Bisys Group Inc. said Tuesday that it would delay reporting results for its fiscal third quarter, which ended March 31, because of an investigation into its mutual fund business.
The New York financial processing outsourcer said last week that it was conducting an internal audit and had hired lawyers to represent it in a Securities and Exchange Commission inquiry.
During a conference call Wednesday, Bisys executives said its operating results were in line with expectations.
Russell P. Fradin, its president and chief executive, said he hoped that at least the internal investigation would be complete by June, when the fiscal year will end.
He also indicated, but did not say explicitly, that Bisys would consider selling its banking core processing operations - the smallest of its three businesses.
Questions about that operation arose in conjunction with a discussion of last week's sale of Bisys' education business to the Kaplan Inc. unit of Washington Post Co. When an analyst asked directly if the sale could presage a sale of the banking division, which Bisys calls information services, Mr. Fradin said that the professional education unit was "not integrally linked to our other businesses."
The call had been dominated by talk of mutual funds and insurance.
"We've talked about the areas of the business that we're going to continue to invest in," he said, and it was implicit that the information services division had not been included in those discussions. "We're not being good corporate stewards if we're not always looking for the right opportunities to maximize shareholder value."
In the first half of its fiscal year, Bisys generated 19% of its $544.5 million of revenue and 33% of its $71.3 million of operating earnings from the information services division.
But the business has been shrinking; its fiscal first-half revenue fell 3% from a year earlier, to $105.9 million. Executives attributed it mostly to the loss of one customer bank. They would not name it but said it had been acquired by another banking company that discontinued the outsourcing contract.
(Brian C. Keane, an analyst at Prudential Equity Group Inc., identified the customer as United National Bancorp of Bridgewater, N.J., which PNC Financial Services Group Inc. bought in late 2003 and had finished converting by March of last year.)
Though the SEC investigation was not a drag on sales, "it is something we want to keep a close eye on," James Fox, an executive vice president and Bisys' chief financial officer, said on the call. "We were very pleased that the results have held up."
Last week Bisys said the regulatory probe appears to involve fees Bisys received from U.S. mutual funds and used to pay fund advisers and support marketing and distribution expenses. It said it has ended or is terminating all those arrangements.
The fees will contribute $15 million to fiscal 2005 revenue, but nothing to profits or cash flow, Mr. Fox said.
Mr. Fradin said legal costs - $5 million in the fiscal third quarter - will probably rise enough this quarter to affect earnings, though he emphasized that Bisys is cooperating with regulators.
He would not predict when the regulatory probe will end, except to say, "We are likely to be dealing with these investigations for some time."
As a matter of policy, Mr. Fradin said, Bisys will not report results until the audit committee is satisfied that the numbers are "absolutely pristine."
This is Bisys' second black eye in a year. In June it lowered its results from 2001 to 2004 by more than $100 million, to reflect overestimates of sales commissions in its life insurance unit.
Andrew W. Jeffrey, an analyst at Needham & Co., downplayed the significance of the investigations and said the fund industry has been under tighter scrutiny for more than a year.
In an interview, Mr. Jeffrey, who rates Bisys' stock a "buy," called the inquiries more of a distraction than "something that undermines the fundamentals of the business."
