FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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 001-15253
STILWELL FINANCIAL INC.
(Exact name of Company as specified in its charter)
DELAWARE 43-1804048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
920 MAIN STREET, 21ST FLOOR, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices) (Zip Code)
(816) 218-2400
(Company's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 2000
- - ------------------------------------------------------------------------------
COMMON STOCK, $.01 PER SHARE PAR VALUE 224,561,456 SHARES
- - ------------------------------------------------------------------------------
STILWELL FINANCIAL INC.
FORM 10-Q
JUNE 30, 2000
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 1999 and June 30, 2000 2
Consolidated Condensed Statements of Income -
Three and Six Months Ended June 30, 1999 and 2000 3
Computation of Basic and Diluted Earnings per Common Share and
Pro Forma Diluted Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1999 and 2000 4
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Year Ended December 31, 1999 and Six Months Ended June 30, 2000 5
Notes to Consolidated Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES 23
ITEM 5. OTHER INFORMATION 23
Stockholder Proposals 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
- - ----------
STILWELL FINANCIAL INC.
FORM 10-Q
JUNE 30, 2000
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by Stilwell Financial Inc. (the "Company" or "Stilwell"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These
Consolidated Condensed Financial Statements should be read in conjunction with
the financial statements and the notes thereto, as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in an Information Statement filed with the Company's Registration
Statement on Form 10 dated June 15, 2000 and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in this Form
10-Q. Results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results expected for the full year 2000.
STILWELL FINANCIAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
December 31, June 30,
1999 2000
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 324.1 $ 443.5
Accounts receivable 155.7 211.3
Investments in advised funds 23.9 31.4
Other current assets 21.3 42.5
--------------- ---------------
Total current assets 525.0 728.7
Investments held for operating purposes 474.1 502.4
Property and equipment (net of $45.3 and $60.3 accumulated
depreciation and amortization, respectively) 70.4 128.7
Intangibles and other assets, net 162.0 198.5
--------------- ---------------
Total assets $ 1,231.5 $ 1,558.3
--------------- ---------------
--------------- ---------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23.2 $ 20.9
Accrued compensation and benefits 80.9 95.0
Federal income taxes payable to
Kansas City Southern Industries, Inc. 22.3 22.5
Deferred income taxes 0.4 14.0
Other accrued liabilities 35.7 57.7
--------------- ---------------
Total current liabilities 162.5 210.1
Other liabilities:
Deferred income taxes 151.8 174.9
Other liabilities 45.3 46.8
--------------- ---------------
Total liabilities 359.6 431.8
--------------- ---------------
MINORITY INTEREST in consolidated subsidiaries 57.3 84.7
--------------- ---------------
Stockholders' equity (Note 3):
Preferred stock ($1.00 par, 10,000,000 shares
authorized, none issued)
Common stock ($0.01 par, 1,000,000,000 shares authorized,
222,999,786 shares issued) 2.2
Additional paid-in capital 104.6
Net investment by Kansas City Southern Industries, Inc. 106.8
Retained earnings 598.9 823.9
Accumulated other comprehensive income 108.9 111.1
--------------- ---------------
Total stockholders' equity 814.6 1,041.8
--------------- ---------------
Total liabilities and stockholders' equity $ 1,231.5 $ 1,558.3
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 2
STILWELL FINANCIAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
Three months Six months
ended June 30, ended June 30,
----------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
REVENUES:
Investment management fees $ 230.8 $ 462.7 $ 421.9 $ 912.6
Shareowner servicing fees 45.0 85.8 81.9 169.4
Other 6.4 14.5 11.7 26.1
------------ ------------ ------------ ------------
Total 282.2 563.0 515.5 1,108.1
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Compensation 76.1 124.1 135.9 249.0
Marketing and promotion 19.3 25.9 35.6 54.7
Alliance and third party administrator fees 31.7 81.4 56.0 153.7
Depreciation and amortization 7.9 19.9 14.7 35.5
Other 31.7 55.9 60.6 114.5
------------ ------------ ------------ ------------
Total 166.7 307.2 302.8 607.4
------------ ------------ ------------ ------------
OPERATING INCOME 115.5 255.8 212.7 500.7
Equity in earnings of unconsolidated affiliates 11.3 15.8 22.5 34.6
Interest expense - Kansas City Southern
Industries, Inc. (0.7) (1.7) (0.7)
Interest expense - third parties (1.3) (3.2)
Gain on litigation settlement 44.2
Gain on sale of Janus Capital Corporation
common stock 15.1
Other, net 4.3 11.5 9.2 21.4
------------ ------------ ------------ ------------
Income before taxes and minority interest 130.4 281.8 242.7 612.1
Income tax provision 46.8 102.3 86.9 216.6
Minority interest in consolidated earnings 12.7 27.8 23.9 55.1
------------ ------------ ------------ ------------
NET INCOME $ 70.9 $ 151.7 $ 131.9 $ 340.4
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
PER SHARE DATA (NOTES 3 AND 4):
Weighted Average Common shares
Outstanding (in thousands) 223,000 223,000 223,000 223,000
Basic Earnings per share $ 0.32 $ 0.68 $ 0.59 $ 1.53
Diluted Earnings per share $ 0.31 $ 0.67 $ 0.58 $ 1.50
PRO FORMA PER SHARE DATA (NOTES 3 AND 4):
Diluted Common shares
Outstanding (in thousands) 231,067 231,067 231,067 231,067
Diluted Earnings per share $ 0.30 $ 0.64 $ 0.56 $ 1.45
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 3
STILWELL FINANCIAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Six months ended June 30,
-------------------------------------
1999 2000
--------------- --------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 131.9 $ 340.4
Adjustments to net income:
Depreciation and amortization 14.7 35.5
Deferred income taxes 11.1 27.9
Minority interest in consolidated earnings 23.9 55.1
Equity in undistributed earnings of unconsolidated affiliates (22.3) (34.6)
Gain on sale of Janus Capital Corporation common stock (15.1)
Employee deferred compensation (1.3) 2.8
Deferred commissions (17.7) (54.7)
Changes in other assets 4.0 (9.0)
Changes in working capital items:
Accounts receivable (32.1) (55.6)
Other current assets (3.3) (3.8)
Accounts payable and accrued compensation and benefits 27.7 11.8
Federal income taxes payable and other accrued liabilities 3.5 29.3
Other, net (0.9) (2.0)
-------------- --------------
Net operating 139.2 328.0
-------------- --------------
INVESTING ACTIVITIES:
Property acquisitions (17.6) (75.8)
Investments in and loans with affiliates (17.2) (3.0)
Sale of investments in advised funds 1.1 11.8
Purchase of investments in advised funds (0.1) (17.6)
Proceeds from sale of investments 6.9
Other, net 4.0 1.5
-------------- --------------
Net investing (29.8) (76.2)
-------------- --------------
FINANCING ACTIVITIES:
Change in long-term debt - Kansas City Southern
Industries, Inc. (16.6)
Repayment of long-term debt - third parties (125.0)
Amounts treated as transfers from (dividends to)
Kansas City Southern Industries, Inc., net (73.2) 6.4
Distributions to minority interest (26.1) (16.9)
Other, net (2.4) 3.1
-------------- --------------
Net financing (118.3) (132.4)
-------------- --------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (8.9) 119.4
At beginning of year 138.5 324.1
-------------- --------------
At end of period $ 129.6 $ 443.5
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 4
STILWELL FINANCIAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
(UNAUDITED)
Net Accumulated
investment other
by Kansas comprehensive
Additional City income Total
Common paid-in Southern Retained stockholders'
Stock capital Industries, earnings equity
Inc.
------------ -------------- ------------- ----------- ------------ -------------
BALANCE AT
DECEMBER 31, 1998 $ - $ - $ 106.8 $ 358.5 $ 74.9 $ 540.2
Comprehensive income:
Net income 313.1
Net unrealized gain
on investments 39.3
Less: reclassification
adjustment for
gains included in
net income (4.4)
Foreign currency
translation adjustment (0.9)
COMPREHENSIVE INCOME 347.1
Dividends to
Kansas City Southern
Industries, Inc., net (72.7) (72.7)
------------ -------------- ------------- ----------- ------------ -------------
BALANCE AT
DECEMBER 31, 1999 - - 106.8 598.9 108.9 814.6
Comprehensive income:
Net income 340.4
Net unrealized gain
on investments 5.9
Less: reclassification
adjustment for
gains included in
net income (1.1)
Foreign currency
translation adjustment (2.6)
COMPREHENSIVE INCOME 342.6
Dividends to
Kansas City Southern
Industries, Inc., net (115.4) (115.4)
222,999.786 - to - 1 stock
split (Note 3) 2.2 (2.2) -
Stock dividend by
Kansas City Southern
Industries, Inc.
(Note 3) 104.6 (104.6) -
------------ -------------- ------------- ----------- ------------ -------------
BALANCE AT
JUNE 30, 2000 $ 2.2 $ 104.6 $ - $ 823.9 $ 111.1 $ 1,041.8
------------ -------------- ------------- ----------- ------------ -------------
------------ -------------- ------------- ----------- ------------ -------------
The accompanying notes are an integral part of these
consolidated condensed financial statements.
Page 5
STILWELL FINANCIAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the management of Stilwell Financial Inc. (the "Company" or
"Stilwell"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting of normal closing procedures)
necessary to present fairly the financial position of the Company and its
subsidiary companies as of December 31, 1999 and June 30, 2000, the results of
operations for the three and six months ended June 30, 1999 and 2000, and cash
flows for the six months ended June 30, 1999 and 2000.
The primary entities comprising Stilwell as of June 30, 2000 were: Janus Capital
Corporation ("Janus"), an approximate 81.5% owned subsidiary; Stilwell
Management, Inc. ("SMI"), a wholly-owned subsidiary; Berger LLC, of which SMI
owns 100% of the preferred limited liability interests and approximately 86% of
the regular limited liability interests; Nelson Money Managers Plc ("Nelson"),
an 80% owned subsidiary; DST Systems, Inc. ("DST"), an equity investment in
which SMI holds an approximate 32% interest; and various other subsidiaries and
equity investments. Janus is the principal business comprising Stilwell,
representing 97% of assets under management at June 30, 2000 and 96% of revenues
and 88% of the ongoing net income for the six months ended June 30, 2000.
Stilwell's businesses offer a variety of asset management and related financial
services to registered investment companies, retail investors, institutions and
individuals.
2. The accompanying consolidated condensed financial statements have been
prepared consistently with the accounting policies described in Note 2 to the
consolidated financial statements for the year ended December 31, 1999 that are
presented in an Information Statement included as an exhibit to the Company's
Registration Statement on Form 10 dated June 15, 2000 ("Information Statement").
Certain prior year amounts have been reclassified to conform to the current year
presentation. The results of operations for the three and six months ended June
30, 2000 are not necessarily indicative of the results to be expected for the
full year 2000.
Within these consolidated condensed financial statements and accompanying notes,
historical transactions and events involving the financial services segment of
Kansas City Southern Industries, Inc. ("KCSI"), which is now Stilwell, are
discussed as if Stilwell were the entity involved in the transaction or event,
unless otherwise indicated. In addition, intercompany transactions between
Stilwell and KCSI during the periods covered herein are reflected as dividends
to or transfers from KCSI.
3. On June 14, 2000, the KCSI Board of Directors approved the spin-off of its
wholly-owned financial services subsidiary, Stilwell, to KCSI's common
stockholders. Stilwell received approval to have its common stock listed on the
New York Stock Exchange under the symbol "SV". On July 12, 2000, the spin-off
was completed through a special dividend of Stilwell common stock distributed to
KCSI common stockholders of record on June 28, 2000 (the "Spin-off").
Stockholders of record received two shares of Stilwell common stock for every
one share of KCSI common stock owned on the record date. The total number of
Stilwell shares distributed was 222,999,786. Immediately prior to the Spin-off,
the Stilwell Board of Directors ("Stilwell Board") declared a 222,999.786-to-1
stock split effected in the form of a stock dividend to provide a sufficient
number of shares for the Spin-off. All share and per share information has been
restated to reflect this stock split, as has the stockholders' equity
information as of June 30, 2000. Additionally, the Stilwell Board changed the
par value of Stilwell common stock to $0.01 and increased the number of common
shares authorized to 1,000,000,000. The Stilwell Board also authorized
10,000,000 shares of blank series $1.00 par Preferred Stock, none of which has
been issued.
Page 6
As previously disclosed, on July 9, 1999, KCSI received a tax ruling from the
Internal Revenue Service ("IRS") which states that for United States federal
income tax purposes the Spin-off qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. Additionally in
February 2000, KCSI received a favorable supplementary tax ruling from the IRS
which states that the assumption of $125 million of KCSI indebtedness by
Stilwell (see Note 7) has no effect on the previously issued tax ruling.
4. Because the Spin-off was completed on July 12, 2000, there were no Stilwell
stock options or other potentially dilutive securities outstanding as of June
30, 2000. Accordingly, the number of shares of Stilwell common stock outstanding
- - - after consideration of the stock split discussed in Note 3 - for purposes of
computing Basis and Diluted earnings per share were the same. In conjunction
with the Spin-off, Stilwell issued 16,698,302 stock options for Stilwell common
stock to holders of KCSI stock options. To provide a basis for comparison to
future periods' earnings per share, pro forma diluted earnings per share
information is presented for the three and six months ended June 30, 1999 and
2000. The number of dilutive shares used in the pro forma computation was
derived by adding the net number of Stilwell shares issuable upon the assumed
exercise of options as of June 30, 2000 to the actual number of shares
outstanding following the stock split and Spin-off (approximately 223 million).
The total incremental shares from assumed conversion of stock options included
in the computation of diluted earnings per share was 8,067,093 for the three and
six month periods ended June 30, 1999 and 2000.
The only adjustments that currently affect the numerator of the Company's
diluted earnings per share and pro forma diluted earnings per share computations
include potentially dilutive securities at subsidiaries and affiliates. These
adjustments totaled $1.0 million and $1.8 million for the three and six month
periods ended June 30, 1999, respectively, and $2.7 million and $5.0 million for
the three and six month periods ended June 30, 2000, respectively.
5. Investments in unconsolidated affiliates accounted for under the equity
method generally include all entities in which the Company or its subsidiaries
have significant influence, but not more than 50% voting control. The Company's
approximately 32% equity interest in DST was its primary equity investment at
June 30, 2000.
Combined condensed financial information for DST is shown below:
December 31, 1999 June 30, 2000
----------------------- ------------------
Percentage ownership 32% 32%
Carrying value $ 470.2 $ 500.7
Equity in DST net assets $ 470.2 $ 500.7
Fair market value (a) $ 1,547.7 $ 1,544.7
FINANCIAL CONDITION:
Current assets $ 464.5 $ 473.6
Non-current assets 1,861.8 1,952.0
---------------- ------------------
Total assets $ 2,326.3 $ 2,425.6
---------------- ------------------
---------------- ------------------
Current liabilities $ 285.8 $ 268.1
Non-current liabilities 576.9 608.4
Stockholders' equity 1,463.6 1,549.1
---------------- ------------------
Total liabilities and
stockholders' equity $ 2,326.3 $ 2,425.6
---------------- ------------------
---------------- ------------------
Page 7
Three months Six months
ended June 30, ended June 30,
--------------------------------- --------------------------------
1999 2000 1999 2000 (b)
-------------- -------------- --------------- -------------
OPERATING RESULTS:
Revenues $ 305.3 $ 337.0 $ 603.7 $ 677.4
Costs and expenses $ 253.9 $ 272.9 $ 502.4 $ 549.6
Net income $ 33.4 $ 47.2 $ 67.0 $ 103.4
(a) Based on DST's closing price on the New York Stock Exchange.
(b) Net income includes after-tax gains of approximately $14.6 million from
settlement of litigation with a former DST equity affiliate and sales of
marketable securities.
6. For purposes of the Statement of Cash Flows, the Company considers all
short-term liquid investments with an initial maturity of generally three months
or less, including investments in money market mutual funds that are managed by
Janus, to be cash equivalents. Janus' investments in its money market mutual
funds are generally used to fund operations and pay dividends. Pursuant to
contractual arrangements between Stilwell and certain Janus minority
stockholders, Janus has distributed at least 90% of its net income to its
stockholders each year.
SUPPLEMENTAL CASH FLOW INFORMATION (IN MILLIONS):
Six months
ended June 30,
--------------
1999 2000
---------- ----------
Interest paid $ 0.9 $ 2.4
Income taxes paid to KCSI $ 52.3 $ 174.7
NONCASH INVESTING AND FINANCING ACTIVITIES:
Company subsidiaries and affiliates hold various investments which are accounted
for as "available for sale" securities as defined by Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). The Company records its proportionate share of
any FAS 115 unrealized gains or losses related to these investments, net of
deferred income taxes, in stockholders' equity as accumulated other
comprehensive income. For the three and six month periods ended June 30, 1999,
the Company recorded its proportionate share of the gain in market value of
these investments of $29.6 million and $29.4 million, respectively, ($18.0
million and $17.9 million, respectively, net of deferred income taxes). For the
three and six month periods ended June 30, 2000, the Company recorded its
proportionate share of the gain in market value of these investments from
December 31, 1999 of $1.6 million and $9.6 million, respectively, ($0.9 million
and $5.9 million, respectively, net of deferred income taxes).
Similar to the FAS 115 unrealized gains or losses, foreign currency translation
adjustments affect accumulated other comprehensive income. Accumulated other
comprehensive income declined as a result of foreign currency translation
adjustments by $0.8 million and $1.8 million for the three and six months ended
June 30, 1999, respectively, and $2.0 million and $2.6 million for the three and
six months ended June 30, 2000, respectively. Taking into consideration these
FAS 115 and foreign currency translation adjustments, the Company reported
comprehensive income of $87.9 million and $147.8 million for the three and six
months ended June 30, 1999, respectively, and $150.8 million and $342.6 million
for the three and six months ended June 30, 2000, respectively.
During the six months ended June 30, 2000, Stilwell recorded approximately $3.2
million directly to stockholders' equity representing Stilwell gains resulting
from issuances of stock by Janus. The shares issued by Janus were available as a
result of repurchases from stockholders. Stilwell had previously recognized
gains (in its Statement of Income) relating to these shares upon their initial
issuance.
Page 8
7. In January 2000, KCSI arranged a new $200 million 364-day senior unsecured
Competitive Advance/Revolving Credit Facility ("New Credit Facility"). KCSI
borrowed $125 million under this facility and used the proceeds to retire other
debt obligations. Stilwell assumed the New Credit Facility, including the $125
million borrowed thereunder, thereby reducing its stockholders' equity. Upon
such assumption, KCSI was released from all obligations, and Stilwell became the
sole obligor, under the New Credit Facility. Stilwell may assign and delegate
all or a portion of its rights and obligations under the New Credit Facility to
one or more of its domestic subsidiaries. Stilwell repaid the $125 million in
March 2000.
Two borrowing options are available under the New Credit Facility: a competitive
advance option, which is uncommitted, and a committed revolving credit option.
Interest on the competitive advance option is based on rates obtained from bids
as selected by Stilwell in accordance with the lender's standard competitive
auction procedures. Interest on the revolving credit option accrues based on the
type of loan (e.g., Eurodollar, Swingline, etc.), with rates computed using
LIBOR plus 0.35% per annum or, alternatively, the highest of the prime rate, the
Federal Funds Effective Rate plus 0.005%, or the Base Certificate of Deposit
Rate plus 1%.
The New Credit Facility includes a facility fee of 0.15% per annum and a
utilization fee of 0.125% on the amount of outstanding loans for each day on
which the aggregate utilization of the New Credit Facility exceeds 33% of the
aggregate commitments of the various lenders. Additionally, the New Credit
Facility contains, among other provisions, various financial covenants, which
could restrict maximum utilization of the New Credit Facility.
Additionally, management elected to not renew the May 14, 1999 364-day senior
unsecured competitive advance/revolving credit facility upon its expiration on
May 13, 2000.
8. In the first quarter of 2000, Stilwell sold to Janus 192,408 shares of Janus
common stock and such shares will be available for awards under Janus' recently
adopted Long Term Incentive Plan. Janus has agreed that for so long as it has
available shares of Janus common stock for grant under that plan, it will not
award phantom stock, stock appreciation rights or similar rights. The sale of
those shares resulted in an after-tax gain of approximately $15.1 million and
reduced Stilwell's ownership to approximately 81.5%.
Subsequent to the repurchase of these shares from Stilwell, Janus granted 35,660
restricted shares of its common stock to certain Janus employees pursuant to
restricted stock agreements. This issuance reduced Stilwell's ownership
percentage to slightly below 81.5%.
After this first quarter 2000 issuance, more than 168,000 shares of Janus common
stock are available for use in connection with Janus' Long Term Incentive Plan
(prior to consideration of any shares repurchased in connection with the
departure of Janus' Chief Investment Officer - see Note 13 below). Upon issuance
of all of these shares in future years, Stilwell's ownership interest in Janus
will be 80.1%.
9. In January 2000, Stilwell received approximately $44.2 million in connection
with the settlement of a legal dispute related to a former equity investment.
The settlement agreement resolves all outstanding issues related to this former
equity investment. In the first quarter of 2000, Stilwell recognized an
after-tax gain of approximately $27.3 million as a result of this settlement.
10. In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting
and reporting standards for derivative financial instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires recognition of all derivatives as either assets or liabilities
measured at fair value. Initially, the effective date of FAS 133 was for all
Page 9
fiscal quarters for fiscal years beginning after June 15, 1999; however, the
FASB has deferred the effective date of FAS 133 for one year so that it will
begin with all fiscal quarters of fiscal years beginning after June 15, 2000.
The FASB encourages early adoption of this standard; however, the provisions of
FAS 133 should not be retroactively applied to financial statements of periods
prior to adoption. While Stilwell does not generally enter into transactions
covered by this statement, the Company continues to evaluate alternatives with
respect to utilizing foreign currency instruments to hedge its U.S. dollar
investment in Nelson as market conditions change or exchange rates fluctuate.
Currently, the Company has no outstanding foreign currency hedges. Stilwell does
not expect that adoption of FAS 133 will have a significant impact on Stilwell's
results of operations, financial position or cash flows.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") for certain issues. It
does not address any issues related to the application of the fair value method
set forth in Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". Among other issues, FIN 44 addresses the definition of "employee"
for purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting effects of modifications to
the terms of a previously fixed stock option and the accounting for an exchange
of stock compensation awards in a business combination. For those issues that
affect the Company, FIN 44 is effective July 1, 2000. Stilwell does not expect
that the application of FIN 44 will have an impact on Stilwell's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes some of the SEC's interpretations of generally
accepted accounting principles relating to revenue recognition. The provisions
of SAB 101 are effective in the fourth quarter of fiscal years beginning after
December 15, 1999 and the provisions are to be retroactively applied to the
entire year. The Company is evaluating the provisions of SAB 101 and does not
expect the adoption of SAB 101 to have a material impact on Stilwell's financial
statements.
11. A stock purchase agreement with Thomas H. Bailey ("Mr. Bailey"), Janus'
Chairman, President and Chief Executive Officer, and another Janus stockholder
(the "Janus Stock Purchase Agreement") and certain restriction agreements with
other Janus minority stockholders contain, among other provisions, mandatory put
rights whereby under certain circumstances, Stilwell would be required to
purchase the minority interests of such Janus minority stockholders at a fair
market value purchase price equal to fifteen times the net after-tax earnings
over the period indicated in the relevant agreement, or in some circumstances as
determined by an independent appraisal. Under the Stock Purchase Agreement,
termination of Mr. Bailey's employment could require a purchase and sale of the
Janus common stock held by him. If other minority holders terminated their
employment, some or all of their shares also could be subject to mandatory
purchase and sale obligations. Certain other minority holders who continue their
employment also could exercise puts. If all of the mandatory purchase and sale
provisions and all the puts under such Janus minority stockholder agreements
were implemented, Stilwell would have been required to pay approximately $870
million as of June 30, 2000, compared to $789 million, $447 million and $337
million at December 31, 1999, 1998 and 1997, respectively. In the future these
amounts may be higher or lower depending on Janus' earnings, fair market value
and the timing of the exercise. Payment for the purchase of the respective
minority interests is to be made under the Janus Stock Purchase Agreement within
120 days after receiving notification of exercise of the put rights. Under the
restriction agreements with certain other Janus minority stockholders, payment
for the purchase of the respective minority interests is to be made 30 days
after the later to occur of (i) receiving notification of exercise of the put
rights or (ii) determination of the purchase price through the independent
appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements and
restriction agreements with other minority stockholders also contain provisions
whereby upon the occurrence of a Change in Ownership (as defined in such
agreements) of Stilwell or KCSI, Stilwell may be required to purchase such
Page 10
holders' Janus stock or, as to the stockholders that are parties to the Janus
Stock Purchase Agreement, at such holders' option, to sell its stock of Janus to
such minority stockholders. For purposes of the Janus Stock Purchase Agreement,
a Change in Ownership may occur only through a change in the composition of the
Stilwell Board not approved by the pre-existing Stilwell Board, or a change in
stock ownership not approved by the pre-existing Stilwell Board. The fair market
value price for such purchase or sale would be equal to fifteen times the net
after-tax earnings over the period indicated in the relevant agreement, in some
circumstances as determined by Janus' Stock Option Committee or as determined by
an independent appraisal. If Stilwell had been required to purchase the holders'
Janus common stock after a Change in Ownership as of June 30, 2000, the purchase
price would have been approximately $1.33 billion.
Stilwell would account for any such purchase as the acquisition of a minority
interest under Accounting Principles Board Opinion No. 16, Business
Combinations.
As of June 30, 2000, Stilwell had $200 million in credit facilities available
and had cash balances at the Stilwell holding company level in excess of $212
million. The market value of Stilwell's 32% investment in DST was approximately
$1.5 billion using DST's closing price on the New York Stock Exchange on June
30, 2000. To the extent that available credit facilities, existing cash balances
and proceeds from the liquidation of Stilwell's investment in DST were
insufficient to fund its purchase obligations, Stilwell had access to the
capital markets and, with respect to the Janus Stock Purchase Agreement, had 120
days to raise additional sums.
12. On July 25, 2000, the Stilwell Board authorized the expenditure of up to $1
billion to repurchase shares of Stilwell common stock over the next two years.
Stilwell plans to repurchase the shares through open market transactions. If all
of the authorized shares are repurchased at prevailing market prices on July 25,
2000, the repurchase program will represent approximately 9% of the 223 million
shares of common stock currently outstanding. The number of shares repurchased
will depend on various factors, including the price of the stock and market
conditions. Stilwell expects to fund the share repurchase program from its cash
flow and other available sources of funds.
13. On August 9, 2000, Janus issued a press release reporting that its Chief
Investment Officer and Director of Research, James P. Craig, III ("Mr. Craig"),
was leaving Janus at the end of September 2000 to manage money for a new
charitable foundation established by Mr. Craig and his wife. Mr. Craig's
responsibilities will be assumed by Janus' Executive Investment Committee, a
group formed by Mr. Craig over a year ago and comprised of several portfolio
managers and Mr. Bailey. Mr. Craig had previously been identified as the
successor to Mr. Bailey in the event that Mr. Bailey left Janus. A revised
succession plan has not been developed. Janus will purchase Mr. Craig's shares
at the fair market value (estimated to be less than $80 million) as set forth in
a stock restriction agreement and will fund this purchase from its existing
cash. These shares will then be available for use in connection with Janus' Long
Term Incentive Plan.
Upon Janus' repurchase of these shares, Stilwell's ownership percentage of Janus
will increase slightly. Stilwell records this type of transaction under the
purchase method of accounting.
Page 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The discussion set forth below and other portions of this Form 10-Q contain
statements concerning potential future events. Such forward-looking comments are
based upon information currently available to management and management's
perception thereof as of the date of this Form 10-Q. Readers can identify these
forward-looking comments by their use of such verbs as expects, anticipates,
believes or similar verbs or conjugations of such verbs. The actual results of
operations of Stilwell Financial Inc. (the "Company" or "Stilwell") could
materially differ from those indicated in forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in the Company's
Information Statement that was included as an exhibit to the Registration
Statement on Form 10 dated June 15, 2000, which is on file with the U.S.
Securities and Exchange Commission (File No. 001-15253) and is hereby
incorporated by reference herein. Readers are strongly encouraged to consider
these factors when evaluating any such forward-looking comments. The Company
will not update any forward-looking comments set forth in this Form 10-Q.
The discussion herein is intended to clarify and focus on the Company's results
of operations, certain changes in financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
condensed financial statements included under Item 1 of this Form 10-Q. This
discussion should be read in conjunction with these consolidated condensed
financial statements and the related notes thereto and is qualified by reference
thereto.
Stilwell, a Delaware Corporation formed in 1998 by Kansas City Southern
Industries, Inc. ("KCSI"), is a holding company for a group of businesses and
investments in the financial services industry, including the following:
o Janus Capital Corporation ("Janus"), an 81.5% owned subsidiary;
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary;
o Berger LLC ("Berger"), of which SMI owns 100% of the preferred limited
liability company interests and approximately 86% of the regular limited
liability company interests;
o Nelson Money Managers Plc ("Nelson"), an 80% owned subsidiary;
o DST Systems, Inc. ("DST"), an equity investment in which SMI owns an
approximate 32% interest; and
o various other subsidiaries and equity investments.
Within this Management's Discussion and Analysis of Financial Condition and
Results of Operations, historical transactions and events involving the
financial services segment of KCSI, which is now Stilwell, are discussed as if
Stilwell were the entity involved in the transaction or event, unless otherwise
indicated. In addition, intercompany transactions between Stilwell and KCSI
during the periods covered herein are reflected as dividends to or transfers
from KCSI.
SIGNIFICANT DEVELOPMENTS
DISTRIBUTION OF STILWELL COMMON STOCK TO KCSI COMMON STOCKHOLDERS. On June 14,
2000, the Board of Directors of KCSI approved the spin-off of its wholly-owned
financial services subsidiary, Stilwell, to KCSI's common stockholders. Stilwell
received approval to have its common stock listed on the New York Stock Exchange
under the symbol "SV". On July 12, 2000, the spin-off was completed through a
special dividend of Stilwell common stock distributed to KCSI common
stockholders of record on June 28, 2000 ("Spin-off"). Stockholders of record
received two shares of Stilwell common stock for every one share of KCSI common
stock owned on the record date. The total number of Stilwell shares distributed
was 222,999,786. Immediately prior to the Spin-off, the Stilwell Board of
Directors ("Stilwell Board") declared a 222,999.786-to-1 stock split effected in
Page 12
the form of a stock dividend to provide a sufficient number of shares for the
Spin-off. Additionally, the Stilwell Board changed the par value of Stilwell
common stock to $0.01 and increased the number of common shares authorized to
1,000,000,000. The Stilwell Board also authorized 10,000,000 shares of blank
series $1.00 par Preferred Stock, none of which has been issued.
As previously disclosed, on July 9, 1999, KCSI received a tax ruling from the
Internal Revenue Service ("IRS") which states that for United States federal
income tax purposes the Spin-off qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. Additionally in
February 2000, KCSI received a favorable supplementary tax ruling from the IRS
which states that the assumption of $125 million of KCSI indebtedness by
Stilwell has no effect on the previously issued tax ruling.
NEW STILWELL CREDIT FACILITY. In January 2000, KCSI arranged a new $200 million
364-day senior unsecured Competitive Advance/Revolving Credit Facility ("New
Credit Facility"). KCSI borrowed $125 million under this facility and used the
proceeds to retire other debt obligations. Stilwell assumed the New Credit
Facility, including the $125 million borrowed thereunder, thereby reducing its
stockholders' equity. Upon such assumption, KCSI was released from all
obligations, and Stilwell became the sole obligor, under the New Credit
Facility. Stilwell may assign and delegate all or a portion of its rights and
obligations under the New Credit Facility to one or more of its domestic
subsidiaries. Stilwell repaid the $125 million in March 2000.
Two borrowing options are available under the New Credit Facility: a competitive
advance option, which is uncommitted, and a committed revolving credit option.
Interest on the competitive advance option is based on rates obtained from bids
as selected by Stilwell in accordance with the lender's standard competitive
auction procedures. Interest on the revolving credit option accrues based on the
type of loan (e.g., Eurodollar, Swingline, etc.), with rates computed using
LIBOR plus 0.35% per annum or, alternatively, the highest of the prime rate, the
Federal Funds Effective Rate plus 0.005%, or the Base Certificate of Deposit
Rate plus 1%.
The New Credit Facility includes a facility fee of 0.15% per annum and a
utilization fee of 0.125% on the amount of outstanding loans for each day on
which the aggregate utilization of the New Credit Facility exceeds 33% of the
aggregate commitments of the various lenders. The New Credit Facility contains,
among other provisions, various financial covenants, which could restrict
maximum utilization of the New Credit Facility.
Additionally, management elected to not renew the May 14, 1999 364-day senior
unsecured competitive advance/revolving credit facility upon its expiration on
May 13, 2000.
STILWELL SALE OF JANUS STOCK AND JANUS ISSUANCE OF RESTRICTED STOCK. In the
first quarter of 2000, Stilwell sold to Janus 192,408 shares of Janus common
stock and such shares will be available for awards under Janus' recently adopted
Long Term Incentive Plan. Janus has agreed that for so long as it has available
shares of Janus common stock for grant under that plan, it will not award
phantom stock, stock appreciation rights or similar rights. The sale of those
shares resulted in an after-tax gain of approximately $15.1 million and reduced
Stilwell's ownership to approximately 81.5%.
Subsequent to the repurchase of these shares from Stilwell, Janus granted 35,660
restricted shares of its common stock to certain Janus employees pursuant to
restricted stock agreements. This issuance reduced Stilwell's ownership
percentage to slightly below 81.5%.
After this first quarter 2000 issuance, more than 168,000 shares of Janus common
stock are available for use in connection with Janus' Long Term Incentive Plan
(prior to consideration of any shares repurchased in connection with the
departure of Janus' Chief Investment Officer - see below). Upon issuance of all
of these shares in future years, Stilwell's ownership interest in Janus will be
80.1%.
Page 13
LITIGATION SETTLEMENT. In January 2000, Stilwell received approximately $44.2
million in connection with the settlement of a legal dispute related to a former
equity investment. The settlement agreement resolves all outstanding issues
related to this former equity investment. In the first quarter of 2000, Stilwell
recognized an after-tax gain of approximately $27.3 million as a result of this
settlement.
COMMON STOCK REPURCHASE PROGRAM. On July 25, 2000, the Stilwell Board authorized
the expenditure of up to $1 billion to repurchase shares of Stilwell common
stock over the next two years. Stilwell plans to repurchase the shares through
open market transactions. If all of the authorized shares are repurchased at
prevailing market prices on July 25, 2000, the repurchase program will represent
approximately 9% of the 223 million shares of common stock currently
outstanding. The number of shares repurchased will depend on various factors,
including the price of the stock and market conditions. Stilwell expects to fund
the share repurchase program from its cash flow and other available sources of
funds.
DEPARTURE OF JANUS' CHIEF INVESTMENT OFFICER. On August 9, 2000, Janus
issued a press release reporting that its Chief Investment Officer and Director
of Research, James P. Craig, III ("Mr. Craig"), was leaving Janus at the end of
September 2000 to manage money for a new charitable foundation established by
Mr. Craig and his wife. Mr. Craig's responsibilities will be assumed by Janus'
Executive Investment Committee ("Committee"), a group formed by Mr. Craig over a
year ago and comprised of several portfolio managers and Mr. Bailey. Mr. Craig
had previously been identified as the successor to Mr. Bailey in the event that
Mr. Bailey left Janus. A revised succession plan has not been developed, but
Janus expects that the successor to Mr. Bailey will likely be selected from
members of the Committee. Janus will purchase Mr. Craig's shares at the fair
market value (estimated to be less than $80 million) as set forth in a stock
restriction agreement and will fund this purchase from its existing cash. These
shares will then be available for use in connection with Janus' Long Term
Incentive Plan.
Upon Janus' repurchase of these shares, Stilwell's ownership percentage of Janus
will increase slightly. Stilwell records this type of transaction under the
purchase method of accounting.
STILWELL STOCK ADDED TO THE S&P 500 INDEX. Effective with the Spin-off, Standard
and Poors (S&P) Financial Information Services announced that it was adding
Stilwell to its S&P 500 index. Management believes that the Company's inclusion
in this index of leading U.S. companies will have a positive long-term impact on
the Stilwell stock and help build the Company's shareholder base.
Page 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 1999
The Company's revenues, operating income and net income (with subsidiary
information exclusive of holding company amortization and interest costs
attributed to the respective subsidiary) were as follows (dollars in millions):
Three months
ended June 30,
--------------------------------------------
1999 2000
--------------- -----------------
REVENUES:
Janus $ 269.3 $ 541.0
SMI and Berger 9.0 16.5
Other 3.9 5.5
--------------- -----------------
Total $ 282.2 $ 563.0
--------------- -----------------
--------------- -----------------
OPERATING INCOME (LOSS):
Janus $ 121.7 $ 254.4
SMI and Berger (0.3) 5.0
Other (5.9) (3.6)
--------------- -----------------
Total $ 115.5 $ 255.8
--------------- -----------------
--------------- -----------------
NET INCOME (LOSS):
Janus $ 63.3 $ 132.3
SMI and Berger (i) 0.3 5.3
DST (i) 9.9 14.2
Other (2.6) (0.1)
--------------- -----------------
Total $ 70.9 $ 151.7
--------------- -----------------
--------------- -----------------
(i) DST results are included in "Net Income - Other".
Assets under management as of June 30, 1999, December 31, 1999 and June 30, 2000
were as follows (in billions):
June 30, December 31, June 30,
1999 1999 2000
--------------- ----------------- ---------------
JANUS:
Janus Advised Funds:
Janus Investment Funds $ 108.7 $ 171.8 $ 206.2
Janus Aspen Series 9.4 17.4 25.4
Janus Money Market Funds 6.8 9.4 10.1
Janus World Funds Plc 0.7 1.4 3.7
--------------- ----------------- ---------------
Total Janus Advised Funds 125.6 200.0 245.4
Janus Sub-Advised Funds and Private
Accounts 30.2 49.5 58.3
--------------- ----------------- ---------------
Total Janus 155.8 249.5 303.7
--------------- ----------------- ---------------
BERGER:
Berger Advised Funds 4.0 6.1 7.2
Berger Sub-Advised Funds and Private
Accounts 0.3 0.5 0.8
--------------- ----------------- ---------------
Total Berger 4.3 6.6 8.0
--------------- ----------------- ---------------
NELSON 1.2 1.3 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 161.3 $ 257.4 $ 313.0
--------------- ----------------- ---------------
--------------- ----------------- ---------------
Page 15
The Company earned $151.7 million in second quarter 2000 compared to $70.9
million in second quarter 1999, a 114% improvement quarter to quarter. Average
assets under management increased 97% compared to prior year's second quarter
(from $154.0 billion to $303.6 billion), leading to a 99% increase in revenues
(to $563.0 million) and a 121% increase in operating income (to $255.8 million).
Additionally, operating margins improved from 40.9% to 45.4%, indicative of the
strong revenue growth and effective cost management at the various subsidiaries.
Assets under management increased to $313.0 billion as of June 30, 2000 compared
to $257.4 billion as of December 31, 1999 and $161.3 billion as of June 30,
1999. During second quarter 2000, net cash inflows totaled $17.6 billion - of
which Janus comprised $17.5 billion - and were more than 26% higher than the
$13.9 billion in second quarter 1999. These cash inflows were offset by market
depreciation of $29.3 billion during the quarter, which reflects the decline in
various segments of the U.S. equity market for that period. See the brief
discussions of Janus, Berger and Nelson separately below.
Investment management fees increased 100% quarter to quarter, reflecting the
growth in assets under management. Shareowner servicing fees and other revenues
increased $48.9 million compared to prior year's second quarter, primarily due
to increases in assets under management, shareowner accounts and assets in the
Janus World Funds Plc ("Janus World Funds").
Stilwell's operating margins improved in second quarter 2000, primarily due to a
higher rate of growth in revenues than in operating expenses. Operating expenses
totaled $307.2 million for the three months ended June 30, 2000 compared to
$166.7 million in the prior year quarter. This increase largely reflects higher
costs associated with the significant growth in revenues.
Operating expenses with notable increases quarter to quarter included the
following: i) compensation, primarily related to increases in investment
performance-based incentive compensation, base salaries and the number of
employees; ii) alliance and third party administrator fees resulting from a
growth in assets distributed through these channels; iii) marketing and
promotion to capitalize on favorable investment performance; iv) depreciation
arising from Janus' infrastructure enhancement efforts over the last 18 months
(more than $120.7 million in capital expenditures since January 1, 1999); and v)
amortization of deferred commission payments in connection with the sales of
class B shares in the Janus World Funds. Other expenses increased quarter to
quarter, largely in support of Janus' growing operations, facilities and
employee numbers.
Second quarter 2000 equity earnings from DST were $15.4 million, a 43% increase
over the $10.8 million in second quarter 1999. This improvement was largely
attributable to higher earnings in DST's financial services and output solutions
segments. Consolidated DST revenues increased due to a higher number of
shareowner accounts processed (totaling 63.9 million at June 30, 2000 versus
53.3 million at June 30, 1999), images produced (17% increase) and statements
mailed (up 15%). Consolidated operating margins improved to 19% during second
quarter 2000 versus 17% in comparable 1999.
Other income increased to $11.5 million for the three months ended June 30, 2000
versus $4.3 million in comparable 1999. This increase was attributable to
interest income on money market accounts and a pretax gain of approximately $2.3
million resulting from Berger's sale of its joint venture, BBOI Worldwide LLC.
Page 16
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999
The Company's revenues, operating income and net income (with subsidiary
information exclusive of holding company amortization and interest costs
attributed to the respective subsidiary) were as follows (dollars in millions):
Six months
ended June 30,
--------------------------------------------
1999 2000 (i)
--------------- -----------------
REVENUES:
Janus $ 490.0 $ 1,064.1
SMI and Berger 17.5 33.2
Other 8.0 10.8
--------------- -----------------
Total $ 515.5 $ 1,108.1
--------------- -----------------
--------------- -----------------
OPERATING INCOME (LOSS):
Janus $ 224.8 $ 505.0
SMI and Berger 0.2 9.7
Other (12.3) (14.0)
--------------- -----------------
Total $ 212.7 $ 500.7
--------------- -----------------
--------------- -----------------
NET INCOME (LOSS):
Janus $ 117.2 $ 262.5
SMI and Berger (ii) 1.5 9.2
DST (ii) 19.8 30.9
Other (6.6) 37.8
--------------- -----------------
Total $ 131.9 $ 340.4
--------------- -----------------
--------------- -----------------
<FN>
(i) Stilwell recorded two one-time gains during first quarter 2000: a)
a $27.3 million (after-tax) gain resulting from the settlement of
litigation with a former equity affiliate; and b) a $15.1 million
(after-tax) gain resulting from the sale by Stilwell of 192,408
shares of Janus common stock to Janus. See "Significant
Developments" above for additional information.
(ii) Net income from SMI and Berger does not include DST.
</FN>
For the six months ended June 30, 2000, Stilwell reported earnings of $340.4
million, a 158% increase over the six months ended June 30, 1999. Exclusive of
the first quarter 2000 one-time gains discussed in "Significant Developments"
above, earnings improved $166.1 million, or 126%, compared to the six months
ended June 30, 1999. This increase was attributable to significant revenue
growth (driven by higher average assets under management), improved operating
margins and an increase in equity earnings period to period.
Year to date 2000 revenues improved 115% to $1,108.1 million versus $515.5
million for the six months ended June 30, 1999. Revenues increased at a slightly
higher rate than average assets (111% period to period) due to relatively higher
growth in offshore funds and sub-advised funds and private accounts, which have
higher fee rates than the domestic advised funds. Assets under management
increased $55.6 billion during the first six months of 2000, driven by net cash
inflows of $60.4 billion, slightly offset by market depreciation of $4.8
billion. Since June 30, 1999, net cash inflows of $90.4 billion and market
appreciation of $61.3 billion drove the $151.7 billion increase in assets under
management. As of June 30, 2000, shareowner accounts exceeded 6.3 million (an
increase of 66% compared to June 30, 1999).
Operating margins improved period to period (from 41.3% to 45.2%), primarily due
to the significant revenue growth during the six months ended June 30, 2000.
Higher operating expenses were evident in the same cost components noted in the
Page 17
second quarter 2000 discussion above. Compensation, alliance costs and marketing
and promotion were approximately 41% of total Stilwell revenues during the first
half of 2000 compared to approximately 44% in 1999. Additionally, planned
infrastructure enhancements throughout 1999 and the first half of 2000, together
with increased deferred commission payments ($17.7 million in the first half of
1999 versus $54.7 million through June 30, 2000), have resulted in higher
depreciation and amortization. The rate of increase in other remaining operating
expenses combined was approximately 26% lower than the rate of revenue growth
period to period, indicative of the management efforts at each subsidiary to
control the growth rate of operating expenses.
Equity earnings from DST totaled $33.5 million for year to date 2000 versus
$21.5 million in comparable 1999. Year to date 2000 DST equity earnings include
approximately $4.3 million (after-tax) in gains representing the Company's
proportionate share of a litigation settlement and sales of marketable
securities recorded by DST in the first half of 2000. Exclusive of these DST
items, the equity in net earnings of DST improved 34% over the six months ended
June 30, 1999. Improvements in revenues, operating margins and DST's equity in
net earnings of unconsolidated affiliates drove this increase period to period.
Other income of $21.4 million through June 30, 2000 exceeded the prior year
period by $12.2 million, primarily due to interest income and gains from sales
of investments in advised funds and other investments.
A brief discussion of significant Janus, Berger and Nelson items during the six
months ended June 30, 2000 follows:
JANUS
Janus revenues are largely dependent on the total value and composition
of assets under management, which are primarily invested in domestic and
international equity and debt securities. Average assets under management
increased 101% quarter to quarter, from $148.6 billion to $299.4 billion.
During the three months ended June 30, 2000, assets under management
declined by $11.5 billion due to net cash inflows of $17.5 billion,
offset by market depreciation of $29.0 billion. Total Janus shareowner
accounts increased to 6.1 million from 3.5 million at June 30, 1999, a
74% increase. Full-time employees increased 71% from approximately 1,700
at June 30, 1999 to 2,900 at June 30, 2000.
For the six months ended June 30, 2000, average assets under management
increased 113% to $295.5 billion, $156.8 billion more than the comparable
1999 period. Net cash inflows of $59.6 billion, partially offset by
market depreciation of $5.4 billion, resulted in a 22% increase in assets
under management since December 31, 1999.
These increases generally reflect ongoing favorable investment
performance by various funds/portfolios within the Janus group of mutual
funds, continued growth through net cash inflows and competitive levels
of expenses and fees compared to industry standards. Additionally, Janus'
operating margins consistently surpass industry standards, reflecting a
well-planned cost structure and effective monitoring of that structure by
Janus management.
BERGER
Berger assets under management increased 18% during the six months ended
June 30, 2000 and 80% since June 30, 1999. These increases reflect net
cash inflows and market appreciation. Shareowner accounts improved
approximately 8% during the first six months of 2000, reversing the trend
of declining numbers of accounts experienced during the last two years.
Improved investment performance, together with an expanding product
offering since 1997, is largely responsible for the increase in
shareowner accounts. Bolstered by the growth in assets under management
and shareowner accounts, and coupled with a focus on cost containment,
Berger's operating margins have improved significantly over prior years,
moving closer to industry averages.
Page 18
NELSON
Nelson's assets under management increased 19% to (pound)891 million as
of June 30, 2000 from (pound)751 million at June 30, 1999. Beginning in
late first quarter 1999, Nelson initiated expansion efforts throughout
the United Kingdom and this project is ongoing. The Company expects that
during this phase of Nelson's development, Nelson will operate at a loss
as the rate of growth in expenses will exceed that of revenues (primarily
due to increases in the number of employees and marketing efforts). These
losses, however, are not expected to have a material impact Stilwell's
results of operations or financial position.
TRENDS AND OUTLOOK
Due to strong growth in assets under management and shareowner accounts -
primarily at Janus - the Company's second quarter and year to date 2000
revenues, operating income and net income each increased by more than 95%
compared to the same 1999 periods. Additionally, operating margins for both
periods in 2000 improved over the same 1999 periods.
A current outlook for the Company's businesses for the remainder of 2000 is
heavily dependent on prevailing financial market conditions. Significant
increases or decreases in the various securities markets, particularly the
equity markets, can have a material impact on Stilwell's results of operations,
financial condition and cash flows. Additionally, Stilwell results are affected
by the relative performance of Janus, Berger and Nelson products, introduction
and market reception of new products, as well as other factors, including
changes in stock and bond markets, increases in the rate of return of
alternative investment products, increasing competition as the number of mutual
funds continues to grow and changes in marketing and distribution channels.
(Also, refer to the first paragraph of the "Overview" section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, regarding forward-looking comments in general.)
Based on a higher level of assets under management starting the third quarter,
revenues for the remainder of 2000 are expected to exceed comparable prior year
periods subject to market conditions and other factors. Management expects
ongoing margin pressure as efforts continue to ensure that the operational and
administrative infrastructure consistently meets the high standards of quality
and service historically provided to investors.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY CASH FLOW DATA IS AS FOLLOWS (IN MILLIONS):
Six months ended June 30,
------------------------------------
1999 2000
-------------- -------------
CASH FLOWS PROVIDED BY (USED FOR):
Operating activities $ 139.2 $ 328.0
Investing activities (29.8) (76.2)
Financing activities (118.3) (132.4)
-------------- -------------
Net increase (decrease) (8.9) 119.4
At beginning of year 138.5 324.1
-------------- -------------
At end of period $ 129.6 $ 443.5
-------------- -------------
-------------- -------------
During the six months ended June 30, 2000, the Company's consolidated cash
position increased $119.4 million from December 31, 1999. This increase resulted
primarily from earnings, partially offset by property acquisitions, repayments
of long-term debt and payment of deferred commissions in connection with the
Janus World Funds B share arrangements. Net operating cash inflows for the six
Page 19
months ended June 30, 2000 were $328.0 million compared to inflows of $139.2
million in the same 1999 period. This $188.8 million improvement was chiefly
attributable to higher net income, partially offset by an increase in payments
of deferred commissions and fluctuations in net working capital items period to
period.
Net investing cash outflows were $76.2 million during the six months ended June
30, 2000 compared to $29.8 million during the comparable 1999 period. This
difference results primarily from higher capital expenditures by Janus in
connection with its infrastructure enhancement efforts.
During the first six months of 2000, financing cash outflows were used primarily
for the repayment of indebtedness that was assumed from KCSI in connection with
the New Credit Facility as discussed in "Significant Developments" above. For
the six months ended June 30, 1999, net activity with KCSI resulted in cash
payments to KCSI of $89.8 million, representing dividends received by Stilwell
from Janus and Berger treated as passed through to KCSI (after satisfaction of
ongoing Stilwell operational obligations), as well as repayments of indebtedness
to KCSI. Distributions to minority stockholders were lower in 2000 versus 1999
due to the timing of dividend payments by Janus.
Cash flows from operations are expected to increase during the remainder of 2000
from positive operating income, which has historically resulted in favorable
operating cash flows. Investing activities will continue to use cash as the
various subsidiaries - led by Janus - continue efforts to strengthen their
infrastructures. Additionally, investor purchases of class B shares in the Janus
World Funds, which require a commission to be advanced by Janus, totaled $54.7
million through June 30, 2000 and management expects that such class B share
purchases will continue to grow in future periods. Janus may obtain a credit
line to help fund these dealer advances either through Stilwell or from third
parties.
In addition to operating cash flows, the Company has financing available through
its New Credit Facility, with a maximum borrowing amount of $200 million, all of
which was available as of June 30, 2000. Because of certain financial covenants
contained in the credit agreements, however, maximum utilization of the
Company's credit facility may be restricted. Stilwell, as a continuation of its
practice of providing credit facilities to its subsidiaries, has provided an
intercompany credit facility to Janus for use by Janus for general corporate
purposes, effectively reducing the amount of credit available for Stilwell's
other purposes. Stilwell may also require additional capital sooner than
anticipated to the extent that Stilwell's operations do not progress as
anticipated or if certain put rights are exercised by Janus minority
stockholders (see below). Stilwell intends to obtain any additional financing
for general corporate purposes on substantially the same terms and conditions as
the New Credit Facility and, upon expiration of the New Credit Facility, expects
to either renew the existing arrangement or negotiate a new facility.
The Company believes its operating cash flows and available financing resources
are sufficient to fund working capital and other requirements for the remainder
of 2000.
As discussed in "Significant Developments" above, the Company announced a $1
billion stock repurchase program to be completed over a period of two years.
While the Company anticipates funding the repurchases with cash flow from
operations, it is possible that the existing credit facility, and/or any
additional financing alternatives, could be used for these purposes.
Page 20
OTHER
MINORITY PURCHASE AGREEMENTS. A stock purchase agreement with Thomas H. Bailey
("Mr. Bailey"), Janus' Chairman, President and Chief Executive Officer, and
another Janus stockholder (the "Janus Stock Purchase Agreement") and certain
restriction agreements with other Janus minority stockholders contain, among
other provisions, mandatory put rights whereby under certain circumstances,
Stilwell would be required to purchase the minority interests of such Janus
minority stockholders at a fair market value purchase price equal to fifteen
times the net after-tax earnings over the period indicated in the relevant
agreement, or in some circumstances as determined by an independent appraisal.
Under the Stock Purchase Agreement, termination of Mr. Bailey's employment could
require a purchase and sale of the Janus common stock held by him. If other
minority holders terminated their employment, some or all of their shares also
could be subject to mandatory purchase and sale obligations. Certain other
minority holders who continue their employment also could exercise puts. If all
of the mandatory purchase and sale provisions and all the puts under such Janus
minority stockholder agreements were implemented, Stilwell would have been
required to pay approximately $870 million as of June 30, 2000, compared to $789
million, $447 million and $337 million at December 31, 1999, 1998 and 1997,
respectively. In the future these amounts may be higher or lower depending on
Janus' earnings, fair market value and the timing of the exercise. Payment for
the purchase of the respective minority interests is to be made under the Janus
Stock Purchase Agreement within 120 days after receiving notification of
exercise of the put rights. Under the restriction agreements with certain other
Janus minority stockholders, payment for the purchase of the respective minority
interests is to be made 30 days after the later to occur of (i) receiving
notification of exercise of the put rights or (ii) determination of the purchase
price through the independent appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements and
restriction agreements with other minority stockholders also contain provisions
whereby upon the occurrence of a Change in Ownership (as defined in such
agreements) of Stilwell or KCSI, Stilwell may be required to purchase such
holders' Janus stock or, as to the stockholders that are parties to the Janus
Stock Purchase Agreement, at such holders' option, to sell its stock of Janus to
such minority stockholders. For purposes of the Janus Stock Purchase Agreement,
a Change in Ownership may occur only through a change in the composition of the
Stilwell Board not approved by the pre-existing Stilwell Board, or a change in
stock ownership not approved by the pre-existing Stilwell Board. The fair market
value price for such purchase or sale would be equal to fifteen times the net
after-tax earnings over the period indicated in the relevant agreement, in some
circumstances as determined by Janus' Stock Option Committee or as determined by
an independent appraisal. If Stilwell had been required to purchase the holders'
Janus common stock after a Change in Ownership as of June 30, 2000, the purchase
price would have been approximately $1.33 billion.
Stilwell would account for any such purchase as the acquisition of a minority
interest under Accounting Principles Board Opinion No. 16, Business
Combinations.
As of June 30, 2000, Stilwell had $200 million in credit facilities available
and had cash balances at the Stilwell holding company level in excess of $212
million. The market value of Stilwell's 32% investment in DST was approximately
$1.5 billion using DST's closing price on the New York Stock Exchange on June
30, 2000. As discussed in the Information Statement filed with Stilwell's
Registration Statement on Form 10 dated June 15, 2000, although the Company has
no intention of converting the DST investment into cash, management believes
that, if cash were needed to fund the purchase of Janus common stock from
minority stockholders, it could liquidate its investment in DST within 120 days.
To the extent that available credit facilities, existing cash balances and
proceeds from the liquidation of Stilwell's investment in DST were insufficient
to fund its purchase obligations, Stilwell had access to the capital markets
and, with respect to the Janus Stock Purchase Agreement, had 120 days to raise
additional sums.
Page 21
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities measured at fair value. Initially,
the effective date of FAS 133 was for all fiscal quarters for fiscal years
beginning after June 15, 1999; however, the FASB has deferred the effective date
of FAS 133 for one year so that it will begin with all fiscal quarters of fiscal
years beginning after June 15, 2000. The FASB encourages early adoption of this
standard; however, the provisions of FAS 133 should not be retroactively applied
to financial statements of periods prior to adoption. While Stilwell does not
generally enter into transactions covered by this statement, the Company
continues to evaluate alternatives with respect to utilizing foreign currency
instruments to hedge its U.S. dollar investment in Nelson as market conditions
change or exchange rates fluctuate. Currently, the Company has no outstanding
foreign currency hedges. Stilwell does not expect that adoption of FAS 133 will
have a significant impact on Stilwell's results of operations, financial
position or cash flows.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") for certain issues. It
does not address any issues related to the application of the fair value method
set forth in Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". Among other issues, FIN 44 addresses the definition of "employee"
for purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting effects of modifications to
the terms of a previously fixed stock option and the accounting for an exchange
of stock compensation awards in a business combination. For those issues that
affect the Company, FIN 44 is effective July 1, 2000. Stilwell does not expect
that the application of FIN 44 will have an impact on Stilwell's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes some of the SEC's interpretations of generally
accepted accounting principles relating to revenue recognition. The provisions
of SAB 101 are effective in the fourth quarter of fiscal years beginning after
December 15, 1999 and the provisions are to be retroactively applied to the
entire year. The Company is evaluating the provisions of SAB 101 and does not
expect the adoption of SAB 101 to have a material impact on Stilwell's financial
statements.
- - -------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has had no significant changes in its Quantitative and Qualitative
Disclosures About Market Risk from that previously reported in the Information
Statement filed with the Company's Registration Statement on Form 10 dated June
15, 2000.
Page 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has had no significant changes in any legal proceedings from that
previously reported in the Information Statement filed with the Company's
Registration Statement on Form 10 dated June 15, 2000.
ITEM 2. CHANGES IN SECURITIES
The information required by this Item 2 of Part II has been previously reported
in this Form 10-Q at Part I - Note 3 of the Notes to Consolidated Condensed
Financial Statements.
ITEM 5. OTHER INFORMATION
The following information discusses the manner by which a Stilwell stockholder
may submit a proposal(s) for consideration by all stockholders. In the future,
this information will be included in Stilwell's Notice and Proxy Statement in
connection with its annual meeting of stockholders.
STOCKHOLDER PROPOSALS. To be properly brought before the annual meeting of
stockholders, a proposal must be either (i) specified in the notice of the
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (iii) otherwise properly brought before
the meeting by a stockholder.
If a holder of Stilwell common stock wishes to present a proposal for inclusion
in Stilwell's Notice and Proxy Statement for next year's annual meeting of
stockholders, Stilwell must receive such proposal on or before November 26,
2000. Such proposal must be made in accordance with the applicable laws and
rules of the Securities and Exchange Commission and the interpretations thereof
as well as Stilwell's Bylaws. Any such proposal should be sent TO THE CORPORATE
SECRETARY OF STILWELL AT 920 MAIN STREET, 21ST Floor, Kansas City, Missouri
64105-2008.
In order for a stockholder proposal that is not included in Stilwell's Notice
and Proxy Statement for next year's annual meeting of stockholders to be
properly brought before the meeting, such proposal must also comply with the
procedures outlined below, which are set forth in Stilwell's Bylaws. The
Chairman presiding over such annual meeting makes the determination that any
such proposal has been properly brought before such meeting.
DIRECTOR NOMINATIONS. With respect to stockholder nominations of candidates for
Stilwell's Board of Directors, Stilwell's Bylaws provide that nominations shall
be made pursuant to timely written notice to the Secretary of Stilwell. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of Stilwell, if more than 30 days' notice is
given to stockholders, not later than the close of BUSINESS ON THE 15TH day
following the day on which notice of the date of the annual meeting was mailed
or public disclosure of the date of the meeting was made, whichever first
occurs, and if less than 30 days' notice is given to STOCKHOLDERS, THEN NOT
LATER THAN THE CLOSE OF BUSINESS ON THE 5TH day following the day on which
notice of the date of the annual meeting was mailed or public disclosure of the
date of the annual meeting was made, whichever first occurs. Such stockholder's
notice to the Secretary shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of capital stock of Stilwell that are beneficially owned by the person,
and (iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as
to the stockholder giving the notice, (i) the name and address of the
stockholder and (ii) the class and number of shares of capital stock of Stilwell
Page 23
which are beneficially owned by the stockholder. The stockholder's notice must
include a signed consent of each such nominee to serve as a director of
Stilwell, if elected. Stilwell may require any proposed nominee to furnish such
other information as may reasonably be required by Stilwell to determine the
eligibility of such proposed nominee to serve as a director of Stilwell.
The Chairman of the meeting shall, in his or her discretion, determine whether
or not a nomination was made in accordance with the foregoing procedure, and if
the Chairman should determine that the nomination was not made in accordance
with the foregoing procedure, the Chairman shall so declare to the stockholders
present at the meeting and the defective nomination shall be disregarded.
MATTERS OTHER THAN DIRECTOR NOMINATIONS. In addition to any other applicable
requirements, for a proposal to be properly brought before the annual meeting by
a stockholder, the stockholder must have given timely notice thereof in writing
to the Secretary of Stilwell. To be timely, such a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of
Stilwell, if more than 30 days' notice is given to stockholders, NOT LATER THAN
THE CLOSE OF BUSINESS ON THE 15TH day following the day on which notice of the
date of the annual meeting was mailed or public disclosure of the date of such
meeting was made, whichever first occurs, and if less THAN 30 DAYS' NOTICE IS
GIVEN TO STOCKHOLDERS, THEN NOT LATER THAN THE CLOSE OF BUSINESS ON THE 5TH day
following the day on which notice of the date of the annual meeting was mailed
or public disclosure of the date of such meeting was made, whichever first
occurs.
A stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before such meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of the stockholder proposing such business, (iii) the class and number of shares
of capital stock of Stilwell which are beneficially owned by such stockholder,
and (iv) any material interest of such stockholder in such business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 10.1 - Exhibit 4.1 to the Company's Registration Statement
on Form S-8 dated July 12, 2000 (Commission File
#333-41288), Stilwell Financial Inc. 1998 Long Term
Incentive Stock Plan, as amended and restated
effective as of June 15, 2000, is hereby
incorporated by reference as Exhibit 10.1
Exhibit 27.1 - Financial Data Schedule
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June 29, 2000 under Item 5,
reporting an amendment to the Stilwell Financial Inc. Employee Stock Ownership
Plan ("ESOP") to provide that all of the Kansas City Southern Industries, Inc.
shares held in Stilwell ESOP participants' accounts - approximately 1.3 million
shares (prior to the reverse split) - will be sold and the sales proceeds
reinvested in shares of Stilwell common stock, with the timing and manner of
sale to be determined by an independent plan fiduciary.
Page 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized and in the capacities indicated on August 14, 2000.
Stilwell Financial Inc.
/S/ ANTHONY P. MCCARTHY
------------------------
Anthony P. McCarthy
Vice President - Finance
(Principal Financial Officer)
/S/ DOUGLAS E. NICKERSON
-------------------------
Douglas E. Nickerson
Vice President and Controller
(Principal Accounting Officer)
Page 25