10-K/A 1 l09095ae10vkza.txt BISYS GROUP, INC. 10-K/AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2003. 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 incorporation or organization) Identification No.) 90 PARK AVENUE NEW YORK, NEW YORK 10016 (Address of principal executive offices) (Zip Code) 212-907-6000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $0.02 PAR VALUE (Title of Class) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (Title of Class) 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of December 31, 2002: $1,858,851,113. State the aggregate market value of voting stock held by non-affiliates of the Registrant as of September 18, 2003: $2,019,672,796. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of June 30, 2004: 120,677,756 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement, dated October 16, 2003, are incorporated by reference into Part III of this Form 10-K/A. THE BISYS GROUP, INC. FORM 10-K/A JUNE 30, 2003
PAGE ---- Part I Item 1. Business............................................................................... 1 Item 2. Properties............................................................................. 14 Item 3. Legal Proceedings...................................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders.................................... 15 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................................. 15 Item 6. Selected Financial Data................................................................ 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 24 Item 8. Financial Statements and Supplementary Data............................................ 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................ 53 Item 9A. Controls and Procedures ............................................................... 53 Part III Item 10. Directors and Executive Officers of the Registrant..................................... 55 Item 11. Executive Compensation................................................................. 55 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 55 Item 13. Certain Relationships and Related Transactions......................................... 55 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................................. 55
EXPLANATORY NOTE Prior to the issuance of the March 31, 2004 interim financial statements, the Company determined that it was appropriate to restate previously issued financial statements to record adjustments for correction of errors resulting from various accounting matters described herein (see Note 17 to consolidated financial statements included in Item 8 of this Report). The restated financial statements for the fiscal years ended June 30, 2003, 2002 and 2001 are reflected in this Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. Concurrently herewith, the Company is filing its amended Quarterly Reports on Form 10-Q/A for the quarters ended December 31, 2003 and September 30, 2003, to reflect the restated financial statements for those periods. The adjustments reflected in the restatement fall into three general categories: adjustments to commissions receivable in the Life Insurance division, adjustments relating to goodwill and deferred taxes established in acquisition accounting for certain acquired entities in the Life Insurance division, and adjustments to agent commissions payable in the Life Insurance division. Additionally, as a result of the restatement adjustments, adjustments to the computation of deferred tax assets and liabilities were also recorded. The restatement principally arose from the Company's review and analysis of estimates used in determining the level of commissions receivable in the Life Insurance Services division. Based upon this review and analysis, the Company determined that an adjustment of $80.0 million to reduce commissions receivable in its Life Insurance division, together with corresponding adjustments to revenues and expenses, should be recorded and be reflected in a restatement of its financial results for the affected periods, as described above. The adjustment to commissions receivable of $80.0 million is primarily attributable to the over accrual of revenue, based on assumptions underlying the estimates that were subsequently determined to be incorrect. The assumptions were used to compute certain first year, bonus and renewal commissions receivable during the period July 1999 through December 2003. In connection with the aforementioned review, the Company also identified adjustments relating to acquisition accounting for certain acquired entities in the Life Insurance business, resulting in an adjustment to goodwill, deferred taxes and revenue over the affected periods of $21.0 million. This adjustment reflects the recording of commissions receivable as of the date of acquisition to convert the acquired entity from the cash basis to the accrual basis of accounting, resulting in a corresponding downward adjustment to revenue incorrectly accrued following each such acquisition. Additionally, adjustments to commissions payable of $2.6 million, together with corresponding adjustments to net revenues, were identified as a result of an understatement in agent commissions payable. The impact of the restatement on net income for the fiscal years ended June 30, 2003, 2002 and 2001 was a decrease in net income of $13.6 million, $27.2 million and $18.1 million, respectively. This Form 10-K/A amends and restates Items 1 and 3 of Part I; Items 6, 7, 8 and 9A of Part II; and Item 15 of Part IV in the original Form 10-K. All other information contained herein was included in the original Form 10-K, which was filed with the Securities and Exchange Commission on September 19, 2003, and has not been amended or updated hereby. The foregoing items have been amended to reflect the restatement and have not been updated to reflect other events occurring after the filing of the original Form 10-K, or to modify or update those disclosures affected by subsequent events, except for those disclosures provided in Note 18 to consolidated financial statements included in Item 8 of this Report. As a result, we recommend that you read this Form 10-K/A in conjunction with the Company's Form 10-Q for the quarter ended March 31, 2004 (the "March 2004 10-Q"), the Company's periodic reports filed under the Securities and Exchange Act of 1934 (the "Exchange Act") following the filing of the March 2004 10-Q, and all other reports filed under the Exchange Act after the filing of the original 10-K, including, without limitation, the information described in Notes 17 and 18 to consolidated financial statements included in Item 8 of this Report. All referenced amounts in this Form 10-K/A for prior periods and prior period comparisons reflect the balances and amounts on a restated basis. The Company did not amend its Annual Report on Form 10-K or Quarterly Reports on Form 10-Q for periods affected by the restatement that ended prior to June 30, 2003, and the financial statements and related financial information contained in such reports should no longer be relied upon. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report and the documents incorporated by reference in this report contain "forward-looking statements" within the meaning of the securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements other than statements of historical facts included or incorporated by reference in this report, regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, and plans and objectives of management are forward-looking statements. When used in this report or incorporated by reference herein, the words "will," "believe," "anticipate," "intend," "estimate," "expect," "project," "plan," "target" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report and in documents incorporated by reference herein are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Factors that could cause our results to materially differ from our expectations include, but are not limited to, those factors set forth in this report under Item 1 "Business - Risk Factors." The cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. Unless otherwise indicated, all information provided is as of June 30, 2003. PART I ITEM I. BUSINESS. The BISYS(R) Group, Inc., together with its wholly owned subsidiaries, supports more than 20,000 financial institutions and corporate clients with products and services provided through three principal business groups: BISYS Investment Services, BISYS Insurance and Education Services, and BISYS Information Services. We distribute and administer approximately 2,100 mutual funds, hedge funds, private equity funds and other investment products representing more than $650 billion in assets under contract; provide retirement plan recordkeeping services to more than 15,000 companies in partnership with 40 of the nation's leading bank and investment management companies; support approximately 400,000 employers and four million IRA holders with ERISA plan documents and ancillary services; provide life and commercial property/casualty insurance distribution solutions, professional certification training and continuing education, and licensing and compliance-related products and services; and provide information processing and check imaging solutions to approximately 1,450 banks, insurance companies and corporations nationwide. We seek to be our clients' single source for our offered outsourcing solutions and to improve their performance, profitability and competitive position. We endeavor to expand the scope of our services through focused account management, emphasizing services with recurring revenues and long-term contracts. We increase our business base through (i) organic growth of our clients, (ii) sales of additional products and services to existing clients, (iii) direct sales to new clients, and (iv) acquisitions of businesses that provide similar and/or complementary outsourcing solutions to financial organizations and other customers. 1 We were organized in August 1989 to acquire certain banking and thrift data processing operations of Automatic Data Processing, Inc. ("ADP"). Our initial business was established in 1966 by United Data Processing, Inc., the predecessor of the banking and thrift information processing operations of ADP. Together with our predecessors, we have been providing outsourcing solutions to the financial services industry for more than 37 years. We are incorporated under the laws of Delaware, and our principal executive offices are located at 90 Park Avenue, New York, New York 10016 (telephone 212-907-6000). Since our founding in 1989, we have completed more than 40 acquisitions as part of our strategic growth plan. During the last fiscal year, we acquired the following businesses, which now operate as part of BISYS Insurance and Education Services: September 2002 - First Northern Financial Resources, Inc., a Minnesota-based insurance brokerage firm, increasing our market share and potential in the North Central United States; December 2002 - Select Insurance Marketing Corporation, a West Coast-based long-term care insurance brokerage firm, expanding our long-term care insurance product offering and increasing our geographical presence and potential on the West Coast; December 2002 - Career Brokerage, Inc., a New York-based insurance brokerage firm, increasing our market share and potential in New York and broadening our portfolio of insurance products; March 2003 - Capital Synergies, Inc., an insurance brokerage firm, increasing our market presence and potential in strategic geographical areas, including San Francisco, Chicago, Indianapolis, Baltimore, Columbus, Philadelphia and Seattle; March 2003 - Tri-City Insurance Brokerage, Inc. and affiliated companies, a wholesale provider of commercial lines property/casualty insurance products, enabling our entrance into the property/casualty insurance marketplace; and May 2003 - Landau Financial Services, Inc., a Philadelphia-based insurance brokerage firm, increasing our market share and potential in the Northeast and in the impaired risk insurance marketplace. BUSINESS STRATEGY Financial organizations today are challenged to compete more effectively, improve productivity and maximize profits during periods of both economic growth and decline. We provide viable alternatives for automating critical tasks and functions, and provide specific expertise and experience to financial organizations. Through our outsourcing solutions, we assist clients in achieving operational and economic benefits, and provide our clients with opportunities to generate incremental revenues. Our objectives are to increase our client base and to expand the services we offer to them. We seek to be the premier, full-service outsourcing business partner focused on enhancing our clients' growth, profits and performance. We seek to build value for our shareholders by consistently increasing both revenues and earnings per share, through a combination of organic growth from existing clients, cross sales to existing clients, sales to new clients and strategic acquisitions. Five key principles have guided us since our formation and continue to shape our strategy for growth: 2 FOCUS ON CLIENT SERVICE. We seek to thoroughly understand the converging financial services industry and proactively respond to our clients' evolving support requirements. Our industry-recognized client service and rewarding levels of client satisfaction are based on decades of day-to-day experience, sophisticated support tools, and a company-wide commitment to strengthen every client relationship with unsurpassed service. GROW INTERNALLY AND SELL AGGRESSIVELY. We seek to sell our business process outsourcing solutions to new clients and cross sell additional products and services to our existing clients. We intend to continue to focus highly targeted sales initiatives on large and growing markets, and to introduce new business solutions and processing capabilities that will enable our clients to retain and attract customers, and enter new markets. LEVERAGE BUSINESS AND PRODUCT SYNERGIES. We seek to leverage the inherent synergies among our business lines to capitalize on the opportunities generated by the converging segments of the financial services industry. We will continue to seek to acquire companies that provide complementary products and services, new clients and cross-sale opportunities, and expanded geographical presence and potential. LEVERAGE TECHNOLOGICAL ADVANCEMENTS. We seek to continue to enhance our outsourcing platforms by integrating leading-edge products, services and technologies. We will continue to seek to leverage the tremendous power of the Internet to revolutionize how we support global clients and deliver products, services and vital information. OPTIMIZE HUMAN RESOURCES. We value the contribution of our associates who represent every business and technical discipline in the financial services industry. We depend on their collective experience and expertise to sustain our industry leadership and growth. We provide our products and services principally through three major business groups: BISYS Investment Services, BISYS Insurance and Education Services, and BISYS Information Services. These business groups are separately managed, strategic business units and are reported as operating segments. Certain of the business segment information required to be included herein is incorporated herein by reference to Note 16 of our consolidated financial statements included in Item 8 of this Report. BISYS INVESTMENT SERVICES Our Investment Services group provides a broad array of investment services, including mutual fund, hedge fund, private equity fund and retirement plan services. We support approximately 100 domestic and offshore mutual fund clients, representing more than 1,500 registered and non-registered funds, and more than $575 billion in assets. Our fund services include administration and accounting, transfer agency and shareholder services, compliance and regulatory support, and marketing and distribution solutions. Through our Financial Research Corporation (FRC) subsidiary, we also provide the market analytics, research and consulting services financial services firms need to develop and distribute competitive products and services. We are a leading global hedge fund administrator, supporting more than 400 hedge funds, funds of hedge funds and other alternative investments, representing approximately $60 billion in assets. Our full-service hedge fund solution includes fund accounting and valuation, investor and transfer agency services, director and corporate secretarial services, and legal, compliance, and tax support. 3 We are also a leading provider of accounting, administration, advisory and tax services for private equity funds, supporting more than 225 funds with invested capital of approximately $17 billion. Through our relationships with 40 institutional clients, we support more than 15,000 small and mid-size retirement plans and their approximately 1.3 million eligible employees. Our comprehensive retirement plan solution includes prototype plan design and maintenance, administration and recordkeeping, ERISA documents and forms, customized marketing and sales support, and staff training and development. In addition, we provide a turnkey administration and recordkeeping solution for owner-only Individual(k) plans, and support 13 institutional clients and approximately 850 Individual(k) plans. We also support approximately 400,000 employers and four million IRA holders with ERISA documents and ancillary services, and train approximately 12,000 industry professionals annually. BISYS INSURANCE AND EDUCATION SERVICES Our Insurance and Education Services group provides an overall solution for life insurance and commercial property/casualty insurance distribution, and financial services education and licensing automation. We are a leading independent distributor of life insurance and provider of the support services required to sell multiple lines of life-related insurance and annuity products and services. We distribute the products of approximately 200 of the most highly rated insurance companies through approximately 100,000 career and independent insurance agents and financial services professionals. The insurance companies manufacture the insurance products and assume the underwriting risk and full responsibility for the policy benefits, while the agents and financial services professionals work directly with consumers. We support the entire sales process for term and fixed universal life, variable life, long-term care, disability and annuity products with a comprehensive suite of services, including agent licensing, contracting and continuing education, sales support, advanced case design, application processing, medical underwriting support, commission reconciliation, and policy owner services. We also provide a robust insurance administration system and advanced Internet-based capabilities designed to expedite the sales process. We are also a leading independent provider of commercial property/casualty insurance products. We distribute the products of approximately 60 property/casualty insurance companies through approximately 1,200 retail brokers and agents. We support the distribution process with complete sales and back-office support services. We specialize in insurance solutions for complex property and casualty risks, commercial and habitational real estate, such as apartment and condominium complexes, high-limit property capacity and property catastrophe, directors' and officers' liability, errors and omissions liability and employment practices liability. We provide training solutions for insurance and investment professionals, supporting compliance requirements at various stages of career development with more than 215 pre-licensing, continuing education and advanced designation courses. Financial services professionals have enrolled in more than 300,000 of our courses during the past year, which were delivered through traditional instructor-led and self-study programs, or through technology-based alternatives including interactive online and computer-based programs. Our suite of integrated products and services automates the complex insurance licensing and securities registration processes, and facilitates compliance with state and federal regulations. More than 4 600 insurance companies, broker-dealers and banks utilize our integrated, Internet-enabled products and services to automate and track the licensing process. BISYS INFORMATION SERVICES Our Information Services group supports approximately 1,450 banks, insurance companies and corporations with information processing, asset retention solutions, specialized back-office services required to support corporate-sponsored cash management programs and check imaging solutions. Our comprehensive banking platform supports banks with integrated core deposit and lending, commercial and retail services, ATM and debit card processing, electronic and Internet-based banking, branch automation, customer relationship management, executive decision-support tools and document imaging. We also provide a complete imaging platform, enabling our clients to convert paper-based checks into digital or "virtual" checks and process them electronically. The American Bankers Association, through its Corporation for American Banking subsidiary, endorses both our core information processing solution and our check imaging platform on an exclusive basis as the recommended solutions for community banks. Our asset retention and corporate banking solutions leverage our traditional banking services to provide an industry-leading suite of outsourced solutions, including information and transaction processing, and call center services. These services enable life and property/casualty insurance companies to establish ongoing customer relationships with claimants and beneficiaries by offering personalized checking accounts and online debit and stored value cards as alternatives to lump sum payments. Our specialized back-office services also provide complete management for corporate-sponsored cash management programs. We currently enable life and property/casualty insurance companies and corporations to retain more than $13.5 billion in assets. CONTRACTS We provide services to our clients, for the most part and wherever possible, on the basis of long-term contracts that renew for successive terms unless terminated by either party. In our Investment Services group, contracts for distribution services to mutual funds, as required by the Investment Company Act, provide that such contracts may continue for a period longer than two years only if such continuance is specifically approved at least annually by both a majority of the disinterested directors and either the other members of the board of directors or the holders of a majority of the outstanding shares of the fund. Our fee structure for mutual fund, hedge fund and private equity fund clients is, in some cases, based on the average net asset value or invested capital of the fund, subject to minimum charges, and in some cases consists of or includes account-based fees and other fixed charges. Our retirement services fee structure is generally based upon the number of eligible employees or participants in a plan subject to certain minimums, as well as position-based fees based on assets held in the retirement plans we service, and transaction fees. Our retirement services documents and forms are sold on a per unit or annual subscription basis, and our ERISA training and reference services are provided on a fee-for-service basis. In our Insurance and Education Services group, contracts with insurance carriers supplying products for our customers provide for compensation based on a percentage of premiums paid and transaction charges, and are generally cancelable on less than 90 days notice at the discretion of either party. We also maintain long-term contracts with the distribution arms of a number of insurance 5 companies, producer groups, broker-dealers and banks to provide insurance products and services. Our insurance services fee structure is generally based on sharing with our clients a percentage of commissions and/or profits we receive. Our education services products are generally provided to customers on an "as needed" basis pursuant to long-term programs. Our fee structure for licensing solutions clients is generally based on the type of services provided and the number of insurance agents and registered representatives being serviced. In our Information Services group, our fee structure for banking solutions and asset retention clients is based primarily on number of accounts, loans, participants and/or transactions handled for each service, in some cases, subject to minimum charges, plus additional charges or special options, services and features. Our check imaging software is licensed subject to a one-time fee with recurring maintenance fees. Although contract terminations and non-renewals have an adverse effect on recurring revenues, we believe that the contractual nature of our businesses, combined with our historical renewal experience, provides a high level of recurring revenues. CLIENT BASE Our clients are located in all 50 states and several international locations, principally Western Europe, Bermuda and the Cayman Islands. We provide outsourcing solutions to commercial banks, mutual savings institutions, thrift organizations, mutual funds, hedge funds, private equity funds, insurance companies, insurance producer groups, corporate clients and other financial organizations, including investment counselors and brokerage firms. Total revenue from unaffiliated clients located outside the United States for fiscal 2001, 2002 and 2003 was approximately $29.3 million, $36.5 million and $65.5 million, respectively. DISASTER RECOVERY SYSTEMS We have implemented business continuity and disaster recovery plans and procedures for each of our material processing platforms. The key restoration services include off-site storage and rotation of critical files, availability of third-party "hot sites" and telecommunications recovery capability. We continue to modify our business continuity and disaster recovery plans to reflect changes in our operating platforms. Our plans include provisions calling for periodic testing of the plans, in some cases, in cooperation with our clients. SALES, MARKETING AND CLIENT SUPPORT We market our services directly to potential clients. In addition, we support insurance agents and companies, brokerage firms and other entities in their endeavors to gain new clients. We have more than 80 sales offices located throughout the United States. We utilize an account executive staff that provides client account management and support. In accordance with our strategy of providing a single source solution to our clients, the account executive staff also markets and sells additional products and services to existing clients and manages the contract renewal process. Using centralized resources, we provide our direct sales staff and account executives with marketplace data, presentation materials and telemarketing data. We maintain client support personnel that are responsible for day-to-day interaction with clients, and also market our products and services to our existing clients. 6 COMPETITION We believe that the markets for our products and services are highly competitive. We believe that we remain competitive due to several factors, including our overall company strategy and commitment, product quality, reliability of service, a comprehensive and integrated product line, timely introduction of new products and services, and competitive pricing. We believe that, by virtue of our range of product and service offerings, and our overall commitment to client service and relationships, we compete favorably in these categories. In addition, we believe that we have a competitive advantage as a result of our position as an independent vendor, rather than as a cooperative, an affiliate of a financial institution, a hardware vendor or competitor to our clients. Our principal competitors are third-party administration firms, mutual fund companies, brokerage firms, insurance companies, distributors of insurance products, independent vendors of computer software and services, in-house departments, affiliates of financial institutions or large computer hardware manufacturers and processing centers owned and operated as user cooperatives. We believe that no single competitor provides the full range of products and services that we offer. PROPRIETARY RIGHTS We regard certain of our software as proprietary and rely upon trade secret law, internal nondisclosure guidelines and contractual provisions in our license, services and other agreements for protection. Other than one patent relating to our check imaging system, we do not hold any registered patents or registered copyrights on our software. We believe that legal protection of our software is less significant than the knowledge and experience of our management and personnel, and their ability to develop, enhance and market new products and services. We believe that we hold all proprietary rights necessary to conduct our business. Application software similar to that licensed by us is generally available from alternate vendors. In addition, in instances where we believe that additional protection is required, the applicable license agreement provides us with the right to obtain access to the software source code upon the occurrence of certain events. GOVERNMENT REGULATION Certain of our subsidiaries are registered as broker-dealers with the Securities and Exchange Commission ("SEC"). Much of the federal regulation of broker-dealers has been delegated to self-regulatory organizations, principally the National Association of Securities Dealers, Inc. ("NASD") and the national securities exchanges. Broker-dealers are subject to regulation which covers all aspects of the securities business, including sales methods, trading practices, use and safekeeping of customers' funds and securities, capital structure, recordkeeping and the conduct of directors, officers and employees. Additional legislation, changes in rules and regulations promulgated by the SEC, the Municipal Securities Rulemaking Board, the Office of the Comptroller of the Currency ("OCC"), the Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board ("FRB") and the self-regulatory organizations or changes in the interpretation of enforcement of existing laws, rules and regulations may also directly affect the mode of operations and profitability of broker-dealers. The SEC, the FRB, the self-regulatory organizations, state securities law administrators, the OCC and the FDIC may conduct regulatory proceedings for violations of applicable laws, rules and regulations. Such violations can result in disciplinary actions (such as censure, the imposition of fines, the issuance of cease-and-desist orders or the suspension or revocation of registrations, memberships or licenses of a broker-dealer or its officers, directors or employees), as well as civil and criminal penalties. The principal purpose of such 7 regulations generally is the protection of the investing public and the integrity of securities markets, rather than protection of securities firms or their creditors or stockholders. In addition, our broker-dealer subsidiaries are subject to SEC Rule 15c3-1 (commonly known as the "Net Capital Rule"). The Net Capital Rule, which specifies the minimum amount of net capital required to be maintained by broker-dealers, is designed to measure the general financial integrity and liquidity of broker-dealers, and requires that a certain part of broker-dealers' assets be kept in relatively liquid form. Failure to maintain the required minimum amount of net capital may subject a broker-dealer to suspension or revocation of licenses, registration or membership with the New York Stock Exchange, Inc., the SEC, the NASD, and various state securities law administrators, and may ultimately require liquidation of the broker-dealer. Under certain circumstances, the Net Capital Rule also prohibits payment of cash dividends, redemption or repurchase of stock, distribution of capital and prepayment of subordinated indebtedness. Thus, compliance with the Net Capital Rule could restrict our ability to withdraw capital from our broker-dealer subsidiaries. At June 30, 2003, each of our broker-dealer subsidiaries met or exceeded the requisite net capital requirement. At June 30, 2003, our broker-dealer subsidiaries had aggregate net capital of approximately $9.4 million, which exceeded the requirements of the Net Capital Rule by approximately $8.1 million. Under the Investment Company Act of 1940, the distribution agreements between each mutual fund and our subsidiary terminate automatically upon assignment of the agreement. The term "assignment" includes direct assignments by us, as well as assignments which may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling block of our voting securities. The Investment Company Act of 1940 presumes that any transfer of more than 25% of the voting securities of any person represents a transfer of a controlling block of voting securities. Our offshore Fund Services, Hedge Fund Services and Private Equity Services operations are regulated by financial regulatory bodies in their respective jurisdictions. These operating platforms are examined periodically by such regulatory bodies and failure to comply with their rules and regulations can result in disciplinary actions (such as censure, the imposition of fines, the issuance of cease-and-desist orders, or the suspension or revocation of registrations, memberships or licenses of our offshore subsidiaries or its officers, directors or employees), as well as civil and criminal penalties. The principal purpose of such regulations generally is the protection of the investing public and the integrity of securities markets, rather than protection of securities firms or their creditors or stockholders. As a provider of services to banking institutions, we are not directly subject to federal or state banking regulations. However, we are subject to review from time to time by the FDIC, the National Credit Union Association, the Office of Thrift Supervision, the OCC and various state regulatory authorities. These regulators make certain recommendations to us regarding various aspects of our operations. In addition, our processing operations are reviewed annually by an independent auditing firm. Banks and other depository institutions doing business with us are subject to extensive regulation at the federal and state levels under laws, regulations and other requirements specifically applicable to regulated financial institutions, and are subject to extensive examination and oversight by federal and state regulatory agencies. As a result, the activities of our bank clients are subject to comprehensive regulation and examination, including those activities specifically relating to the sale by or through them of mutual funds and other investment products. Federal regulatory agencies have promulgated guidelines or other requirements which apply to depository institutions subject to their respective supervisory jurisdiction with respect to the sale of 8 mutual funds and other non-FDIC insured investment products to retail customers. These requirements apply to, among other things, sales of investment products on bank premises by or through the use of third-party service providers. These requirements generally require banking institutions which contract to sell investment products through the use of third-party service providers to implement appropriate measures to ensure that such activities are being conducted in accordance with applicable bank and securities regulatory requirements (including the agencies' retail sales guidelines), and may in some instances impose certain "due diligence" obligations on regulated depository institutions with respect to the nature and the quality of services provided by such third-party service providers. Such regulatory requirements may increase the extent of oversight which federal regulatory agencies may require our bank clients to exercise over our activities. Federal and state banking laws grant state and federal regulatory agencies broad authority to take administrative enforcement and other adverse supervisory actions against banks and other regulated depository institutions where there is a determination that unsafe and unsound banking practices, violations of laws and regulations, failures to comply with or breaches of written agreements, commitments or undertakings entered into by such banks with their regulatory agencies, or breaches of fiduciary and other duties exist. Banks engaged in, among other things, mutual fund-related activities may be subject to such regulatory enforcement and other adverse actions to the extent that such activities are determined to be unlawful, unsound or otherwise actionable. Certain of our operations are subject to regulation by the insurance departments of the states in which we distribute insurance products. Certain of our employees are required to be licensed as insurance producers in certain states. The Financial Services Modernization Act of 1999 and regulations promulgated thereunder also impose restrictions on financial institutions with respect to the use and disclosure of non-public consumer information. Some of our businesses may be covered entities under the Act and therefore subject to regulations governing privacy of non-public consumer information. In addition, as a service provider to financial institutions, we are required by our customers to safeguard non-public consumer information of their customers that comes into our possession. The USA PATRIOT Act and regulations promulgated thereunder impose certain requirements on our clients and certain of our businesses to establish anti-money laundering programs. These programs are required to include processes for verifying the identities of customers, identifying suspicious transactions and reporting such transactions to the appropriate governmental agency, preventing transactions with individuals in specifically designated countries and checking certain customer names against published lists of terrorist organizations. We are subject to similar laws and regulations in each of the foreign jurisdictions in which we act as a transfer agent. EMPLOYEES As of June 30, 2003, we employed approximately 4,900 employees. None of our employees are represented by a union and there have been no work stoppages, strikes or organization attempts. We believe that our relations with our employees are good. The service nature of our businesses makes our employees an important corporate asset. Most of our employees are not subject to employment agreements, however, a limited number of executives of our operating subsidiaries have such agreements that were entered into in connection with the acquisition of their businesses. 9 AVAILABLE INFORMATION We maintain a website with the address www.bisys.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K/A. We make available, free of charge, through our website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. RISK FACTORS OUR BUSINESS CAN BE SIGNIFICANTLY AFFECTED BY DIRECT AND INDIRECT GOVERNMENTAL REGULATION, WHICH REDUCES OUR FLEXIBILITY AND INCREASES THE COSTS OF DOING BUSINESS. Our business is affected by federal, state and foreign regulations. Our noncompliance with these regulations could result in the suspension or revocation of our licenses or registrations, including broker-dealer licenses and registrations, and insurance producer licenses and registrations. Regulatory authorities could also impose on us civil fines and criminal penalties for noncompliance. Some of our subsidiaries are registered with the Securities Exchange Commission as broker-dealers. Much of the federal regulation of broker-dealers has been delegated to self-regulatory organizations, principally the National Association of Securities Dealers, Inc. and the national securities exchange. Broker-dealers are subject to regulations which cover all aspects of their securities business, including, for example: - sales methods; - trading practices; - use and safekeeping of customers' funds and securities; - capital structure; - recordkeeping; and - the conduct of directors, officers and employees. The operations of our broker-dealers and their profitability could be affected by: - federal and state legislation; - changes in rules and regulations of the SEC, banking and other regulatory agencies, and self-regulatory agencies; and - changes in the interpretation or enforcement of existing laws, rules and regulations. Banks and other depository institutions with whom we do business are also subject to extensive regulation at the federal and state levels under laws and regulations applicable to regulated financial institutions. They are also subject to extensive examination and oversight by federal and state regulatory agencies. Changes in the laws, rules and regulations affecting our client banks and financial institutions, and the examination of their activities by applicable regulatory agencies could adversely affect our results of operations. Some of our subsidiaries, and officers and employees of these subsidiaries, are required to be licensed as insurance producers in various jurisdictions in which we conduct our insurance services business. They are subject to regulation under the insurance laws and regulations of these jurisdictions. 10 Changes in the laws, rules and regulations affecting licensed insurance producers could adversely affect our operations. A portion of our revenues in our Insurance and Education Services group are based on income tax-driven and estate planning-driven sales of life insurance and annuity products. Changes in laws, rules and regulations relating to income taxes and estate taxes could adversely affect this portion of our business. OUR REVENUES AND EARNINGS ARE SUBJECT TO CHANGES IN THE SECURITIES MARKETS. A significant portion of our earnings are derived from fees based on the average daily market value of the assets we administer for our clients. Changes in interest rates or a substantial decline in the securities market could influence an investor's decision whether to invest or maintain an investment in an investment vehicle administered by us. As a result, fluctuations could occur in the amount of assets which we administer. If investors were to seek alternatives to those investment vehicles, it could have a negative impact on our revenues by reducing the amount of assets we administer. Changes in the securities markets could also have a negative impact on demand for our securities training and education products and services. WEAKNESSES IN OUR INTERNAL CONTROLS AND PROCEDURES COULD ADVERSELY IMPACT OUR BUSINESS. Effective internal controls and procedures are critical to our ability to properly process and account for our business. Deficiencies and weaknesses in our internal controls and procedures could have a material adverse effect on our business, financial condition and results of operations. 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. As more fully described in Item 9A of this Report, we have identified 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. Since the identification of the material weakness, we have implemented and are continuing to implement various initiatives intended to improve our internal controls and procedures to address this weakness. No assurance can be given that we will be able to successfully implement all of our revised internal controls and procedures or that our revised controls and procedures will be effective in remedying all of these identified deficiencies in our internal controls and procedures. There also can be no assurances that this material weakness will be rectified or that additional significant deficiencies and/or material weaknesses in our internal controls will not be identified. CONSOLIDATION IN THE BANKING AND FINANCIAL SERVICES INDUSTRY COULD ADVERSELY IMPACT OUR BUSINESS BY ELIMINATING THE NUMBER OF EXISTING AND POTENTIAL CLIENTS. There has been and continues to be merger, acquisition and consolidation activity in the banking and financial services industry. Mergers or consolidations of banks and financial institutions in the future could reduce the number of our clients or potential clients. A smaller market for our services could have a material adverse impact on our business and results of operations. Also, it is possible that the larger banks or financial institutions that result from mergers or consolidations could decide to perform some or all of the services themselves which we currently provide or could provide. If that were to occur, it could have a material adverse impact on our business and our results of operations. 11 OUR ACQUISITION STRATEGY SUBJECTS US TO RISKS, INCLUDING INCREASED DEBT, ASSUMPTION OF UNFORESEEN LIABILITIES AND DIFFICULTIES IN INTEGRATING OPERATIONS. Since our founding, we have acquired a number of other companies. We may make additional acquisitions. We cannot predict if or when any additional acquisitions will occur or whether they will be successful. Acquiring a business involves many risks, including: - incurrence of unforeseen obligations or liabilities; - difficulty in integrating the acquired operations and personnel; - difficulty in maintaining uniform controls, procedures and policies; - possible impairment of relationships with employees and customers as a result of the integration of new personnel; - risk of entering markets in which we have minimal prior experience; - decrease in earnings as a result of non-cash charges; - dilution to existing stockholders from the issuance of our common stock to make or finance acquisitions; and - incurrence of debt. OUR SYSTEMS MAY BE SUBJECT TO INFILTRATION BY UNAUTHORIZED PERSONS. We maintain and process data on behalf of our clients, some of which is critical to the business operations of our clients. For example, our Information Services group maintains account information for our bank and insurance company clients we service, and our Investment Services group maintains transfer agency records and processes trades for our mutual fund clients. If our systems or facilities were infiltrated and damaged by unauthorized persons, our clients could experience data loss, financial loss and significant business interruption. If that were to occur, it could have a material adverse effect on our business, financial condition and results of operations. DISRUPTION OF OUR DISASTER RECOVERY PLANS AND PROCEDURES IN THE EVENT OF A CATASTROPHE COULD ADVERSELY AFFECT OUR OPERATIONS. We have made a significant investment in our infrastructure, and our operations are dependent on our ability to protect the continuity of our infrastructure against damage from catastrophe or natural disaster, breach of security, loss of power, telecommunications failure or other natural or man-made events. A catastrophic event could have a direct negative impact on us or an indirect impact on us by adversely affecting our customers, the financial markets or the overall economy. While we have implemented business continuity and disaster recovery plans, it is impossible to fully anticipate and protect against all potential catastrophes. If our business continuity and disaster recovery plans and procedures were disrupted or unsuccessful in the event of a catastrophe, we could experience a material adverse interruption of our operations. WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES. Many of our competitors are well-established companies, and some of them have greater financial, technical and operating resources than we do. Competition in our business is based primarily upon: 12 - pricing; - quality of products and services; - breadth of products and services; - new product development; and - the ability to provide technological solutions. WE DEPEND ON KEY MANAGEMENT PERSONNEL, MOST OF WHOM DO NOT HAVE LONG-TERM EMPLOYMENT AGREEMENTS. Our success depends upon the continued services of our key senior management personnel, including our executive officers and the senior managers of our businesses. None of our executive officers have employment agreements with us and substantially all of our other senior management personnel do not have employment agreements with us. The loss or unavailability of these individuals could have a material adverse effect on our business prospects. WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN SKILLED PERSONNEL. Our success depends on our ability to attract and retain highly skilled personnel in all areas of our business. We cannot assure that we will be able to attract and retain personnel on acceptable terms in the future. Our inability to attract and retain highly skilled personnel could have an adverse effect on our business prospects. WE DO NOT INTEND TO PAY DIVIDENDS. We have never paid cash dividends to stockholders and do not anticipate paying cash dividends in the foreseeable future. In addition, our existing credit facility limits our ability to pay cash dividends. OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE. The market price of our common stock has been volatile. From July 1, 2002 to July 30, 2004, the last sale price of our common stock ranged from a low of $12.20 per share to a high of $32.20 per share. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. Sales of a substantial number of shares of our common stock in the public market, or the appearance that such shares are available for sale, could adversely affect the market price for our common stock. As of August 29, 2003, we had 119,585,515 shares of common stock outstanding. As of August 29, 2003, we also had options to purchase 14,429,147 shares of our common stock outstanding, 8,516,096 shares of our common stock reserved for issuance pursuant to options available for issuance under our stock option plans and employee stock purchase plan, and 8,983,740 shares of our common stock reserved for issuance upon the conversion of our 4% Convertible Subordinated Notes due 2006. ANTI-TAKEOVER EFFECTS OF CERTAIN BY-LAW PROVISIONS, DELAWARE LAW, AND OUR SHAREHOLDER RIGHTS PLAN COULD DISCOURAGE, DELAY OR PREVENT A CHANGE IN CONTROL. We have a shareholder rights plan. Under the plan, if a person or group were to acquire or announce the intention to acquire 15% or more of our outstanding shares of common stock, and in some cases 10%, each right would entitle the holder, other than the acquiring person or group, to purchase shares of our common stock at $175, the exercise price of the right, with a value of twice the exercise 13 price. This plan could have the effect of discouraging, delaying or preventing persons from attempting to acquire us. In addition, the Delaware General Corporation Law, to which we are subject, prohibits, except under circumstances specified in the statute, a corporation from engaging in any mergers, significant sales of stock or assets, or business combinations with any stockholder or group of stockholders who own at least 15% of our common stock. ITEM 2. PROPERTIES. All of our principal properties are leased. We maintain offices throughout the United States and in the United Kingdom, Ireland, Guernsey, Luxembourg and Bermuda. Our principal data centers and operating centers are located in: - Birmingham, Alabama (Information Services); - San Francisco, California (Insurance and Education Services); - Atlanta, Georgia (Insurance and Education Services); - Lombard, Illinois (Information Services); - Indianapolis, Indiana (Insurance and Education Services); - Boston, Massachusetts (Investment Services and Insurance and Education Services); - Brainerd, Minnesota (Investment Services); - Cherry Hill, New Jersey (Information Services); - New York, New York (Corporate Headquarters and Investment Services); - Columbus, Ohio (Investment Services); - Dresher, Pennsylvania (Investment Services); - Harrisburg, Pennsylvania (Insurance and Education Services); - Houston, Texas (Information Services); - Salt Lake City, Utah (Insurance and Education Services); - Hamilton, Bermuda (Investment Services); - Guernsey, Channel Islands (Investment Services); - Dublin, Ireland (Investment Services); and - The Grand Duchy of Luxembourg (Investment Services). Leases on our properties expire periodically during the next 15 years. We own or lease central processors and associated peripheral equipment used in our data processing operations and communications network, retirement services business and electronic banking business. We believe that our existing facilities and equipment, together with expansion in the ordinary course of business, are adequate for our present and foreseeable needs. ITEM 3. 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. 14 Following the Company's May 17, 2004 announcement regarding the restatement of our financial results, seven putative class action and two derivative lawsuits were filed against the Company and certain of its current and former officers in the United States District Court for the Southern District of New York. The class action complaints purport to be brought on behalf of all shareholders who purchased the Company's securities between October 23, 2000 and May 17, 2004 and generally assert that the Company and certain of its officers allegedly violated the federal securities laws in connection with the purported issuance of false and misleading information concerning the Company's financial condition. The class action complaints seek damages in an unspecified amount against the Company. The derivative complaints purport to be on behalf of the Company and generally assert that certain officers and directors are liable for alleged breaches of fiduciary duties, abuse of control, gross mismanagement, waste, and unjust enrichment that purportedly occurred between October 23, 2000 and the present. The derivative complaints seek disgorgement, constructive trust, and damages in an unspecified amount. The Company intends to defend itself vigorously against these claims but is unable to determine the ultimate outcome. We are also involved in other litigation arising in the ordinary course of business. We believe that we have adequate defenses and/or insurance coverage against claims arising in such litigation and that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect upon our financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of our security holders during the fourth quarter of fiscal 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE INFORMATION The following information relates to the Company's $0.02 par value common stock which is traded on the New York Stock Exchange under the symbol BSG. Price information on the Company's common stock is presented below and has been adjusted to reflect the two-for-one stock split declared in January 2002.
Fiscal 2003 Fiscal 2002 ---------------------- ----------------------- Quarter Ended High Low High Low ------ ------ ------ ------ September 30 $32.20 $16.00 $31.70 $24.60 December 31 20.86 13.32 32.00 22.12 March 31 17.87 14.21 35.60 29.62 June 30 20.70 14.50 35.90 31.15
At June 30, 2003, the Company's common stock was held by 1,112 stockholders of record. It is estimated that an additional 21,800 stockholders own the Company's common stock through nominee or street name accounts with brokers. 15 In addition, certain of the information required by this Item 5 is incorporated herein by reference to Note 5 to our consolidated financial statements included in Item 8 of this Report. We have not paid or declared any cash dividends during our most recent two fiscal years. ITEM 6. SELECTED FINANCIAL DATA. (As Restated) (in thousands, except per share data) The following data should be read in conjunction with the consolidated financial statements and related notes thereto and management's discussion and analysis of results of operations and financial condition included elsewhere in this Report. All referenced amounts and comparisons reflect the balances and amounts on a restated basis (see Note 17, Restatements). INCOME STATEMENT DATA: (1)(2)
For Years Ended June 30, 2003 2002 2001 2000 1999 ------------- ------------- -------------- ------------- -------------- Revenues $ 933,639 $ 821,175 $ 668,639 $ 561,896 $ 471,614 Operating costs and expenses: Service and operating 554,351 487,648 396,600 326,315 266,800 Selling, general and administrative 176,728 157,743 132,001 118,172 103,728 Amortization of goodwill - - 11,273 7,540 5,398 Amortization of intangible assets 18,822 13,125 9,018 3,904 2,358 Restructuring, business divestitures and other charges, net 12,079 6,475 4,245 (520) 400 Acquired in-process research and development - - - - 19,000 ------------- ------------- -------------- ------------- -------------- Total operating costs and expenses 761,980 664,991 553,137 455,411 397,684 ------------- ------------- -------------- ------------- -------------- Operating earnings 171,659 156,184 115,502 106,485 73,930 Interest income 1,475 3,599 5,646 3,183 2,690 Interest expense (18,146) (15,701) (11,548) (3,134) (1,490) ------------- ------------- -------------- ------------- -------------- Income before income taxes 154,988 144,082 109,600 106,534 75,130 Income taxes 56,745 55,384 42,530 45,607 38,076 ------------- ------------- -------------- ------------- -------------- Net income $ 98,243 $ 88,698 $ 67,070 $ 60,927 $ 37,054 ============= ============= ============== ============= ============== Basic earnings per share $ 0.82 $ 0.75 $ 0.58 $ 0.55 $ 0.35 ============= ============= ============== ============= ============== Diluted earnings per share $ 0.81 $ 0.72 $ 0.56 $ 0.53 $ 0.33 ============= ============= ============== ============= ============== BALANCE SHEET DATA: June 30, Total assets $ 1,458,142 $ 1,191,342 $ 975,808 $ 591,714 $ 458,599 Short-term borrowings 172,000 93,000 - 115,000 52,000 Long-term debt, including current maturities 300,000 300,000 300,578 - - Total stockholders' equity 715,929 627,066 499,561 351,198 287,444
(1) Per share amounts restated for stock splits. (2) Includes amortization of goodwill, net of tax, of $7.9 million, $5.5 million, and $4.0 million in fiscal 2001, 2000, and 1999, respectively ($0.07, $0.04, and $0.04 per diluted share, respectively). See Note 1 to Consolidated Financial Statements. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Throughout this discussion and analysis of financial condition and results of operations, all referenced amounts and comparisons reflect the balances and amounts on a restated basis (see Note 17, Restatements). The BISYS Group, Inc. and subsidiaries (the "Company") provides outsourcing solutions to and through financial organizations. The following table presents the percentage of revenues represented by each item in the Company's consolidated income statements for the periods indicated. Information for fiscal 2001 has been adjusted to exclude goodwill amortization of $11.3 million and related tax effects of $3.4 million for comparability purposes.
As Restated ---------------------------------------------------- As Adjusted For Years Ended June 30, 2003 2002 2001 ------------- ------------ ------------ Revenues 100.0% 100.0% 100.0% ----- ----- ----- Operating costs and expenses: Service and operating 59.4 59.4 59.3 Selling, general and administrative 18.9 19.2 19.7 Amortization of intangible assets 2.0 1.6 1.4 Restructuring charges 1.3 0.8 0.6 ----- ----- ----- Total operating costs and expenses 81.6 81.0 81.0 ----- ----- ----- Operating earnings 18.4 19.0 19.0 Interest income 0.1 0.4 0.8 Interest expense (1.9) (1.9) (1.7) ----- ----- ----- Income before income taxes 16.6 17.5 18.1 Income taxes 6.1 6.7 6.4 ----- ----- ----- Net income 10.5% 10.8% 11.7% ===== ===== =====
Revenues increased $112.5 million in fiscal 2003 and $152.5 million in fiscal 2002, representing increases of 13.7% and 22.8%, respectively. Growth in fiscal 2003 and 2002 was derived from existing client growth, cross-sales to existing clients, sales to new clients, and revenues from acquired businesses. Revenue growth from acquired businesses approximated $70.8 million in fiscal 2003 and $80.1 million in fiscal 2002. Service and operating expenses increased $66.7 million in fiscal 2003 and $91.0 million in fiscal 2002, representing increases of 13.7% and 23.0%, respectively. Service and operating expenses remained flat as a percentage of revenues in fiscal 2003 and increased by 0.1% to 59.4% in fiscal 2002. The dollar increases resulted from additional costs associated with greater revenues. Selling, general and administrative expenses increased $19.0 million, or 12.0%, and decreased as a percentage of revenues by 0.3% to 18.9% in fiscal 2003 and increased $25.7 million, or 19.5%, and decreased as a percentage of revenues by 0.5% to 19.2% in fiscal 2002. The dollar increase in fiscal 2003 and 2002 resulted from additional costs associated with greater revenues. The decrease as a percentage of 17 revenues in fiscal 2003 and 2002 resulted from further utilization of existing general and administrative support resources. Amortization of intangible assets was $18.8 million in fiscal 2003, compared to $13.1 million in fiscal 2002 and $9.0 million in fiscal 2001. The increases in fiscal 2003 and fiscal 2002 were due to the higher level of intangible assets associated with recently acquired businesses and customer contracts. The Company recorded a pre-tax restructuring charge of $12.1 million in fiscal 2003, relating to the integration, consolidation and relocation of certain business operations, primarily as a result of acquisition activity and the downsizing of certain areas in the investment, insurance, education and check imaging businesses. The restructuring charge includes a provision of $7.2 million for severance-related costs for approximately 300 employees and $4.9 million for facility closure and related costs. At June 30, 2003, the remaining accrual amounts to $2.0 million and primarily relates to lease costs for facility closures. The Company is presently evaluating opportunities to further integrate and consolidate certain business operations during fiscal 2004. The Company recorded a pre-tax restructuring charge of $6.5 million in fiscal 2002 relating to the integration, consolidation, and relocation of certain business operations, primarily as a result of acquisition activity. The restructuring charge included a provision of $4.2 million for severance-related costs for approximately 200 employees and $2.3 million for facility consolidation and related costs. All restructuring activities in connection with this charge were completed by the end of the first quarter of fiscal 2003. As a result of the acquisitions of Pictorial and Ascensus, the Company recorded a pretax restructuring charge of $4.2 million in fiscal 2001. The charge related to restructuring activities in the existing businesses within the Insurance and Education Services segment and included a provision of $2.1 million for severance-related costs for approximately 150 employees, $1.0 million for facility consolidation and related costs, and $1.1 million for impairments relating to the abandonment of certain software and product development efforts. All restructuring activities were completed and amounts expended during fiscal 2001. Operating earnings increased by $15.5 million to $171.7 million in fiscal 2003 and decreased as a percentage of revenues from 19.0% to 18.4%. The dollar increase was primarily due to revenue gains while the percentage decrease was due to a larger restructuring charge in fiscal 2003. Adjusted operating earnings increased by $29.4 million to $156.2 million in fiscal 2002, primarily due to revenue gains and synergies realized from consolidation of acquired businesses, and remained flat as a percentage of revenues at 19.0%. Operating results, before amortization of intangibles and restructuring charges, resulted in margins of 21.7%, 21.4%, and 20.9% for fiscal 2003, 2002, and 2001, respectively. The margin increase in fiscal 2003 was generally due to changes in the mix of business and faster growth from the Insurance and Education Services segment, offset by the overall economic downturn that adversely impacted the Company's Investment Services segment. The margin increase in fiscal year 2002 was attributable to internal growth, improved operating leverage through cost efficiencies and increased volumes, and faster growth from the higher-margin Insurance and Education Services segment. Interest income was $1.5 million in fiscal 2003 compared to $3.6 million in fiscal 2002 and $5.6 million in fiscal 2001. The decreases in fiscal 2003 and 2002 were due to lower interest rates and reduced levels of interest-bearing assets. 18 Interest expense was $18.1 million in fiscal 2003 compared to $15.7 million in fiscal 2002 and $11.5 million in fiscal 2001. The increase in fiscal 2003 was due to the interest costs associated with additional borrowings for acquisitions under the Company's revolving credit facility. The increase in fiscal 2002 was due to interest costs associated with additional borrowings for acquisitions, including the convertible debt offering in March 2001. The provision for income taxes reflects an effective tax rate of 36.7%, 38.4%, and 38.8% for fiscal 2003, 2002, and 2001, respectively. The decrease in the effective tax rate in fiscal 2003 is primarily due to the impact of lower tax rates in foreign tax jurisdictions for recently acquired businesses and to recently enacted tax law changes. The decrease in the effective tax rate in fiscal 2002 is primarily due to the cessation of goodwill amortization and the impact of lower tax rates in foreign tax jurisdictions for recently acquired businesses. The Company's effective tax rate in fiscal 2004 is expected to be between 36.5% and 37.5%. The Company anticipates that the undistributed earnings of foreign subsidiaries will continue to be reinvested in the foreseeable future. SEGMENT INFORMATION The following table sets forth operating revenue and operating income by business segment and for corporate operations for the years ended June 30, 2003, 2002, and 2001 as originally reported and as restated for the effects of the restatement adjustments. Restructuring charges are excluded from the operating results of the segment as management does not consider such charges in its assessment of segment performance, or in allocating resources among segments. Additionally, adjusted information has been presented for the year ended June 30, 2001 to exclude goodwill amortization for comparative purposes. The ensuing discussion of operating income and margins compares fiscal 2003 and 2002 actual results with fiscal 2001 results, adjusted to exclude goodwill amortization.
AS REPORTED (IN THOUSANDS) ------------------------------------ As Adjusted 2003 2002 2001 --------- --------- ----------- Operating revenue: Investment Services $ 498,531 $ 449,930 $ 359,300 Insurance and Education Services 244,835 218,185 164,737 Information Services 215,053 197,590 177,720 --------- --------- ---------- Total operating revenue $ 958,419 $ 865,705 $ 701,757 ========= ========= ========== Operating income (loss): Investment Services $ 77,556 $ 77,449 $ 62,077 Insurance and Education Services 88,532 94,847 68,548 Information Services 59,387 54,895 48,415 Corporate (21,430) (20,765) (16,713) --------- --------- ---------- Total operating income $ 204,045 $ 206,426 $ 162,327 ========= ========= ==========
19
AS RESTATED (IN THOUSANDS) ------------------------------------ As Adjusted 2003 2002 2001 --------- --------- ----------- Operating revenue: Investment Services $ 498,531 $ 449,930 $ 359,300 Insurance and Education Services 220,055 173,655 131,619 Information Services 215,053 197,590 177,720 --------- --------- --------- Total operating revenue $ 933,639 $ 821,175 $ 668,639 ========= ========= =========== Operating income (loss): Investment Services $ 77,556 $ 77,449 $ 62,077 Insurance and Education Services 68,225 51,080 37,241 Information Services 59,387 54,895 48,415 Corporate (21,430) (20,765) (16,713) --------- --------- ----------- Total operating income $ 183,738 $ 162,659 $ 131,020 ========= ========= ===========
Internal revenue growth in fiscal 2003, as restated, for Investment Services, Insurance and Education Services, and Information Services approximated 3%, 7% and 9%, respectively. 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's internal revenue growth approximated 5% for fiscal year 2003. Revenue in the Investment Services business segment increased $48.6 million in fiscal 2003 and $90.6 million in fiscal 2002, representing increases of 10.8% and 25.2%, respectively. The revenue increase in fiscal 2003 was due to recent acquisitions and internal growth of 3% including the acquisition of several new clients, primarily in the 401(k) plan record keeping business. The revenue increase in fiscal 2002 was due to internal growth and several acquisitions. Operating income in the Investment Services business segment increased $0.1 million in fiscal 2003 and increased $15.4 million in fiscal 2002, resulting in margins of 15.6%, 17.2%, and 17.3% in fiscal 2003, 2002, and 2001, respectively. Margins declined in fiscal 2003 primarily as a result of lower revenue growth and changes in business mix. The Company is evaluating its transfer agency services market position and alternatives in Europe following the acquisition of two of the Company's significant customers by acquirers with existing transfer agency capabilities. See Note 17 to consolidated financial statements included in Item 8 of this Report, which describes the adjustments for correction of errors impacting the Life Insurance Services division. The ensuing discussion of the results of the Insurance and Education Services segment is after the effects of the restatement adjustments. The Company has taken steps to improve the internal controls at the Life Insurance Services division as more fully described in Item 9A of Part II, Controls and Procedures. Revenue in the Insurance and Education Services business segment increased $46.4 million in fiscal 2003 and $42.0 million in fiscal 2002, representing increases of 26.7% and 31.9%, respectively. Revenue growth in fiscal 2003 and fiscal 2002 was attributable to acquisitions and internal growth. Operating income in the Insurance and Education Services business segment increased $17.1 million in fiscal 2003 and $13.8 million in fiscal 2002, resulting in margins of 31.0%, 29.4%, and 28.3% in fiscal 2003, 2002, and 2001, respectively. Margins increased in fiscal 2003 primarily due to leverage gained from higher 20 volumes and changes in business mix. Margins increased in fiscal 2002 due to high-end sales and leverage gained from higher volumes. Revenue in the Information Services business segment increased $17.5 million in fiscal 2003 and $19.9 million in fiscal 2002, representing increases of 8.8% and 11.2%, respectively. The increases in revenue growth were due to existing client growth, cross sales of ancillary products and services to existing clients, and sales to new clients. Operating income in the Information Services business segment increased $4.5 million in fiscal 2003 and $6.5 million in fiscal 2002, resulting in operating margins of 27.6%, 27.8%, and 27.2% for fiscal 2003, 2002, and 2001, respectively. Corporate operations represent charges for the Company's executive, human resources, legal, accounting and finance functions, and various other unallocated overhead charges. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003, the Company had cash and cash equivalents of $79.6 million and negative working capital of approximately $34.1 million. At June 30, 2003, the Company had outstanding borrowings against its $300.0 million revolving credit facility of $172.0 million, bearing interest at LIBOR plus a margin of 0.875% (2.00% at June 30, 2003). The weighted average interest rate is 2.04% on all outstanding borrowings under the facility at June 30, 2003. The facility is used to support the Company's working capital requirements and fund the Company's future acquisitions. On March 31, 2004, the Company entered into a new senior unsecured credit facility. The $400 million facility contains a $300 million revolving line of credit and a $100 million term loan. The new facility expires March 31, 2008 and replaces the $300 million facility which was due to expire on June 30, 2004. At June 30, 2003, the Company had $2.7 million outstanding in the form of letters of credit and $300.0 million of outstanding 4% convertible subordinated notes due March 2006. The Company's debt ratio (total debt/total debt plus equity) is 0.40 at June 30, 2003, and the Company's maximum debt ratio may not exceed 0.50 under the terms of the revolving credit facility, as amended. At June 30, 2003, the Company is in compliance with all financial covenants required by the credit facility. Accounts receivable represented 44 and 50 days sales outstanding (DSO) at June 30, 2003 and 2002, respectively, based on quarterly revenues. The improvement in DSO is attributable to the Company's ongoing efforts to actively pursue collection of aged receivables and to establish billing and payment terms that are more favorable to the Company. The calculation of DSO for accounts receivable excludes insurance premiums and commissions receivable arising from the Company's insurance-related business. DSO is less relevant for this type of receivable because it includes premiums that are ultimately remitted to the insurer and not recognized as revenue. Additionally, certain life insurance commissions due from insurance carriers have customary collection terms of up to twelve months. For the year ended June 30, 2003, operating activities provided cash of $171.2 million, primarily as a result of net income of $98.2 million, depreciation and amortization of $49.7 million, deferred income taxes of $10.1 million and improved DSO's for accounts receivable. Investing activities used cash of $229.6 million, primarily for the acquisition of businesses of $155.9 million, capital expenditures of $43.1 million, and purchases of intangibles of $27.8 million. Financing activities provided cash of $59.6 million, primarily from $79.0 million of net proceeds from short-term borrowings, $9.6 million of proceeds from the exercise of stock options, and $4.6 million from the issuance of common stock in 21 connection with the Company's annual employee stock purchase plan, offset by repurchases of common stock of $33.4 million. For the years ended June 30, 2002 and 2001, operating activities provided cash of $128.9 million and $113.8 million, respectively. Investing activities used cash of $315.5 million and $231.5 million in fiscal 2002 and 2001, respectively. Financing activities provided cash of $105.6 million in fiscal 2002 and $206.9 million in fiscal 2001. 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. In January 1999, the Company's Board of Directors authorized a stock buy-back program of up to $100 million of its outstanding common stock. From January 1999 through September 2002, the Company purchased approximately 4.25 million shares of its common stock under the stock buy-back program for $70.4 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 former program effective upon completion of an amendment to the Company's revolving credit facility modifying certain buy-back provisions. The amendment to the credit facility became effective on September 24, 2002. Between September 24, 2002 and June 30, 2003, the Company purchased 0.3 million shares for $4.8 million under the new stock buy-back program, leaving $95.2 million available for future purchases. 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. On January 24, 2002, the Board of Directors approved a two-for-one stock split effected in the form of a dividend, payable to shareholders of record on February 8, 2002. On September 21, 2000, the Board of Directors approved a two-for-one stock split effected in the form of a dividend, payable to shareholders of record on October 6, 2000. CRITICAL ACCOUNTING POLICIES AND 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 premiums and commissions receivable, 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. The following is a discussion of the critical accounting policies that, in the Company's view, require significant use of judgment. 22 INSURANCE PREMIUMS AND COMMISSIONS RECEIVABLE - The Company recognizes revenue and related receivables from insurance distribution operations when all placement services have been provided, protection is afforded under the insurance policy, and the premium is known or can be reasonably estimated and is billable. Commission revenue in the Life Insurance Services division is recorded net of an allowance for commission adjustments due to lapses, policy cancellations, and revisions in coverage. The actual amount of commission adjustments may differ from management's estimates. ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company records allowances for doubtful accounts when it is probable that the accounts receivable balance will not be collected based upon historical experience and other relevant factors. If the financial condition of BISYS' customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. GOODWILL AND INTANGIBLE ASSETS - The Company carries goodwill and intangible assets that were initially recognized as a result of business acquisitions. In accordance with FAS 142, the Company must reevaluate the valuation of goodwill at least annually by comparing the fair value and carrying value of the reporting unit to which the goodwill relates. If the carrying value of the reporting unit exceeds its fair value, the Company must further evaluate goodwill for a possible impairment loss. The estimate of a reporting unit's fair value requires the use of assumptions and estimates regarding the reporting unit's future cash flows and discount rates. Changes in the business supporting the goodwill and intangible assets may affect management's assessment of the recoverability of goodwill and intangible assets. RESTRUCTURING CHARGES - As discussed in Note 11 to the Consolidated Financial Statements, the Company has established reserves in fiscal 2003 and 2002 related to restructuring activities to integrate, consolidate and relocate certain business operations primarily as a result of recent acquisitions. The reserves are based on the estimated costs of employee terminations and benefits, facility consolidations, and other costs directly related to the Company's reorganization plans and incremental to the Company's normal operating costs. The actual costs related to these plans may differ from management's estimates. INCOME TAXES - The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. CONTINGENCIES - Accounting for contingencies, such as litigation, tax assessments, self-insurance and acquisition-related liabilities, requires the Company to estimate the expected costs of events which have already occurred but which the Company has not completely resolved. Judgements exceeding established reserves or changes in circumstances requiring management to update its estimates may materially affect the Company's financial position and operating results. REVENUE RECOGNITION - The Company records revenue as earned from services provided in the periods in which the services are performed. Future interpretations of existing accounting standards or changes in the Company's business practices could result in changes in the Company's revenue recognition accounting policies that could have a material effect on the Company's results of operations and 23 business. See Note 1 to the Consolidated Financial Statements for a more complete description of the Company's revenue recognition policies. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Results of Operations and Financial Condition and other sections of this report contain forward-looking statements that are based on management's current expectations, estimates, forecasts and assumptions concerning future events. In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of management. These statements are subject to numerous known and unknown risks, uncertainties and assumptions that could cause actual events or results to differ materially from those projected. Words such as "believes," "anticipates," "intends," "estimates," "projects," "plans," "targets," and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (the "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; attracting and retaining qualified key employees; no material breech of security of any of the Company's systems; control of costs and expenses; continued availability of financing and financial resources on the terms required to support the Company's future business endeavors; the mix of products and services; compliance with the covenants and restrictions of the Company's bank credit facilities; the possible acceleration of the amounts borrowed under the Company's bank credit facility; 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We do not have material exposure to market risk from derivative or non-derivative financial instruments. We do not utilize such instruments to manage market risk exposures or for trading or speculative purposes. We do, however, invest available cash and cash equivalents in highly liquid financial instruments with original maturities of three months or less. As of June 30, 2003, we had approximately $79.6 million of cash and cash equivalents invested in highly liquid debt instruments purchased with original maturities of three months or less, including $2.3 million of overnight repurchase 24 agreements. We believe that potential near-term losses in future earnings, fair values and cash flows from reasonably possible near-term changes in the market rates for such instruments are not material to us. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The BISYS Group, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of The BISYS Group, Inc. (the "Company") and its subsidiaries at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Notes 1 and 4 to the consolidated financial statements, effective July 1, 2001, the Company changed its method of accounting for goodwill and intangible assets in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." As discussed in Note 17 to the consolidated financial statements, the Company has restated its consolidated financial statements as of June 30, 2003, 2002 and 2001. /s/ PricewaterhouseCoopers LLP ---------------------------------------------- New York, New York July 29, 2003, except for Notes 17 and 18 as to which the date is July 30, 2004 25 CONSOLIDATED STATEMENTS OF INCOME (As Restated) (in thousands, except per share data) For Years Ended June 30,
2003 2002 2001 --------- --------- --------- Revenues $ 933,639 $ 821,175 $ 668,639 --------- --------- --------- Operating costs and expenses: Service and operating 554,351 487,648 396,600 Selling, general and administrative 176,728 157,743 132,001 Amortization of goodwill - - 11,273 Amortization of intangible assets 18,822 13,125 9,018 Restructuring charges 12,079 6,475 4,245 --------- --------- --------- Total operating costs and expenses 761,980 664,991 553,137 --------- --------- --------- Operating earnings 171,659 156,184 115,502 Interest income 1,475 3,599 5,646 Interest expense (18,146) (15,701) (11,548) --------- --------- --------- Income before income taxes 154,988 144,082 109,600 Income taxes 56,745 55,384 42,530 --------- --------- --------- Net income $ 98,243 $ 88,698 $ 67,070 ========= ========= ========= Basic earnings per share $ 0.82 $ 0.75 $ 0.58 ========= ========= ========= Diluted earnings per share $ 0.81 $ 0.72 $ 0.56 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 26 CONSOLIDATED BALANCE SHEETS (As Restated) (in thousands, except share data) June 30,
2003 2002 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 79,558 $ 78,371 Accounts receivable, net 96,237 101,851 Insurance premiums and commissions receivable 87,535 24,639 Deferred tax asset 45,202 36,100 Other current assets 61,409 35,401 ----------- ----------- Total current assets 369,941 276,362 Property and equipment, net 107,152 94,711 Goodwill 731,174 612,314 Intangible assets, net 206,036 159,391 Other assets 43,839 48,564 ----------- ----------- Total assets $ 1,458,142 $ 1,191,342 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 172,000 $ 93,000 Accounts payable 21,518 16,492 Insurance premiums and commissions payable 81,840 1,221 Other current liabilities 128,645 126,014 ----------- ----------- Total current liabilities 404,003 236,727 Long-term debt 300,000 300,000 Deferred tax liability 34,184 15,190 Other liabilities 4,026 12,359 ----------- ----------- Total liabilities 742,213 564,276 ----------- ----------- Commitments and contingencies (see Note 7) STOCKHOLDERS' EQUITY Common stock, $.02 par value; 320,000,000 shares authorized; 120,274,571 and 119,880,003 shares issued 2,405 2,398 Additional paid-in capital 378,986 370,854 Retained earnings 348,401 265,238 Notes receivable from stockholders (10,776) (10,776) Employee benefit trust, 344,207 shares (5,676) - Deferred compensation 5,752 - Accumulated other comprehensive loss (340) (648) Treasury stock at cost, 141,118 shares (2,823) - ----------- ----------- Total stockholders' equity 715,929 627,066 ----------- ----------- Total liabilities and stockholders' equity $ 1,458,142 $ 1,191,342 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 27 CONSOLIDATED STATEMENTS OF CASH FLOWS (As Restated) (in thousands) For Years Ended June 30,
2003 2002 2001 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 98,243 $ 88,698 $ 67,070 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49,704 40,600 42,590 Restructuring charges 12,079 6,475 4,245 Deferred income tax provision 10,086 722 (1,760) Change in assets and liabilities, net of effects from acquisitions: Account receivable, net 5,540 3,655 (313) Insurance premiums and commissions receivable (21,950) (4,471) (4,001) Other current assets (6,220) (4,765) (5,738) Other assets 7,631 6,472 9,752 Accounts payable 4,223 1,720 (3,676) Insurance premiums and commissions payable 22,414 1,221 - Other current liabilities (10,510) (11,381) 5,635 --------- --------- --------- Net cash provided by operating activities 171,240 128,946 113,804 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired (155,872) (269,948) (192,886) Proceeds (expenses paid) relating to dispositions 235 (521) (1,560) Capital expenditures (43,106) (39,310) (28,509) Change in other investments (3,102) 2,110 (4,259) Purchase of intangible assets (27,763) (7,862) (4,255) --------- --------- --------- Net cash used in investing activities (229,608) (315,531) (231,469) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net 79,000 93,000 (115,000) Proceeds from convertible debt offering, net of expenses paid - - 292,050 Exercise of stock options 9,646 11,593 26,480 Issuance of common stock 4,581 4,226 3,065 Repurchases of common stock (33,419) (2,684) - Other (253) (578) 292 --------- --------- --------- Net cash provided by financing activities 59,555 105,557 206,887 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 1,187 (81,028) 89,222 Cash and cash equivalents at beginning of year 78,371 159,399 70,177 --------- --------- --------- Cash and cash equivalents at end of year $ 79,558 $ 78,371 $ 159,399 ========= ========= ========= SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for: Interest $ 15,876 $ 13,137 $ 7,209 Income taxes $ 42,277 $ 32,218 $ 16,758
The accompanying notes are an integral part of the consolidated financial statements. 28 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Notes Employee Benefit Additional Receivable Trust For Years ended June 30, 2001, 2002, and Common Stock Paid-in Retained from -------------- 2003 Shares Amount Capital Earnings Stockholders Shares Amount ------- -------- --------- -------- ------------ ------ ------ BALANCE, JUNE 30, 2000, AS REPORTED 27,807 $ 556 $ 220,558 $151,874 $ (11,347) - $ - ======= ======== ========= ======== ============ ====== ====== Adjustments (See Note 17) - - - (10,339) - - - ------- -------- --------- -------- ------------ ------ ------ BALANCE, JUNE 30, 2000, AS RESTATED 27,807 556 220,558 141,535 (11,347) - - ======= ======== ========= ======== ============ ====== ====== Exercise of stock options 1,748 35 39,304 (17,588) 571 - - Tax benefit of stock options exercised - - 20,460 - - - - Issuance of common stock 111 2 3,063 - - - - Common stock options issued in acquisitions 472 10 36,138 - - - - Foreign currency translation adjustment - - - - - - - Two-for-one stock split 28,284 565 (565) - - - - Net income - - - 67,070 - - - ------- -------- --------- -------- ------------ ------ ------ BALANCE, JUNE 30, 2001, AS RESTATED 58,422 1,168 318,958 191,017 (10,776) - - ======= ======== ========= ======== ============ ====== ====== Exercise of stock options 1,868 38 28,074 (14,477) - - - Tax benefit of stock options exercised - - 19,688 - - - - Issuance of common stock 94 2 4,224 - - - - Common stock options issued in acquisitions 32 1 1,099 - - - - Repurchases of common stock - - - - - - - Foreign currency translation adjustment - - - - - - - Two-for-one stock split 59,464 1,189 (1,189) - - - - Net income - - - 88,698 - - - ------- -------- --------- -------- ------------ ------ ------ BALANCE, JUNE 30, 2002, AS RESTATED 119,880 2,398 370,854 265,238 (10,776) - - ======= ======== ========= ======== ============ ====== ====== Exercise of stock options 395 7 4,443 (10,532) - - - Tax benefit of stock options exercised - - 3,689 - - - - Issuance of common stock - - - (4,548) - (2) 29 Repurchases of common stock - - - - - - - Employee Benefit Trust - - - - - 346 (5,705) Deferred compensation - - - - - - - Foreign currency translation adjustment - - - - - - - Net income - - - 98,243 - - - ------- -------- --------- -------- ------------ ------ ------ BALANCE, JUNE 30, 2003, AS RESTATED 120,275 $ 2,405 $ 378,986 $348,401 $ (10,776) 344 $(5,676) ======= ======== ========= ======== ============ ====== ====== Accumulated Other For Years ended June 30, 2001, 2002, and Deferred Comprehensive Treasury Stock 2003 Compensation Income (Loss) Shares Amount Total ------------ ------------- ------- -------- --------- BALANCE, JUNE 30, 2000, AS REPORTED $ - $ (104) - $ - $ 361,537 ============ ============= ====== ======== ========= Adjustments (See Note 17) - - - - (10,339) ------------ ------------- ------ -------- --------- BALANCE, JUNE 30, 2000, AS RESTATED - (104) - - 351,198 ============ ============= ====== ======== ========= Exercise of stock options - - - - 22,322 Tax benefit of stock options exercised - - - - 20,460 Issuance of common stock - - - - 3,065 Common stock options issued in acquisitions - - - - 36,148 Foreign currency translation adjustment - (702) - - (702) Two-for-one stock split - - - - - Net income - - - - 67,070 ------------ ------------- ------ -------- --------- BALANCE, JUNE 30, 2001, AS RESTATED - (806) - - 499,561 ============ ============= ====== ======== ========= Exercise of stock options - - (72) 2,684 16,319 Tax benefit of stock options exercised - - - - 19,688 Issuance of common stock - - - - 4,226 Common stock options issued in acquisitions - - - - 1,100 Repurchases of common stock - - 59 (2,684) (2,684) Foreign currency translation adjustment - 158 - - 158 Two-for-one stock split - - 13 - - Net income - - - - 88,698 ------------ ------------- ------ -------- --------- BALANCE, JUNE 30, 2002, AS RESTATED - (648) - - 627,066 ============ ============= ====== ======== ========= Exercise of stock options - - (625) 15,762 9,680 Tax benefit of stock options exercised - - - - 3,689 Issuance of common stock (29) - (339) 9,129 4,581 Repurchases of common stock - - 1,451 (33,419) (33,419) Employee Benefit Trust - - (346) 5,705 - Deferred compensation 5,781 - - - 5,781 Foreign currency translation adjustment - 308 - - 308 Net income - - - - 98,243 ------------ ------------- ------ -------- --------- BALANCE, JUNE 30, 2003, AS RESTATED $ 5,752 $ (340) 141 $ (2,823) $ 715,929 ============ ============= ====== ======== =========
The accompanying notes are an integral part of the consolidated financial statements. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Throughout these notes to the Consolidated Financial Statements, all referenced amounts and comparisons reflect the balances and amounts on a restated basis. For information on the restatement, see Note 17, Restatements, to these financial statements. 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY The BISYS Group, Inc. and subsidiaries ("BISYS" or the "Company") is a leading provider of business process outsourcing solutions for the financial services sector. BASIS OF PRESENTATION The consolidated financial statements include the accounts of The BISYS Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts reported in fiscal 2001 and 2002 have been reclassified to conform to the fiscal 2003 presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid debt instruments purchased with original maturities of three months or less, including $2.3 million and $6.4 million of overnight repurchase agreements at June 30, 2003 and 2002, respectively. The Company maintains cash deposits in banks which from time to time exceed the amount of deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any potential credit loss is minimal. RESTRICTED CASH Unremitted insurance premiums, included in other current assets, are held in a fiduciary capacity and approximated $26.6 million at June 30, 2003. The period for which the Company holds such funds is dependent upon the date the agent or broker remits the payment of the premium to the Company and the date the Company is required to forward such payment to the insurer. RECEIVABLES A majority of the Company's receivables are from banks, investment firms, insurance companies and retail insurance brokers which approximated $42.5 million, $39.3 million, $46.3 million, and $47.4 million, respectively, at June 30, 2003. The Company performs appropriate credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company has separately reflected receivables and payables arising from its insurance-related businesses on the accompanying consolidated balance sheets. The captions "insurance premiums and commissions receivable" and "insurance premiums and commissions payable" include insurance premiums and commissions arising from the Company's commercial insurance services division and net commissions arising from the Company's life insurance brokerage division. In its capacity as a commercial property and casualty wholesale broker, the Company collects premiums from other agents and brokers and, after deducting its commissions, remits the premiums to the respective insurers. 30 The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. Bad debt expense for the years ended June 30, 2003, 2002 and 2001 approximated $6.1 million, $2.4 million, and $3.0 million, respectively. Write-offs for the years ended June 2003, 2002 and 2001 approximated $6.6 million, $3.6 million, and $4.3 million, respectively. At June 30, 2003 and 2002, the Company's allowance for doubtful accounts was approximately $6.0 million and $4.8 million, respectively. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the straight line method over the estimated useful lives of the assets as follows:
estimated useful lives (years) Buildings and leasehold improvements 8 - 40 Data processing equipment and systems 3 - 10 Furniture and fixtures 3 - 12 Software development costs 2 - 7
Depreciation expense for the years ended June 30, 2003, 2002 and 2001 was $30.9 million, $27.5 million and $22.3 million, respectively. Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs which do not improve or extend the life of such assets are charged to expense as incurred. Disposals are removed at cost less accumulated depreciation with the resulting gain or loss being reflected in operations. GOODWILL AND INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued FAS 141, "Business Combinations" and FAS 142, "Goodwill and Other Intangible Assets." FAS 141 addresses the financial accounting and reporting for business combinations. This standard requires that all business combinations be accounted for by the purchase method and intangible assets be recognized as assets apart from goodwill. FAS 142 addresses financial accounting for goodwill and other intangible assets subsequent to their acquisitions. FAS 142 requires that a recognized intangible asset be amortized over its useful life unless that life is determined to be indefinite. FAS 142 also requires that goodwill not be amortized but tested for impairment on an annual basis and between annual tests in certain circumstances. The Company adopted both FAS 141 and 142 as of July 1, 2001. In connection with the adoption of FAS 142, the Company completed testing of goodwill impairment for each of its reporting units and determined there were no goodwill impairment losses that should be recognized. The Company also determined that no reclassifications between goodwill and intangible assets were required based upon the guidance in FAS 142. 31 For acquisitions accounted for by the purchase method, the excess purchase price over the fair value of net tangible assets is allocated to intangible assets and goodwill based upon estimates of fair value. Goodwill represents the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. The Company periodically evaluates goodwill for impairment no less than annually by comparing the carrying value to implied fair value for each of its reporting units using a two-step impairment test set forth in FAS 142. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company evaluates, for impairment, the carrying value of acquired intangible assets by comparing the carrying value to the anticipated future undiscounted cash flows from the businesses whose acquisition gave rise to the asset. If an intangible asset is impaired, the asset is written down to fair value. Intangible assets resulting from acquired customer relationships are evaluated in light of actual customer attrition rates to ensure that the carrying value of these intangible assets is recoverable. Information pertaining to intangible assets and goodwill and the effects of adopting FAS 142 are presented in Note 4. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically assesses the likelihood of recovering the cost of long-lived assets based on its expectations of future profitability and undiscounted cash flows of the related business operations. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property, equipment and other long-lived assets. SOFTWARE COSTS The Company capitalizes certain costs incurred to develop new software or enhance existing software which is utilized by the Company to process customer transactions or marketed externally. The Company charges to operations routine maintenance of software, design costs and development costs incurred prior to the establishment of a product's technological feasibility. Costs incurred subsequent to the establishment of a product's technological feasibility are capitalized and amortized over the expected useful life of the related product. Capitalized software costs for fiscal years 2003, 2002 and 2001 approximated $23.2 million, $19.6 million, and $15.0 million, respectively. Software amortization for the years ended June 2003, 2002 and 2001 approximated $16.7 million, $15.5 million, and $11.7 million, respectively. REVENUE RECOGNITION The Company records revenue as earned as evidenced by contracts or invoices for its services at prices established by contract, price list and/or fee schedule less applicable discounts. The Company's principal sources of service revenues include information processing and software services, administration and distribution of mutual funds, hedge funds, and private equity funds, brokerage and consulting services, administration and record keeping of retirement plans, and training. Revenues from these services are recognized in the periods in which the services are performed. Cash received by the Company in advance of the performance of services is deferred and recognized as 32 revenue when earned. Reimbursements received for out-of-pocket expenses incurred are recorded as revenue. Net commission revenue from insurance distribution operations is recognized when all placement services have been provided, protection is afforded under the insurance policy, and the premium is known or can be reasonably estimated and is billable. Commission revenue in the Life Insurance Services division is recorded net of an allowance for commission adjustments due to lapses, policy cancellations, and revisions in coverage. Revenue from software sales is recognized in accordance with the AICPA's Statement of Position (SOP) 97-2, "Software Revenue Recognition." Under the SOP, revenue is recognized at the time of sale, or licensing if the Company has no continuing obligation. When the Company has a continuing obligation, revenue is recognized over the period of continuing obligation. Maintenance fee revenue is recognized ratably over the term of the related support period, generally twelve months. The Company recognizes revenue in accordance with the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. PER SHARE DATA Basic earnings per share is computed using the weighted average number of common shares outstanding during each year presented. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each year presented. Common equivalent shares consist of stock options and are computed using the treasury stock method. The effect of the assumed conversion of the convertible notes into common stock would be anti-dilutive and therefore is excluded from the computation of diluted earnings per share. Amounts utilized in per share computations are as follows (in thousands):
Year Ended June 30, 2003 2002 2001 ------- ------- ------- Weighted average common shares outstanding 119,597 118,623 114,694 Assumed conversion of common shares issuable under stock plans 2,124 5,236 5,956 ------- ------- ------- Weighted average common and common equivalent shares outstanding 121,721 123,859 120,650 ======= ======= =======
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. On September 21, 2000, 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 on October 6, 2000. All historical weighted average shares and per share amounts have been restated to reflect these stock splits. 33 Options to purchase 5,961,031 shares of common stock at various prices ranging from $19.94 to $35.30 were outstanding at June 30, 2003, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of common shares. FOREIGN CURRENCY TRANSLATION The U.S. dollar is the functional currency for all company businesses except operations in the United Kingdom, Guernsey, Ireland and Luxembourg. Foreign currency denominated assets and liabilities for these units are translated into U.S. dollars based on exchange rates prevailing at the end of each year, and revenues, expenses and cash flows are translated at average exchange rates during the year. Translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders' equity. STOCK-BASED COMPENSATION The Company accounts for its stock option and restricted stock purchase plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table presents the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation" (in thousands, except per share data). See Note 15.
As Restated -------------------------------- Year Ended June 30, 2003 2002 2001 -------- -------- ---------- Net income, as reported $ 98,243 $ 88,698 $ 67,070 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (17,944) (24,897) (22,825) -------- -------- ---------- Pro forma net income $ 80,299 $ 63,801 $ 44,245 ======== ======== ========== Earnings per share: Basic, as reported $ 0.82 $ 0.75 $ 0.58 ======== ======== ========== Basic, pro forma $ 0.67 $ 0.54 $ 0.39 ======== ======== ========== Diluted, as reported $ 0.81 $ 0.72 $ 0.56 ======== ======== ========== Diluted, pro forma $ 0.66 $ 0.52 $ 0.37 ======== ======== ==========
The Company presently intends to continue to account for stock options under the provisions of APB 25. 34 INCOME TAXES The liability method is used in accounting for income taxes whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws. 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 net commissions receivable, 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. DISCLOSURE REGARDING FINANCIAL INSTRUMENTS For financial instruments, such as cash and cash equivalents, receivables, accounts payable, and short-term borrowings, the carrying value is considered to approximate fair value. At June 30, 2003 and 2002, the carrying value of long-term debt approximated fair value. 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 additional information required by FAS 148 has been included in the notes to the consolidated financial statements. 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. The adoption of this EITF consensus is not expected to have a material impact on the Company's financial position, results of operations or liquidity. 35 2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS (in thousands)
As Restated ---------------------- 2003 2002 --------- --------- Other current assets: Prepaids $ 26,565 $ 24,975 Restricted cash 26,603 - Other 8,241 10,426 --------- --------- $ 61,409 $ 35,401 ========= ========= Property and equipment, net: Land $ 74 $ 74 Buildings and leasehold improvements 22,891 20,425 Data processing equipment and systems 73,935 70,628 Furniture and fixtures 35,189 33,760 Software development costs 89,659 74,720 --------- --------- 221,748 199,607 Less accumulated depreciation and amortization (114,596) (104,896) --------- --------- $ 107,152 $ 94,711 ========= ========= Other current liabilities: Compensation $ 30,355 $ 31,231 Deferred revenues 24,634 25,125 Income taxes 13,640 12,207 Marketing 4,299 5,561 Other 55,717 51,890 --------- --------- $ 128,645 $ 126,014 ========= =========
3. BUSINESS COMBINATIONS FISCAL 2003 ACQUISITIONS
BUSINESS DATE ACQUIRED NATURE OF BUSINESS CONSIDERATIONS -------------------------------------- -------------- ------------------------------- -------------- Landau Financial Services, Inc. May 2003 Life insurance brokerage and Cash for stock distribution Tri-City Brokerage March 2003 Commercial property and Cash for stock casualty insurance distribution Capital Synergies, Inc. March 2003 Life insurance brokerage and Cash for stock distribution Feingold & Scott, Ltd. December 2002 Life insurance brokerage and Cash for stock (dba Career Brokerage, Inc.) distribution Select Insurance Marketing Corporation December 2002 Long-term care and life Cash for stock insurance distribution First Northern Financial Resources, September 2002 Life insurance distribution Cash for stock Inc.
In March 2003, the Company acquired all the equity interests in Tri-City Brokerage (Tri-City), a San Francisco based insurance brokerage firm specializing in the wholesale distribution of commercial property and casualty insurance products. The acquisition of Tri-City represents the Company's strategic entrance into the commercial property and casualty insurance market. 36 The fair value of assets acquired and liabilities assumed, including transaction fees and expenses, for fiscal 2003 acquisitions were as follows (in thousands):
As Restated --------------- --------------- ---------------- Tri-City All Others Total --------------- --------------- ---------------- Estimated fair value of assets acquired: Goodwill $ 66,281 $ 51,661 $ 117,942 Intangible assets 27,100 8,734 35,834 Other assets 55,224 12,839 68,063 Liabilities assumed (68,410) (6,172) (74,582) --------------- --------------- ---------------- Net cash paid $ 80,195 $ 67,062 $ 147,257 =============== =============== ================
The acquired intangible assets of $35.8 million have a weighted average useful life of approximately 9 years. The intangible assets that make up that amount include customer-related intangibles of $32.2 million (9-year weighted average useful life) and non-compete agreements of $3.6 million (5-year weighted average useful life). Of the total amount of goodwill assigned of $117.9 million, approximately $44.7 million is expected to be deductible for tax purposes. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions of all the companies set forth above had occurred at the beginning of fiscal 2003 and 2002 (in thousands, except per share data):
As Restated ---------------------------------- 2003 2002 --------- -------- Revenues $ 977,490 $877,502 Net income 100,290 90,153 Diluted earnings per share 0.82 0.73
FISCAL 2002 ACQUISITIONS
BUSINESS DATE ACQUIRED NATURE OF BUSINESS CONSIDERATIONS --------------------------------- ------------- --------------------------- --------------- Harrison James, Inc. May 2002 Life insurance distribution Cash for stock DML May 2002 Private equity fund Cash for equity administration interests Dalton Publications May 2002 Education and support Cash for stock services The Hemisphere Group of Companies March 2002 Hedge fund administration Cash for stock The Hanleigh Companies February 2002 Insurance brokerage and Cash for stock distribution Life Brokerage Corporation October 2001 Life insurance distribution Cash for stock
In March 2002, the Company acquired a majority interest in the Hemisphere Group of Companies (Hemisphere) and subsequently acquired the remaining nominal interest in June 2002. Hemisphere is a Bermuda-based hedge fund administrator and primarily conducts operations in Bermuda, Europe, and the United States. 37 The fair value of assets acquired and liabilities assumed, including transaction fees and expenses, for fiscal 2002 acquisitions were as follows (in thousands):
As Restated ------------------------------------------------- Hemisphere All Others Total ----------- ----------- ----------- Estimated fair value of assets acquired: Goodwill $ 108,709 $ 103,392 $ 212,101 Intangible assets 23,000 19,083 42,083 Other assets 14,974 12,737 27,711 Liabilities assumed (14,028) (14,212) (28,240) ----------- ----------- ----------- Net cash paid $ 132,655 $ 121,000 $ 253,655 =========== =========== ===========
The acquired intangible assets of $42.1 million have a weighted average useful life of approximately 9 years. The intangible assets that make up that amount include customer-related intangibles of $37.3 million (10-year weighted average useful life) and noncompete agreements of $4.8 million (5-year weighted average useful life). Of the total amount of goodwill assigned of $212.1 million, approximately $96.8 million is expected to be deductible for tax purposes. In April 2002, the Company issued 32,000 shares of its common stock as contingent merger consideration in connection with the fiscal 2001 acquisition of The Advanced Markets, LLC. The above transactions in fiscal 2003 and 2002 have been accounted for by the purchase method of accounting, and, accordingly, the operations of the acquired companies are included in the consolidated financial statements since the dates of acquisition. 4. INTANGIBLE ASSETS AND GOODWILL INTANGIBLE ASSETS At June 30, 2003 and 2002, acquired intangible assets were comprised of the following (in thousands):
ESTIMATED GROSS USEFUL LIVES CARRYING ACCUMULATED NET BOOK (YEARS) AMOUNT AMORTIZATION VALUE ------------ -------- ------------ -------- 2003 Customer related 5-30 $190,917 $ (32,618) $158,299 Noncompete agreements 5-15 42,451 (11,629) 30,822 Other 5-23 23,070 (6,155) 16,915 -------- ------------ -------- $256,438 $ (50,402) $206,036 ======== ============ ======== 2002 Customer related 5-30 $129,740 $ (19,846) $109,894 Noncompete agreements 5-15 39,132 (7,423) 31,709 Other 5-23 22,070 (4,282) 17,788 -------- ------------ -------- $190,942 $ (31,551) $159,391 ======== ============ ========
All of the Company's intangible assets are subject to amortization. Amortization expense for acquired intangible assets was approximately $18.8 million, $13.1 million, and $9.0 million for the years ended June 30, 2003, 2002, and 2001, respectively. Estimated 38 amortization expense for the succeeding five years is $25.0 million in fiscal 2004, $24.4 million in fiscal 2005, $23.3 million in fiscal 2006, $22.0 million in fiscal 2007, and $21.3 million in fiscal 2008. GOODWILL The changes in the carrying amounts of goodwill by business segment for the years ended June 30, 2002 and 2003 are as follows (in thousands):
Investment Insurance & Information Services Education Services Services Total ---------- ------------------ ----------- ---------- Balance, June 30, 2001, as restated $ 150,322 $ 210,846 $ 35,390 $ 396,558 2002 Acquisitions 161,846 54,334 - 216,180 Adjustments to previous acquisitions (366) (58) - (424) ---------- ------------------ ----------- ---------- Balance, June 30, 2002, as restated 311,802 265,122 35,390 612,314 ---------- ------------------ ----------- ---------- 2003 Acquisitions 541 119,375 - 119,916 2003 Dispositions (70) - - (70) Adjustments to previous acquisitions (907) (79) - (986) ---------- ------------------ ----------- ---------- Balance, June 30, 2003, as restated $ 311,366 $ 384,418 $ 35,390 $ 731,174 ========== ================== =========== ==========
The following information reflects adjustments to exclude goodwill amortization expense and related tax effects for the year ended June 30, 2001 (in thousands, except per share data):
Basic Diluted Net Earnings Earnings Income per Share per Share -------- --------- --------- Reported net income, as restated $ 67,070 $ 0.58 $ 0.56 Add back: Goodwill amortization, net of taxes 7,871 0.07 0.07 -------- --------- --------- Adjusted net income, as restated $ 74,941 $ 0.65 $ 0.63 ======== ========= =========
5. BORROWINGS The Company has a $300 million senior unsecured revolving credit facility (including a $20 million letter of credit subfacility) with certain banks to support working capital requirements and fund the Company's future acquisitions. The facility expires June 30, 2004. Outstanding borrowings under the credit facility bear interest at prime or, at the company's option, LIBOR plus a margin not to exceed 1.325% based upon the ratio of the Company's consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (the "Pricing Formula"). The credit agreement requires the Company to pay an agent fee of $25,000 per year and an annual facility fee not to exceed 0.30%, or $900,000. The facility is guaranteed by certain significant subsidiaries of The BISYS Group, Inc. The credit agreement requires, among other things, the Company to maintain certain financial covenants and limits the Company's ability to incur additional indebtedness 39 and to pay dividends. As of June 30, 2003, no amounts were permitted for the payment of cash dividends. The Company may borrow under the facility through June 2004 up to $300 million, reduced by any outstanding letters of credit ($2.7 million at June 30, 2003). Interest is payable quarterly for prime rate borrowings or at maturity for LIBOR borrowings, which range from 30 to 180 days. At June 30, 2003, the Company had outstanding borrowings of $172 million bearing interest at LIBOR plus a margin of 0.875% (2.00% at June 30, 2003). Long-term debt at June 30, 2003 and 2002 consists of $300 million of convertible subordinated notes. In March 2001, the Company issued $300 million of convertible subordinated notes (the "Notes") due March 2006. The Notes bear interest at 4% and require semi-annual interest payments. The Notes are convertible at any time at the option of the holder into shares of the Company's common stock at a conversion price of $33.39 per share, subject to adjustment under certain conditions. At the Company's option, subject to the terms of its existing revolving credit facility agreement, the Notes are redeemable on or after March 2004 at a premium price of 101% declining to par in March 2005 and thereafter. Annual interest expense on long-term debt amounted to $12.0 million in fiscal 2003 and 2002. 6. INCOME TAXES The significant components of the Company's net deferred tax asset as of June 30, 2003 and 2002 are as follows (in thousands):
As Restated ------------------------------ 2003 2002 -------- -------- Deferred tax assets related to: Accrued liabilities $ 15,076 $ 12,167 Receivables 35,169 29,031 Tax carryforwards 19,635 16,476 Other 139 86 -------- -------- Deferred tax assets 70,019 57,760 Less valuation allowance (1,100) (603) -------- -------- Net deferred tax assets 68,919 57,157 -------- -------- Deferred tax liabilities related to: Property and equipment (18,036) (13,643) Goodwill and intangible assets (39,333) (22,110) Other (532) (494) -------- -------- Deferred tax liabilities (57,901) (36,247) -------- -------- Net deferred tax asset $ 11,018 $ 20,910 ======== ========
The Company periodically evaluates deferred tax assets and adjusts the related valuation allowance on deferred tax assets to an amount which is more likely than not to be realized through future taxable income. 40 A valuation allowance for deferred tax assets associated with certain loss carry-forwards has been established as the Company currently believes that a portion of the deferred tax assets will not be realized. At June 30, 2003, the Company had $31.0 million of federal net operating loss carry-forwards expiring in years after 2015 and $87.4 million of state and foreign net operating losses of which $85.4 million expire in years after 2009. The components of the income tax provision for the years ended June 30, 2003, 2002 and 2001 are as follows (in thousands):
As Restated -------------------------------------------------- 2003 2002 2001 -------- -------- -------- Deferred federal tax expense (benefit) $ 8,993 $ 1,533 $ 651 Current federal tax expense 36,786 46,593 36,437 Deferred state tax expense (benefit) 425 (177) (1,100) Current state tax expense 11,083 9,064 5,575 Current foreign tax expense 403 244 1,164 Deferred foreign tax benefit (945) (1,873) (197) -------- -------- -------- $ 56,745 $ 55,384 $ 42,530 ======== ======== ========
Deferred income taxes have not been provided on the undistributed earnings of foreign subsidiaries as such earnings will continue to be reinvested in the foreseeable future. A reconciliation of the Company's income tax provision and the amount computed by applying the statutory federal income tax rate to income before income tax provision for the years ended June 30, 2003, 2002 and 2001 is as follows (in thousands):
As Restated ------------------------------------------------------ 2003 2002 2001 -------- -------- -------- Federal income tax $ 54,246 $ 50,429 $ 38,360 at statutory rate Amortization of non-deductible goodwill - - 2,660 Change in valuation allowance 497 - (5) State taxes 7,480 5,777 2,909 Foreign taxes (3,381) (1,046) 83 Tax credits (559) (732) (693) Other, net (1,538) 956 (784) -------- -------- -------- $ 56,745 $ 55,384 $ 42,530 ======== ======== ========
7. COMMITMENTS AND CONTINGENCIES The Company leases office space under noncancellable operating leases with remaining terms of up to fifteen years. The Company also leases certain office and computer equipment and software under operating leases expiring through 2008. Rental expense associated with these operating leases for the years ended June 30, 2003, 2002 and 2001 were $36.7 million, $32.3 million and $24.6 million, respectively. 41 The future minimum rental payments under noncancellable operating leases for the years ending after June 30, 2003 are as follows (in thousands):
Fiscal year Operating leases 2004 $ 37,267 2005 33,369 2006 30,221 2007 25,737 2008 22,913 Thereafter 135,585 ---------------- $ 285,092 ================
The Company's broker-dealer subsidiaries are subject to the Uniform Net Capital Rule of the Securities and Exchange Commission. At June 30, 2003, the aggregate net capital of such subsidiaries was $9.4 million, exceeding the net capital requirement by $8.1 million. The Company is involved in litigation arising in the ordinary course of business. The Insurance Services division is involved in litigation with a West Coast-based distributor of life insurance products, with which the Company had a former business relationship. The Company intends to continue to vigorously defend the claims asserted and has asserted a number of counter claims. Management believes that the Company has adequate defenses against claims arising in such litigation and that the outcome of this and other matters will not have a material adverse effect upon the Company's financial position, results of operations, or cash flows. 8. SUPPLEMENTAL CASH FLOW INFORMATION In fiscal 2003, 2002 and 2001, the Company recorded a reduction to taxes currently payable related to tax benefits associated with stock options of approximately $3.7 million, $19.7 million and $20.5 million, respectively, with a corresponding increase to additional paid-in capital. Net cash paid for acquisition of businesses was comprised of the following for the years ended June 30, 2003, 2002 and 2001 (in thousands):
As Restated ----------------------------------------------- 2003 2002 2001 -------- -------- --------- Fair value of assets acquired, net of cash $230,375 $299,230 $ 414,844 Deposit on business acquisition - - (115,000) Less: issuance of common stock and stock - options pursuant to acquisitions (1,100) (36,148) Liabilities assumed (74,503) (28,182) (70,810) -------- -------- --------- Net cash paid $155,872 $269,948 $ 192,886 ======== ======== =========
42 9. ACCUMULATED OTHER COMPREHENSIVE INCOME The components of comprehensive income for the years ended June 30, 2003, 2002 and 2001 are as follows (in thousands):
As Restated ----------------------------------------------- 2003 2002 2001 -------- -------- --------- Net income $ 98,243 $ 88,698 $ 67,070 Foreign currency translation adjustment 308 158 (702) -------- -------- --------- Total comprehensive income $ 98,551 $ 88,856 $ 66,368 ======== ======== =========
10. RETIREMENT SAVINGS PLAN The Company and certain of its subsidiaries maintain retirement savings plans that cover substantially all employees. These plans generally provide for tax-deferred amounts for each participant and matching Company contributions, subject to certain limitations. The aggregate amounts charged to expense in connection with these plans were $5.7 million, $4.7 million and $4.1 million for the years ended June 30, 2003, 2002 and 2001, respectively. 11. RESTRUCTURING, BUSINESS DIVESTITURES AND OTHER CHARGES The Company recorded a pre-tax restructuring charge of $12.1 million in fiscal 2003, relating to the integration, consolidation and relocation of certain business operations, primarily as a result of acquisition activity and the downsizing of certain areas in the investment, insurance, education and check imaging businesses. The restructuring charge includes a provision of $7.2 million for severance-related costs for approximately 300 employees and $4.9 million for facility closure and related costs. At June 30, 2003, the remaining accrual amounts to $2.0 million and primarily relates to lease costs for facility closures. The Company recorded a pre-tax restructuring charge of $6.5 million in fiscal 2002 relating to the integration, consolidation, and relocation of certain business operations, primarily as a result of acquisition activity. The restructuring charge included a provision of $4.2 million for severance-related costs for approximately 200 employees and $2.3 million for facility consolidation and related costs. All restructuring activities in connection with this charge were completed by the end of the first quarter of fiscal 2003. As a result of the acquisitions of Pictorial and Ascensus in fiscal 2001, the Company recorded a pre-tax restructuring charge of $4.2 million. The charge related to restructuring activities in the existing businesses within the Insurance and Education Services segment and included a provision of $2.1 million for severance-related costs for approximately 150 employees, $1.0 million for facility consolidation and related costs, and $1.1 million for impairments relating to the abandonment of certain software and product development efforts. All restructuring activities were completed and amounts expended during fiscal 2001. 43 Total restructuring, business divestitures and other charges recorded for the years ended June 30, 2003, 2002 and 2001 consisted of the following (in thousands):
As Restated ----------------------------------------------- 2003 2002 2001 -------- -------- --------- Compensation related $ 7,161 $ 4,185 $ 2,104 Facilities or systems related and other 4,918 2,290 2,141 -------- -------- --------- $ 12,079 $ 6,475 $ 4,245 ======== ======== =========
During the years ended June 30, 2003, 2002 and 2001, the following costs were paid or charged against the restructuring related accruals and the liability for loss on an administrative services contract (in thousands):
As Restated ----------------------------------------------- 2003 2002 2001 -------- -------- --------- Compensation related costs $ 7,173 $ 4,014 $ 2,104 Facilities or systems related and other costs 3,120 2,264 2,141 Loss on contract - - 2,300 -------- -------- --------- $ 10,293 $ 6,278 $ 6,545 ======== ======== =========
12. SHAREHOLDER RIGHTS PLAN The Company has adopted a Shareholder Rights Plan and declared a dividend distribution at the rate of one Right for each share of common stock held of record as of the close of business on May 16, 1997 and for each share of common stock issued thereafter up to the distribution date (defined below). Each Right entitles holders of common stock to buy shares of common stock of the Company at an exercise price of $175. The Rights would be exercisable, and would detach from the common stock (the "Distribution Date") only if a person or group (i) were to acquire 15 percent or more of the outstanding shares of common stock of the Company; (ii) were to announce a tender or exchange offer that, if consummated, would result in a person or group beneficially owning 15 percent or more of the outstanding shares of common stock of the Company; or (iii) were declared by the Board to be an Adverse Person (as defined in the Plan) if such person or group beneficially owns 10 percent or more of the outstanding shares of common stock in the Company. In the event of any occurrence triggering the Distribution Date, each right would entitle the holder (other than such an acquiring person or group) to purchase the outstanding shares of common stock of the Company (or, in certain circumstances, common stock of the acquiring person) with a value of twice the exercise price of the Rights upon payment of the exercise price. The Company will be entitled to redeem the Rights at $.000625 per Right at any time. The Rights will expire at the close of business on May 16, 2012. 13. NOTES RECEIVABLE FROM STOCKHOLDERS The Board of Directors approved and the Company made loans in fiscal 2000 to certain executive officers to assist them in exercising non-qualified stock options, retaining the underlying shares and paying the applicable taxes resulting from such exercises. These 44 loans bear interest at 2.48% as of June 30, 2003, are full recourse, and are secured by a pledge of certain shares of the Company's Common Stock acquired pursuant to the exercise of the options. As of June 30, 2003, the pledged shares represented approximately 69% of the outstanding loan balances. The principal is repayable the later of five years from the date of the loan or the expiration date of the options exercised using such loan proceeds. The principal is also repayable within one year of the employee's death or termination of employment due to disability and within 30 days of voluntary resignation. Interest is payable annually on the anniversary date of each loan. The notes receivable of $10.8 million at June 30, 2003 and 2002 are reflected on the accompanying consolidated balance sheets as a reduction in stockholders' equity. 14. 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 of accounting for treasury stock. Additionally, the EITF requires that the portion of the deferred compensation obligation that is required to be settled by the delivery of shares of employer stock be classified in equity. At June 30, 2003, 344,207 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, 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. 15. STOCK-BASED COMPENSATION PLANS The Company has stock option and restricted stock purchase plans which provide for granting of options and/or restricted stock to certain employees and outside directors. The options vest primarily over a five-year period at each anniversary date of the grant. These options expire following termination of employment or within ten years of the date of the grant, whichever comes first. At June 30, 2003, options to purchase approximately 7.5 million shares are available for grant under the plans. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions for grants in fiscal 2003, 2002 and 2001: 1) expected dividend yields of 0%, 2) risk-free interest rates ranging from 2.10% to 6.06%, 3) expected volatility of 40% in fiscal 2003 and 35% in fiscal 45 2002 and 2001, and 4) an expected option life of 4.8 years, 4.6 years and 4.5 years in fiscal 2003, 2002 and 2001, respectively. For the purpose of pro forma disclosures (see Note 1), the estimated fair value of the options is amortized to expense over the options' vesting period of five years for employees. Using these assumptions, the weighted average fair value per option at date of grant for options granted during fiscal 2003, 2002 and 2001 was $8.07, $10.83 and $7.80, respectively. The following is a summary of stock option activity for the years ended June 30, 2003, 2002, and 2001. All share and price information has been adjusted to reflect the two-for-one stock splits declared in September 2000 and January 2002 (options in thousands):
2003 2002 2001 ------------------- --------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- Outstanding at beginning of year 13,403 $ 18.87 14,278 $ 13.93 15,033 $ 10.34 Options assumed in acquisitions - - - - 409 6.46 Options granted - original 1,979 20.37 2,770 29.71 4,946 16.83 Options granted - reload 132 25.77 907 28.88 1,968 22.48 Options exercised (1,128) 11.06 (3,862) 11.17 (6,420) 10.20 Options cancelled (614) 22.08 (690) 15.98 (1,658) 12.17 ------- -------- ------- -------- ------- -------- Outstanding at end of year 13,772 $ 19.70 13,403 $ 18.87 14,278 $ 13.93 ======= ======== ======= ======== ======= ======== Exercisable at end of year 6,238 $ 18.42 4,206 $ 16.68 3,366 $ 9.11 ======= ======== ======= ======== ======= ========
The following summarizes information about the Company's stock options outstanding at June 30, 2003 (options in thousands):
Weighted Average Weighted Weighted Remaining Average Option Average Life Exercise Price Range of Exercise Prices Outstanding Exercise Price (in years) Exercisable of Exercisable ------------------------ ----------- -------------- ---------- ----------- -------------- $ 0.01-$10.00 1,459 $ 7.87 3.7 1,459 $ 7.87 $10.01-$20.00 6,489 $ 14.78 7.0 2,233 $ 14.16 $20.01-$30.00 4,763 $ 27.04 7.2 2,054 $ 27.09 $30.01-$40.00 1,061 $ 33.44 7.5 492 $ 32.84
16. BUSINESS SEGMENT INFORMATION The Company is a leading provider of business process outsourcing solutions to financial institutions and other financial organizations. The Company's operations have been classified into three business segments: Investment Services, Insurance and Education Services, and Information Services. The Company's reportable segments are separately managed strategic business units that offer different products and services, and are based on the Company's method of internal reporting. The Investment Services segment provides business process outsourcing services, including administration and distribution, to domestic and offshore mutual fund complexes, hedge funds and private equity funds and retirement plan services to small to mid-size 401(k) plans. The Insurance and Education Services segment provides distribution solutions for commercial property and casualty, annuities, life, long-term 46 care, disability and special risk insurance products; offers certification and continuing education training for insurance and investment professionals; and provides licensing-related software products and services. The Information Services segment provides information processing and check imaging solutions to financial services companies, asset retention solutions to insurance companies, and corporate banking services to support corporate-sponsored cash management programs. Summarized financial information by business segment and for corporate operations for the years ended June 30, 2003, 2002 and 2001 is presented below (in thousands). Results for fiscal 2003 and 2002 exclude goodwill amortization due to the adoption of FAS 142.
As Restated --------------------------------------------------------- 2003 2002 2001 ------------ ----------- ----------- Revenues: Investment Services $ 498,531 $ 449,930 $ 359,300 Insurance and Education Services 220,055 173,655 131,619 Information Services 215,053 197,590 177,720 ------------ ----------- ----------- Total $ 933,639 $ 821,175 $ 668,639 ============ =========== =========== Operating earnings (loss): Investment Services $ 77,556 $ 77,449 $ 59,421 Insurance and Education Services 68,225 51,080 31,195 Information Services 59,387 54,895 45,844 Corporate (21,430) (20,765) (16,713) ------------ ----------- ----------- Total $ 183,738 $ 162,659 $ 119,747 ============ =========== =========== Assets: Investment Services $ 600,647 $ 567,604 $ 369,042 Insurance and Education Services 645,790 406,801 329,976 Information Services 133,155 133,444 122,685 Corporate 78,550 83,493 154,105 ------------ ----------- ----------- Total $ 1,458,142 $ 1,191,342 $ 975,808 ============ =========== =========== Depreciation and amortization expense: Investment Services $ 22,633 $ 17,983 $ 14,844 Insurance and Education Services 14,699 11,269 15,683 Information Services 11,355 10,334 11,253 Corporate 1,017 1,014 810 ------------ ----------- ----------- Total $ 49,704 $ 40,600 $ 42,590 ============ =========== =========== Capital expenditures: Investment Services $ 21,631 $ 18,863 $ 11,591 Insurance and Education Services 6,621 7,107 4,979 Information Services 13,755 14,072 12,088 Corporate 1,208 989 946 ------------ ----------- ----------- Total $ 43,215 $ 41,031 $ 29,604 ============ =========== ===========
47 The following is a reconciliation of operating earnings to the Company's consolidated total (in thousands):
As Restated --------------------------------------------------------- 2003 2002 2001 ------------ ----------- ----------- Total operating earnings for reportable $ 183,738 $ 162,659 $ 119,747 segments Restructuring charges (12,079) (6,475) (4,245) ------------ ----------- ----------- Total operating earnings $ 171,659 $ 156,184 $ 115,502 ============ =========== ===========
The net revenues of each segment are principally domestic, and no single customer accounted for 10% or more of the consolidated revenues for the years ended June 30, 2003, 2002 and 2001. Assets in the Insurance and Education Services segment increased 59% in fiscal 2003 primarily as a result of the six acquisitions consummated during the year. Revenues from unaffiliated customers located outside the United States approximated $65.5 million, $36.5 million and $29.3 million for the years ended June 30, 2003, 2002 and 2001, respectively. 17. RESTATEMENTS Prior to the issuance of the March 31, 2004 interim financial statements, the Company determined that it was appropriate to restate previously issued financial statements to record adjustments for correction of errors resulting from various accounting matters described below. The Company restated its financial results for the fiscal years ended June 30, 2003, 2002 and 2001 and the quarters ended December 31 and September 30, 2003. The adjustments fall into three general categories: adjustments to commissions receivable in the Life Insurance division, adjustments relating to goodwill and deferred taxes established in acquisition accounting for certain acquired entities in the Life Insurance division, and adjustments to agent commissions payable in the Life Insurance division. Additionally, as a result of the restatement adjustments, adjustments to the computation of deferred tax assets and liabilities were also recorded. The impact of the restatement on net income for the fiscal years ended June 30, 2003, 2002 and 2001 for each such category is set forth below (in thousands, except per share data): 48
YEARS ENDED JUNE 30, ----------------------------------- 2003 2002 2001 --------- ---------- -------- Net income, as reported $ 111,823 $ 115,861 $ 85,120 --------- ---------- -------- Pretax adjustments: Commissions receivable (11,738) (36,060) (23,880) Goodwill and deferred taxes (7,348) (6,486) (7,214) Commissions payable (1,221) (1,221) - --------- ---------- -------- Total pretax adjustments (20,307) (43,767) (31,094) Tax effect of restatement adjustment (6,727) (16,604) (13,044) --------- ---------- -------- Total net adjustments (13,580) (27,163) (18,050) --------- ---------- -------- Net income, as restated $ 98,243 $ 88,698 $ 67,070 ========= ========== ======== Basic earnings per share, as reported $ 0.93 $ 0.98 $ 0.74 Effect of net adjustments (0.11) (0.23) (0.16) --------- ---------- -------- Basic earnings per share, as restated $ 0.82 $ 0.75 $ 0.58 ========= ========== ======== Diluted earnings per share, as reported $ 0.92 $ 0.94 $ 0.71 Effect of net adjustments (0.11) (0.22) (0.15) --------- ---------- -------- Diluted earnings per share, as restated $ 0.81 $ 0.72 $ 0.56 ========= ========== ========
The restatement principally arose from the Company's review and analysis of estimates used in determining the level of commissions receivable in the Life Insurance Services division. Based upon this review and analysis, the Company determined that an adjustment of $80.0 million to reduce commissions receivable in its Life Insurance division, together with corresponding adjustments to revenues and expenses, should be recorded and be reflected in a restatement of its financial results for the affected periods, as described above. The adjustment to commissions receivable of $80.0 million is primarily attributable to the over accrual of revenue, based on assumptions underlying the estimates that were subsequently determined to be incorrect. The assumptions were used to compute certain first year, bonus and renewal commissions receivable during the period July 1999 through December 2003. In connection with the aforementioned review, the Company also identified adjustments relating to acquisition accounting for certain acquired entities in the Life Insurance business, resulting in an adjustment to goodwill, deferred taxes and revenue over the affected periods of $21.0 million. This adjustment reflects the recording of commissions receivable as of the date of acquisition to convert the acquired entity from the cash basis to the accrual basis of accounting, resulting in a corresponding downward adjustment to revenue incorrectly accrued following each such acquisition. Additionally, adjustments to commissions payable of $2.6 million, together with corresponding adjustments to net revenues, were identified as a result of an understatement in agent commissions payable. Concurrent with the filing of this report on Form 10-K/A for the period ended June 30, 2003, the Company is filing revised financial statements reflecting the impact of the restatement on the quarters ended December 31 and September 30, 2003 on Form 10-Q/A. The restatement also affects periods prior to the fiscal year ended June 30, 2001. The net 49 impact of the restatement on such prior periods has been reflected as a reduction to beginning stockholders' equity as of July 1, 2000 in the amount of $10.3 million. In connection with the process, the Company restated its financial statements for the years ended June 30, 2003, 2002 and 2001. The impact of the restatement on net income for the years ended June 30, 2003, 2002 and 2001 was a decrease in net income of $13.6 million, $27.2 million, and $18.1 million, respectively. The following table sets forth the effects of the restatement adjustments discussed above on the Consolidated Statements of Income for the years ended June 30, 2003, 2002 and 2001 (in thousands, except per share data):
Year Ended Year Ended Year Ended June 30, 2003 June 30, 2002 June 30, 2001 ------------------------- ------------------------ ------------------------- As Reported As Restated As Reported As Restated As Reported As Restated ----------- ----------- ----------- ----------- ----------- ----------- Revenues $ 958,419 $ 933,639 $ 865,705 $ 821,175 $ 701,757 $ 668,639 ----------- ----------- ----------- ----------- ----------- ----------- Operating costs and expenses: Service and operating 558,824 554,351 488,411 487,648 398,411 396,600 Selling, general and administrative 176,728 176,728 157,743 157,743 132,001 132,001 Amortization of goodwill - - - - 11,486 11,273 Amortization of intangible assets 18,822 18,822 13,125 13,125 9,018 9,018 Restructuring charges 12,079 12,079 6,475 6,475 4,245 4,245 ----------- ----------- ----------- ----------- ----------- ----------- Total operating costs and expenses 766,453 761,980 665,754 664,991 555,161 553,137 ----------- ----------- ----------- ----------- ----------- ----------- Operating earnings 191,966 171,659 199,951 156,184 146,596 115,502 Interest income 1,475 1,475 3,599 3,599 5,646 5,646 Interest expense (18,146) (18,146) (15,701) (15,701) (11,548) (11,548) ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes 175,295 154,988 187,849 144,082 140,694 109,600 Income taxes 63,472 56,745 71,988 55,384 55,574 42,530 ----------- ----------- ----------- ----------- ----------- ----------- Net income $ 111,823 $ 98,243 $ 115,861 $ 88,698 $ 85,120 $ 67,070 =========== =========== =========== =========== =========== =========== Basic earnings per share $ 0.93 $ 0.82 $ 0.98 $ 0.75 $ 0.74 $ 0.58 =========== =========== =========== =========== =========== =========== Diluted earnings per share $ 0.92 $ 0.81 $ 0.94 $ 0.72 $ 0.71 $ 0.56 =========== =========== =========== =========== =========== ===========
50 The following table sets forth the effects of the restatement adjustments discussed above on the Consolidated Balance Sheets at June 30, 2003 and 2002 (in thousands, except share data):
June 30, 2003 June 30, 2002 ----------------------------- ----------------------------- As Reported As Restated As Reported As Restated ----------- ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 79,558 $ 79,558 $ 78,371 $ 78,371 Accounts receivable, net 96,237 96,237 101,851 101,851 Insurance premiums and commissions receivable 169,780 87,535 95,146 24,639 Deferred tax asset 13,655 45,202 9,466 36,100 Other current assets 61,409 61,409 35,401 35,401 ------------- ------------- ------------- ------------- Total current assets 420,639 369,941 320,235 276,362 Property and equipment, net 107,152 107,152 94,711 94,711 Goodwill 749,227 731,174 623,250 612,314 Intangible assets, net 206,036 206,036 159,391 159,391 Other assets 43,839 43,839 48,564 48,564 ------------- ------------- ------------- ------------- Total assets $ 1,526,893 $ 1,458,142 $ 1,246,151 $ 1,191,342 ============= ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 172,000 $ 172,000 $ 93,000 $ 93,000 Accounts payable 21,518 21,518 16,492 16,492 Insurance premiums and commissions payable 79,398 81,840 - 1,221 Other current liabilities 127,643 128,645 125,012 126,014 ------------- ------------- ------------- ------------- Total current liabilities 400,559 404,003 234,504 236,727 Long-term debt 300,000 300,000 300,000 300,000 Deferred tax liability 37,247 34,184 16,670 15,190 Other liabilities 4,026 4,026 12,359 12,359 ------------- ------------- ------------- ------------- Total liabilities 741,832 742,213 563,533 564,276 ------------- ------------- ------------- ------------- Stockholders' equity: Common stock, $0.02 par value, 320,000,000 shares authorized, 120,274,571 and 119,880,003 shares issued 2,405 2,405 2,398 2,398 Additional paid-in capital 378,986 378,986 370,854 370,854 Retained earnings 417,533 348,401 320,790 265,238 Notes receivable from stockholders (10,776) (10,776) (10,776) (10,776) Employee benefit trust, 344,207 shares (5,676) (5,676) - - Deferred compensation 5,752 5,752 - - Accumulated other comprehensive loss (340) (340) (648) (648) Treasury stock at cost, 141,118 shares (2,823) (2,823) - - ------------- ------------- ------------- ------------- Total stockholders' equity 785,061 715,929 682,618 627,066 ------------- ------------- ------------- ------------- Total liabilities and stockholders' equity $ 1,526,893 $ 1,458,142 $ 1,246,151 $ 1,191,342 ============= ============= ============= =============
51 18. SUBSEQUENT EVENTS 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 as described in Note 17. 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 Securities and Exchange Commission ("SEC") of its intention to restate prior period financial results and that there would be a delay in the filing of its Form 10-Q for the quarter ended March 31, 2004. Subsequently, the SEC advised the Company that the SEC is conducting an investigation into the facts and circumstances related to the restatement. The Company has cooperated and intends to continue to cooperate with the SEC. Following the Company's May 17, 2004 announcement regarding the restatement of its financial results, seven putative class action and two derivative lawsuits were filed against the Company and certain of its current and former officers in the United States District Court for the Southern District of New York. The class action complaints purport to be brought on behalf of all shareholders who purchased the Company's securities between October 23, 2000 and May 17, 2004 and generally assert that the Company and certain of its officers allegedly violated the federal securities laws in connection with the purported issuance of false and misleading information concerning the Company's financial condition. The class action complaints seek damages in an unspecified amount against the Company. The derivative complaints purport to be on behalf of the Company and generally assert that certain officers and directors are liable for alleged breaches of fiduciary duties, abuse of control, gross mismanagement, waste, and unjust enrichment that purportedly occurred between October 23, 2000 and the present. The derivative complaints seek disgorgement, constructive trust, and damages in an unspecified amount. The Company intends to defend itself vigorously against these claims but is unable to determine the ultimate outcome. As part of the Credit Agreement governing the new senior unsecured credit facility that was entered into on March 31, 2004, the Company made certain representations about its prior period financial statements. In light of the need for adjustments to these prior period financial statements, the lenders consider these representations to have been inaccurate when made, and therefore, the lenders have asserted that there has been a breach under the Credit Agreement causing the Company to be in default. The Company subsequently procured a waiver from the lenders which allows the Company to continue to rollover certain LIBOR-based borrowings. However, until the waiver becomes permanent, the terms of the waiver do not cure the asserted default and preclude the Company from drawing down additional borrowings under the credit facility. The lenders have asserted that they have the right to accelerate payment of outstanding borrowings under the credit facility until the waiver becomes permanent. Effective with the filing of this Form 10-K/A, the waiver becomes permanent for all purposes. 52 19. CONSOLIDATED QUARTERLY RESULTS (unaudited, in thousands, except per share data)
Fiscal 2003, As Reported ---------------------------------------------------- Quarter Ended Sep 30 Dec 31 Mar 31 Jun 30 ------ ------ ------ ------ Revenues $ 227,344 $ 233,112 $ 244,776 $ 253,187 Operating earnings 30,858 50,000 54,999 56,109 Income before income taxes 26,846 45,967 50,794 51,688 Net income 16,779 28,729 32,508 33,807 Basic earnings per share 0.14 0.24 0.27 0.28 Diluted earnings per share 0.14 0.24 0.27 0.28
Fiscal 2003, As Restated ---------------------------------------------------- Quarter Ended Sep 30 Dec 31 Mar 31 Jun 30 ------ ------ ------ ------ Revenues $ 223,417 $ 224,736 $ 238,074 $ 247,412 Operating earnings 27,458 42,655 49,627 51,919 Income before income taxes 23,446 38,622 45,422 47,498 Net income 14,678 23,538 28,987 31,040 Basic earnings per share 0.12 0.20 0.24 0.26 Diluted earnings per share 0.12 0.19 0.24 0.26
Fiscal 2002, As Reported ---------------------------------------------------- Quarter Ended Sep 30 Dec 31 Mar 31 Jun 30 ------ ------ ------ ------ Revenues $ 196,531 $ 209,908 $ 220,539 $ 238,727 Operating earnings 33,244 46,045 56,763 63,899 Income before income taxes 30,929 43,158 53,621 60,141 Net income 18,943 26,435 33,194 37,289 Basic earnings per share 0.16 0.22 0.28 0.31 Diluted earnings per share 0.15 0.22 0.27 0.30
Fiscal 2002, As Restated ---------------------------------------------------- Quarter Ended Sep 30 Dec 31 Mar 31 Jun 30 ------ ------ ------ ------ Revenues $ 186,456 $ 198,273 $ 213,149 $ 223,297 Operating earnings 23,099 34,380 49,500 49,205 Income before income taxes 20,784 31,493 46,358 45,447 Net income 12,464 18,792 28,893 28,549 Basic earnings per share 0.11 0.16 0.24 0.24 Diluted earnings per share 0.10 0.15 0.23 0.23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES. As previously disclosed in the March 2004 10-Q, 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 have determined that commissions receivable should be adjusted as described below. 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 53 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. We have taken, and continue to take, steps to rectify these matters. Based upon our review and analysis, we determined that an adjustment of $80.0 million to commissions receivable in our Life Insurance division, together with corresponding adjustments to revenues and expenses, should be recorded. We also determined that the adjustment requires a restatement of our financial results for each of the fiscal years ended June 30, 2003, 2002 and 2001, as well as our interim results for the quarters ended December 31 and September 30, 2003, to reflect the impact of the adjustment on each of the periods presented. 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 of $21.0 million, and adjustments to commissions payable of $2.6 million as a result of an understatement in agent commissions payable. These adjustments will also be reflected in the restatement of financial results described above. 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; - Enhanced process 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; - Initiated system enhancements to further automate processes associated with 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-K/A, 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 54 the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, other than the material weakness described above, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. Subsequent to March 31, 2004, the Company has implemented the steps described above and concluded that the disclosure controls and procedures are effective as of the date of filing of this report. 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. PART III Pursuant to Instruction G(3) to Form 10-K, the information required by Items 10 through 13 of this report is incorporated by reference from our definitive proxy statement, which was filed with the SEC pursuant to Regulation 14A within 120 days after the end of our fiscal year. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements Our consolidated financial statements as of June 30, 2003 and 2002, and for each of the three years in the period ended June 30, 2003, together with the report of PricewaterhouseCoopers LLP dated July 29, 2003, except for Notes 17 and 18 as to which the date is July 30, 2004, are included in Item 8 of this Report. (a)(2) Financial Statement Schedules All financial statement schedules are omitted for the reason that they are either not applicable or not required, or because the information required is contained in the consolidated financial statements or notes thereto. (a)(3) Exhibits: 3.1 Amended and Restated Certificate of Incorporation of The BISYS Group, Inc., as amended by Certificates of Amendment to Amended and Restated Certificate of Incorporation of The BISYS Group, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2001.) 3.2 Amended and Restated By-Laws of The BISYS Group, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.) 4.1 Rights Agreement, dated as of May 8, 1997 (the "Rights Agreement"), by and between The BISYS Group, Inc. and The Bank of New York, as Rights Agent 55 (including the form of Rights Certificate as Exhibit A). (Incorporated by reference to Exhibit 2.1 of Form 8-A filed on May 8, 1997 with the SEC.) 4.2 Amendment to the Rights Agreement, dated as of August 15, 2002. (Incorporated by reference to Exhibit 4.2 of Form 8-A/A filed on September 26, 2002 with the SEC.) 4.3 Indenture, dated as of March 13, 2001, between The BISYS Group, Inc. and Chase Manhattan Trust Company, National Association, as trustee (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 15, 2001, Commission File No. 0-19922.) 10.1 Amended and Restated Deferred Compensation Plan, dated as of June 14, 2002. (Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003.) 10.2 Executive Life Insurance Plan (Incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, Commission File No. 0-19922.) 10.3 The BISYS Group, Inc. Executive Officer Annual Incentive Plan. (Incorporated by reference to Exhibit C to Registrant's proxy statement for its 1999 annual meeting of stockholders, Commission File No. 0-19922.) 10.4 The BISYS Group, Inc. 1999 Equity Participation Plan. (Incorporated by reference to Exhibit B to Registrant's proxy statement for its 1999 annual meeting of stockholders, Commission File No. 0-19922.) 10.5 BISYS 401(k) Savings Plan. (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-19922.) 10.6 The BISYS Group, Inc. Non-Employee Directors' Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, Commission File No. 0-19922.) 10.7 Executive Loan Agreement (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, Commission File No. 0-19922.) 10.8 Credit Agreement (the "Credit Agreement") by and among The BISYS Group, Inc., the Lenders party thereto, The Chase Manhattan Bank, The First National Bank of Chicago, First Union National Bank and Fleet Bank, National Association, as co-Agents, and The Bank of New York, as Administrative Agent, with BNY Capital Markets, Inc., as Arranger, dated as of June 30, 1999, without exhibits. (Incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-19922.) 10.9 Amendment No. 1 to the Credit Agreement, dated as of September 28, 2000 (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, Commission File No. 0-19922.) 10.10 Amendment No. 2 to the Credit Agreement, dated as of September 24, 2002 (Incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.) 10.11 Transition Services Agreement, dated as of October 30, 2002, by and between The BISYS Group, Inc. and Lynn J. Mangum (Incorporated by reference to Exhibit 10.11 to the Registrant's original Annual Report on Form 10-K for the fiscal year ended June 30, 2003). 56 21 List of significant subsidiaries of The BISYS Group, Inc. (Incorporated by reference to Exhibit 21 to the Registrant's original Annual Report on Form 10-K for the fiscal year ended June 30, 2003.) 23* Consent of PricewaterhouseCoopers LLP. 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. *Filed herewith. (b) Reports on Form 8-K No Current Reports on Form 8-K were filed with the Securities and Exchange Commission during the fiscal quarter ended June 30, 2003. A Current Report on Form 8-K, dated July 29, 2003, was furnished to the Securities and Exchange Commission (Item 12 - Results of Operations and Financial Condition) to report the announcement of the Corporation's financial results for the fiscal quarter and fiscal year ended June 30, 2003. 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: August 9, 2004 By: /s/ James L. Fox ---------------------------------- James L. Fox Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 9th day of August, 2004.
Signature Title /s/ Russell P. Fradin Director, President and Chief ------------------------------------ Executive Officer (Principal Executive Officer) (Russell P. Fradin) /s/ James L. Fox Executive Vice President and Chief Financial Officer ------------------------------------ (Principal Financial and Accounting Officer) (James L. Fox) /s/ Lynn J. Mangum Director and Chairman of the Board ------------------------------------ (Lynn J. Mangum) /s/ Denis A. Bovin Director ------------------------------------ (Denis A. Bovin) /s/ Robert J. Casale Director ------------------------------------ (Robert J. Casale) /s/ Thomas A. Cooper Director ------------------------------------ (Thomas A. Cooper) /s/ Paula G. McInerney Director ------------------------------------ (Paula G. McInerney) /s/ Thomas E. McInerney Director ------------------------------------ (Thomas E. McInerney) /s/ Joseph J. Melone Director ------------------------------------ (Joseph J. Melone)
58 INDEX TO EXHIBITS FILED HEREWITH
EXHIBIT NO. DESCRIPTION 23 Consent of PricewaterhouseCoopers LLP 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
59