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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2006
 OR
 o
    
    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.
  DELAWARE
    
    13-3532663(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 105 Eisenhower Parkway, Roseland, New Jersey
07068
 973-461-2500
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check One):
 Large accelerated filer þ Accelerated filer o Non-accelerated filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
 As of February 28, 2007, there were 121,281,695 shares of common stock, par value $0.02 per share,
of the issuer outstanding.




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##### 



THE BISYS GROUP, INC.
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed Consolidated Statements of Income for the
three and six months ended December 31, 2006 and
2005
    
    
    3Condensed Consolidated Balance Sheets as of
December 31, 2006 and June 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for
the six months ended December 31, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4.
    
    Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6.
    
    Exhibits
    
    
    41SIGNATURES
    
    
    42EXHIBIT INDEX
    
    
    43EX-31.1EX-31.2EX-32
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PART I
 
 ITEM 1. FINANCIAL STATEMENTS
 THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    221,272
    
    
    $
    207,275
    
    
    $
    432,807
    
    
    $
    412,949Operating costs and expenses:Service and
operating (exclusive of depreciation and amortization shown separately below)
    
    
    147,095
    
    
    
    130,990
    
    
    
    288,376
    
    
    
    263,927Selling,
general and administrative (exclusive of depreciation and amortization shown separately below)
    
    
    41,586
    
    
    
    38,054
    
    
    
    80,254
    
    
    
    75,688Depreciation and amortization
    
    
    12,799
    
    
    
    11,952
    
    
    
    24,994
    
    
    
    23,933Litigation and regulatory settlements
    
    
    (713
    )
    
    
    3,036
    
    
    
    1,027
    
    
    
    7,478Total operating costs and expenses
    
    
    200,767
    
    
    
    184,032
    
    
    
    394,651
    
    
    
    371,026Operating earnings
    
    
    20,505
    
    
    
    23,243
    
    
    
    38,156
    
    
    
    41,923Interest income
    
    
    1,630
    
    
    
    1,287
    
    
    
    3,579
    
    
    
    2,785Interest expense
    
    
    (514
    )
    
    
    (4,463
    )
    
    
    (1,255
    )
    
    
    (10,317
    )Investment gains and other
    
    
    237
    
    
    
    149
    
    
    
    382
    
    
    
    187Income from continuing operations
before income taxes
    
    
    21,858
    
    
    
    20,216
    
    
    
    40,862
    
    
    
    34,578Income taxes
    
    
    7,417
    
    
    
    8,791
    
    
    
    12,380
    
    
    
    13,535Income from continuing operations
    
    
    14,441
    
    
    
    11,425
    
    
    
    28,482
    
    
    
    21,043Income (loss) from discontinued
operations, net of tax
    
    
    (130
    )
    
    
    10,832
    
    
    
    (208
    )
    
    
    14,644Net income
    
    $
    14,311
    
    
    $
    22,257
    
    
    $
    28,274
    
    
    $
    35,687Basic earnings per share:Continuing operations
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.18Discontinued operations
    
    
    
    
    
    
    0.09
    
    
    
    
    
    
    
    0.12Total basic earnings per share
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.24
    
    
    $
    0.30Diluted earnings per share:Continuing operations
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.24
    
    
    $
    0.18Discontinued operations
    
    
    
    
    
    
    0.09
    
    
    
    
    
    
    
    0.12Total diluted earnings per share
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.24
    
    
    $
    0.30
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THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except per share data)
 December 31,
    
    
    June 30,2006
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    104,222
    
    
    $
    159,610Restricted cash
    
    
    42,544
    
    
    
    40,151Accounts receivable, net
    
    
    96,400
    
    
    
    90,550Insurance premiums and commissions receivable
    
    
    118,352
    
    
    
    119,461Deferred tax asset
    
    
    26,893
    
    
    
    56,981Other current assets
    
    
    19,121
    
    
    
    16,889Total current assets
    
    
    407,532
    
    
    
    483,642Property and equipment, net
    
    
    40,515
    
    
    
    42,100Goodwill
    
    
    725,906
    
    
    
    716,810Intangible assets, net
    
    
    130,915
    
    
    
    139,177Other assets
    
    
    17,596
    
    
    
    17,014Total assets
    
    $
    1,322,464
    
    
    $
    1,398,743LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    21,769
    
    
    $
    1,656Accounts payable
    
    
    10,042
    
    
    
    10,735Insurance premiums and commissions payable
    
    
    134,896
    
    
    
    132,637Other current liabilities
    
    
    103,273
    
    
    
    144,200Litigation and regulatory settlements
    
    
    28,233
    
    
    
    115,361Total current liabilities
    
    
    298,213
    
    
    
    404,589Long-term debt
    
    
    2,191
    
    
    
    2,890Deferred tax liability
    
    
    32,053
    
    
    
    36,256Deferred revenues
    
    
    5,463
    
    
    
    6,622Other liabilities
    
    
    7,707
    
    
    
    6,772Total liabilities
    
    
    345,627
    
    
    
    457,129Stockholders equity:Common stock, $0.02 par value, 320,000,000 shares
authorized, 122,223,430 and 121,914,030 shares
issued
    
    
    2,445
    
    
    
    2,438Additional paid-in capital
    
    
    400,709
    
    
    
    396,484Retained earnings
    
    
    590,804
    
    
    
    564,809Employee benefit trust, 434,176 and 434,505 shares
    
    
    (6,632
    )
    
    
    (6,819
    )Deferred compensation
    
    
    6,640
    
    
    
    6,848Accumulated other comprehensive income
    
    
    197
    
    
    
    141Treasury stock at cost, 1,184,005 and 1,502,478 shares
    
    
    (17,326
    )
    
    
    (22,287
    )Total stockholders equity
    
    
    976,837
    
    
    
    941,614Total liabilities and stockholders equity
    
    $
    1,322,464
    
    
    $
    1,398,743
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THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedDecember 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    28,274
    
    
    $
    35,687Adjustment for income from discontinued operations, net of tax
    
    
    208
    
    
    
    (14,644
    )Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    24,994
    
    
    
    23,933Deferred income tax provision
    
    
    27,279
    
    
    
    66Share-based compensation
    
    
    4,761
    
    
    
    3,948Investment gains and other
    
    
    (382
    )
    
    
    (187
    )Change in assets and liabilities, net of effects from
acquisitions and divestitures
    
    
    (35,617
    )
    
    
    (37,427
    )Payment related to legal settlements
    
    
    (87,903
    )
    
    
    Tax payment on sale of discontinued operations business
    
    
    (13,000
    )
    
    
    Net cash provided by operating activities from discontinued
operations
    
    
    725
    
    
    
    25,469Net cash provided by (used in) operating activities
    
    
    (50,661
    )
    
    
    36,845CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of businesses, net of cash acquired
    
    
    (15,500
    )
    
    
    Payments related to businesses previously acquired
    
    
    
    
    
    
    (300
    )Capital expenditures for property and equipment
    
    
    (4,905
    )
    
    
    (6,226
    )Capitalized software costs
    
    
    (5,599
    )
    
    
    (3,769
    )Proceeds from sale of investments
    
    
    
    
    
    
    63Other
    
    
    (821
    )
    
    
    (294
    )Net cash used in investing activities from discontinued operations
    
    
    (725
    )
    
    
    (23,095
    )Net cash used in investing activities
    
    
    (27,550
    )
    
    
    (33,621
    )CASH FLOWS FROM FINANCING ACTIVITIESShort-term borrowings, net
    
    
    20,000
    
    
    
    (93,750
    )Payment of long-term debt
    
    
    (911
    )
    
    
    (861
    )Exercise of stock options
    
    
    593
    
    
    
    5,822Issuance of common stock
    
    
    2,757
    
    
    
    Repurchases of common stock
    
    
    (1,095
    )
    
    
    (898
    )Repayment of notes receivable from stockholders
    
    
    
    
    
    
    3,718Changes in bank overdrafts
    
    
    1,417
    
    
    
    (1,990
    )Excess tax benefits from share-based payment arrangements
    
    
    62
    
    
    
    200Net cash used in financing activities from discontinued operations
    
    
    
    
    
    
    (2,386
    )Net cash provided by (used in) financing activities
    
    
    22,823
    
    
    
    (90,145
    )Change in cash and cash equivalents
    
    
    (55,388
    )
    
    
    (86,921
    )Cash and cash equivalents at beginning of period (includes cash
of discontinued operations of $0 in 2006 and $618 in 2005)
    
    
    159,610
    
    
    
    172,953Cash and cash equivalents at end of period (includes cash of
discontinued operations of $0 in 2006 and $606 in 2005)
    
    $
    104,222
    
    
    $
    86,032
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THE BISYS GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unless otherwise noted, tabular dollars and share information in thousands, except per share data)
 (Unaudited)
 1.
    
    Basis of Presentation and Summary of Significant Accounting PoliciesThe CompanyThe BISYS Group, Inc. and subsidiaries (the Company) provides outsourcing solutions to the
financial services sector. The Investment Services segment provides administration and
distribution services for mutual funds, hedge funds, private equity funds, retirement plans,
and other investment products. The Insurance Services segment provides independent wholesale
distribution of life insurance and commercial property/casualty insurance, long-term care,
disability, and annuity products.Discontinued OperationsOn September 15, 2005, the Company entered into an agreement to sell its Information
Services segment, which included the Banking Solutions and Document Solutions divisions, to
Open Solutions Inc. for $471.3 million in cash. The transaction closed on March 3, 2006, and
the Company recognized a gain of $203.7 million, net of tax.In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144), the financial results of the Companys Information Services segment are
reported as discontinued operations for all periods presented. Accordingly, the notes to the
consolidated financial statements reflect historical amounts exclusive of discontinued
operations, unless otherwise noted.Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of America and
with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not contain all
of the information and footnotes required by accounting principles generally accepted in the
United States of America for complete annual statements. The accompanying financial
information includes all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of the results for the interim
period. These condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2006 (Fiscal 2006 Form 10-K). The
results of operations for the three and six months ended December 31, 2006 may not be
indicative of the results expected for the fiscal year ending June 30, 2007.Fiscal YearThe Companys fiscal year is from July 1 to June 30. Unless otherwise stated, references to
the years 2007 and 2006 relate to the fiscal years ended June 30, 2007 and 2006,
respectively. References to future years also relate to the fiscal year ended June 30.Restricted CashUnremitted insurance premiums are held in a fiduciary capacity and approximated $42.5
million and $40.2 million at December 31, 2006 and June 30, 2006, respectively. The period
for which the Company holds such funds is dependent upon the date the agent or broker remits
the payment of the premium to the Company and the date the Company is required to forward
such payment to the insurer.Insurance Premiums and Commissions Receivable and PayableThe Company has separately reflected receivables and payables arising from its
insurance-related businesses on the accompanying condensed consolidated balance sheets. The
captions insurance premiums and commissions receivable and insurance premiums and
commissions payable include insurance premiums and commissions in the Companys Commercial
Insurance Services business. In its capacity as a commercial property and casualty wholesale
broker and managing general agent, the Company collects premiums from other agents and
brokers and, after deducting its commissions, remits the premiums to the respective
insurers. In the Companys Life Insurance Services business, commissions receivable from
carriers are reflected net of amounts owed to agents and brokers as a component of
insurance premiums and commission receivable. In
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its capacity as a distributor of life insurance products, the Company typically receives
commissions from the respective insurance carriers and remits the appropriate commission to
agents and brokers after deducting its commission. Life insurance premiums are usually paid
directly to the carrier by the insured.InvestmentsManagement determines the appropriate classification of investments in equity securities at
the time of purchase. Marketable equity securities available for sale are carried at market
value based upon quoted market prices. Unrealized gains or losses on available for sale
securities are accumulated as an adjustment to stockholders equity, net of related deferred
income taxes. Realized gains or losses are computed based on specific identification of the
securities sold. During the three and six months ended December 31, 2006 and 2005, proceeds
from securities sold and the realized gains were not significant.LeasesThe Company leases facilities and equipment used in its operations, some of which are
required to be capitalized in accordance with SFAS No. 13, Accounting for Leases (FAS
13). FAS 13 requires the capitalization of leases meeting certain criteria, with the
related asset being recorded in property, plant and equipment subject to amortization and an
offsetting amount recorded as a liability.Rental payments, including rent escalations, rent holidays, rent concessions and leasehold
improvement incentives in connection with operating leases of real property, are amortized
on a straight-line basis over the lease term.Income TaxesThe asset and 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. A
valuation allowance is provided when the Company determines that it is more likely than not
that a portion of the deferred tax asset balances will not be realized.The provision for income taxes of $7.4 million and $8.8 million for the three months ended
December 31, 2006 and 2005, respectively, represent an effective tax rate of 33.9% in 2006
and 43.5% in 2005. For the three months ended December 31, 2005, the effective tax rate was
impacted by the U.S. tax on repatriation of earnings under the American Jobs Creation Act of
2004 (AJCA).The provision for income taxes of $12.4 million and $13.5 million for the six months ended
December 31, 2006 and 2005, respectively, represent an effective tax rate of 30.3% in 2006
and 39.1% in 2005. The effective tax rate for the six months ended December 31, 2006 was
impacted by the reversal in the first quarter of
Fiscal 2007 of a loss contingency for state taxes for which the statute of limitations had expired. For the six months ended
December 31, 2005, the effective tax rate was impacted by the U.S. tax on the repatriation
of earnings under the AJCA and permanent differences associated with certain error
corrections in the Life Insurance business.New Accounting PronouncementsIn May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
Accounting for Changes and Error Corrections  A Replacement of APB Opinion No. 20 and FASB
Statement No. 3 (FAS 154). FAS 154 requires retrospective application to prior period
financial statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. The
Company has adopted FAS 154 effective July 1, 2006. The adoption of FAS 154 did not have a
material impact on the Companys financial position and results of operations.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments  an amendment to FASB Statements No. 133 and 144 (FAS 155). FAS 155
simplifies the accounting for certain hybrid financial instruments containing embedded
derivatives. FAS 155 allows fair value measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation under FAS 133. In
addition, it amends FAS 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. The Company has adopted FAS 155
effective July 1, 2006. The adoption of FAS 155 did not have a material impact on the
Companys financial position and results of operations.
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In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets 
an amendment of FASB Statement No. 140 (FAS 156). This Statement amends FASB Statement
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to accounting for separately recognized servicing assets and
servicing liabilities. This Statement clarifies when servicing rights should be separately
accounted for, requires companies to account for separately recognized servicing rights
initially at fair value, and gives companies the option of subsequently accounting for those
servicing rights at either fair value or under the amortization method. FAS 156 is effective
for fiscal years beginning after September 15, 2006 (the Companys Fiscal 2008). The
implementation of FAS 156 is not expected to have a material impact on its consolidated
financial statements.In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial
statements. This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Specifically, FIN 48 requires the recognition in financial
statements of the impact of a tax position, if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. Additionally, FIN
48 provides guidance on the derecognition of previously recognized deferred tax items,
classification, accounting for interest and penalties, and accounting in interim periods
related to uncertain tax positions, as well as, requires expanded disclosures. FIN 48 is
effective for fiscal years beginning after December 15, 2006 (the Companys Fiscal 2008),
with the cumulative effect of the change in accounting principle recorded as an adjustment
to opening retained earnings. The Company has not completed its evaluation of adopting FIN
48.In September 2006, the FASB issued SFAS No. 157, Fair Value Measures (FAS 157). FAS 157
defines fair value and establishes a framework for measuring fair value in accordance with
generally accepted accounting principles. This Statement also applies to other accounting
pronouncements that require or permit a fair value measure. As defined by this Statement,
the fair value of an Asset or Liability would be based on an exit price basis rather than
an entry price basis. Additionally, the fair value should be market-based and not an
entity-based measurement. FAS 157 is effective for fiscal years beginning after November 15,
2007 (the Companys Fiscal 2009). The Company has not completed its evaluation of adopting
FAS 157 but does not expect the implementation of FAS 157 to have a material impact on its
consolidated financial statements.In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements (SAB 108), which provides interpretive guidance on
the consideration of the effects of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. SAB 108 is effective for the
first fiscal year ending after November 15, 2006. The Company plans to apply the provisions
of SAB 108 in its Annual Report on Form 10-K for the year ending June 30, 2007. The Company
does not expect the application of this interpretation to have an impact on its financial
position or results of operations.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (FAS 159). FAS 159 enables companies to report selected
financial assets and liabilities at their fair value. This statement also requires companies
to provide additional information to help investors and other users of financial statements
understand the effects of a companys election to use fair value on its earnings. FAS 159
requires companies to display the fair value of assets and liabilities on the face of the
balance sheet when a company elects to use fair value. FAS 159 is effective for fiscal years
beginning after November 15, 2007 (the Companys Fiscal 2009). The Company has not completed
its evaluation of adopting FAS 159.2.
    
    Use of EstimatesThe 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
goodwill, acquired intangible assets, income taxes, legal and regulatory contingencies, and
revenue recognition.
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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.3.
    
    Comprehensive IncomeThe components of comprehensive income are as follows:
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    14,311
    
    
    $
    22,257
    
    
    $
    28,274
    
    
    $
    35,687Unrealized gain on investments, net of
tax
    
    
    4
    
    
    
    15
    
    
    
    6
    
    
    
    31Unrealized gain (loss) on foreign
currency exchange contracts
    
    
    
    
    
    
    61
    
    
    
    (23
    )
    
    
    125Foreign currency translation adjustment
    
    
    (167
    )
    
    
    3
    
    
    
    73
    
    
    
    (71
    )Total comprehensive income
    
    $
    14,148
    
    
    $
    22,336
    
    
    $
    28,330
    
    
    $
    35,772
 4.
    
    Per Share DataAmounts utilized in per share computations for the three and six months ended December 31,
2006 and 2005 are as follows:
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average
common shares
outstanding
    
    
    119,898
    
    
    
    118,880
    
    
    
    119,668
    
    
    
    118,705Assumed conversion of
common shares
issuable under
stock-based
compensation plans
    
    
    134
    
    
    
    358
    
    
    
    287
    
    
    
    914Weighted average
common and common
equivalent shares
outstanding
    
    
    120,032
    
    
    
    119,238
    
    
    
    119,955
    
    
    
    119,619
   Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Number of options excluded
    
    
    7,602
    
    
    
    10,200
    
    
    
    7,602
    
    
    
    8,976Option price per share
    
    $
    11.81 to $35.10
    
    
    $
    13.30 to $35.30
    
    
    $
    11.81 to $35.10
    
    
    $
    14.18 to $35.30Average market price of
common shares for the
period
    
    
    $11.79
    
    
    
    $13.23
    
    
    
    $11.65
    
    
    
    $14.14
 9




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##### Table of Contents



5.
    
    Share-Based CompensationIn December 2004, the FASB issued SFAS 123R, Share-Based Payment (FAS 123R) that
requires companies to expense the value of employee stock purchase plans, stock option
grants and similar awards at the beginning of their next fiscal year that begins after June
15, 2005 and requires the use of either the modified prospective or the modified
retrospective application method. The Company adopted FAS 123R on July 1, 2005 under the
modified prospective method; as such, prior periods do not include share-based compensation
expense related to FAS 123R. The modified prospective method requires the application of FAS
123R to new awards and to awards modified, repurchased or cancelled after the effective
date. Additionally, compensation cost for the portion of outstanding awards for which
service has not been rendered (such as unvested options) that are outstanding as of the date
of adoption are recognized as the remaining services are rendered. The Company recognizes
the fair value of stock-based compensation awards in service and operating expense or
selling, general and administrative expense based upon the department classification of each
employee in the condensed consolidated statements of income on a straight-line basis over
the vesting period.The Companys stock-based compensation primarily consists of the following:Stock Options:The Company generally grants stock options to employees and directors at
exercise prices equal to fair market value of the Companys stock at the dates of grant.
Stock options are typically granted in the first fiscal quarter, generally vest 20% one year
from date of grant and 20% each year thereafter and expire 10 years from the date of the
award. The Company recognizes compensation expense for the fair value of the stock options
on a straight-line basis over the vesting period of each stock option award.Restricted Stock:The Company awards shares of stock to employees that are restricted.
Except for limited exceptions for some non-U.S. employees, the holder of restricted stock
has voting rights and is entitled to receive all distributions including any dividends paid
with respect to the stock during the period of restriction. The Company recognizes
compensation expense relating to the issuance of restricted stock based on market price on
the date of award over the period during which the restrictions expire, which is generally
four years from the date of grant, on a straight-line basis.Employee Stock Purchase Plan:The Company offers an employee stock purchase plan that grants
eligible employees the right to purchase a limited number of shares of common stock each
calendar year through payroll deductions at 85% of the lower of either (1) the closing price
of the Companys common stock on the first business day of the plan year (grant date) or (2)
the closing price of the Companys common stock on the last business day of the plan year
(exercise date). Compensation expense is based upon the 15% discount and the fair value of
the look-back feature under the employee stock purchase plan and is recognized ratably over
the plan year, adjusted for withdrawals.During the three months ended December 31, 2006, the Company recognized approximately $2.9
million of stock-based compensation expense ($0.9 million relating to stock option, $1.3
million relating to restricted stock and $0.7 relating to employee stock purchase plan).
During the six months ended December 31, 2006, the Company recognized approximately $4.8
million of stock-based compensation expense ($1.5 million relating to stock option, $2.6
million relating to restricted stock and $0.7 relating to employee stock purchase plan).
During the three and six months ended December 31, 2006, the Company recognized $0.5 million
and $1.1 million, respectively, in related tax benefits. As of December 31, 2006, the total
remaining unrecognized compensation cost related to non-vested stock options and restricted
stock awards, net of forfeitures, was approximately $19.9 million and is expected to be
recognized over an estimated weighted amortization period of 4.39 years. During the six
months ended December 31, 2006, the Company modified 416,464 stock options by extending the
life of the options through December 31, 2006. The financial impact of the modification was
$0.4 million.
 10




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##### Table of Contents



Six Months EndedDecember 31,2006
    
    2005Expected life (in years)
    
    
    5.23
    
    
    
    4.08Average risk-free interest rate
    
    
    4.83
    %
    
    
    4.11
    %Expected volatility
    
    
    40.5
    %
    
    
    39.6
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Total intrinsic
value of stock
options exercised
    
    $
    
    
    
    $
    786
    
    
    $
    170
    
    
    $
    1,724Total fair value of
stock options vested
    
    
    559
    
    
    
    540
    
    
    
    1,109
    
    
    
    1,127Cash received from
stock option
exercises
    
    $
    
    
    
    $
    2,831
    
    
    $
    593
    
    
    $
    5,822
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueOutstanding, June 30, 2006
    
    
    10,262
    
    
    $
    19.45Granted
    
    
    513
    
    
    
    11.46Exercised
    
    
    (70
    )
    
    
    8.51Forfeited or expired
    
    
    (2,686
    )
    
    
    20.36Outstanding, December 31,
2006
    
    
    8,019
    
    
    $
    18.73
    
    
    
    4.36
    
    
    $
    2,059Exercisable, December 31,
2006
    
    
    6,941
    
    
    $
    19.59
    
    
    
    3.73
    
    
    $
    1,583
 11




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##### Table of Contents



WeightedNumber of
    
    
    Average FairShares
    
    
    ValueUnvested at June 30, 2006
    
    
    1,176
    
    
    $
    6.08Granted
    
    
    513
    
    
    
    4.67Vested
    
    
    (323
    )
    
    
    5.45Forfeited or expired
    
    
    (288
    )
    
    
    6.44Unvested at December 31, 2006
    
    
    1,078
    
    
    $
    5.50
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average Fair
    
    
    Vesting Term
    
    
    IntrinsicShares
    
    
    Value
    
    
    (years)
    
    
    ValueUnvested at June 30, 2006
    
    
    1,145
    
    
    $
    14.83
    
    
    
    3.57
    
    
    $
    16,988Granted
    
    
    533
    
    
    
    10.69
    
    
    
    3.70
    
    
    
    5,694Vested
    
    
    (320
    )
    
    
    15.01
    
    
    
    
    
    
    
    (4,797
    )Forfeited
    
    
    (223
    )
    
    
    14.41
    
    
    
    2.53
    
    
    
    (3,218
    )Unvested at December 31,
2006
    
    
    1,135
    
    
    $
    12.92
    
    
    
    2.97
    
    
    
    14,667
 At December 31, 2006, options to purchase 9.6 million shares were available for grant under
the Companys stock option and restricted stock plans. At December 31, 2006, there were 0.8
million shares available for grant under the employee stock purchase plan.The Company has a policy of utilizing shares held in treasury to satisfy stock option
exercises and share issuances in connection with its employee stock purchase plan and does
not expect to repurchase any additional shares in the open market until it completes its
evaluation of strategic alternatives.6.
    
    RestructuringThe Company did not incur any restructuring costs during the six months ended December 31,
2006 and 2005. In Fiscal 2006, restructuring charges of $1.4 million were primarily related
to the completion of the relocation of the Companys corporate headquarters from New York to
Roseland, New Jersey. The restructuring charges represent the excess of the future minimum
lease commitments of the former New York headquarters over the expected sublease income,
partially offset by a related deferred rent liability of approximately $0.3 million. The
following summarizes activity with respect to the Companys restructuring activities for the
six months ended December 31, 2006:
 Restructuring accrual at June 30, 2006
    
    $
    1,729Expense provision:Facility closure
    
    
    Cash payments and other
    
    
    348Remaining accrual at December 31, 2006:Facility closure
    
    
    1,381Total
    
    $
    1,381
 12




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##### Table of Contents



7.
    
    Litigation and Regulatory InvestigationsLitigationFollowing the Companys May 17, 2004 announcement regarding the restatement of its financial
results, seven putative class action and two derivative lawsuits were filed against the
Company and certain of its current and former officers in the United States District Court
for the Southern District of New York. By order of the Court, all but one of the putative
class actions were consolidated into a single action, and on October 25, 2004, plaintiffs
filed a consolidated amended complaint generally alleging that during the class period the
Company, certain of its officers, and its independent registered public accounting firm
allegedly violated the federal securities laws in connection with the purported issuance of
false and misleading information concerning the Companys financial condition. On October
28, 2005, the Court dismissed certain claims under the Securities Exchange Act of 1934 as to
six of the individual defendants, narrowed certain additional claims against the Company and
the individual defendants and dismissed all claims as to the Companys independent
registered public accounting firm.The remaining putative class action purported to be brought on behalf of all persons who
acquired BISYS securities from the Company as part of private equity transactions during the
class period. The complaint generally asserted that the Company and certain of its officers
allegedly violated the federal securities laws in connection with the purported issuance of
false and misleading information concerning the Companys financial condition, and seeks
damages in an unspecified amount. The Court subsequently consolidated plaintiffs complaint
into the above complaint, but in August 2006, a magistrate judge issued a recommendation to
the Court that it not certify the proposed class of non-publicly traded Company security
holders. Plaintiff subsequently filed objections to the magistrate judges recommendation.On October 16, 2006, the Company announced that it had reached an agreement in principle to
settle the consolidated class action lawsuit (including claims relating to the second
restatement filed on April 26, 2006), as well as the remaining putative class lawsuit on an
individual basis. The parties signed two definitive stipulations of settlement dated as of
October 30, 2006. Under the proposed settlements, the Company paid an aggregate of $66.5
million in cash into escrow accounts on November 15 and 16, 2006. The consolidated class
action settlement received preliminary Court approval on November 6, 2006 but remains
subject to, among other things, final Court approval. Following such approval, the funds
will be disbursed to certain purchasers of BISYS securities according to a Court-approved
distribution plan. A fairness hearing for the consolidated class action settlement was held
on January 18, 2007, at which time the Court took the matter under advisement. If the Court
determines that the settlement is fair to the class members, the settlement will be
approved. The settlements include no admission of wrongdoing by the Company or any of the
individual defendants, and were funded through a combination of cash on hand and the
Companys existing credit facility. The Company has reached an agreement with three of its
insurers to recover a total of $16 million under its $25 million directors and officers
liability policy. The Company has also filed a request for mediation under its insurance
policy to assert a claim against an additional insurance carrier. The claim is for recovery
of monetary losses of $5 million paid by the Company in excess of policy limits to settle
the securities class action lawsuit. There can be no assurance that the claim will be
successful. The Company will not record a recovery related to this claim prior to final
settlement.The derivative complaints filed in 2004 purported to be brought on behalf of the Company and
generally asserted that certain officers and directors were 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 time of the filing. The derivative
complaints sought disgorgement, a constructive trust and damages in an unspecified amount.
The Court ordered that the derivative actions be consolidated into a single action and on
November 24, 2004, plaintiffs filed a consolidated amended complaint. On January 24, 2005,
the Company and the individual defendants filed separate motions to dismiss the complaint.
On October 31, 2005, the Court granted defendants motions, dismissing on the merits
plaintiffs claim under Section 304 of the Sarbanes-Oxley Act of 2002 on the ground that the
Act does not create a private right of action upon which plaintiffs may sue. Having so
ruled, the Court also dismissed plaintiffs state law claims on the ground that it lacked
subject matter jurisdiction over them. Plaintiffs appealed the rulings, but subsequently
determined to dismiss with prejudice their appeal to the United States Court of Appeals for
the Second Circuit and the Company agreed to such dismissal. Plaintiffs then filed two
derivative complaints in New Jersey state court raising similar claims. One of these actions
was subsequently dismissed. On February 27, 2007, the Company reached an agreement in
principle with the remaining plaintiff to settle the claims brought in the plaintiffs
complaint.
 13




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##### Table of Contents



Regulatory Investigations
    14




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##### Table of Contents



December 31,
    
    
    June 30,2006
    
    
    2006Regulatory settlement  Fund Services
    
    $
    
    
    
    $
    21,403Class action suit settlement
    
    
    
    
    
    
    66,500SEC settlement  financial restatements
    
    
    25,100
    
    
    
    25,100Derivative settlement
    
    
    775
    
    
    
    Other
    
    
    2,358
    
    
    
    2,358$
    28,233
    
    
    $
    115,361
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Litigation
    
    $
    3,867
    
    
    $
    2,997
    
    
    $
    9,400
    
    
    $
    7,275Regulatory settlement
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    203Derivative settlement
    
    
    775
    
    
    
    
    
    
    
    775
    
    
    
    Insurance recoveries
    
    
    (5,355
    )
    
    
    
    
    
    
    (9,148
    )
    
    
    $
    (713
    )
    
    $
    3,036
    
    
    $
    1,027
    
    
    $
    7,478
 15




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##### Table of Contents



In Fiscal 2006, the Company reached an agreement regarding coverage with its insurance
carriers that resulted in an insurance recovery of $11.9 million for certain legal expenses
incurred by the Company in connection with the aforementioned litigation and investigatory
matters. For the three and six months ended December 31, 2006, the Company recognized
additional insurance recoveries of $5.3 million and $9.1 million, respectively. Amounts
recovered have been recognized as a reduction to legal expenses and related litigation
settlements. To date, the Company has received total insurance proceeds of $16.0
million associated with its directors and officers policy and $5.0 million associated with
its errors and omissions policy, representing the final agreed payments from three of its
insurance carriers. The Company filed a request for mediation under its policy to assert a
claim against the remaining excess carrier.Legal fees and related costs for litigation arising in the ordinary course of business, and
exclusive of the specific aforementioned litigation and investigatory matters, are included
in the caption, Selling, general and administrative in the accompanying consolidated
statements of income.8.
    
    Goodwill and Intangible AssetsGoodwillThe changes in carrying amount of goodwill by business segment for the six months ended
December 31, 2006 were as follows:
 Investment
    
    
    Insurance
    
    
    TotalServices
    
    
    ServicesBalance, June 30, 2006
    
    $
    362,858
    
    
    $
    353,952
    
    
    $
    716,810Additions
    
    
    
    
    
    
    9,142
    
    
    
    9,142Adjustments to previous acquisitions
    
    
    
    
    
    
    (46
    )
    
    
    (46
    )Balance, December 31, 2006
    
    $
    362,858
    
    
    $
    363,048
    
    
    $
    725,906
 Intangible Assets
  Gross Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    ValueCapitalized software
    
    $
    64,353
    
    
    $
    (38,818
    )
    
    $
    25,535Customer related
    
    
    185,562
    
    
    
    (86,663
    )
    
    
    98,899Noncompete agreements
    
    
    16,836
    
    
    
    (11,801
    )
    
    
    5,035Other
    
    
    4,115
    
    
    
    (2,669
    )
    
    
    1,446Total
    
    $
    270,866
    
    
    $
    (139,951
    )
    
    $
    130,915
  Gross Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    ValueCapitalized software
    
    $
    59,983
    
    
    $
    (35,181
    )
    
    $
    24,802Customer related
    
    
    185,580
    
    
    
    (77,832
    )
    
    
    107,748Noncompete agreements
    
    
    16,299
    
    
    
    (11,014
    )
    
    
    5,285Other
    
    
    3,695
    
    
    
    (2,353
    )
    
    
    1,342Total
    
    $
    265,557
    
    
    $
    (126,380
    )
    
    $
    139,177
 16




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##### Table of Contents



Fiscal Year
    
    Amount2007
    
    $
    18,5762008
    
    
    31,7532009
    
    
    27,2442010
    
    
    17,8862011
    
    
    13,045Thereafter
    
    
    22,411
 9.
    
    Borrowings
 2006 Credit Facility
     2004 Credit Facility
  17




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##### Table of Contents



December 31, 2006
    
    
    June 30, 2006Interim facility, at a rate of 6.14%
    
    $
    20,000
    
    
    $
    Capital lease obligations
    
    
    3,960
    
    
    
    4,54623,960
    
    
    
    4,546Less amounts due within one year
    
    
    21,769
    
    
    
    1,656Long-term debt
    
    $
    2,191
    
    
    $
    2,890
 10.
    
    Business Segment InformationThe Company provides business outsourcing solutions to financial institutions and other
financial organizations. The Companys continuing operations have been classified into two
business segments: Investment Services and Insurance Services.The Companys reportable segments are separately managed strategic business units that offer
different products and services, and they are based on the Companys method of internal
reporting. The businesses that comprise the Investment Services segment are Fund Services,
Alternative Investment Services and Retirement Services. 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 retirement plans. The Insurance Services
segment, comprised of the Life Insurance Services and Commercial Insurance Services
businesses, provides distribution solutions for commercial property and casualty, annuities,
life, long-term care, disability, and special risk insurance products.
 18




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Investment Services
    
    $
    156,088
    
    
    $
    142,804
    
    
    $
    307,748
    
    
    $
    292,081Insurance Services
    
    
    65,184
    
    
    
    64,471
    
    
    
    125,059
    
    
    
    120,868Total consolidated revenues
    
    $
    221,272
    
    
    $
    207,275
    
    
    $
    432,807
    
    
    $
    412,949Operating earnings for
reportable segments:Investment Services
    
    $
    16,016
    
    
    $
    14,687
    
    
    $
    33,031
    
    
    $
    34,134Insurance Services
    
    
    16,543
    
    
    
    19,909
    
    
    
    27,129
    
    
    
    32,753Total
    
    $
    32,559
    
    
    $
    34,596
    
    
    $
    60,160
    
    
    $
    66,887Less reconciling items:Corporate expenses
    
    $
    12,767
    
    
    $
    8,317
    
    
    $
    20,977
    
    
    $
    17,486Litigation and regulatory
settlements (net of
recoveries):Investment Services
    
    $
    
    
    
    $
    39
    
    
    $
    
    
    
    $
    203Insurance Services
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    1,131Corporate
    
    
    (713
    )
    
    
    2,596
    
    
    
    1,027
    
    
    
    6,144Total litigation and
regulatory settlements
    
    $
    (713
    )
    
    $
    3,036
    
    
    $
    1,027
    
    
    $
    7,478Total consolidated
operating earnings
    
    $
    20,505
    
    
    $
    23,243
    
    
    $
    38,156
    
    
    $
    41,923
 December 31,
    
    
    June 30,2006
    
    
    2006Assets:Investment Services
    
    $
    633,975
    
    
    $
    631,696Insurance Services
    
    
    609,896
    
    
    
    601,036Corporate
    
    
    78,593
    
    
    
    166,011Total
    
    $
    1,322,464
    
    
    $
    1,398,743
 11.
    
    AcquisitionsAssets acquired and liabilities assumed in business combinations were recorded on the
Companys condensed consolidated balance sheets based on their estimated fair values as of
the respective acquisition dates. The results of operations of business acquired by the
Company have been included in the Companys condensed statements of income as of their
respective acquisition date through the end of the interim period. The excess of the
purchase price over the estimated fair values of the assets acquired (both tangible and
intangible) and liabilities assumed was allocated to goodwill. In certain circumstances, the
allocations of the excess purchase
 19




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##### Table of Contents



price are based upon preliminary estimates and assumptions. Accordingly, the allocations are
subject to adjustments based on final information, including appraisals and other analyses.The Company acquired Ramkade Insurance Services, Inc. (d/b/a TIME Financial Services), a
life insurance services business, on July 13, 2006 for cash consideration of approximately
$9.0 million, excluding potential additional earn-out consideration. The acquisition
resulted in approximately $5.1 million of goodwill. Intangible assets acquired, which
totaled approximately $1.6 million, consist primarily of broker contract rights, commission
renewals and non-compete agreements that are being amortized over a weighted average life of
6.87 years. Proforma information has not been presented due to the lack of materiality. The
total amount of goodwill assigned is not deductible for tax purposes.The Company acquired substantially all the assets of D&O Concepts, Inc., David A. Ratner
Associates, Inc. and David A. Ratner Associates of New Jersey, Inc., a commercial insurance
services business, on September 1, 2006 for cash consideration of approximately $4.4
million, excluding potential additional earn-out consideration. The acquisitions resulted in
approximately $2.2 million of goodwill. Intangible assets acquired, which totaled
approximately $2.2 million consists primarily of customer relationships and non-compete
agreements that are being amortized over a weighted average life of 6.94 years. Proforma
information has not been presented due to the lack of materiality. The total amount of
goodwill assigned is expected to be deductible for tax purposes.The Company acquired substantially all the assets of the environmental solutions business of
James C. Hermann & Associates Ltd., a commercial insurance services business, on September
7, 2006 for cash consideration of approximately $2.3 million, excluding potential additional
earn-out consideration. The acquisition resulted in approximately $1.8 million of goodwill.
Intangible assets acquired, which totaled approximately $0.5 million consists primarily of
customer relationships and non-compete agreements that are being amortized over a weighted
average life of 6.73 years. Proforma information has not been presented due to the lack of
materiality. The total amount of goodwill assigned is expected to be deductible for tax
purposes.12.
    
    Discontinued OperationsOn September 15, 2005, the Company entered into an agreement to sell its Information
Services segment, which included the Banking Solutions and Document Solutions divisions, to
Open Solutions Inc. (OSI) for $471.3 million in cash. The transaction closed on March 3,
2006, and the Company recognized an after-tax gain of $203.7 million.The Company has classified the results of operations of these
businesses as discontinued operations. Operating results of these discontinued operations were as follows:
 Three months ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    52,319
    
    
    $
    
    
    
    $
    103,155Expenses
    
    
    (460
    )
    
    
    34,122
    
    
    
    (444
    )
    
    
    74,701Income from
discontinued
operations, before
taxes
    
    
    460
    
    
    
    18,197
    
    
    
    444
    
    
    
    28,454Applicable income taxes
    
    
    590
    
    
    
    7,365
    
    
    
    652
    
    
    
    13,810Income (loss) from
discontinued
operations, net of tax
    
    $
    (130
    )
    
    $
    10,832
    
    
    $
    (208
    )
    
    $
    14,644
 The total tax expense associated with the disposition of the Information Services segment
was $151.6 million, consisting of $156.7 million associated with the gain on the sale offset
by a $5.1 million reversal of deferred tax liability associated with the business segment.
All of these taxes associated with the disposition have been paid: $143.7 million during the
fourth quarter of Fiscal 2006 and $13.0 million in July 2006.13.
    
    Repatriation of Foreign EarningsThe Company evaluated the provisions of the American Jobs Creation Act of 2004 (the AJCA),
which includes a temporary incentive for U.S. multinationals to repatriate foreign earnings
at a substantially reduced
 20




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##### Table of Contents



effective tax rate. The Company repatriated $33.7 million in Fiscal 2006 ($22.7 million in
November 2005 and $11.0 million in June 2006) from certain of its foreign subsidiaries under
the AJCA. The Company recorded tax charges of $1.3 million in November 2005 and $0.6 million
in June 2006 for this repatriation.14.
    
    Other CommitmentsOn September 12, 2006, in connection with its initiative
to explore strategic alternatives, the Company
 entered into retention bonus agreements with certain key employees, including certain
executive officers of the Company. Under these agreements, the Company offered two separate bonus
opportunities of equal amounts to selected employees. The first bonus payment became payable
March 8, 2007, provided that the employee remained with the Company. The second bonus
payment will be payable September 8, 2007, if the employee remains with the Company and
there has been a change in control of the Company. If any employee voluntarily terminates
employment or is terminated for cause before a payment is made, the employee would not
receive that payment. Aggregate future payments in connection with these bonuses and other
retention bonuses may range up to $13.0 million. The Company recognized the first bonus as
compensation expense ratably over the service period, which ended on March 8, 2007. The
second bonus will be recognized ratably over the remaining applicable service period upon
the consummation of a change of control of the Company as specified in the agreement. For
the three and six months ended December 31, 2006, the Company recognized compensation
expense associated with these agreements of $3.7 million and $4.7 million, respectively.15.
    
    Subsequent EventOn February 1, 2007, the Company entered into an agreement to acquire from Empire Fire and
Marine Insurance Company all of the issued and outstanding shares of common stock of
Truckwriters, Inc., a commercial insurance services business. The aggregate purchase price
of the acquisition is $11 million, less any amount of indebtedness, at the closing date.
 21




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Overview
    Recent Developments
   Results of Operations
  22




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##### Table of Contents



Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Operating costs and expenses:Service and operating
    
    
    66.5
    
    
    
    63.2
    
    
    
    66.6
    
    
    
    63.9Selling, general and administrative
    
    
    18.8
    
    
    
    18.3
    
    
    
    18.5
    
    
    
    18.3Depreciation and amortization
    
    
    5.7
    
    
    
    5.8
    
    
    
    5.9
    
    
    
    5.8Litigation and regulatory settlements
    
    
    (0.3
    )
    
    
    1.5
    
    
    
    0.2
    
    
    
    1.8Total operating costs and expenses
    
    
    90.7
    
    
    
    88.8
    
    
    
    91.2
    
    
    
    89.8Operating earnings
    
    
    9.3
    
    
    
    11.2
    
    
    
    8.8
    
    
    
    10.2Interest income
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.6Interest expense
    
    
    (0.2
    )
    
    
    (2.2
    )
    
    
    (0.3
    )
    
    
    (2.5
    )Investment gains and other
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Income from continuing operations
before income taxes
    
    
    9.9
    
    
    
    9.7
    
    
    
    9.4
    
    
    
    8.4Income taxes
    
    
    3.4
    
    
    
    4.2
    
    
    
    2.9
    
    
    
    3.3Income from continuing operations
    
    
    6.5
    
    
    
    5.5
    
    
    
    6.5
    
    
    
    5.1Income (loss) from discontinued
operations, net of tax
    
    
    
    
    
    
    5.2
    
    
    
    
    
    
    
    3.5Net income
    
    
    6.5
    %
    
    
    10.7
    %
    
    
    6.5
    %
    
    
    8.6
    %
 Second Quarter 2007 vs. Second Quarter 2006
 Continuing Operations
    23




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Discontinued Operations
  First Six Months 2007 vs. First Six Months 2006
 Continuing Operations
      24




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Discontinued Operations
  Restructuring and Impairment Charges
  Restructuring accrual at June 30, 2006
    
    $
    1,729Expense provision:Facility closure
    
    
    Cash payments and other
    
    
    348Remaining accrual at December 31, 2006:Facility closure
    
    
    1,381Total
    
    $
    1,381
 Litigation and Regulatory Settlements
   December 31,
    
    
    June 30,2006
    
    
    2006Regulatory settlement  Fund Services
    
    $
    
    
    
    $
    21,403Class action suit settlement
    
    
    
    
    
    
    66,500SEC settlement  financial restatements
    
    
    25,100
    
    
    
    25,100Derivative settlement
    
    
    775
    
    
    
    Other
    
    
    2,358
    
    
    
    2,358$
    28,233
    
    
    $
    115,361
 25




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Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Litigation
    
    $
    3,867
    
    
    $
    2,997
    
    
    $
    9,400
    
    
    $
    7,275Regulatory settlement
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    203Derivative settlement
    
    
    775
    
    
    
    
    
    
    
    775
    
    
    
    Insurance recoveries
    
    
    (5,355
    )
    
    
    
    
    
    
    (9,148
    )
    
    
    $
    (713
    )
    
    $
    3,036
    
    
    $
    1,027
    
    
    $
    7,478
   26




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##### Table of Contents



Segment Information
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Investment Services
    
    $
    156,088
    
    
    $
    142,804
    
    
    $
    307,748
    
    
    $
    292,081Insurance Services
    
    
    65,184
    
    
    
    64,471
    
    
    
    125,059
    
    
    
    120,868Total consolidated revenues
    
    $
    221,272
    
    
    $
    207,275
    
    
    $
    432,807
    
    
    $
    412,949Operating earnings for
reportable segments:Investment Services
    
    $
    16,016
    
    
    $
    14,687
    
    
    $
    33,031
    
    
    $
    34,134Insurance Services
    
    
    16,543
    
    
    
    19,909
    
    
    
    27,129
    
    
    
    32,753Total
    
    $
    32,559
    
    
    $
    34,596
    
    
    $
    60,160
    
    
    $
    66,887Less reconciling items:Corporate expenses
    
    $
    12,767
    
    
    $
    8,317
    
    
    $
    20,977
    
    
    $
    17,486Litigation and regulatory
settlements (net of
recoveries):Investment Services
    
    $
    
    
    
    $
    39
    
    
    $
    
    
    
    $
    203Insurance Services
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    1,131Corporate
    
    
    (713
    )
    
    
    2,596
    
    
    
    1,027
    
    
    
    6,144Total litigation and
regulatory settlements
    
    $
    (713
    )
    
    $
    3,036
    
    
    $
    1,027
    
    
    $
    7,478Total consolidated
operating earnings
    
    $
    20,505
    
    
    $
    23,243
    
    
    $
    38,156
    
    
    $
    41,923Operating margins:Investment Services
    
    
    10.3
    %
    
    
    10.3
    %
    
    
    10.7
    %
    
    
    11.7
    %Insurance Services
    
    
    25.4
    %
    
    
    30.9
    %
    
    
    21.7
    %
    
    
    27.1
    %
 Investment Services
 Revenues
  27




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Operating Earnings
  Insurance Services
 Revenues
  Operating Earnings
  Corporate Expenses
  28




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Financial Condition
   Liquidity and Capital Resources
     29




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Six Months Ended
    
    Year EndedDecember 31, 2006
    
    June 30, 2006Shares
    
    Cost
    
    Shares
    
    CostShare repurchase programs:$100 million, authorized
November 2003
    
    
    103
    
    
    $
    1,095
    
    
    
    76
    
    
    $
    1,140
 30




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Critical Accounting Policies
  New Accounting Pronouncements
      31




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Off-Balance Sheet Arrangements
  Forward-Looking Statements
   32




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33




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    34




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ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    Changes in Internal Control Over Financial Reporting
  Managements Remediation Efforts
  1.
    
    Control environment.We have taken, and are developing further plans to take,
significant actions to improve our control environment and eliminate the material
weakness. The Company hired a new CFO in August 2005 to oversee the transition of
financial responsibilities, address staffing matters and implement improved controls
and procedures. Our CEO and CFO, together with other senior executives, are committed
to maintaining a strong control environment, high ethical standards and financial
reporting integrity. Several of these steps have been taken as of the date of this
filing but have not been in place for a sufficient period of time for management to
conclude that the material weakness has been remediated:
 
    
    Evaluated key financial positions and added senior management personnel focused
on financial accounting, financial reporting and financial controls, resulting in
the replacement of eight out of the ten most senior finance positions in the
Company including CFO, Controller, Vice President of Internal Audit, and Assistant
Controller. We continue to evaluate and take appropriate actions with
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respect to certain employees in management, internal audit and financial reporting
functions, which may include further training, supervision and/or reassignment.
    
    Created a direct reporting line from the business unit accountants to the
Corporate Controller in an effort to ensure the independence of accounting
decisions.
    
    Created new controller positions for each of our businesses.
    
    Continue to develop and revise our written accounting policies and procedures to
establish a comprehensive up-to-date accounting manual, including revenue and
expense recognition guidelines and processes.
    
    Establish enhanced quarterly accounting reviews and formal training programs for
financial staff in an effort to ensure all relevant personnel are familiar with our
accounting policies, control processes and have the necessary competency, training
and supervision for their assigned level of responsibility and the nature and
complexity of our business.
    
    Required all finance staff to complete ethics training.
    
    Engaged third party education material vendor to provide course material for
continuing education for all finance personnel.
    
    Continue to enhance our tone at the top and whistleblower procedures,
including the engagement of a third party vendor to provide an independent
whistleblower hotline service, to increase the likelihood that concerns related to
financial reporting or the control environment will be timely reported and properly
evaluated.
    
    Maintain and enhance a quarterly and annual sub-certification process requiring
written confirmations from business and finance managers as to the operating
effectiveness of our disclosure controls and procedures and internal control over
financial reporting.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.2.
    
    Controls over revenue recognition. The following are the actions we have taken
or plan on taking, to improve our controls over revenue recognition and eliminate the
material weakness:
 
    
    Implemented procedures to ensure new customer contracts are identified and
evaluated by the appropriate level of personnel within each operating division to
ensure proper recording of revenue and deferred revenue, with particular attention
given to contracts with up front payments terms, including conversion fees.
    
    Developed procedures to ensure the accounting for significant and unusual
contracts are reviewed by qualified, senior level personnel within the corporate
finance department.
    
    Continue to enhance contractual documentation requirements for all new and
existing business relationships to ensure proper accounting treatment and
disclosure.
    
    Implement procedures to enhance month-end closing procedures to ensure that
timely, effective and consistent reconciliations are performed and reviewed by
qualified personnel within the finance organization, with particular emphasis on
revenue recorded for services yet to be billed.
    
    Continue to add and retain technical accounting personnel and enhance
supervision with regard to, among other things, timely account analysis and review
and approval of significant revenue transactions.
    
    Continue to develop processing systems to provide more automation, accuracy and
control in invoicing and recording revenue transactions.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.3.
    
    Controls over insurance commissions payable. The following are the actions we
are taking, or plan on taking, to improve our controls over insurance commission
payables and eliminate the material weakness:
 
    
    Continue to develop processing systems to provide more automation, accuracy and
control in recording insurance commissions payable transactions.
    
    Continue to improve procedures for verifying and documenting insurance
commissions payable, including the review of account reconciliations, account
analyses and supporting documentation.
    
    Continue to implement procedures ensuring qualified, senior level personnel
within the finance organization review the impact of insurance commissions
receivable and commissions payable
 36




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##### Table of Contents



transactions, including supporting documentation, and are responsible for the review
and approval of all related accounting considerations and schedules.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.4.
    
    Controls over segregation of duties at certain international locations.The
following are the actions we are taking, or plan on taking, to improve our controls
over certain international locations in our Hedge Fund Services business and eliminate
the material weakness:
 
    
    Continue to add technical accounting personnel and enhance supervision with
regard to, among other things, timely review and approval of all related accounting
considerations and schedules.
    
    Perform a comprehensive review of financial accounting processes and internal
controls to facilitate the development of more effective internal controls over
financial reporting, with particular emphasis on segregation of duties.
    
    Enhance our analytical and review procedures with respect to our international
locations, including but not limited to the utilization of outside professionals to
supplement our staff.
 Notwithstanding such effort, the material weakness described in Item 9A of the 2006 Form
10-K has not yet been remediated.
  37




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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
 Legal Proceedings
     38




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Regulatory Investigations
   39




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   (c) Total Number
    
    (d) Approximateof Shares
    
    Dollar Value ofPurchased as Part
    
    Shares that May(a) Total Number
    
    
    
    
    
    of Publicly
    
    Yet Be Purchasedof Shares
    
    (b) Average Price
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    Paid per Share
    
    or Programs
    
    ProgramsOctober 2006
    
    
    
    
    
    
    
    
    
    
    4,193,302
    
    
    $
    38,487,011November 2006
    
    
    
    
    
    
    
    
    
    
    4,193,302
    
    
    $
    38,487,011December 2006
    
    
    3,460
    
    
    $
    12.05
    
    
    
    4,196,762
    
    
    $
    38,445,307Total
    
    
    3,460
    
    
    $
    12.05
  40




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ITEM 6. EXHIBITS
 (a) Exhibits
    41




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SIGNATURES
  THE BISYS GROUP, INC.Date: March 15, 2007
    By:
    /s/ Bruce D. DalzielBruce D. DalzielExecutive Vice President and Chief Financial Officer
(Duly Authorized Officer) 42




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THE BISYS GROUP, INC.
 
 EXHIBIT INDEX
 Exhibit No.(31.1)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer(31.2)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer(32)
    
    Section 1350 Certifications
 43