results
to differ materially from those projected. Words such as "believes,"
"anticipates," "expects," "intends," "estimates, "projects," "plans,"
"targets," and variations of such words and similar expressions are
intended to identify such forward-looking statements. Except as
required under the federal securities laws and the rules and
regulations of the Securities and Exchange Commission (SEC), the
Company does not undertake any obligation to update or revise publicly
any forward-looking statements, whether as a result of new information,
future events, changes in assumptions or otherwise. Although the
Company believes that its plans, intentions, and expectations reflected
in or suggested by the forward-looking statements made in this report
are reasonable, there can be no assurance that such plans, intentions
or expectations will be achieved.
The risks, uncertainties and assumptions include: achieving planned
revenue growth in each of the Company's business units; renewal of
material contracts in the Company's business units consistent with past
experience; successful and timely integration of significant businesses
acquired by the Company and realization of anticipated synergies;
increasing price, products, and services competition by U.S. and
non-U.S. competitors, including new entrants; changes in U.S. and
non-U.S. governmental regulations; the timely implementation of the
Company's restructuring program and financial plans; general U.S. and
non-U.S. economic and political conditions, including the global
economic slowdown and interest rate and currency exchange rate
fluctuation; continuing development and maintenance of appropriate
business continuity plans for the Company's processing systems; absence
of consolidation among client financial institutions or other client
groups; timely conversion of new customer data to the Company's
platforms; attracting and retaining qualified key employees; no
material breech of security of any of the Company's systems; control of
costs and expenses; continued availability of financing, and financial
resources on the terms required to support the Company's future
business endeavors; the mix of products and services; compliance with
the covenants and restrictions of the Company's bank credit facility
and convertible subordinated notes indenture; and the outcome of
pending and future litigation and governmental or regulatory
proceedings.
These are representative of the risks, uncertainties and assumptions
that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and
market conditions and growth rates, and other future events.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB)
issued FAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure." FAS 148 amends FAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the
disclosure requirements of FAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company presently does not
anticipate changing its method of accounting for stock-based employee
compensation from the intrinsic value method to the fair value based
method. However, the additional information required by FAS 148 will be
included in the Company's interim and annual financial statements
beginning with the period ending March 31, 2003.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on determining
whether a multi-deliverable revenue arrangement contains more than one
unit of accounting and, if so, how to measure and allocate the
arrangement consideration to the separate units of accounting. The
guidance in this issue is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is
currently evaluating the impact that this guidance may have on its
financial statements and plans to adopt EITF Issue No. 00-21 in fiscal
2004.
In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. FAS 146 supersedes previous accounting
guidance, principally EITF Issue No. 94-3. FAS 146 requires that the
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF Issue No. 94-3, a
liability for an exit cost was recognized at the date of a company's
commitment to an exit plan. FAS 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly,
FAS 146 may affect the timing of recognizing any future restructuring
costs as well as the amount recognized. The provisions of FAS 146 are
effective for restructuring activities initiated after December 31,
2002.
15
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports, filed
pursuant to the Securities Exchange Act of 1934, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the internal controls subsequent to the date the
Company completed its evaluation.
16
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held on
November 14, 2002, the Stockholders approved the following matters:
1. Re-election of the eight Directors named below to hold
office until the next Annual Meeting of Stockholders and
until their successors have been duly elected and
qualified:
Number of
Name of Director Votes in Favor
---------------- --------------
Denis A. Bovin 84,698,127
Robert J. Casale 84,697,953
Thomas A. Cooper 84,549,327
Jay W. DeDapper 84,548,317
John J. Lyons 84,698,127
Lynn J. Mangum 83,565,305
Thomas E. McInerney 84,698,063
Joseph J. Melone 84,548,509
For Against Abstain
2. 2003 Employee Stock
Purchase Plan 84,414,136 362,855 21,206
For Against Abstain
3. Appointment of PricewaterhouseCoopers LLP
as independent accountants for fiscal year 2003 82,028,596 2,756,641 12,960
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 3.1 - Amendment to By-Laws, Effective as of November
15, 2002
Exhibit 10.1 - Amendment No. 3, dated as of October 24, 2002,
to the Credit Agreement, dated as of June 30, 1999, among The
BISYS Group, Inc., the Lenders party thereto, JP Morgan Chase
Bank, Bank One, NA, Wachovia Bank, National Association and
Fleet National Bank, as co-agents thereunder, and The Bank of
New York, as Administrative Agent.
(B) REPORTS ON FORM 8-K
None.
17
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: February 13, 2003 By: /s/ Andrew C. Corbin
------------------- ----------------------------------------
Andrew C. Corbin
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
18
CERTIFICATIONS
I, Dennis R. Sheehan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The BISYS Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Dennis R. Sheehan
----------------------------------------
Dennis R. Sheehan
President and Chief Executive Officer
19
CERTIFICATIONS
I, Andrew C. Corbin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The BISYS Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Andrew C. Corbin
------------------------------
Andrew C. Corbin
Executive Vice President
and Chief Financial Officer
20
THE BISYS GROUP, INC.
EXHIBIT INDEX
Exhibit No. Page
(3.1) Amendment to By-Laws, Effective as of November 15, 2002.................................22
(10.1) Amendment No. 3, dated as of October 24, 2002, to the Credit
Agreement, dated as of June 30, 1999, among The BISYS Group,
Inc., the Lenders party thereto, JP Morgan Chase Bank, Bank
One, NA, Wachovia Bank, National Association and Fleet
National Bank, as co-agents thereunder, and The Bank of New
York, as Administrative Agent...........................................................23
21