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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER: 001-31254
THE BISYS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3532663
(State or other jurisdiction of (I.R.S. Employer 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 BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
AS OF JANUARY 31, 2005, THERE WERE 120,805,664 SHARES OF COMMON STOCK, PAR VALUE
$0.02 PER SHARE, OF THE REGISTRANT OUTSTANDING.
This document contains 28 pages.
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THE BISYS GROUP, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three and six
months ended December 31, 2004 and 2003 3
Condensed Consolidated Balance Sheets as of December 31, 2004 and
June 30, 2004 4
Condensed Consolidated Statements of Cash Flows for the six months
ended December 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
EXHIBIT INDEX 28
2
PART I
ITEM 1. FINANCIAL STATEMENTS
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues $ 276,338 $ 261,381 $ 544,467 $ 497,815
--------- --------- --------- ---------
Operating costs and expenses:
Service and operating 177,793 166,314 352,132 316,233
Selling, general and administrative 55,460 49,397 106,940 95,526
Amortization of intangible assets 6,987 6,693 14,137 12,499
Restructuring, impairment and other charges 2,350 2,151 2,838 14,775
--------- --------- --------- ---------
Total operating costs and expenses 242,590 224,555 476,047 439,033
--------- --------- --------- ---------
Operating earnings 33,748 36,826 68,420 58,782
Interest income 626 282 1,106 607
Interest expense (4,526) (4,735) (9,377) (9,399)
Investment gains 4,331 - 8,524 -
--------- --------- --------- ---------
Income before income taxes 34,179 32,373 68,673 49,990
Income taxes 12,304 12,059 25,067 23,833
--------- --------- --------- ---------
Net income $ 21,875 $ 20,314 $ 43,606 $ 26,157
========= ========= ========= =========
Basic earnings per share $ 0.18 $ 0.17 $ 0.36 $ 0.22
========= ========= ========= =========
Diluted earnings per share $ 0.18 $ 0.17 $ 0.36 $ 0.22
========= ========= ========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
December 31, June 30,
2004 2004
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 144,606 $ 139,872
Restricted cash 49,007 67,125
Accounts receivable, net 100,121 96,385
Insurance premiums and commissions receivable, net 121,967 87,154
Deferred tax asset 11,901 13,484
Other current assets 39,251 49,747
------------- ---------------
Total current assets 466,853 453,767
Property and equipment, net 108,998 112,074
Goodwill 802,178 802,178
Intangible assets, net 196,862 211,298
Other assets 25,581 32,923
------------- ---------------
Total assets $ 1,600,472 $ 1,612,240
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 18,750 $ 6,250
Short-term borrowings - 66,000
Accounts payable 17,857 17,397
Insurance premiums and commissions payable 148,170 126,173
Other current liabilities 146,827 158,459
------------- ---------------
Total current liabilities 331,604 374,279
Long-term debt 381,250 393,750
Deferred tax liability 62,693 54,669
Other liabilities 6,272 4,560
------------- ---------------
Total liabilities 781,819 827,258
------------- ---------------
Stockholders' equity:
Common stock, $0.02 par value, 320,000,000 shares authorized, 121,238,514
and 120,836,315 shares issued 2,425 2,417
Additional paid-in capital 395,417 389,484
Retained earnings 445,836 403,738
Notes receivable from stockholders (3,718) (8,116)
Employee benefit trust, 415,242 and 342,613 shares (6,558) (5,507)
Deferred compensation 6,708 5,292
Unearned compensation - restricted stock (9,738) (6,199)
Accumulated other comprehensive income 447 6,337
Treasury stock at cost, 865,617 and 158,559 shares (12,166) (2,464)
------------- ---------------
Total stockholders' equity 818,653 784,982
------------- ---------------
Total liabilities and stockholders' equity $ 1,600,472 $ 1,612,240
============= ===============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
THE BISYS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
December 31,
-----------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 43,606 $ 26,157
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring, impairment and other charges 2,838 14,775
Depreciation and amortization 31,980 29,251
Deferred income tax provision 13,855 7,968
Investment gains (8,524) -
Change in operating assets and liabilities, net of effects from acquisitions (5,446) 7,056
------------ ------------
Net cash provided by operating activities 78,309 85,207
------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired - (41,709)
Payments related to businesses previously acquired (319) (2,851)
Capital expenditures (14,830) (16,802)
Proceeds from sale of investments 14,772 -
Change in other investments 677 1,348
------------ ------------
Net cash provided by (used in) investing activities 300 (60,014)
------------ ------------
Cash flows from financing activities:
Short-term borrowings, net (66,000) 28,000
Proceeds from exercise of stock options 3,543 5,547
Repurchases of common stock (15,816) (53,244)
Repayment of notes receivable from stockholders 4,398 -
------------ ------------
Net cash used in financing activities (73,875) (19,697)
------------ ------------
Net increase in cash and cash equivalents 4,734 5,496
Cash and cash equivalents at beginning of period 139,872 79,558
------------ ------------
Cash and cash equivalents at end of period $ 144,606 $ 85,054
============ ============
The accompanying notes are an integral part of condensed
consolidated financial statements.
5
THE BISYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNLESS OTHERWISE NOTED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The BISYS Group, Inc. and subsidiaries (the "Company") is a leading
provider of outsourcing solutions for the financial services sector.
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
The BISYS Group, Inc. and its subsidiaries and have been prepared
consistent with the accounting policies reflected in the 2004 Annual
Report on Form 10-K filed with the Securities and Exchange Commission and
should be read in conjunction therewith. The condensed consolidated
financial statements include all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary
to fairly state this information.
RECLASSIFICATION
Certain reclassifications have been made to the fiscal 2004 financial
statements to conform to the fiscal 2005 presentation.
RESTRICTED CASH
Unremitted insurance premiums are held in a fiduciary capacity and
approximated $49.0 million and $67.1 million at December 31, 2004 and June
30, 2004, respectively. The period for which the Company holds such funds
is dependent upon the date the agent or broker remits the payment of the
premium to the Company and the date the Company is required to forward
such payment to the insurer.
INSURANCE PREMIUMS AND COMMISSIONS RECEIVABLE AND PAYABLE
The Company has separately reflected receivables and payables arising from
its insurance-related businesses on the accompanying condensed
consolidated balance sheets. The captions "insurance premiums and
commissions receivable" and "insurance premiums and commissions payable"
include insurance premiums and commissions in the Company's commercial
insurance services division and net commissions receivable in the
Company's life insurance brokerage division. In its capacity as a
commercial property and casualty wholesale distributor, the Company
collects premiums from other agents and brokers and, after deducting its
commissions, remits the premiums to the respective insurers.
INVESTMENTS
Management determines the appropriate classification of investments in
equity securities at the time of purchase. Marketable equity securities
available for sale are carried at market value based upon quoted market
prices. Unrealized gains or losses on available for sale securities are
accumulated as an adjustment to stockholders' equity, net of related
deferred income taxes. Realized gains or losses are computed based on
specific identification of the securities sold. Net realized gains from
securities sold during the three and six months ended December 31, 2004
were $4.3 million and $8.5 million, respectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock option, restricted stock and stock
purchase plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Accordingly, compensation expense has been recorded for restricted stock
awards, and no expense has been recorded for the Company's other
stock-based plans. The following table presents the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of FAS No. 123, "Accounting for Stock-Based
Compensation":
6
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ---------------------------
2004 2003 2004 2003
--------- ---------- ---------- ----------
Net income, as reported $ 21,875 $ 20,314 $ 43,606 $ 26,157
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 706 298 1,166 463
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects (4,813) (4,000) (9,151) (8,096)
--------- ---------- ---------- ----------
Pro forma net income $ 17,768 $ 16,612 $ 35,621 $ 18,524
========= ========== ========== ==========
Earnings per share:
Basic, as reported $ 0.18 $ 0.17 $ 0.36 $ 0.22
========= ========== ========== ==========
Basic, pro forma $ 0.15 $ 0.14 $ 0.30 $ 0.15
========= ========== ========== ==========
Diluted, as reported $ 0.18 $ 0.17 $ 0.36 $ 0.22
========= ========== ========== ==========
Diluted, pro forma $ 0.15 $ 0.14 $ 0.30 $ 0.15
========= ========== ========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
FAS123R, "Share Based Payment," a revision of FAS123, "Accounting for
Stock-Based Compensation." FAS123R requires companies to expense the fair
value of employee stock options and similar awards, is effective for
periods beginning after June 15, 2005, and supersedes APB 25. Management
plans to adopt FAS123R effective July 1, 2005 and is presently analyzing
the alternative transition methods and option pricing models that are
available under the new standard.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. The most significant estimates are
related to insurance commissions receivable, goodwill, intangible assets,
income taxes, and revenue recognition.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates in the near term.
7
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
2004 2003 2004 2003
--------- ---------- --------- ----------
Net income $ 21,875 $ 20,314 $ 43,606 $ 26,157
Unrealized gain on investments, net of tax 2 3,126 29 3,138
Reclassification adjustment for gains included in
net income, net of tax (2,742) - (5,817) -
Foreign currency translation adjustment 123 360 (102) 617
--------- ---------- --------- ----------
Total comprehensive income $ 19,258 $ 23,800 $ 37,716 $ 29,912
========= ========== ========= ==========
4. EARNINGS PER SHARE
Basic and diluted EPS computations for the three and six months ended
December 31, 2004 and 2003 are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -------------------------
2004 2003 2004 2003
----------- --------- ----------- -----------
Basic EPS
Net income $ 21,875 $ 20,314 $ 43,606 $ 26,157
=========== ========= =========== ===========
Weighted average common shares outstanding 119,698 119,350 119,797 119,578
=========== ========= =========== ===========
Basic earnings per share $ 0.18 $ 0.17 $ 0.36 $ 0.22
=========== ========= =========== ===========
Diluted EPS
Net income $ 21,875 $ 20,314 $ 43,606 $ 26,157
=========== ========= =========== ===========
Weighted average common shares outstanding 119,698 119,350 119,797 119,578
Assumed conversion of common shares issuable
under stock-based compensation plans 863 741 710 1,152
----------- --------- ----------- -----------
Weighted average common and common equivalent
shares outstanding 120,561 120,091 120,507 120,730
=========== ========= =========== ===========
Diluted earnings per share $ 0.18 $ 0.17 $ 0.36 $ 0.22
=========== ========= =========== ===========
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.
8
Certain stock options were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of common shares during the period, as follows:
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------------- -----------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Number of options excluded 8,620 10,365 9,257 8,922
Option price per share $15.24 to $35.30 $14.21 to $35.30 $14.71 to $35.30 $16.22 to $35.30
Average market price of common shares
for the period $ 15.24 $ 14.21 $ 14.58 $ 16.02
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
FISCAL 2005
During the three and six months ended December 31, 2004, the Company
recorded pre-tax restructuring, impairment and other charges of $2.4
million and $2.8 million, respectively, as follows:
Three Months Ended Six Months Ended
December 31, 2004 December 31, 2004
------------------ -----------------
Restructuring charges $ 1,103 $ 1,210
Impairment charges 1,025 1,025
Litigation and other charges 222 603
---------- ---------
Total restructuring, impairment and other charges $ 2,350 $ 2,838
========== =========
Restructuring charges of $1.2 million during the six months ended December
31, 2004 were related to the completion of the restructuring of the
European mutual fund services operations and were comprised of severance
totaling $0.2 million and lease termination costs of $1.2 million, offset
by reversals and currency translation gains of $0.2 million. The following
summarizes activity with respect to the Company's restructuring activities
for the six months ended December 31, 2004:
Restructuring accrual at June 30, 2004 $ 3,849
--------
Expense provision:
Employee severance 263
Facilities 1,190
Reversals (133)
Currency translation gain (110)
--------
Total 1,210
--------
Cash payments and other 3,401
--------
Remaining accrual at December 31, 2004:
Employee severance 90
Facility closure 1,568
--------
Total $ 1,658
========
The Company recorded asset impairment charges of $1.0 million during the
three months ended December 31, 2004 related to other than temporary
declines in the value of memberships in the New York and Boston Stock
exchanges included in other assets on the accompanying condensed
consolidated balance sheets.
9
FISCAL 2004
During the three and six months ended December 31, 2003, the Company
recorded pre-tax restructuring, impairment and other charges of $2.2
million and $14.8 million, respectively, as follows:
Three Months Ended Six Months Ended
December 31, 2003 December 31, 2003
------------------ -----------------
Restructuring charges $ 1,950 $ 7,413
Impairment charges - 4,515
Litigation and other charges 201 2,847
--------- --------
Total restructuring, impairment and other charges $ 2,151 $ 14,775
========= ========
The charges relate to the integration, consolidation, and reorganization
of certain business operations, particularly in the Company's European
Fund Services division and the Insurance Services group, and the recording
of an estimated charge for litigation expenses.
For the six months ended December 31, 2003, restructuring charges of $7.4
million were comprised of severance totaling $6.1 million and lease
termination costs of $1.3 million. Severance charges resulted from the
termination of approximately 330 employees representing all levels of
staffing. In connection with its restructuring activities, the Company
recorded asset impairment charges of $4.5 million. Of these charges, $3.9
million relates to impairment of an intangible asset and other long-lived
assets as a result of the Company's plan to restructure its European
mutual fund services operations and to exit certain European locations
following the acquisition of two of the Company's significant customers by
acquirers with existing fund services capabilities. The Company also
recorded an additional tax valuation allowance of $5.2 million for
deferred tax assets associated with tax loss carryforwards arising from
the European mutual fund services operations as the Company believes the
deferred tax assets will not be realized.
Based on internal analysis and discussions with counsel on the status of
various litigation matters and contract disputes, the Company recorded a
charge of approximately $2.8 million during the six months ended December
31, 2003 related to breach of contract claims in the life insurance
services business. The total amount of the charge includes an estimated
resolution amount and actual legal fees incurred. The Company intends to
continue to vigorously defend the claims asserted and has asserted a
number of counterclaims.
6. GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The changes in carrying amount of goodwill by business segment for the six
months ended December 31, 2004 were as follows:
Investment Insurance Information
Services Services Services Total
---------- ---------- ------------- ----------
Balance, June 30, 2004 $ 311,191 $ 455,597 $ 35,390 $ 802,178
Additions - - - -
Adjustments to previous acquisitions - - - -
---------- ---------- ------------- ----------
Balance, December 31, 2004 $ 311,191 $ 455,597 $ 35,390 $ 802,178
========== ========== ============= ==========
10
INTANGIBLE ASSETS
At December 31, 2004, acquired intangible assets were comprised of the
following:
Gross Carrying Accumulated
Amount Amortization Net Book Value
-------------- ------------ --------------
Customer related $ 213,421 $ (57,099) $ 156,322
Noncompete agreements 46,504 (19,808) 26,696
Other 22,695 (8,851) 13,844
---------- ---------- ----------
Total $ 282,620 $ (85,758) $ 196,862
========== ========== ==========
At June 30, 2004, acquired intangible assets were comprised of the
following:
Gross Carrying Accumulated
Amount Amortization Net Book Value
-------------- ------------ --------------
Customer related $ 218,621 $ (51,571) $ 167,050
Noncompete agreements 46,504 (17,066) 29,438
Other 22,695 (7,885) 14,810
---------- ---------- ----------
Total $ 287,820 $ (76,522) $ 211,298
========== ========== ==========
All of the Company's acquired intangible assets are subject to
amortization. Amortization expense for acquired intangible assets was $7.0
million and $14.1 million for the three and six months ended December 31,
2004 and $27.0 million for the year ended June 30, 2004. Estimated annual
amortization expense is $28.1 million in fiscal 2005, $27.0 million in
fiscal 2006, $25.7 million in fiscal 2007, $24.9 million in fiscal 2008,
and $22.8 million in fiscal 2009.
7. BORROWINGS
In March 2004, the Company entered into a senior unsecured credit
facility. The $400 million facility contains a $300 million revolving line
of credit facility and a $100 million term loan. The facility, which
expires March 31, 2008, supports working capital requirements, repurchases
of the Company's common stock, and the funding of future acquisitions.
Outstanding borrowings under the credit facility bear interest at prime
or, at the Company's option, LIBOR plus a margin. The margin will not
exceed 1.45% on the revolving component and 1.75% on the term loan
component based upon the ratio of the Company's consolidated indebtedness
to consolidated earnings before interest expense, taxes, depreciation, and
amortization. The credit agreement requires the Company to pay an annual
facility fee on the $300 million revolving credit, not to exceed 0.30% or
$900,000. The facility is guaranteed by certain subsidiaries of The BISYS
Group, Inc.
The credit agreement requires the Company to maintain certain financial
covenants and limits the Company's ability to incur future indebtedness
and to pay dividends. As of December 31, 2004, no amounts were permitted
for the payment of cash dividends.
The Company may borrow under the revolving credit facility through March
2008 up to $300 million, reduced by any outstanding letters of credit
($2.6 million at December 31, 2004). The $100 million term loan has
quarterly principal payments commencing on June 30, 2005 with a final
maturity of March 31, 2008. Interest is payable quarterly for prime rate
borrowings or at maturity for LIBOR borrowings, which range from 30 to 180
days. At December 31, 2004, the weighted average interest rate of the
credit facility borrowings was 3.44%.
Long-term debt also includes $300 million of 4% convertible subordinated
notes due March 2006.
11
Debt outstanding at December 31, 2004 and June 30, 2004 is as follows:
December 31, 2004 June 30, 2004
----------------- -------------
Senior credit facility, term loan, at a rate
of 3.438% and 2.625%, respectively $ 100,000 $ 100,000
Senior credit facility, revolving line of
credit, at a rate of 2.275% - 66,000
Convertible subordinated 4% notes 300,000 300,000
----------------- -------------
400,000 466,000
Less amounts due within one year 18,750 72,250
----------------- -------------
Long-term debt $ 381,250 $ 393,750
================= =============
Long-term debt repayments at December 31, 2004 are due as follows:
2006 $ 312,500
2007 31,250
2008 37,500
---------
$ 381,250
=========
8. SEGMENT INFORMATION
The Company's segments are separately managed strategic business units
that offer different products and services. The Investment Services
segment provides outsourcing services, including administration and
distribution, to domestic and offshore mutual fund complexes, hedge funds
and private equity funds and retirement plan services to small to mid-size
retirement plans. The Insurance Services segment provides distribution
solutions for commercial property and casualty, annuities, life, long-term
care, disability and special risk insurance products; offers certification
and continuing education training for insurance and investment
professionals; and provides licensing-related software products and
services. The Information Services segment provides information
processing, imaging, and corporate financial solutions to banks, insurance
companies and corporate clients.
The following table sets forth revenue and operating income by business
segment for the three and six months ended December 31, 2004 and 2003.
Measures used to assess segment performance include revenues and operating
earnings, exclusive of restructuring, impairment and other charges.
Segment operating earnings exclude restructuring, impairment and other
charges since they are not allocated to the segments for internal
evaluation purposes. While these items are identifiable to the business
segments, they are not included in the measurement of segment operating
earnings provided to the chief operating decision maker for purposes of
assessing segment performance and decision making with respect to resource
allocation.
12
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenue:
Investment Services $ 149,195 $ 138,211 $ 298,630 $ 266,382
Insurance Services 73,323 66,488 139,959 122,666
Information Services 53,820 56,682 105,878 108,767
--------- --------- --------- ---------
Total revenue $ 276,338 $ 261,381 $ 544,467 $ 497,815
========= ========= ========= =========
Segment operating income:
Investment Services $ 18,500 $ 16,457 $ 36,768 $ 32,870
Insurance Services 14,275 13,841 26,266 24,301
Information Services 12,258 14,839 23,832 27,726
--------- --------- --------- ---------
Total segment operating income $ 45,033 $ 45,137 $ 86,866 $ 84,897
========= ========= ========= =========
Corporate expenses $ (8,935) $ (6,160) $ (15,608) $ (11,340)
========= ========= ========= =========
Restructuring, impairment and other charges:
Investment Services $ 2,143 $ 968 $ 2,255 $ 6,406
Insurance Services 222 755 603 6,931
Information Services - 353 - 498
Corporate (15) 75 (20) 940
--------- --------- --------- ---------
Total restructuring, impairment and
other charges $ 2,350 $ 2,151 $ 2,838 $ 14,775
========= ========= ========= =========
Total consolidated operating earnings $ 33,748 $ 36,826 $ 68,420 $ 58,782
========= ========= ========= =========
9. REGULATORY INVESTIGATIONS
On May 17, 2004, the Company announced that it would restate its financial
results for the fiscal years ended June 30, 2003, 2002, and 2001 and for
the quarters ended December 31 and September 30, 2003 in order to record
adjustments for correction of errors resulting from various accounting
matters in the Life Insurance Services division. An amended Annual Report
on Form 10-K for the fiscal year ended June 30, 2003 was filed with the
Securities and Exchange Commission ("SEC") on August 10, 2004 along with
amended Quarterly Reports on Form 10-Q for the quarters ended December 31
and September 30, 2003 to reflect the restated financial results. All
referenced amounts and comparisons in the accompanying condensed
consolidated financial statements, notes and management's discussion and
analysis reflect the balances and amounts on a restated basis. The Audit
Committee of the Company's Board of Directors conducted an independent
investigation into the events and circumstances that resulted in the
restatement and retained independent counsel to assist in such
investigation. The Company notified the SEC in May 2004 of its intention
to restate prior period financial results. Subsequently, the SEC advised
the Company that the SEC is conducting an investigation into the facts and
circumstances related to the restatement. That investigation is ongoing.
The Company has cooperated and intends to continue to cooperate with the
SEC's investigation.
The Company also is responding to SEC investigations and requests for
information related to marketing and distribution arrangements,
performance fees and redemption fees, and an NASD request for information
into market timing and late trading in the mutual fund services business.
Additionally, the Company recently received and is responding to a Letter
of Inquiry from the California Department of Insurance requesting
information on practices related to compensation arrangements with brokers
in the commercial insurance services industry.
10. LEGAL PROCEEDINGS
Following the Company's May 17, 2004 announcement regarding the
restatement of its financial results, seven putative class action and two
derivative lawsuits were filed against the Company and certain of its
current and
13
former officers in the United States District Court for the Southern
District of New York. By order of the Court, all but one of the putative
class actions have been consolidated into a single action, and on October
25, 2004, plaintiffs filed a consolidated amended complaint. The complaint
purports to be brought on behalf of all shareholders who purchased the
Company's securities between October 23, 2000 and May 17, 2004 and
generally asserts that the Company, certain of its officers, and its
independent auditors allegedly violated the federal securities laws in
connection with the purported issuance of false and misleading information
concerning the Company's financial condition. The complaint seeks damages
in an unspecified amount as well as unspecified equitable/injunctive
relief. On December 23, 2004, the Company and the individual defendants
filed separate motions to dismiss the complaint.
The remaining putative class action purports to be brought on behalf of
all persons who acquired non-publicly traded BISYS securities from the
Company as part of private equity transactions during the period October
23, 2000 to May 17, 2004. The complaint generally asserts that the Company
and certain of its officers allegedly violated the federal securities laws
in connection with the purported issuance of false and misleading
information concerning the Company's financial condition, and seeks
damages in an unspecified amount. On November 29, 2004, plaintiffs filed
an amended complaint. By order of the Court, the defendants' time to
answer the complaint has been extended until resolution of the motion to
dismiss the complaint described in the previous paragraph.
The derivative complaints purport to be brought on behalf of the Company
and generally assert that certain officers and directors are liable for
alleged breaches of fiduciary duties, abuse of control, gross
mismanagement, waste, and unjust enrichment that purportedly occurred
between October 23, 2000 and the present. The derivative complaints seek
disgorgement, constructive trust, and damages in an unspecified amount.
The Court has ordered that the derivative actions be consolidated into a
single action. On November 24, 2004, plaintiffs filed a consolidated
amended complaint. On January 24, 2005, the Company and the individual
defendants filed separate motions to dismiss the complaint.
The Company intends to defend itself vigorously against these claims but
is unable to determine the ultimate outcome.
11. SUBSEQUENT EVENTS
On January 7, 2005, the Company acquired RK Consulting, a New Jersey-based
provider of investment fund administration services to the hedge fund and
private equity industries. The acquisition of RK Consulting complements
and expands the Company's Alternative Investment businesses. The Company
purchased the assets of RK Consulting for cash consideration of
approximately $83 million.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
We provide outsourcing solutions that enable investment firms, insurance
companies, and banks to more efficiently serve their customers, grow their
businesses, and respond to evolving regulatory requirements. We currently
support over 1,000 clients in the financial services industry through
three business segments: Investment Services, Insurance Services, and
Information Services.
Our segments are separately managed strategic business units that offer
different products and services. The Investment Services segment provides
outsourcing services, including administration and distribution, to
domestic and offshore mutual fund complexes, hedge funds and private
equity funds and retirement plan services to small to mid-size retirement
plans. The Insurance Services segment provides distribution solutions for
commercial property and casualty, annuities, life, long-term care,
disability and special risk insurance products; offers certification and
continuing education training for insurance and investment professionals;
and provides licensing-related software products and services. The
Information Services segment provides information processing, imaging, and
corporate financial solutions to banks, insurance companies and corporate
clients.
Our growth strategy emphasizes internal revenue growth, supplemented by
acquisitions of complementary businesses. Our objectives in the near term
are to focus on internal revenue growth and margin expansion, improve
customer service performance to achieve higher retention, and further
invest in the development of our associates. We endeavor to expand the
scope of our services through focused account management, emphasizing
services with recurring revenues and long-term contracts. We achieve
internal revenue growth and expand our business base through organic
growth of our clients, sales of additional products and services to
existing clients, and direct sales to new clients.
RESULTS OF OPERATIONS
The following table presents the percentage of revenues represented by
each item in our condensed consolidated statements of income for the
periods indicated:
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
2004 2003 2004 2003
------- ------- ----- -------
Revenues 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Service and operating 64.3 63.6 64.7 63.5
Selling, general and administrative 20.1 18.9 19.6 19.2
Amortization of intangible assets 2.5 2.6 2.6 2.5
Restructuring, impairment and other charges 0.9 0.8 0.5 3.0
---- ---- ---- -----
Total operating costs and expenses 87.8 85.9 87.4 88.2
---- ---- ---- -----
Operating earnings 12.2 14.1 12.6 11.8
Interest income 0.2 0.1 0.2 0.1
Interest expense (1.6) (1.8) (1.8) (1.9)
Investment gains 1.6 - 1.6 -
---- ---- ---- -----
Income before income taxes 12.4 12.4 12.6 10.0
Income taxes 4.5 4.6 4.6 4.8
---- ---- ---- -----
Net income 7.9% 7.8% 8.0% 5.2%
==== ==== ==== =====
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2004 WITH THE THREE MONTHS
ENDED DECEMBER 31, 2003
Revenues increased 6% from $261.4 million for the three months ended
December 31, 2003 to $276.3 million for the three months ended December
31, 2004. This growth was derived from sales to new clients, existing
client growth, cross sales to existing clients, and recently acquired
businesses. Internal revenue growth approximated 5% for the three months
ended December 31, 2004 over the same period last year.
15
Service and operating expenses increased 7% from $166.3 million for the
three months ended December 31, 2003 to $177.8 million for the three
months ended December 31, 2004 and increased as a percentage of revenues
from 63.6% to 64.3%. The dollar and percentage increases resulted from
additional costs associated with greater revenues, lower margins in the
Information Services segment and changes in the mix of our business.
Selling, general and administrative expenses increased 12% from $49.4
million for the three months ended December 31, 2003 to $55.5 million for
the three months ended December 31, 2004 and increased as a percentage of
revenues from 18.9% to 20.1%. The percentage increase was primarily due to
additional expenses of over $2.0 million related to the ongoing SEC
investigation in our Fund Services business, Sarbanes Oxley implementation
costs, and other legal and accounting fees.
Investment gains of $4.3 million were realized during the three months
ended December 31, 2004 from the sale of the remaining portion of an
investment we held in the common stock of another publicly traded company.
The income tax provision of $12.3 million for the three months ended
December 31, 2004 increased from $12.1 million for the three months ended
December 31, 2003, due to higher taxable income. The provision represents
an effective tax rate, excluding the impact of restructuring, impairment
and other charges, of 36.0% and 37.25% for the periods ended December 31,
2004 and 2003, respectively. The decrease in the effective tax rate is
primarily due to the mix of business in foreign tax jurisdictions, which
have lower tax rates. At December 31, 2004, deferred income taxes of $7.7
million have not been provided on the undistributed earnings of foreign
subsidiaries as such earnings will continue to be reinvested in the
foreseeable future. However, the Company is presently evaluating the
provisions of the recently enacted American Jobs Creation Act of 2004,
which includes a temporary incentive for U.S. multinationals to repatriate
foreign earnings at a substantially reduced effective tax rate. At this
time, management is not in a position to determine if, and to what extent,
foreign earnings will be repatriated. Management expects to complete its
evaluation by the end of the current fiscal year.
Operating earnings, before restructuring, impairment and other charges,
resulted in margins of 13.1% and 14.9% for the three months ended December
31, 2004 and 2003, respectively. The margin decrease was primarily the
result of a margin decline in the Information Services segment due to an
acquisition-related client loss and additional corporate expenses
attributable to an SEC investigation, Sarbanes Oxley implementation costs,
and other legal and accounting fees.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2004 WITH THE SIX MONTHS ENDED
DECEMBER 31, 2003
Revenues increased 9% from $497.8 million for the six months ended
December 31, 2003 to $544.5 million for the six months ended December 31,
2004. This growth was derived from sales to new clients, existing client
growth, cross sales to existing clients and recently acquired businesses.
Internal revenue growth approximated 8% for the six months ended December
31, 2004 over the same period last year.
Service and operating expenses increased 11% from $316.2 million for the
six months ended December 31, 2003 to $352.1 million for the six months
ended December 31, 2004 and increased as a percentage of revenues from
63.5% to 64.7%. The dollar and percentage increase resulted from
additional costs associated with greater revenues, lower margins in the
Information Services segment, expenses associated with adding new clients,
and changes in the mix of our business.
Selling, general and administrative expenses increased 12% from $95.5
million for the six months ended December 31, 2003 to $106.9 million for
the six months ended December 31, 2004 and increased as a percentage of
revenues from 19.2% to 19.6%. The dollar and percentage increases resulted
from additional costs associated with greater revenues and additional
corporate expense of more than $3 million attributable to the ongoing SEC
investigation in our Fund Services division, Sarbanes Oxley implementation
costs, and other legal and accounting fees.
Amortization of intangible assets increased $1.6 million for the six
months ended December 31, 2004 over the same period last year due to a
higher level of intangible assets associated with recently acquired
businesses and customer contracts.
16
Investment gains of $8.5 million were realized during the six months ended
December 31, 2004 from the sale of an investment we held in the common
stock of another publicly traded company.
The income tax provision of $25.1 million for the six months ended
December 31, 2004 increased from $23.8 million for the six months ended
December 31, 2003. The provision represents an effective tax rate,
excluding the impact of restructuring, impairment and other charges, of
36.5% and 37.25% for the six months ended December 31, 2004 and 2003,
respectively. The decrease in the effective tax rate is primarily due to
the mix of business in foreign tax jurisdictions, which have lower tax
rates.
Operating earnings, before restructuring, impairment and other charges,
resulted in margins of 13.1% and 14.8% for the six months ended December
31, 2004 and 2003, respectively. The margin decrease was primarily the
result of a margin decline in the Information Services segment due to an
acquisition-related client loss and additional corporate expenses.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
FISCAL 2005
During the three and six months ended December 31, 2004, we recorded
pre-tax restructuring, impairment and other charges of $2.4 million and
$2.8 million, respectively, as follows:
Three Months Ended Six Months Ended
December 31, 2004 December 31, 2004
------------------ -----------------
Restructuring charges $ 1,103 $ 1,210
Impairment charges 1,025 1,025
Litigation and other charges 222 603
----------- -----------
Total restructuring, impairment and other charges $ 2,350 $ 2,838
=========== ===========
Restructuring charges of $1.2 million during the six months ended December
31, 2004 were related to the completion of the restructuring of the
European mutual fund services operations and were comprised of severance
totaling $0.2 million and lease termination costs of $1.2 million, offset
by reversals and currency translation gains of $0.2 million. The following
summarizes activity with respect to restructurings for the six months
ended December 31, 2004:
Restructuring accrual at June 30, 2004 $ 3,849
--------
Expense provision:
Employee severance 263
Facilities 1,190
Reversals (133)
Currency translation gain (110)
--------
Total 1,210
--------
Cash payments and other 3,401
--------
Remaining accrual at December 31, 2004:
Employee severance 90
Facility closure 1,568
--------
Total $ 1,658
--------
We recorded asset impairment charges of $1.0 million during the three
months ended December 31, 2004 related to other than temporary declines in
the value of memberships in the New York and Boston Stock exchanges
included in other assets on the accompanying condensed consolidated
balance sheets.
17
FISCAL 2004
During the three and six months ended December 31, 2003, we recorded
pre-tax restructuring, impairment and other charges of $2.2 million and
$14.8 million, respectively, as follows:
Three Months Ended Six Months Ended
December 31, 2003 December 31, 2003
------------------ -----------------
Restructuring charges $ 1,950 $ 7,413
Impairment charges - 4,515
Litigation and other charges 201 2,847
--------- ---------
Total restructuring, impairment and other charges $ 2,151 $ 14,775
========= =========
The charges relate to the integration, consolidation, and reorganization
of certain business operations, particularly in the Company's European
Fund Services division and the Insurance Services group, and the recording
of an estimated charge for litigation expenses.
For the six months ended December 31, 2003, restructuring charges of $7.4
million were comprised of severance totaling $6.1 million and lease
termination costs of $1.3 million. Severance charges resulted from the
termination of approximately 330 employees representing all levels of
staffing. In connection with our restructuring activities, we recorded
asset impairment charges of $4.5 million in the second quarter of fiscal
2004. Of these charges, $3.9 million relates to impairment of an
intangible asset and other long-lived assets as a result of our plan to
restructure our European mutual fund services operations and to exit
certain European locations following the acquisition of two of our
significant customers by acquirers with existing fund services
capabilities. We also recorded an additional tax valuation allowance of
$5.2 million for deferred tax assets associated with tax loss
carryforwards arising from the European mutual fund services operations as
we believe the deferred tax assets will not be realized.
Based on internal analysis and discussions with counsel on the status of
various litigation matters and contract disputes, we recorded a charge of
approximately $2.8 million during the six months ended December 31, 2003
related to breach of contract claims in the life insurance services
business. The total amount of the charge includes an estimated resolution
amount and actual legal fees incurred. We intend to continue to vigorously
defend the claims asserted and have asserted a number of counterclaims.
SEGMENT INFORMATION
The following table sets forth revenue and operating income by business
segment and for corporate operations for the three and six months ended
December 31, 2004 and 2003. Measures used to assess segment performance
include revenues and operating earnings, exclusive of restructuring,
impairment and other charges. Segment operating earnings exclude
restructuring, impairment and other charges since they are not allocated
to the segments for internal evaluation purposes. While these items are
identifiable to the business segments, they are not included in the
measurement of segment operating earnings provided to the chief operating
decision maker for purposes of assessing segment performance and decision
making with respect to resource allocation.
18
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenue:
Investment Services $ 149,195 $ 138,211 $ 298,630 $ 266,382
Insurance Services 73,323 66,488 139,959 122,666
Information Services 53,820 56,682 105,878 108,767
--------- --------- --------- ---------
Total revenue $ 276,338 $ 261,381 $ 544,467 $ 497,815
========= ========= ========= =========
Operating income (loss):
Investment Services $ 18,500 $ 16,457 $ 36,768 $ 32,870
Insurance Services 14,275 13,841 26,266 24,301
Information Services 12,258 14,839 23,832 27,726
Corporate (8,935) (6,160) (15,608) (11,340)
--------- --------- --------- ---------
Total operating income $ 36,098 $ 38,977 $ 71,258 $ 73,557
========= ========= ========= =========
Restructuring, impairment and other charges:
Investment Services $ 2,143 $ 968 $ 2,255 $ 6,406
Insurance Services 222 755 603 6,931
Information Services - 353 - 498
Corporate (15) 75 (20) 940
--------- --------- --------- ---------
Total restructuring, impairment and other
charges $ 2,350 $ 2,151 $ 2,838 $ 14,775
========= ========= ========= =========
Total consolidated operating earnings $ 33,748 $ 36,826 $ 68,420 $ 58,782
========= ========= ========= =========
Internal revenue growth (excluding acquisitions) for Investment Services,
Insurance Services, and Information Services approximated 8%, 9%, and
(5)%, respectively, during the three months ended December 31, 2004 over
the same period last year. A substantial portion of our revenues,
especially in the Investment and Information Services business segments,
are recurring in nature and are derived from long-term customer contracts
with terms that generally average from three to five years.
Revenue in the Investment Services business segment increased $11.0
million, or 8.0%, during the three months ended December 31, 2004, over
the same period last year. The revenue increase was primarily due to the
addition of several new clients and increased assets under administration.
Operating income in the Investment Services business segment increased
$2.0 million, or 12.4%, during the fiscal second quarter. Operating
margins were 12.4% and 11.9% for the three months ended December 31, 2004
and 2003, respectively. The margin increased primarily due to faster
growth in the higher margin Hedge Fund and Private Equity businesses. For
fiscal year 2005, margins in the Investment Services segment are expected
to expand modestly and internal revenue growth is expected to be in the
range of 6% to 9%. The projected rate of internal revenue growth reflects
the loss of a significant Fund Services client in the second half of the
fiscal year representing approximately $30 million of annualized revenue.
The loss of the customer was the result of the acquiring entity's decision
to use its in-house solution to service the acquired client.
Revenue in the Insurance Services business segment increased $6.8 million,
or 10.3%, during the three months ended December 31, 2004, over the same
period last year. The revenue increase was primarily from strong growth in
the Commercial Insurance business and from the acquisition of USA
Insurance Group in November 2003. Operating income in the Insurance
Services business segment increased $0.4 million, or 3.1%, during the
fiscal second quarter. Operating margins were 19.5% and 20.8% for the
three months ended December 31, 2004 and 2003, respectively. The margin
decrease was primarily due to additional investments in sales support,
customer service, finance, and IT resources. For fiscal year 2005,
internal revenue growth is expected to be positive, and margins in the
Insurance Services business segment are expected to be in the range of 17%
to 19%.
Revenue in the Information Services business segment decreased $2.9
million, or 5.1%, during the three months ended December 31, 2004, over
the same period last year. The revenue decrease was due to an
acquisition-related loss of a major customer in the latter half of fiscal
2004, offset by existing client growth, cross sales of ancillary products
and services to existing clients, and sales to new clients. Operating
income in
19
the Information Services business segment decreased $2.6 million, or
17.4%, during the fiscal second quarter. Operating margins were 22.8% and
26.2% for the three months ended December 31, 2004 and 2003, respectively.
The margin decrease was primarily due to decreasing revenue and ongoing
investments in the growth of several new products. For fiscal year 2005,
margins in the Information Services business segment are expected to
decline by approximately 400 basis points, and revenue is expected to be
lower than fiscal 2004 due to the loss of a major customer that was
acquired and deconverted in the latter half of fiscal 2004.
Corporate operations represent charges for our human resources, legal,
accounting and finance functions, and various other unallocated overhead
charges. Corporate expenses of $8.9 million for the three months ended
December 31, 2004 increased from $6.2 million in the same period last year
primarily due to additional expenses of more than $2 million related to
the ongoing SEC investigation in our Fund Services division, Sarbanes
Oxley implementation costs, and other legal and accounting fees. We
anticipate incurring additional legal expenses for investigatory matters
of approximately $6 million to $9 million during the second half of the
fiscal year.
FINANCIAL CONDITION
At December 31, 2004 and June 30, 2004, we had cash and cash equivalents
of $144.6 million and $139.9 million, respectively. Cash and cash
equivalents held outside the U.S. at December 31, 2004 and June 30, 2004
amounted to $51.0 million and $50.9 million, respectively. Stockholders'
equity was $818.7 million and $785.0 million at December, 2004 and June
30, 2004, respectively.
Capital expenditures were $14.8 million for the six months ended December
31, 2004 and are expected to approximate $30 to $35 million for fiscal
year 2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had no outstanding borrowings against our $300
million revolving credit facility and a $100 million term loan outstanding
under the credit facility. The term loan bears interest at LIBOR plus a
margin of 1.00%, resulting in a weighted average interest rate of 3.44%
under the facility at December 31, 2004. The facility is used to support
our working capital requirements, repurchase our common stock, and fund
our future acquisitions. At December 31, 2004, we had $2.6 million
outstanding in letters of credit and $300 million of outstanding 4%
convertible subordinated notes due March 2006. Our debt ratio (total
debt/total debt plus equity) is 0.33 at December 31, 2004, and our maximum
debt ratio may not exceed 0.50 under the terms of the revolving credit
facility. At December 31, 2004, we were in compliance with all financial
covenants required by the credit facility.
We manage our debt structure and interest rate risk through the use of
fixed- and floating-rate debt. While changes in interest rates could
decrease interest income or increase interest expense, we do not believe
that it has a material exposure to changes in interest rates based on the
relative size of our interest bearing assets and liabilities. We do not
undertake any specific actions concerning exposure to interest rate risk,
and we are not party to any interest rate management transactions.
Our strategy includes the acquisition of complementary businesses financed
by a combination of internally generated funds, borrowings from the
revolving credit facility, long-term debt and common stock. Our policy is
to retain earnings to support future business opportunities, rather than
to pay dividends. We have historically used a significant portion of our
cash flow from operations to fund acquisitions and capital expenditures,
with any remainder used to reduce outstanding borrowings under the credit
facility or repurchase our own common stock. We believe that our cash flow
from operations, together with other available sources of funds, will be
adequate to meet our funding requirements. In the event that we make
significant future acquisitions, however, we may raise funds through
additional borrowings or the issuance of securities.
Accounts receivable represented 43 and 42 days sales outstanding (DSO) at
December 31, 2004 and 2003, respectively, based on quarterly revenues. The
calculation of DSO for accounts receivable excludes insurance premiums and
commissions receivable arising from our insurance-related businesses. DSO
is less relevant for this type of receivable because it includes premiums
that are ultimately remitted to the insurer and not recognized as revenue.
Additionally, certain life insurance commissions due from insurance
carriers have customary payment terms of up to twelve months. We regularly
evaluate our accounts receivable position relative to our revenues and
monitor our accounts receivable aging as part of managing our receivable
portfolio. Credit risk is generally mitigated by reasonably short payment
terms, the nature of our customers
20
(i.e., commercial banks, mutual funds, and insurance carriers) and our
large and diverse customer base. We generally do not require collateral
for accounts receivable.
For the six months ended December 31, 2004, operating activities provided
cash of $78.3 million, primarily as a result of net income of $43.6
million, depreciation and amortization of $32.0 million, and deferred
income taxes of $13.9 million, offset by investment gains of $8.5 million
and changes in working capital items of $5.4 million. Investing activities
provided cash of $0.3 million, including $14.8 million of proceeds from
the sale of investments, offset by capital expenditures of $14.8 million.
Financing activities used cash of $73.9 million, comprised of repurchases
of our stock of $15.8 million and net payments of short-term borrowings of
$66.0 million, offset by proceeds from exercise of stock options of $3.5
million and repayment of notes receivable from shareholders of $4.4
million.
Repurchases of the Company's common stock have occurred and are expected
to continue to occur from time to time in the open market to offset the
possible dilutive effect of shares issued under employee benefit plans,
for possible use in future acquisitions, and for general and other
corporate purposes. The following table presents stock repurchase activity
during the six months ended December 31, 2004 and the year ended June 30,
2004 under programs authorized by the Board of Directors, disclosing total
shares repurchased under each program and the associated cost. Upon
authorization of each new stock repurchase program, the former program is
superseded and replaced.
Six Months Ended Year Ended
December 31, 2004 June 30, 2004
----------------------- ----------------------
Shares Cost Shares Cost
-------- --------- -------- --------
Share Repurchase Programs:
$100 million, authorized August 2002 - $ - 3,158 $ 46,153
$100 million, authorized November 2003 1,135 15,820 869 13,565
----- --------- ----- --------
Total Stock Repurchases 1,135 $ 15,820 4,027 $ 59,718
===== ========= ===== ========
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain
forward-looking statements that are based on management's current
expectations, estimates, forecasts and assumptions concerning future
events. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of management.
These statements are subject to numerous known and unknown risks,
uncertainties and assumptions that could cause actual events or results to
differ materially from those projected. Words such as "believes,"
"anticipates," "expects," "intends," "estimates, "projects," "plans,"
"targets," and variations of such words and similar expressions are
intended to identify such forward-looking statements. Except as required
under the federal securities laws and the rules and regulations of the
Securities and Exchange Commission (SEC), we do not undertake any
obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events, changes in
assumptions or otherwise. Although we believe that its plans, intentions,
and expectations reflected in or suggested by the forward-looking
statements made in this report are reasonable, there can be no assurance
that such plans, intentions or expectations will be achieved.
The risks, uncertainties and assumptions include: achieving planned
revenue growth in each of our business units; renewal of material
contracts in our business units consistent with past experience;
successful and timely integration of significant businesses acquired by us
and realization of anticipated synergies; increasing price, products, and
services competition by U.S. and non-U.S. competitors, including new
entrants; changes in U.S. and non-U.S. governmental regulations; the
timely implementation of our restructuring programs and financial plans;
general U.S. and non-U.S. economic and political conditions, including the
global economic environment and interest rate and currency exchange rate
fluctuation; continuing development and maintenance of appropriate
business continuity plans for our processing systems; absence of
consolidation among client financial institutions or other client groups;
timely conversion of new customer data to our platforms; attracting and
retaining qualified key employees; no material breach of security of any
of our systems; control of costs and expenses; continued availability of
financing, and financial resources on the terms required to support our
future business endeavors; the mix of products and services; compliance
with the covenants and restrictions of our bank credit facility and
convertible subordinated notes indenture; and the outcome of pending and
future litigation and governmental or regulatory proceedings.
21
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.
22
ITEM 4. CONTROLS AND PROCEDURES
As previously disclosed, we engaged in a review and analysis of estimates used
in determining the level of commissions receivable in our Life Insurance
Services division. As a result of our efforts, we determined that an adjustment
to commissions receivable in our Life Insurance division, together with
corresponding adjustments to revenues and expenses, should be recorded and
reflected in a restatement of our prior period financial results. In connection
with the aforementioned review, we also identified adjustments relating to
acquisition accounting for certain acquired entities in the Life Insurance
business, resulting in a reduction in goodwill and deferred tax liabilities over
the affected periods, and adjustments to commissions payable as a result of an
understatement in agent commissions payable. These adjustments were also
reflected in the restatement of our prior period financial results. In addition,
in reviewing our past practices, procedures and processes, we have determined
that there needs to be revisions to such practices, procedures and processes. In
this regard, we concluded there was a material weakness in our internal controls
over financial reporting relating to the validation and monitoring of
assumptions underlying the estimates used to compute certain first year, bonus
and renewal commissions receivable and with respect to related documentation and
review processes for significant accounting entries, including entries relating
to acquisition accounting.
To date, we have taken steps to improve our internal controls at our Life
Insurance Services division, including the following:
- Added personnel to the accounts receivable department to allow for
more timely reconciliation and adjustment of aged accounts
receivable and related agent payable accounts;
- Added senior management personnel to the finance staff focused on
financial accounting, financial reporting and financial controls;
- Enhanced processes for reviewing and monitoring reserves for
commissions receivable;
- Augmented review of commission revenue transactions to ensure
adherence to our revenue recognition policies;
- Improved process for documentation and review of significant
accounting entries and balance sheet account reconciliations;
- Initiated system enhancements to further automate processes
associated with cash receipts, accounts receivable and revenue
recognition; and
- Implemented systematic review of data quality and control.
We intend to continue to monitor our internal controls, and if further
improvements or enhancements are identified, we will take steps to implement
such improvements or enhancements. Except as set forth above, there have been no
changes in our internal controls over financial reporting, which have materially
affected, or are reasonably likely to materially affect, such internal controls.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports, filed pursuant to the
Securities Exchange Act of 1934, is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
We carried out an evaluation as of the end of the period covered by this report
on Form 10-Q, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing and upon
taking into consideration the steps described above to remediate the noted
material weakness, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.
It should be noted that the design of any system of controls is based upon
certain assumptions about the likelihood of future events, and there can be no
assurance that such design will succeed in achieving its stated objective under
all potential future conditions, regardless of how remote. However, the
Company's Chief Executive Officer and the Company's Chief Financial Officer
believe the Company's disclosure controls and procedures provide reasonable
assurance that the disclosure controls and procedures are effective.
23
PART II
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
(e) Issuer Purchases of Equity Securities
(c) Total Number of (d) Approximate
Shares Purchased as Dollar Value of
Part of Publicly Shares that May Yet
(a) Total Number of (b) Average Price Paid Announced Plans or Be Purchased Under
Period Shares Purchased per Share Programs the Plans or Programs
- ------------- ------------------- ---------------------- ------------------- ---------------------
October 2004 492,829 $ 14.10 492,829 $ 70,731,750
November 2004 - - - $ 70,731,750
December 2004 7,017 $ 16.58 7,017 $ 70,615,408
Total 499,846 $ 14.14 499,846 $ 70,615,408
Effective November 12, 2003, the Board of Directors authorized a
stock buy-back program of up to $100 million. Purchases have
occurred and will continue to occur from time to time in the open
market to offset the possible dilutive effects of shares issued
under employee benefit plans, for possible use in future
acquisitions, and for general and other corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held on
November 11, 2004, the Stockholders approved the following matters:
1. Election of the seven 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 79,075,693
Robert J. Casale 107,800,578
Thomas A. Cooper 104,996,956
Russell P. Fradin 108,212,838
Richard J. Haviland 107,831,231
Paula G. McInerney 105,981,585
Joseph J. Melone 108,295,224
For Against Abstain
--- ------- -------
2. Approval of the 2005 Employee Stock
Purchase Plan 95,500,363 1,554,499 27,883
For Against Abstain
--- ------- -------
3. Appointment of PricewaterhouseCoopers LLP as
independent registered public accounting
firm for fiscal year 2005 104,662,934 4,415,864 114,986
24
ITEM 5. OTHER INFORMATION
Legal Proceedings
Our Insurance Services division is involved in litigation with a
West Coast-based distributor of life insurance products, with which
we had a former business relationship. We intend to continue to
vigorously defend the claims asserted and have asserted a number of
counterclaims. We believe that we have adequate defenses against
claims arising in such litigation and that the outcome of this
matter will not have a material adverse effect upon our financial
position, results of operations or cash flows.
Following the Company's May 17, 2004 announcement regarding the
restatement of its financial results, seven putative class action
and two derivative lawsuits were filed against the Company and
certain of its current and former officers in the United States
District Court for the Southern District of New York. By order of
the Court, all but one of the putative class actions have been
consolidated into a single action, and on October 25, 2004,
plaintiffs filed a consolidated amended complaint. The complaint
purports to be brought on behalf of all shareholders who purchased
the Company's securities between October 23, 2000 and May 17, 2004
and generally asserts that the Company, certain of its officers, and
its independent auditors allegedly violated the federal securities
laws in connection with the purported issuance of false and
misleading information concerning the Company's financial condition.
The complaint seeks damages in an unspecified amount as well as
unspecified equitable/injunctive relief. On December 23, 2004, the
Company and the individual defendants filed separate motions to
dismiss the complaint.
The remaining putative class action purports to be brought on behalf
of all persons who acquired non-publicly traded BISYS securities
from the Company as part of private equity transactions during the
period October 23, 2000 to May 17, 2004. The complaint generally
asserts that the Company and certain of its officers allegedly
violated the federal securities laws in connection with the
purported issuance of false and misleading information concerning
the Company's financial condition, and seeks damages in an
unspecified amount. On November 29, 2004, plaintiffs filed an
amended complaint. By order of the Court, the defendants' time to
answer the complaint has been extended until resolution of the
motion to dismiss the complaint described in previous paragraph.
The derivative complaints purport to be brought on behalf of the
Company and generally assert that certain officers and directors are
liable for alleged breaches of fiduciary duties, abuse of control,
gross mismanagement, waste, and unjust enrichment that purportedly
occurred between October 23, 2000 and the present. The derivative
complaints seek disgorgement, constructive trust, and damages in an
unspecified amount. The Court has ordered that the derivative
actions be consolidated into a single action. On November 24, 2004,
plaintiffs filed a consolidated amended complaint. On January 24,
2005, the Company and the individual defendants filed separate
motions to dismiss the complaint.
The Company intends to defend itself vigorously against these claims
but is unable to determine the ultimate outcome.
Regulatory Investigations
We notified the SEC in May 2004 of our intention to restate prior
period financial results. Subsequently, the SEC commenced an
investigation into the facts and circumstances related to the
restatement. That investigation is ongoing. We have cooperated and
intend to continue to cooperate with the SEC's investigation. We
cannot predict when the SEC will conclude its investigation or the
outcome or impact thereof.
The Company also is responding to SEC investigations and requests
for information related to marketing and distribution arrangements,
performance fees and redemption fees, and an NASD request for
information into market timing and late trading in the mutual fund
services business. Additionally, the Company recently received and
is responding to a Letter of Inquiry from the California Department
of Insurance requesting information on practices related to
compensation arrangements with brokers in the commercial insurance
services industry.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
Exhibit 32 - Section 1350 Certifications
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K, dated November 11, 2004, was filed
with the Securities and Exchange Commission to report on the
retirement of Thomas E. McInerney from the Board of Directors.
26
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 9, 2005 By: /s/ James L. Fox
------------------------------------------
James L. Fox
Executive Vice President and Chief
Financial Officer (Duly Authorized Officer)
27
THE BISYS GROUP, INC.
EXHIBIT INDEX
Exhibit No.
(31.1) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(31.2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(32) Section 1350 Certifications
28