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 SEPTEMBER 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 October 31, 2000
- - -------------------------------------------------------------------------------
Common Stock, $.01 per share par value 222,390,989 Shares
- - -------------------------------------------------------------------------------
STILWELL FINANCIAL INC.
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 1999 and September 30, 2000 2
Consolidated Condensed Statements of Income -
Three and Nine Months Ended September 30, 1999 and 2000 3
Computation of Basic and Diluted Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 2000 4
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Year Ended December 31, 1999 and Nine Months Ended
September 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 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
- - ----------
STILWELL FINANCIAL INC.
FORM 10-Q
SEPTEMBER 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 nine months ended September 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, September 30,
1999 2000
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 324.1 $ 528.8
Accounts receivable 155.7 225.0
Investments in advised funds 23.9 34.2
Other current assets 21.3 46.9
-------------- -------------
Total current assets 525.0 834.9
Investments held for operating purposes 474.1 537.3
Property and equipment (net of $45.3 and $70.8 accumulated
depreciation and amortization, respectively) 70.4 138.9
Intangibles and other assets, net 162.0 267.7
-------------- -------------
Total assets $ 1,231.5 $ 1,778.8
============== =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23.2 $ 34.1
Accrued compensation and benefits 80.9 103.7
Federal income taxes payable 91.7
Federal income taxes payable to
Kansas City Southern Industries, Inc. 22.3
Deferred income taxes 0.4 9.0
Other accrued liabilities 35.7 107.0
-------------- -------------
Total current liabilities 162.5 345.5
Other liabilities:
Deferred income taxes 151.8 223.5
Other liabilities 45.3 42.4
-------------- -------------
Total liabilities 359.6 611.4
-------------- -------------
Minority Interest in consolidated subsidiaries 57.3 64.1
-------------- -------------
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,
224,790,650 shares issued and 222,511,398 shares outstanding) 2.2
Additional paid-in capital
Net investment by Kansas City Southern Industries, Inc. 106.8
Retained earnings 598.9 973.5
Accumulated other comprehensive income 108.9 127.6
------------- -------------
Total stockholders' equity 814.6 1,103.3
------------- -------------
Total liabilities and stockholders' equity $ 1,231.5 $ 1,778.8
============= =============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Stilwell Financial Inc.
Consolidated Condensed Statements of Income
(Dollars in millions, except per share information)
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
---------------------------- -----------------------------
1999 2000 1999 2000
------------ ------------ ------------ -------------
Revenues:
Investment management fees $ 253.8 $ 502.3 $ 675.7 $1,414.9
Shareowner servicing fees 49.2 90.2 131.1 259.6
Other 8.2 17.0 19.9 43.1
------------ ------------ ------------ -------------
Total 311.2 609.5 826.7 1,717.6
------------ ------------ ------------ -------------
Operating Expenses:
Compensation 82.8 138.3 218.7 387.3
Marketing and promotion 16.3 22.3 51.9 77.0
Third party concession fees 40.2 83.4 96.2 237.1
Depreciation and amortization 10.0 21.5 24.7 57.0
Professional services 5.9 17.0 19.3 49.0
Other 23.2 34.6 70.4 117.1
------------ ------------ ------------ -------------
Total 178.4 317.1 481.2 924.5
------------ ------------ ------------ -------------
Operating Income 132.8 292.4 345.5 793.1
Equity in earnings of unconsolidated affiliates 11.6 14.3 34.1 48.9
Interest expense - Kansas City Southern
Industries, Inc. (0.7) (2.4) (0.7)
Interest expense - third parties (1.9) (5.1)
Gain on litigation settlement 44.2
Gain on sale of Janus Capital Corporation
common stock 15.1
Other, net 9.3 10.7 18.5 32.1
------------ ------------ ------------ -------------
Income before taxes and minority interest 153.0 315.5 395.7 927.6
Income tax provision 55.6 114.2 142.5 330.8
Minority interest in consolidated earnings 14.7 31.2 38.6 86.3
------------ ------------ ------------ -------------
Net income $ 82.7 $ 170.1 $ 214.6 $ 510.5
============ ============ ============ =============
Per Share Data (Notes 3 and 4):
Weighted Average Common shares
outstanding (in thousands) 223,000 223,407 223,000 223,163
Basic Earnings per share $ 0.37 $ 0.76 $ 0.96 $ 2.29
Diluted Common shares
outstanding (in thousands) 223,000 229,297 223,000 225,126
Diluted Earnings per share $ 0.36 $ 0.73 $ 0.95 $ 2.23
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Stilwell Financial Inc.
Consolidated Condensed Statements of Cash Flows
(Dollars in millions)
(Unaudited)
Nine months ended September 30,
----------------------------------
1999 2000
--------------- -------------
Cash flows provided by (used for):
Operating activities:
Net income $ 214.6 $ 510.5
Adjustments to net income:
Depreciation and amortization 24.7 57.0
Deferred income taxes 10.8 25.2
Minority interest in consolidated earnings 38.6 86.3
Equity in undistributed earnings of unconsolidated affiliates (33.8) (48.9)
Gain on sale of Janus Capital Corporation common stock (15.1)
Employee deferred compensation 1.9 (2.7)
Deferred commissions (22.9) (63.2)
Changes in other assets 2.4 (8.4)
Changes in working capital items:
Accounts receivable (43.7) (69.6)
Other current assets 2.9 (6.8)
Accounts payable and accrued compensation and benefits 33.4 34.4
Federal income taxes payable and other accrued liabilities 18.6 169.0
Other, net (4.5) (3.0)
------------- -------------
Net operating 243.0 664.7
------------- -------------
Investing activities:
Property acquisitions (28.6) (96.4)
Investments in affiliates (17.2) (89.0)
Sale of investments in advised funds 18.9 14.0
Purchase of investments in advised funds (15.3) (22.6)
Proceeds from sale of investments 6.9
Other, net 4.0 1.6
------------- -------------
Net investing (38.2) (185.5)
------------- -------------
Financing activities:
Change in long-term debt - Kansas City Southern
Industries, Inc. (16.6)
Repayment of long-term debt - third parties (125.0)
Common stock repurchased (154.0)
Proceeds from stock plans 22.2
Amounts treated as transfers from (dividends to)
Kansas City Southern Industries, Inc., net (73.2) 6.4
Distributions to minority interest (31.5) (26.9)
Other, net (2.0) 2.8
------------- -------------
Net financing (123.3) (274.5)
------------- -------------
Cash and cash equivalents:
Net increase 81.5 204.7
At beginning of year 138.5 324.1
------------- -------------
At end of period $ 220.0 $ 528.8
============= =============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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
Amounts treated as 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 510.5
Net unrealized gain
on investments 22.9
Less: reclassification
adjustment for gains
included in net
income (1.0)
Foreign currency
translation adjustment (3.2)
Comprehensive Income 529.2
Amounts treated as 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) -
Common stock repurchased (133.5) (20.5) (154.0)
Common stock options and
benefit plans 28.9 28.9
Stock dividend by
Kansas City Southern
Industries, Inc. (Note 3) 104.6 (104.6) -
------------ ------------- ------------- ----------- ------------ -----------
Balance at
September 30, 2000 $ 2.2 $ - $ - $ 973.5 $ 127.6 $ 1,103.3
============ ============= ============= =========== ============ ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
STILWELL FINANCIAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2000, the results
of operations for the three and nine months ended September 30, 1999 and 2000,
and cash flows for the nine months ended September 30, 1999 and 2000.
The primary entities comprising Stilwell as of September 30, 2000 were: Janus
Capital Corporation ("Janus"), an approximate 82.3% 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 88% of
the regular limited liability interests; Nelson Money Managers Plc ("Nelson"),
an 80% owned subsidiary; and DST Systems, Inc. ("DST"), an equity investment in
which SMI holds an approximate 32% interest. Janus is the principal business
comprising Stilwell, representing 97% of assets under management at September
30, 2000 and 96% of revenues and 89% of net income (exclusive of one-time gains
discussed in Notes 8 and 9 below) for the nine months ended September 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 nine months ended
September 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 (i.e., that period of time prior to July 12,
2000) 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 up
to and including July 12, 2000 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 September 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.
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. The effect of stock options represent the only difference between the
weighted average shares used for the basic earnings per share computation
compared to the diluted earnings per share computation. Incremental shares from
assumed conversion of stock options included in the computation of diluted
earnings per share totaled 5,889,224 and 1,963,075 for the three and nine months
ended September 30, 2000, respectively. Because there were no Stilwell options
issued prior to July 12, 2000, the computations for the number of shares to be
used in the denominator are the same for basic and diluted earnings per share in
the three and nine month periods ended September 30, 1999. For the three and
nine month periods ended September 30, 2000, the weighted average of options to
purchase 135,350 and 45,117 shares of Stilwell common stock, respectively, were
excluded from the respective computation of diluted earnings per share because
the exercise prices were greater than the average market prices of the common
shares.
The only adjustments that currently affect the numerator of the Company's
diluted earnings per share computations include potentially dilutive securities
at subsidiaries and affiliates. These adjustments totaled $1.6 million and $3.4
million for the three and nine months ended September 30, 1999, respectively,
and $2.9 million and $7.9 million for the three and nine months ended September
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
September 30, 2000.
Condensed consolidated financial information for DST is shown below:
December 31, 1999 September 30, 2000
----------------- ------------------
Percentage ownership 32.1% 32.4%
Carrying value $ 470.2 $ 535.7
Equity in DST net assets $ 470.2 $ 535.7
Fair market value (a) $ 1,547.7 $ 2,383.1
Financial Condition:
Current assets $ 464.5 $ 437.6
Non-current assets 1,861.8 2,145.8
---------------- ------------------
Total assets $ 2,326.3 $ 2,583.4
================ ==================
Current liabilities $ 285.8 $ 253.4
Non-current liabilities 576.9 681.0
Stockholders' equity 1,463.6 1,649.0
---------------- ------------------
Total liabilities and
stockholders' equity $ 2,326.3 $ 2,583.4
================ ==================
Three months Nine months
ended September 30, ended September 30,
---------------------------- -----------------------------
1999 2000 1999 2000 (b)
------------ ------------ ------------ -------------
OPERATING RESULTS:
Revenues $ 304.6 $ 335.5 $ 908.3 $ 1,012.9
Costs and expenses $ 256.3 $ 269.6 $ 758.7 $ 819.2
Net income $ 33.9 $ 44.8 $ 100.9 $ 148.2
(a) Based on DST's closing price on the New York Stock Exchange.
(b) Net income includes after-tax gains of approximately $14.7 million from
settlement of litigation with a former DST equity affiliate and sales of
marketable securities.
During the nine months ended September 30, 2000, the Company recorded
approximately $17.4 million in goodwill relating to the DST investment. This
goodwill resulted from DST stock repurchases.
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, to be cash
equivalents. Cash and cash equivalents of Janus (totaling $123.1 million and
$244.7 million at September 30, 1999 and 2000, respectively) are generally used
to fund its operations and to 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):
Nine months
ended September 30,
----------------------------
1999 2000
---------- ----------
Interest paid $ 1.1 $ 3.8
Income taxes paid to KCSI $ 81.3 $ 175.9
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 months ended September 30, 1999, the Company
recorded its proportionate share of the loss in the market value of these
investments of $22.5 million ($13.9 million net of deferred income taxes). For
the nine months ended September 30, 1999, the Company reported a gain of $7.3
million ($4.5 million net of deferred income taxes). For the three and nine
month periods ended September 30, 2000, the Company recorded its proportionate
share of the gain in market value of these investments from December 31, 1999 of
$27.5 million and $37.1 million, respectively, ($17.0 million and $22.9 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 increased as a result of foreign currency translation
adjustments by $1.6 million during the three months ended September 30, 1999,
but declined by $0.2 million for the nine months ended September 30, 1999.
Accumulated other comprehensive income declined as a result of foreign currency
translation adjustments by $0.6 million and $3.2 million for the three and nine
months ended September 30, 2000, respectively.
Taking into consideration these FAS 115 and foreign currency translation
adjustments, the Company reported comprehensive income of $67.1 million and
$214.9 million for the three and nine months ended September 30, 1999,
respectively, and $186.6 million and $529.2 million for the three and nine
months ended September 30, 2000, respectively.
During the nine months ended September 30, 2000, Stilwell recorded approximately
$3.6 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.
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% per annum 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% (prior to consideration of the shares
repurchased in connection with the departure of Janus' Chief Investment Officer
- - - see Note 13 below).
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
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 adoption of SAB 101 did not 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 Janus 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 $821
million as of September 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 an 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 September 30, 2000, the
purchase price would have been approximately $1.5 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 September 30, 2000, Stilwell had $200 million in credit facilities
available and had cash balances at the Stilwell holding company level in excess
of $255 million. The market value of Stilwell's 32% investment in DST was
approximately $2.4 billion using DST's closing price on the New York Stock
Exchange on September 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 is repurchasing shares under this program through open market
transactions. If all of the authorized shares were repurchased at the prevailing
market price of Stilwell common stock as of July 25, 2000, the repurchase
program would result in an approximate 9% reduction to the 223 million shares of
common stock originally 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.
Through September 30, 2000, Stilwell repurchased approximately 3.1 million
shares of its common stock for an aggregate cost of approximately $150 million.
13. On September 25, 2000, the Chief Investment Officer and Director of
Research of Janus, James P. Craig, III ("Mr. Craig"), left Janus to manage money
for a new charitable foundation established by Mr. Craig and his wife. Mr.
Craig's responsibilities have been 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. Although no formal succession plan has yet been adopted, Stilwell
believes that there are several officers at Janus who would be capable of
succeeding Mr. Bailey should the need for that arise.
Janus purchased Mr. Craig's shares of Janus at the fair market value
(approximately $78 million) as set forth in a stock restriction agreement and
funded this purchase from its existing cash. Upon Janus' repurchase of these
shares, Stilwell's ownership percentage of Janus increased to approximately
82.3%. Stilwell records this type of transaction under the purchase method of
accounting. After this transaction, more than 265,000 shares of Janus common
stock are available for use in connection with Janus' Long Term Incentive Plan.
Upon issuance of all of these shares in future years, Stilwell's ownership
interest in Janus will be 80.1%.
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 approximately 82.3% 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 88% 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 (i.e., that period of
time prior to July 12, 2000) 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 up to and including July 12, 2000 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
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% per annum 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% (prior to consideration of any shares
repurchased in connection with the departure of Janus' Chief Investment Officer
- - - see below).
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 is repurchasing shares under this
program through open market transactions. If all of the authorized shares were
repurchased at the prevailing market price of Stilwell common stock as of July
25, 2000, the repurchase program would result in an approximate 9% reduction to
the 223 million shares of common stock originally outstanding. The number of
shares repurchased will depend on various factors, including the price of the
stock and market conditions.
Through September 30, 2000, Stilwell repurchased approximately 3.1 million
shares of its common stock for an aggregate cost of approximately $150 million.
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 September 25, 2000, the
Chief Investment Officer and Director of Research of Janus, James P. Craig, III
("Mr. Craig"), left Janus to manage money for a new charitable foundation
established by Mr. Craig and his wife. Mr. Craig's responsibilities were assumed
by Janus' Executive Investment Committee ("Committee"), a group formed by Mr.
Craig over a year ago and comprised of several portfolio managers and Thomas H.
Bailey ("Mr. Bailey"). Mr. Craig had previously been identified as the successor
to Mr. Bailey in the event that Mr. Bailey left Janus. Although no formal
succession plan has yet been adopted, Stilwell believes that there are several
officers at Janus who would be capable of succeeding Mr. Bailey should the need
for that arise.
Janus purchased (with existing cash) Mr. Craig's shares of Janus at the fair
market value (approximately $78 million) as set forth in a stock restriction
agreement. Upon Janus' repurchase of these shares, Stilwell's ownership
percentage of Janus increased to approximately 82.3%. Stilwell records this type
of transaction under the purchase method of accounting. After this transaction,
more than 265,000 shares of Janus common stock are available for use in
connection with Janus' Long Term Incentive Plan. Upon issuance of all of these
shares in future years, Stilwell's ownership interest in Janus will be 80.1%.
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.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared With the Three Months Ended
September 30, 1999
The Company's revenues, operating income and net income (with subsidiary
information exclusive of holding company amortization attributed to the
respective subsidiary) were as follows (dollars in millions):
Three months
ended September 30,
-------------------------------------------
1999 2000
--------------- ----------------
Revenues:
Janus $ 296.6 $ 584.6
SMI and Berger 10.4 19.4
Other 4.2 5.5
--------------- ----------------
Total $ 311.2 $ 609.5
=============== ================
Operating Income (Loss):
Janus $ 137.9 $ 289.4
SMI and Berger - 7.6
Other (5.1) (4.6)
--------------- ----------------
Total $ 132.8 $ 292.4
=============== ================
Net Income (Loss):
Janus $ 73.5 $ 151.1
SMI and Berger (i) 0.9 5.3
DST 10.1 13.5
Other (1.8) 0.2
--------------- ----------------
Total $ 82.7 $ 170.1
=============== ================
<FN>
(i) Net income from SMI and Berger does not include DST.
</FN>
Assets Under Management as of September 30, 1999, December 31, 1999 and
September 30, 2000 were as follows (in billions):
September 30, December 31, September 30,
1999 1999 2000
--------------- ----------------- ---------------
JANUS:
Janus Advised Funds:
Janus Investment Fund $ 114.6 $ 171.8 $ 203.9
Janus Aspen Series (i) 10.9 17.4 25.8
Janus Adviser Series (i) - - 1.6
Janus Money Market Funds 6.5 9.4 11.4
Janus World Funds Plc 0.8 1.4 4.1
--------------- ----------------- ---------------
Total Janus Advised Funds 132.8 200.0 246.8
Janus Sub-Advised Funds and
Private Accounts 32.2 49.5 58.6
--------------- ----------------- ---------------
Total Janus 165.0 249.5 305.4
--------------- ----------------- ---------------
BERGER:
Berger Advised Funds 4.1 6.1 7.7
Berger Sub-Advised Funds and
Private Accounts 0.3 0.5 1.1
--------------- ----------------- ---------------
Total Berger 4.4 6.6 8.8
--------------- ----------------- ---------------
NELSON 1.2 1.3 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 170.6 $ 257.4 $ 315.5
=============== ================= ===============
<FN>
(i) On July 31, 2000, shareholders of the Retirement Shares of the Janus
Aspen Series approved a spin-off of such shares to form the Janus Adviser
Series, which eliminated the requirement that the Retirement Shares be
sold only to certain qualified retirement plans.
</FN>
The Company earned $170.1 million in third quarter 2000 compared to $82.7
million in third quarter 1999, a 106% improvement quarter to quarter. Average
assets under management increased 97% compared to prior year's third quarter
(from $164.8 billion to $324.2 billion), leading to a 96% increase in revenues
(to $609.5 million) and a 120% increase in operating income (to $292.4 million).
Additionally, operating margins improved from 42.7% to 48.0%, indicative of the
revenue growth and effective cost management at the various subsidiaries.
Assets under management increased to $315.5 billion as of September 30, 2000
compared to $257.4 billion as of December 31, 1999 and $170.6 billion as of
September 30, 1999. During third quarter 2000, net cash inflows totaled $8.5
billion and were more than 7% higher than the $7.9 billion in third quarter
1999. These cash inflows were largely offset by market depreciation of $6.0
billion during the quarter, which reflects the decline in various segments of
the U.S. equity markets for that period. See the brief discussions of Janus,
Berger and Nelson separately below.
Investment management fees increased 98% quarter to quarter, reflecting the
growth in assets under management. Aggregate investment management fees
continued to total approximately 61-62 basis points of average assets under
management. Shareowner servicing fees and other revenues increased $49.8 million
compared to prior year's third 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 third quarter 2000, indicative of
efforts by the management of Stilwell's subsidiaries to control expenditures.
Operating expenses totaled $317.1 million for the three months ended September
30, 2000 compared to $178.4 million in the prior year quarter. Operating
expenses with notable increases quarter to quarter included the following: i)
compensation, primarily related to increases in investment performance-based
incentive compensation and the number of employees; ii) third party concession
fees resulting from a growth in the level of assets distributed through these
channels; iii) marketing and promotion, largely fulfillment-related; iv)
depreciation arising from Janus' infrastructure enhancement efforts over the
last two years (approximately $93.2 million in capital expenditures during 2000
alone); v) amortization of deferred commission payments in connection with the
sales of class B shares in the Janus World Funds; and vi) professional services
fees associated with web development and maintenance efforts. Other expenses
increased quarter to quarter, largely in support of Janus' growing operations,
facilities and employee numbers.
Third quarter 2000 equity earnings from DST were $14.3 million versus $10.9
million in third quarter 1999. This improvement was largely attributable to
higher earnings in DST's financial services and output solutions segments.
Consolidated DST revenues increased 10.1% due to a higher number of shareowner
accounts serviced (totaling 65.1 million at September 30, 2000 versus 54.8
million at September 30, 1999 and 63.9 million at June 30, 2000) and images
produced and statements mailed (increases of 18% and 6%, respectively, since
prior year third quarter). Consolidated operating margins improved to 19.6%
during third quarter 2000 versus 15.9% in comparable 1999.
Other, net increased to $10.7 million for the three months ended September 30,
2000 versus $9.3 million in comparable 1999. This increase was primarily
attributable to interest income on money market accounts.
Nine Months Ended September 30, 2000 Compared With the Nine Months Ended
September 30, 1999
The Company's revenues, operating income and net income (with subsidiary
information exclusive of holding company amortization attributed to the
respective subsidiary) were as follows (dollars in millions):
Nine Months
Ended September 30,
--------------------------------------------
1999 2000 (i)
--------------- -----------------
Revenues:
Janus $ 786.6 $ 1,648.7
SMI and Berger 27.9 52.6
Other 12.2 16.3
--------------- -----------------
Total $ 826.7 $ 1,717.6
=============== =================
Operating Income (Loss):
Janus $ 362.7 $ 794.4
SMI and Berger 0.2 17.3
Other (17.4) (18.6)
--------------- -----------------
Total $ 345.5 $ 793.1
=============== =================
Net Income (Loss):
Janus $ 190.7 $ 413.6
SMI and Berger (ii) 2.4 14.5
DST 29.9 44.4
Other (8.4) 38.0
--------------- -----------------
Total $ 214.6 $ 510.5
=============== =================
<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 nine months ended September 30, 2000, Stilwell reported earnings of
$510.5 million, a 138% increase over the nine months ended September 30, 1999.
Exclusive of the first quarter 2000 one-time gains discussed in "Significant
Developments" above, earnings improved $253.5 million, or 118%, compared to the
nine months ended September 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 108% to $1,717.6 million versus $826.7
million for the nine months ended September 30, 1999. Average assets under
management increased 109% period to period - from $147.1 billion to $307.6
billion - due to net cash inflows and market appreciation. Since September 30,
1999, Stilwell subsidiaries experienced net cash inflows and market appreciation
of $91.3 billion and $53.6 billion, respectively. As of September 30, 2000, open
shareowner accounts exceeded 6.3 million (an increase of 58% compared to
September 30, 1999).
Operating margins improved period to period (from 41.8% to 46.2%), mirroring the
strong improvement quarter to quarter. Higher operating expenses were evident in
the same cost components noted in the third quarter 2000 discussion above.
Compensation and third party concession costs were approximately 36% of total
Stilwell revenues during the nine months ended September 30, 2000 compared to
approximately 38% in 1999. With the numerous infrastructure enhancements
throughout 1999 and 2000, together with increased deferred commission payments
($22.9 million through September 30, 1999 versus $63.2 million through September
30, 2000), depreciation and amortization has more than doubled period to period.
Additionally, the dramatic increase in assets under management during the first
half of 2000 generated significant shareowner activity, thereby requiring
substantial professional services fees for temporary employee help. The rate of
increase in the remaining operating expenses on a combined basis continues to
trail the rate of revenue growth, highlighting subsidiary management efforts to
maintain competitive operating margins.
Equity earnings from DST totaled $47.9 million for year to date 2000 versus
$32.4 million in comparable 1999. Year to date 2000 DST equity earnings include
approximately $4.7 million (pretax) 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 33% over the nine months ended
September 30, 1999. Improvements in revenues and operating margins, together
with the non-recurring items discussed above, drove this increase period to
period.
Other, net of $32.1 million through September 30, 2000 exceeded the prior year
period by $13.6 million, primarily due to interest income, gains from sales of
investments in advised funds and a $2.3 million gain resulting from Berger's
sale of its joint venture, BBOI Worldwide LLC.
A brief discussion of significant Janus, Berger and Nelson items during the nine
months ended September 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. During the three months ended
September 30, 2000, assets under management increased by $1.6 billion due
to net cash inflows of $7.9 billion, offset by market depreciation of
$6.3 billion. Total Janus open shareowner accounts increased to 6.0
million from 3.7 million at September 30, 1999, a 62% increase. Full-time
employees increased 51% from approximately 1,950 at September 30, 1999 to
2,940 at September 30, 2000.
For the nine months ended September 30, 2000, assets under management
increased 22% to $305.4 billion due to net cash inflows of $67.7 billion,
partially offset by market depreciation of $11.8 billion. Of the $67.7
billion in net cash inflows, approximately 56% were received in the Janus
Investment Fund - the component of total flows frequently reported in
industry journals. The remaining 44% of cash inflows were received
through other channels.
In September 2000, Janus announced the closing of the Janus Fund, its $48
billion flagship equity product. Earlier in 2000, Janus closed four other
funds, including Janus Global Technology Fund, Janus Worldwide Fund,
Janus Global Life Sciences Fund and Janus Olympus Fund. These fund
closings reflect the ongoing focus of Janus to act in its shareowners'
best interests by ensuring that funds do not grow to a size at which the
ability to capitalize on suitable investment opportunities is restricted.
Further evidencing its focus on shareowners, Janus broadened its
portfolio offerings during 2000 by introducing Janus Strategic Value Fund
and Janus Orion Fund.
These increases generally reflect 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 33% during the nine months ended
September 30, 2000 and 100% since September 30, 1999. These increases
reflect net cash inflows and market appreciation during the periods.
Shareowner accounts improved approximately 9% during the nine months
ended September 30, 2000, reversing the trend of declining numbers of
accounts experienced during the previous 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 (improving to approximately 32.9%
for the nine months ended September 30, 2000), moving closer to industry
averages.
NELSON
Nelson's assets under management increased 22% to (pound)918 million as
of September 30, 2000 from (pound)750 million at September 30, 1999.
Beginning in 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 third quarter and year to date 2000 operating
income and net income each increased by more than 105% compared to the same 1999
periods and by more than 12% compared to second quarter 2000. These improvements
are a result of revenue increases and higher operating margins during both
periods in 2000 compared to the 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, the closing of existing funds to new
investors, as well as other factors, including 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 fourth quarter,
revenues for the remainder of 2000 are expected to exceed 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):
Nine months ended September 30,
------------------------------------
1999 2000
-------------- -------------
CASH FLOWS PROVIDED BY (USED FOR):
Operating activities $ 243.0 $ 664.7
Investing activities (38.2) (185.5)
Financing activities (123.3) (274.5)
-------------- -------------
Net increase 81.5 204.7
At beginning of year 138.5 324.1
-------------- -------------
At end of period $ 220.0 $ 528.8
============== =============
During the nine months ended September 30, 2000, the Company's consolidated cash
position increased $204.7 million from December 31, 1999. This increase resulted
primarily from higher earnings and positive fluctuations in working capital
components. These increases were partially offset by property acquisitions,
repayments of long-term debt, investment in affiliates, common stock repurchases
and payments of deferred commissions in connection with the Janus World Funds B
share arrangements.
Net operating cash inflows for the nine months ended September 30, 2000 were
$664.7 million compared to inflows of $243.0 million in the same 1999 period.
This $421.7 million improvement was chiefly attributable to higher net income
and increases in liabilities due to timing of payments associated with federal
income taxes and distributions payable to Janus minority shareholders, partially
offset by an increase in payments of deferred commissions period to period.
Net investing cash outflows were $185.5 million during the nine months ended
September 30, 2000 compared to $38.2 million during the comparable 1999 period.
This difference results primarily from the following items: i) a $67.8 million
increase in capital expenditures - $67 million by Janus - in connection with
infrastructure enhancement efforts and ii) a $71.8 million increase in
investments in affiliates, largely attributable to the purchase of Janus common
stock from Mr. Craig (as discussed in "Significant Developments" above).
Through September 30, 2000, financing cash outflows were used primarily for the
repurchase of Stilwell common stock and repayment of indebtedness that was
assumed from KCSI in connection with the New Credit Facility as discussed in
"Significant Developments" above. For the nine months ended September 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, deferred commissions resulting from investor
purchases of class B shares in the Janus World Funds totaled $63.2 million
through September 30, 2000 and management expects that such class B share
purchases will continue to grow in future periods.
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 September 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, prior to 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.
OTHER
Minority Purchase Agreements. A stock purchase agreement with 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 Janus 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 $821
million as of September 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 an 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 September 30, 2000, the
purchase price would have been approximately $1.5 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 September 30, 2000, Stilwell had $200 million in credit facilities
available and had cash balances at the Stilwell holding company level in excess
of $255 million. The market value of Stilwell's 32% investment in DST was
approximately $2.4 billion using DST's closing price on the New York Stock
Exchange on September 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.
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 adoption of SAB 101 did not 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.
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 6. Exhibits and Reports On Form 8-K
a) Exhibits
Exhibit 10.1 - Amendment of Employment Agreement between Joseph D.
Monello and Stilwell Financial Inc. dated
October 20, 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 that Stilwell mailed a letter to the participants of the Stilwell
Financial Inc. Employee Stock Ownership Plan (ESOP) that described an amendment
to the Stilwell ESOP.
The Company filed a Current Report on Form 8-K dated July 21, 2000 under Item 5,
reporting that Stilwell issued a news release concerning the announcement of
financial results for the three and six months ended June 30, 2000.
The Company filed a Current Report on Form 8-K dated July 25, 2000 under Item 5,
reporting that Stilwell issued a news release concerning the announcement of a
$1 billion stock repurchase program to be completed over a period of two years.
The Company filed a Current Report on Form 8-K dated July 31, 2000 under Item 5,
reporting total assets under management by its subsidiaries Janus Capital
Corporation, Berger LLC and Nelson Money Managers Plc as of July 31, 2000.
The Company filed a Current Report on Form 8-K dated August 31, 2000 under Item
5, reporting total assets under management by its subsidiaries Janus Capital
Corporation, Berger LLC and Nelson Money Managers Plc as of August 31, 2000.
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 November 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)