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 March 31, 2001
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 April 30, 2001
- - -----------------------------------------------------------------------------
Common Stock, $0.01 per share par value 219,305,638 Shares
- - -----------------------------------------------------------------------------
STILWELL FINANCIAL INC.
Form 10-Q
March 31, 2001
Index
Page
PART I - FINANCIAL INFORMATION ----
- - ------------------------------
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 2000 and March 31, 2001 2
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2000 and 2001 3
Computation of Basic and Diluted Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2000 and 2001 4
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Year Ended December 31, 2000 and Three Months Ended March 31, 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Qualitative and Quantitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 28
- - ----------
STILWELL FINANCIAL INC.
FORM 10-Q
MARCH 31, 2001
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 the Company's Annual Report on Form 10-K for the year ended December
31, 2000 and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this Form 10-Q. Results for the three months
ended March 31, 2001 are not necessarily indicative of the results expected for
the full year 2001.
STILWELL FINANCIAL INC.
Consolidated Condensed Balance Sheets
(Dollars in Millions, except per share information)
(Unaudited)
December 31, March 31,
2000 2001
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 364.3 $ 335.4
Accounts receivable 194.4 164.9
Investments in advised funds 30.2 25.8
Other current assets 52.2 65.8
--------------- ---------------
Total current assets 641.1 591.9
Investments held for operating purposes 511.1 423.9
Property and equipment (net of $79.4 and $92.1 accumulated
depreciation and amortization, respectively) 137.7 129.8
Intangibles and other assets, net 291.1 617.0
--------------- ---------------
Total assets $ 1,581.0 $ 1,762.6
=============== ===============
Liabilities and
stockholders' equity
Current liabilities:
Accounts payable $ 27.3 $ 24.4
Accrued compensation and benefits 98.0 54.5
Income taxes payable 9.7 27.6
Accrued liability to third party administrators 33.2 25.3
Distributions payable to minority interest 40.6
Other accrued liabilities 27.9 39.2
--------------- ---------------
Total current liabilities 196.1 211.6
Other liabilities:
Long-term debt 100.0
Deferred income taxes 211.1 261.6
Other liabilities 42.7 33.5
--------------- ---------------
Total liabilities 449.9 606.7
--------------- ---------------
Minority interest in consolidated subsidiaries 73.3 33.8
--------------- ---------------
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 219,155,197 shares outstanding) 2.2 2.2
Additional paid-in capital
Retained earnings 952.3 1,071.7
Accumulated other comprehensive income 103.3 48.2
--------------- ---------------
Total stockholders' equity 1,057.8 1,122.1
--------------- ---------------
Total liabilities and stockholders' equity $ 1,581.0 $ 1,762.6
=============== ===============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Income
(Dollars in Millions, except per share information)
(Unaudited)
Three months
ended March 31,
-------------------------------
2000 2001
-------------- --------------
Revenues:
Investment management fees $ 449.9 $ 367.8
Shareowner servicing fees 83.6 64.1
Other 11.6 16.6
-------------- --------------
Total 545.1 448.5
-------------- --------------
Operating expenses:
Compensation 124.9 95.3
Marketing and promotion 28.8 24.4
Third party concession fees 72.3 66.0
Depreciation and amortization 15.6 24.9
Professional services 15.2 16.7
Other 43.4 38.4
-------------- --------------
Total 300.2 265.7
-------------- --------------
Operating income 244.9 182.8
Equity in earnings of
unconsolidated affiliates 18.8 17.8
Interest expense - Parent (0.7)
Interest expense - third parties (1.9) (5.0)
Gain on litigation settlement 44.2
Gain on sale of Janus Capital Corporation
common stock 15.1
Other, net 9.9 6.8
-------------- --------------
Income before taxes and minority 330.3 202.4
interest
Income tax provision 114.3 72.2
Minority interest in consolidated earnings 27.3 18.8
-------------- --------------
Net income $ 188.7 $ 111.4
============== ===============
Per Share Data (Note 3):
Weighted Average Common shares
outstanding (in thousands) 223,000 219,042
Basic Earnings per share $ 0.85 $ 0.51
Diluted Common shares
outstanding (in thousands) 223,000 224,666
Diluted Earnings per share $ 0.84 $ 0.48
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Cash Flows
(Dollars in millions)
(Unaudited)
Three months ended March 31,
------------------------------------------
2000 2001
--------------- --------------
Cash flows provided by (used for):
Operating activities:
Net income $ 188.7 $ 111.4
Adjustments to net income:
Depreciation and amortization 15.6 24.9
Deferred income taxes 27.5 42.1
Minority interest in consolidated earnings 27.3 18.8
Equity in undistributed earnings of unconsolidated affiliates (18.8) (17.8)
Gain on sale of Janus Capital Corporation common stock (15.1)
Employee deferred compensation 1.0 (5.2)
Deferred commissions (44.7) (1.0)
Changes in other assets (8.6) (31.7)
Changes in working capital items:
Accounts receivable (67.8) 29.3
Other current assets (5.6) (16.3)
Accounts payable and accrued compensation and benefits 46.8 (32.4)
Federal income taxes payable and other accrued liabilities 43.8 25.2
Other, net (0.7) 2.7
-------------- --------------
Net operating 189.4 150.0
-------------- --------------
Investing activities:
Property acquisitions (31.5) (13.0)
Investments in affiliates (1.8) (230.8)
Sale of investments in advised funds 11.8
Purchase of investments in advised funds (18.6) (0.3)
Other, net 1.4 5.4
-------------- --------------
Net investing (38.7) (238.7)
-------------- --------------
Financing activities:
Proceeds from borrowing under credit facilities 100.0
Repayment of long-term debt - third parties (125.0)
Proceeds from stock plans 5.4
Amounts treated as transfers from Parent 7.6
Distributions to minority interest (7.0) (43.8)
Other, net 0.3 (1.8)
-------------- --------------
Net financing (124.1) 59.8
-------------- --------------
Cash and cash equivalents:
Net increase (decrease) 26.6 (28.9)
At beginning of year 324.1 364.3
-------------- --------------
At end of period $ 350.7 $ 335.4
============== ==============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Changes in Stockholders' Equity
(Dollars in millions)
(Unaudited)
Additional Net investment Accumulated other Total
Common paid-in by Retained comprehensive stockholders'
stock capital Parent earnings income equity
----- ------- ------ -------- ------ ------
Balance at December 31, 1999 $ - $ - $ 106.8 $ 598.9 $ 108.9 $ 814.6
Comprehensive income:
Net income 663.7
Net unrealized gain on investments 1.3
Less: reclassification adjustment
for gains included in net income (5.8)
Foreign currency translation
adjustment (1.1)
Comprehensive income 658.1
Amounts treated as dividends
to Parent (115.4) (115.4)
222,999.786 - to - 1 stock
split (Note 3) 2.2 (2.2) -
Stock dividend by Parent (Note
3) 104.6 (104.6) -
Common stock options and
benefit plans 39.9 39.9
Common stock repurchased (144.5) (190.5) (335.0)
Common stock dividends (4.4) (4.4)
---------- ------------- ------------- ----------- ------------ ---------
Balance at December 31, 2000 2.2 - - 952.3 103.3 1,057.8
Comprehensive income:
Net income 111.4
Net unrealized loss on investments (53.8)
Less: reclassification adjustment
for gains included in net income (0.4)
Foreign currency translation
adjustment (0.9)
Comprehensive income 56.3
Common stock options and
benefit plans 8.0 8.0
---------- ------------- ------------- ----------- ------------ ---------
Balance at March 31, 2001 $ 2.2 $ - $ - $ 1,071.7 $ 48.2 $ 1,122.1
========== ============= ============= =========== ============ =========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
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, 2000 and March 31,
2001 and the results of operations and cash flows for the three months
ended March 31, 2000 and 2001.
The primary entities comprising Stilwell as of March 31, 2001 were: Janus
Capital Corporation ("Janus"), an approximate 84.0% owned subsidiary - see
Note 7 regarding acquisition of additional 6.2% of Janus in May 2001;
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 33%
interest. Janus is the principal business comprising Stilwell, representing
96% of assets under management at March 31, 2001, and 95% of revenues and
91% of net income for the three months ended March 31, 2001. 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 that are presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. Certain
prior year amounts have been reclassified to conform to the current year
presentation. The results of operations for the three months ended March
31, 2001 are not necessarily indicative of the results to be expected for
the full year 2001.
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" or "Parent"), 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. 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 5,623,869 for the three months ended
March 31, 2001. 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 months ended March 31, 2000. For the three months ended March 31,
2001, the weighted average of options to purchase 225,266 shares of
Stilwell common stock were excluded from the 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 $2.3
million and $2.7 million for the three months ended March 31, 2000 and
2001, respectively.
6
4. 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 equity interest in DST was its primary equity
investment at March 31, 2001.
Condensed consolidated financial information for DST is shown below:
December 31, 2000 March 31, 2001
----------------------- -----------------------
Percentage ownership 32.5% 33.1%
Carrying value (a) $ 509.3 $ 422.1
Equity in DST net assets $ 509.3 $ 422.1
Fair market value (b) $ 2,717.7 $ 1,954.7
Financial condition:
Current assets $ 590.7 $ 580.1
Non-current assets 1,961.7 1,719.6
---------------- ------------------
Total assets $ 2,552.4 $ 2,299.7
================ ==================
Current liabilities $ 356.2 $ 475.6
Non-current liabilities 630.4 543.7
Stockholders' equity 1,565.8 1,280.4
---------------- ------------------
Total liabilities and stockholders' equity $ 2,552.4 $ 2,299.7
================ ==================
Three months
ended March 31,
---------------------------------
2000 (c) 2001
-------------- ---------------
Operating results:
Revenues $ 340.4 $ 371.0
Costs and expenses $ 276.7 $ 293.3
Net income $ 56.2 $ 54.5
(a) During the three months ended March 31, 2001, the Company recorded
approximately $23.6 million in goodwill relating to the DST investment as a
result of DST stock repurchases. With this additional amount, Stilwell had
approximately $45.4 million in goodwill related to its investment in DST.
(b) Based on DST's closing price on the New York Stock Exchange.
(c) Net income includes after-tax gains of approximately $11.8 million from
settlement of litigation with a former DST equity affiliate and sales of
marketable securities.
5. 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 $186.6
million and $109.5 million at March 31, 2000 and 2001, 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.
7
Supplemental Cash Flow Information (in millions):
Three months
ended March 31,
---------------------------------------
2000 (a) 2001
------------- ---------------
Interest paid $ 1.9 $ 0.3
Income taxes paid $ 22.4 $ 6.9
(a) For the three months ended March 31, 2000, all income tax payments
were made to KCSI.
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 March
31, 2000, the Company recorded its proportionate share of the gain in
market value of these investments of $8.0 million ($5.0 million net of
deferred income taxes). For the three months ended March 31, 2001, the
Company recorded its proportionate share of the loss in the market value of
these investments of $88.2 million ($53.8 million 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 decreased as a result of foreign
currency translation adjustments by $0.6 million and $0.9 million during
the three months ended March 31, 2000 and 2001, respectively.
Taking into consideration these FAS 115 and foreign currency translation
adjustments, the Company reported comprehensive income of $191.8 million
and $56.3 million for the three months ended March 31, 2000 and 2001,
respectively.
During the three months ended March 31, 2001, 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.
6. The Company has three primary business units that produce the revenues and
operating income of Stilwell. These units, together with DST, comprise over
90% of the net income of the Company. For purposes of segment reporting,
Stilwell reports Janus and Berger as one segment, representing businesses
that derive the majority of their revenues and income from the provision of
investment management under investment advisory agreements. Nelson, DST,
the holding company and the various other subsidiaries and affiliates of
Stilwell are aggregated as a separate segment.
8
Summarized financial information concerning the segments is shown in
the following tables (in millions):
Three months ended March 31, 2000
-------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
---------- --------- ------------
Revenues $ 539.8 $ 5.3 $ 545.1
Operating expenses 284.5 15.7 300.2
---------- --------- ----------
Operating Income (Loss) 255.3 (10.4) 244.9
Equity earnings of
unconsolidated affiliates 0.8 18.0 18.8
Interest expense - Parent (0.7) (0.7)
Interest expense - third parties (1.9) (1.9)
Gain on litigation settlement 44.2 44.2
Gain on sale of Janus common stock 15.1 15.1
Other, net 4.3 5.6 9.9
---------- --------- ----------
Pretax income 260.4 69.9 330.3
Income tax provision 98.9 15.4 114.3
Minority interest 27.4 (0.1) 27.3
---------- --------- ----------
Net Income $ 134.1 $ 54.6 $ 188.7
========== ========= ==========
Three months ended March 31, 2001
------------------------------------------
Nelson, DST
Janus and and Consolidated
Berger Other Stilwell
---------- --------- ------------
Revenues $ 443.2 $ 5.3 $ 448.5
Operating expenses 253.4 12.3 265.7
----------- --------- -----------
Operating Income (Loss) 189.8 (7.0) 182.8
Equity earnings of
unconsolidated affiliates 17.8 17.8
Interest expense - Parent (5.0) (5.0)
Other, net 4.6 2.2 6.8
----------- --------- -----------
Pretax income 194.4 8.0 202.4
Income tax provision (benefit) 72.3 (0.1) 72.2
Minority interest 19.0 (0.2) 18.8
----------- --------- -----------
Net Income $ 103.1 $ 8.3 $ 111.4
=========== ========= ===========
9
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the three months ended March 31 (in millions):
2000 2001
----------- -----------
Revenues (1):
United States............. $ 531.9 $ 427.2
United Kingdom............ 13.2 21.3
----------- -----------
Total................. $ 545.1 $ 448.5
=========== ===========
Long-lived assets:
United States............. $ 250.3 $ 712.1
United Kingdom............ 34.7 34.7
----------- -----------
Total................. $ 285.0 $ 746.8
=========== ===========
(1) Revenues are attributed to countries based on location at which
services are performed.
7. During first quarter 2001, Stilwell announced several transactions that,
upon completion, will increase Stilwell's ownership interest in Janus to
approximately 91.6%, based on maximum participation of Janus employees in a
Janus stock repurchase program as discussed below.
Stilwell acquisition of Janus shares from Thomas H. Bailey. On January 26,
2001, Stilwell announced that it expected to acquire 600,000 shares of Janus
common stock from Thomas H. Bailey, Janus's Chairman, Chief Executive Officer
and President, through the exercise of put rights by Mr. Bailey.
The acquisition was completed on May 1, 2001. The purchase price of the shares
totaled approximately $603 million. In addition, Stilwell paid to Mr. Bailey
approximately $7 million representing interest expense that began to accrue on
the unpaid purchase price 30 days after Stilwell received notice of Mr. Bailey's
decision to exercise his put right. For the three months ended March 31, 2001,
approximately $3.9 million in interest expense is included in the consolidated
condensed financial statements.
Stilwell funded the purchase price and associated interest with proceeds
received in connection with its zero-coupon convertible debt offering. See Note
12 below. Stilwell will account for the acquisition under the purchase method of
accounting.
Stilwell acquisition of Janus shares from other minority stockholders. On
March 16, 2001, Stilwell acquired 199,042 shares of Janus from several minority
stockholders. Approximately 160,900 of these shares were acquired by certain
Janus employees in 1995 when Janus stock ownership was first extended to a
broader group of key management employees other than Mr. Bailey. The remainder
of the shares had been held since 1984 or before. Stilwell purchased the shares
through the exercise of put rights, virtually eliminating all mandatory put
rights to Stilwell except for those on remaining shares held by Mr. Bailey
(after the purchase by Stilwell of 600,000 shares of Mr. Bailey's Janus stock as
discussed above). The purchase price for the shares totaled approximately $200
million, which was funded through cash and borrowings under the Company's credit
facilities. In connection with the transactions, amounts owed to Stilwell by
certain of the selling minority stockholders were repaid (see information in
Note 10 to the consolidated financial statements under Part II Item 8, Financial
Statements and Supplementary Data, of the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).
10
Stilwell accounted for these transactions using the purchase method of
accounting. Based on initial estimates, the purchase price was in excess of the
fair value of the net tangible and identifiable intangible assets acquired and
this excess - approximately $152.8 million - was recorded as goodwill to be
amortized over a period of 20 years. The Company expects to have an independent
valuation completed in order to determine the actual allocation of purchase
price for the shares acquired, which will affect the levels of goodwill and
other intangibles, as well as the periods over which these assets are required
to be amortized.
Janus offer to purchase shares of Janus common stock from employees. Janus
has offered to purchase from employees (other than Mr. Bailey) up to 50% of
their eligible shares of Janus common stock. If all eligible shares were
purchased under this offer, Janus would acquire approximately 143,000 shares of
its common stock for approximately $145 million. The shares would then be
available for Janus to utilize in connection with its Long Term Incentive Plan
("Janus Incentive Plan"). The repurchases by Janus are expected to occur in the
second half of 2001.
Net effect of transactions. Upon completion of the purchase of the 799,042
shares of Janus common stock by Stilwell, and assuming the maximum number of
shares were purchased under Janus's repurchase offer, Stilwell's ownership of
Janus would increase to approximately 91.6%. Mr. Bailey would continue to own
approximately 6.2% and more than 150 other Janus employees would own the
remaining 2.2%. In addition, each of the Janus employees participating in these
transactions will continue to own other shares of Janus common stock and,
consistent with Janus's goal of broadening corporate equity ownership, will be
eligible to receive future grants of Janus stock - from the approximately
370,000 shares available at Janus after these transactions - in connection with
the Janus Incentive Plan.
8. In February 2001, Janus eliminated 468 jobs from its operations unit, Janus
Service Corporation, as a result of a lower level of shareowner activity
and its aggressive use of technology to moderate costs. The job reduction
did not affect Janus's investment team, which continues to aggressively
recruit and add analysts to its staff. Janus recorded a non-recurring
charge in first quarter 2001 of approximately $6.4 million related to
severance, operational and other costs.
On April 20, 2001, Janus announced a further work force reduction that
affected approximately 546 employees and resulted in the closing of its
Austin, Texas call center. This action reflects a return to a more
normalized level of shareowner activity, significant technological
advancements that provide capacity to adjust to business fluctuations and
the evolution in shareowner approaches to inquiries and investments.
Stilwell expects that Janus will record in second quarter 2001
non-recurring costs associated with severance, business closing and related
expenses.
9. On January 26, 2001, certain Janus employees were granted 64,885 shares of
restricted Janus stock. The terms of the grant were consistent with the
grant made in 2000 (see additional information in Note 10 to the
consolidated financial statements under Part II Item 8, Financial
Statements and Supplementary Data, in the Company's Annual Report on Form
10-K for the year ended December 31, 2000). Pursuant to the terms of the
grant, 20% of the shares vested immediately in recognition of the
employees' contributions during 2000. Accordingly, Janus recorded
approximately $24 million of compensation expense relating to this grant
during 2000. Approximately $13 million of the compensation expense
represented the fair market value of the shares granted and approximately
$11 million resulted from the amortization of the prepaid expense
associated with compensation payments made by Janus to grantee employees in
connection with the decision by each employee to make a ss.83(b) election
under the Internal Revenue Code upon receipt of the Janus shares.
11
10. In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"), which establishes accounting standards for derivative
instruments, the derivative portion of certain other contracts that have
similar characteristics and for hedging activities. It requires recognition
of all derivatives as either assets or liabilities measured at fair value.
In June 1999, the FASB issued an amendment to FAS 133 changing the
effective date of FAS 133 to fiscal quarters of fiscal years beginning
after June 15, 2000. Stilwell does not generally enter into transactions
covered by this statement. The adoption of FAS 133 on January 1, 2001 did
not have an impact on Stilwell's results of operation, financial position
or cash flows.
11. A stock purchase agreement with Mr. Bailey and another Janus stockholder
(the "Janus Stock Purchase Agreement") contains, 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. 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 the other minority holder terminated
his employment, some or all of his shares also could be subject to
mandatory purchase and sale obligations. If Mr. Bailey and the other
stockholder exercised the puts as of May 4, 2001 (i.e., after consideration
of the purchase of 600,000 shares by Stilwell on May 1, 2001), Stilwell
would have been required to pay approximately $613 million. In the future
these amounts may be higher or lower depending on Janus's 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.
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 (as to the Janus Stock Purchase Agreement)
or KCSI (as to the purchase and restriction agreements), 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's 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
May 4, 2001 (i.e., after consideration of the purchase of 600,000 shares by
Stilwell on May 1, 2001), the purchase price would have been approximately
$903 million.
Stilwell would account for any such purchase as the acquisition of a
minority interest under Accounting Principles Board Opinion No. 16,
Business Combinations (see Note 7).
As of May 4, 2001, Stilwell had $350 million in credit facilities available
and had cash balances at the Stilwell holding company level in excess of
$340 million. The market value of Stilwell's 33% investment in DST was
approximately $2.0 billion using DST's closing price on the New York Stock
Exchange on May 4, 2001. To the extent that available credit facilities,
existing cash balances and proceeds from borrowing against or liquidating a
portion of Stilwell's investment in DST (within the covenant limitations
pursuant to the credit facilities) 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
12. On April 30, 2001, Stilwell completed an offering of approximately $931
million principal amount at maturity of zero-coupon convertible senior
notes due 2031. The convertible securities were offered only to qualified
institutional buyers at an initial offering price of $741.37 per $1,000
principal amount at maturity, resulting in gross proceeds to Stilwell of
approximately $690 million (prior to consideration of approximately $15
million in debt issuance costs). The issue price represents a yield to
maturity of 1% per year. The total gross proceeds received include
approximately $90 million from the exercise of an over-allotment option by
the underwriter.
Each $1,000 principal amount at maturity of the convertible securities will
initially be convertible into 17.1544 shares of common stock upon the
occurrence of any of the following events: i) if the closing prices of
Stilwell's shares of common stock on the New York Stock Exchange exceed
specified levels; ii) if, after the date on which the convertible
securities have been assigned a credit rating, the credit rating assigned
is below a specified level; iii) if Stilwell calls the convertible
securities for redemption; or iv) in the event that Stilwell takes certain
corporate actions, such as declaration of an extraordinary dividend.
Stilwell may redeem the convertible securities for cash on or after April
30, 2006 at their accreted value. Stilwell may be required to repurchase
the convertible securities at the accreted value thereof, at the option of
the holders on April 30th of 2002, 2004, 2006, 2011, 2016, 2021 and 2026.
Stilwell may choose to pay the purchase price for such repurchases in cash
or shares of Stilwell common stock.
Under the terms of the convertible securities, Stilwell is required to
obtain a credit rating from a nationally recognized rating service within
150 days. If Stilwell fails to obtain such a rating, the Company will be
required to pay cash interest to holders of the securities at the rate of
0.50% of the original issue price of the securities per annum.
Additionally, to the extent that Stilwell's average common stock price
exceeds certain thresholds, Stilwell could be required to pay contingent
interest at a rate of the greater of Stilwell's regular quarterly cash
dividend or 0.0625% of the average market price of the security over a
specified time period.
Approximately $610 million of the proceeds received from the offering were
used to purchase 600,000 shares of Janus common stock. See Note 7. The
remaining $65 million (after payment of debt issuance costs) will be used
for general corporate purposes.
13
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 Annual
Report on Form 10-K for the year ended December 31, 2000 and the Information
Statement that was included as an exhibit to the Registration Statement on Form
10 dated June 15, 2000, both of which are on file with the U.S. Securities and
Exchange Commission (File No. 001-15253) and are 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.
Within this Management's Discussion and Analysis of Financial Condition and
Results of Operations, historical transactions and events (i.e., occurring 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. Since the financial services business was operated as part of KCSI prior
to July 12, 2000, such financial information and statements may not necessarily
reflect the results of operations or financial position of Stilwell or what the
results of operations would have been if Stilwell had been a separate,
independent company during those periods.
Stilwell, a Delaware Corporation formed in 1998 by 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 84.0% owned
subsidiary (prior to acquisition of additional 6.2% in May 2001
- see below;
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 33% interest; and
o various other subsidiaries and equity investments.
For purposes of segment reporting, Stilwell reports Janus and Berger as one
segment, representing businesses that derive the majority of their revenues and
income from the provision of investment management under investment advisory
agreements. Nelson, DST, the holding company and the various other subsidiaries
and affiliates of Stilwell are aggregated as a separate segment.
14
SIGNIFICANT DEVELOPMENTS
Zero-Coupon Convertible Debt Offering. On April 30, 2001, Stilwell
completed an offering of approximately $931 million principal amount at maturity
of zero-coupon convertible senior notes due 2031. The convertible securities
were offered only to qualified institutional buyers at an initial offering price
of $741.37 per $1,000 principal amount at maturity, resulting in gross proceeds
to Stilwell of approximately $690 million (prior to consideration of
approximately $15 million in debt issuance costs). The issue price represents a
yield to maturity of 1% per year. The total gross proceeds received include
approximately $90 million from the exercise of an over-allotment option by the
underwriter.
Each $1,000 principal amount at maturity of the convertible securities will
initially be convertible into 17.1544 shares of common stock upon the occurrence
of any of the following events: i) if the closing prices of Stilwell's shares of
common stock on the New York Stock Exchange exceed specified levels; ii) if,
after the date on which the convertible securities have been assigned a credit
rating, the credit rating assigned is below a specified level; iii) if Stilwell
calls the convertible securities for redemption; or iv) in the event that
Stilwell takes certain corporate actions, such as declaration of an
extraordinary dividend. Stilwell may redeem the convertible securities for cash
on or after April 30, 2006 at their accreted value. Stilwell may be required to
repurchase the convertible securities at the accreted value thereof, at the
option of the holders on April 30th of 2002, 2004, 2006, 2011, 2016, 2021 and
2026. Stilwell may choose to pay the purchase price for such repurchases in cash
or shares of Stilwell common stock.
Under the terms of the convertible securities, Stilwell is required to
obtain a credit rating from a nationally recognized rating service within 150
days. If Stilwell fails to obtain such a rating, the Company will be required to
pay cash interest to holders of the securities at the rate of 0.50% of the
original issue price of the securities per annum. Additionally, to the extent
that Stilwell's average common stock price exceeds certain thresholds, Stilwell
could be required to pay contingent interest at a rate of the greater of
Stilwell's regular quarterly cash dividend or 0.0625% of the average market
price of the security over a specified time period.
Approximately $610 million of the proceeds received from the offering were
used to purchase 600,000 shares of Janus common stock as discussed below. The
remaining $65 million (after payment of debt issuance costs) will be used for
general corporate purposes.
Stilwell's Increased Ownership Interest in Janus. During first quarter
2001, Stilwell announced several transactions that, upon completion, will
increase Stilwell's ownership interest in Janus to approximately 91.6%, based on
maximum participation of Janus employees in a Janus stock repurchase program as
discussed below.
Stilwell acquisition of Janus shares from Thomas H. Bailey. On January 26,
2001, Stilwell announced that it expected to acquire 600,000 shares of Janus
common stock from Thomas H. Bailey, Janus's Chairman, Chief Executive Officer
and President, through the exercise of put rights by Mr. Bailey.
The acquisition was completed on May 1, 2001. The purchase price of the
shares totaled approximately $603 million. In addition, Stilwell paid to Mr.
Bailey approximately $7 million representing interest expense that began to
accrue on the unpaid purchase price 30 days after Stilwell received notice of
Mr. Bailey's decision to exercise his put right. For the three months ended
March 31, 2001, approximately $3.9 million in interest expense is included in
the consolidated condensed financial statements.
Stilwell funded the purchase price and associated interest with proceeds
received in connection with its zero-coupon convertible debt offering. See
discussion above. Stilwell will account for the acquisition under the purchase
method of accounting. Stilwell expects to have an independent valuation
completed in order to determine the actual allocation of purchase price for the
shares acquired, which will affect the levels of goodwill and other intangibles,
as well as the periods over which these assets are required to be amortized
under current accounting rules.
15
Stilwell acquisition of Janus shares from other minority stockholders. On
March 16, 2001, Stilwell acquired 199,042 shares of Janus from several minority
stockholders. Approximately 160,900 of these shares were acquired by certain
Janus employees in 1995 when Janus stock ownership was first extended to a
broader group of key management employees other than Mr. Bailey. The remainder
of the shares had been held since 1984 or before. Stilwell purchased the shares
through the exercise of put rights, virtually eliminating all mandatory put
rights to Stilwell except for those on remaining shares held by Mr. Bailey
(after the purchase by Stilwell of 600,000 shares of Mr. Bailey's Janus stock as
discussed above). The shares cost approximately $200 million, which was funded
through cash and borrowings under the Company's credit facilities. In connection
with the transactions, amounts owed to Stilwell by certain of the selling
minority stockholders were repaid (see information in Note 10 to the
consolidated financial statements under Part II Item 8, Financial Statements and
Supplementary Data, of the Company's Annual Report on Form 10-K for the year
ended December 31, 2000).
Stilwell accounted for these transactions using the purchase method of
accounting. Based on initial estimates, the purchase price was in excess of the
fair value of the net tangible and identifiable intangible assets acquired and
this excess - approximately $152.8 million - was recorded as goodwill to be
amortized over a period of 20 years. The Company expects to have an independent
valuation completed in order to determine the actual allocation of purchase
price for the shares acquired, which will affect the levels of goodwill and
other intangibles, as well as the periods over which these assets are required
to be amortized under current accounting rules.
Janus offer to purchase shares of Janus common stock from employees. Janus
has offered to purchase from employees (other than Mr. Bailey) up to 50% of
their eligible shares of Janus common stock. If all eligible shares were
purchased under this offer, Janus would acquire approximately 143,000 shares of
its common stock for approximately $145 million. The shares would then be
available for Janus to utilize in connection with its Long Term Incentive Plan
("Janus Incentive Plan"). The repurchases by Janus are expected to occur in the
second half of 2001.
Net effect of transactions. Upon completion of the purchase of the 799,042
shares of Janus common stock, and assuming the maximum number of shares were
purchased under Janus's repurchase offer, Stilwell's ownership of Janus would
increase to approximately 91.6 %. Mr. Bailey would continue to own approximately
6.2% and more than 150 other Janus employees would own the remaining 2.2%. In
addition, each of the Janus employees participating in these transactions will
continue to own other shares of Janus common stock and, consistent with Janus's
goal of broadening corporate equity ownership, will be eligible to receive
future grants of Janus stock - from the approximately 370,000 shares available
at Janus after these transactions - in connection with the Janus Incentive Plan.
Janus Reduction in Workforce. In February 2001, Janus eliminated 468 jobs
from its operations unit, Janus Service Corporation, as a result of a lower
level of shareowner activity and its aggressive use of technology to moderate
costs. The job reduction did not affect Janus's investment team, which continues
to aggressively recruit and add analysts to its staff. Janus recorded a
non-recurring charge in first quarter 2001 of approximately $6.4 million related
to severance, operational and other costs.
On April 20, 2001, Janus announced a further work force reduction that
affected approximately 546 employees and resulted in the closing of its Austin,
Texas call center. This action reflects a return to a more normalized level of
shareowner activity, significant technological advancements that provide
capacity to adjust to business fluctuations and the evolution in shareowner
approaches to inquiries and investments. Stilwell expects that Janus will record
in second quarter 2001 approximately $0.06 to $0.08 per share in non-recurring
costs associated with severance, business closing and related expenses.
The reductions in workforce are expected to save expenses in the future and
to contribute an annual increase in earnings of approximately $0.10 to $0.15 per
diluted share.
16
Janus Issuance of Restricted Stock. On January 26, 2001, certain Janus
employees were granted 64,885 shares of restricted Janus stock. The terms of the
grant were consistent with the grant made in 2000 (see additional information in
Note 10 to the consolidated financial statements under Part II Item 8, Financial
Statements and Supplementary Data, in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000). Pursuant to the terms of the grant, 20%
of the shares vested immediately in recognition of the employees' contributions
during 2000. Accordingly, Janus recorded approximately $24 million of
compensation expense relating to this grant during 2000. Approximately $13
million of the compensation expense represented the fair market value of the
shares granted and approximately $11 million resulted from the amortization of
the prepaid expense associated with compensation payments made by Janus to
grantee employees in connection with the decision by each employee to make a
ss.83(b) election under the Internal Revenue Code upon receipt of the Janus
shares.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared with the Three Months
Ended March 31, 2000
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):
March 31,
-----------------------------------------------
2000 (i) 2001
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 523.1 $ 427.0
SMI and Berger 16.7 16.2
--------------------- --------------------
Sub-total 539.8 443.2
Other 5.3 5.3
--------------------- --------------------
Total $ 545.1 $ 448.5
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 250.6 $ 187.3
SMI and Berger 4.7 2.5
--------------------- --------------------
Sub-total 255.3 189.8
Other (10.4) (7.0)
--------------------- --------------------
Total $ 244.9 $ 182.8
===================== ====================
Net income (loss):
Janus and Berger:
Janus (ii) $ 130.2 $ 101.0
SMI and Berger (iii) 3.9 2.1
--------------------- --------------------
Sub-total 134.1 103.1
--------------------- --------------------
Other:
DST (iii) 16.6 16.5
Other 38.0 (8.2)
--------------------- --------------------
Sub-total 54.6 8.3
--------------------- --------------------
Total $ 188.7 $ 111.4
===================== ====================
17
(i) Includes certain non-recurring gains: a) a $27.3 million (after-tax) gain
on the settlement of litigation with a former equity affiliate; b) a $15.1
million (after-tax) gain resulting from the sale by Stilwell of 192,408
shares of Janus common stock to Janus; and c) approximately $3.4 million
representing the Company's proportionate share of non-recurring gain items
recorded by DST resulting from litigation settlement and sales of
marketable securities.
(ii) Janus net income is reported after minority interest of approximately $27.4
and $19.0 million for the three months ended March 31, 2000 and 2001,
respectively.
(iii) Stilwell's investment in DST is held by SMI.
Assets under management as of March 31, 2000, December 31, 2000 and March
31, 2001 were as follows (in billions):
March 31, December 31, March 31,
2000 2000 2001
--------------- ----------------- ---------------
Janus:
Janus Advised Funds:
Janus Investment Fund $ 218.2 $ 162.2 $ 126.1
Janus Aspen Series (i) 24.0 22.7 18.8
Janus Adviser Series (i) - 1.8 2.2
Janus Money Market Funds 9.4 12.2 13.7
Janus World Funds Plc 3.4 3.6 3.0
--------------- ----------------- ---------------
Total Janus Advised Funds 255.0 202.5 163.8
Janus Sub-Advised Funds and Private
Accounts 60.3 46.3 34.3
--------------- ----------------- ---------------
Total Janus 315.3 248.8 198.1
--------------- ----------------- ---------------
Berger:
Berger Funds 7.1 6.0 5.1
Berger Sub-Advised Funds and Private
Accounts 1.1 1.6 1.4
--------------- ----------------- ---------------
Total Berger 8.2 7.6 6.5
--------------- ----------------- ---------------
Nelson 1.4 1.4 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 324.9 $ 257.8 $ 205.9
=============== ================= ===============
(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.
The Company earned $111.4 million in first quarter 2001 compared to $188.7
million in first quarter 2000. Exclusive of one-time items in first quarter 2000
discussed below, earnings decreased approximately 22%. This decrease reflects
lower revenues due to lower asset under management levels, an increase in
depreciation and amortization associated with the technology infrastructure
development at Janus and interest expense associated with funding purchases of
Janus common stock.
Average assets under management decreased 16% compared to prior year's
first quarter (from $294.4 billion to $246.6 billion), leading to a $96.6
million (18%) decline in revenues and a $62.1 million (25%) decrease in
operating income. Stilwell reported lower operating margins in first quarter
2001 compared to first quarter 2000 (from 44.9% to 40.8%), indicative of the
pressures expected due to the lower level of assets under management and
resulting lower revenue totals, as well as to higher depreciation and
amortization and certain components of expenses that are fixed. Exclusive of
one-time items, Stilwell's equity in net earnings of DST increased 24% during
first quarter 2001 versus 2000, continuing the strong growth trends experienced
by DST over the last several quarters.
18
Non-recurring gains during 2000 included the following: i) an after-tax
gain of approximately $27.3 million resulting from the settlement of litigation
with a former equity affiliate; ii) a $15.1 million after-tax gain associated
with the Company's sale of 192,408 shares of its Janus common stock to Janus for
use in the Janus employee stock incentive programs; and iii) approximately $3.4
million (after-tax) in gains representing the Company's proportionate share of a
litigation settlement and sales of marketable securities recorded by DST.
JANUS AND BERGER
Assets under management for Janus and Berger totaled $204.6 billion,
approximately 20% lower than fourth quarter 2000 and 37% lower than first
quarter 2000. The decline in assets under management during first quarter 2001
reflects market depreciation of $48.2 billion - largely following the general
downturn in the various markets and indexes, such as NASDAQ, Dow Jones
Industrial Average and Standards & Poors 500 - and net cash outflows of $3.6
billion. Average assets under management for Janus and Berger during first
quarter 2001 totaled approximately $245.2 billion compared to $283.4 billion in
fourth quarter 2000 and $293.0 billion in first quarter 2000. See the brief
discussions of Janus and Berger separately below.
Investment management fees for Janus and Berger decreased 18% in first
quarter 2001 compared to first quarter 2000, reflecting the decrease in average
assets under management. Aggregate investment management fees continued to total
approximately 60 basis points of average assets under management. Shareowner
servicing fees and other revenues decreased $14.5 million compared to prior
year's first quarter, primarily due to declines in assets under management.
Operating margins for Janus and Berger decreased to 42.8% from 47.3% in
first quarter 2000. Operating expenses totaled $253.4 million for the three
months ended March 31, 2001 compared to $284.5 million in the prior year
quarter. Operating expenses with notable decreases quarter to quarter included
the following items: i) compensation, primarily related to reduced investment
performance-based incentive compensation and the reversal of approximately $8.2
million in stock bonus accruals that were no longer payable (as a result of the
sale of shares of Janus common stock by various employees to Stilwell on March
16, 2001 as discussed in "Significant Developments" above), partially offset by
approximately $6.4 million in severance costs associated with the Janus work
force reduction announced in February 2001; and ii) third party concession fees
resulting from a lower level of assets distributed through these arrangements.
Offsetting these decreases, however, was a $7.9 million increase in depreciation
and amortization arising from Janus's technology and operational infrastructure
efforts over the last two years, the aggregate cost of which totaled $175
million, and deferred commission payments in connection with the growth in the
Janus World Funds plc. The increase in these expenses had the effect of reducing
margins by nearly two percentage points.
A brief discussion of significant Janus and Berger items during the three
months ended March 31, 2001 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
March 31, 2001, assets under management decreased by $50.7 billion due to
market depreciation of $47.0 billion and net cash outflows of $3.7 billion.
Despite this decline in assets under management, total Janus shareowner
accounts remained relatively stable during the quarter. While operating
margins declined during first quarter 2001 compared to the record levels
experienced throughout 2000, Janus's well-planned cost structure and
ongoing review of that structure has produced margins that consistently
surpass industry averages.
As a result of the work force reductions in February and April 2001,
full-time employees in the operational and service areas of Janus declined
approximately 34% since December 31, 1999. Over that same period of time,
however, Janus has increased its personnel in the investment area by
approximately 15%.
19
During 2000, Janus closed five funds, including the Janus Fund, its
flagship equity product, and introduced three new funds (Janus Strategic
Value Fund, Janus Orion Fund and Janus Fund 2). These actions, together
with the focus on providing leading-edge technology for electronic
transaction and servicing capabilities, highlight the ongoing focus of
Janus to act in its shareowners' best interests.
Berger
Berger assets under management decreased by $1.1 billion during the three
months ended March 31, 2001, reflecting market depreciation of $1.2
billion, partially offset by net cash inflows of $0.1 billion. Berger's
ability to maintain net cash inflows during the quarter, as well as to
increase its shareowner accounts to more than 267,000, reflects the results
of Berger's efforts to broaden its fund platform to include value products,
such as the Small Cap Value Fund. Berger experienced a decrease in its
operating margin quarter to quarter, primarily due to increases in
third-party concession costs based on growth in assets through such
arrangements and higher compensation resulting from an increase in the
number of employees.
NELSON, DST AND OTHER
Nelson's assets under management declined slightly from fourth quarter 2000
and first quarter 2000. The decline from March 31, 2000, however, reflects
fluctuations in the currency exchange rate. Assets under management in British
pounds actually increased from (pound)866 million as of March 31, 2000 to
(pound)884 million at March 31, 2001. Further, the number of shareowner accounts
grew approximately 13% since March 31, 2000. The net loss from Nelson increased
in first quarter 2001 versus 2000 as a result of its ongoing efforts to expand
its existing operations and develop products and services that complement its
core business. 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, technology infrastructure development and marketing efforts). These
losses, however, are not expected to have a material impact on Stilwell's
results of operations or financial position.
First quarter 2001 equity earnings from DST were $17.8 million versus $18.0
million in first quarter 2000. Exclusive of the one-time items discussed above,
equity earnings from DST increased $3.4 million quarter to quarter. This
improvement was largely attributable to higher earnings in DST's financial
services segment. Consolidated DST revenues increased 9% due to a higher number
of shareowner accounts serviced (totaling 73.5 million at March 31, 2001 versus
72.1 million at December 31, 2000 and 61.0 million at March 31, 2000) and images
produced and statements mailed (increases of 11% and 3%, respectively, since
prior year first quarter). Consolidated DST operating margins improved to 20.9%
during first quarter 2001 versus 18.7% in comparable 2000.
Other Stilwell operating expenses declined quarter to quarter, primarily as
a result of lower consulting, legal and other professional expenses (amounts in
2000 reflect efforts to develop Stilwell's corporate infrastructure), as well as
reduced compensation costs, partially offset by an increase in amortization
associated with higher intangible and other asset balances.
Interest expense to third parties increased by $3.1 million as a result of
accrued interest associated with the acquisition of shares of Janus common stock
from Mr. Bailey (see "Significant Developments" above).
20
TRENDS AND OUTLOOK
Stilwell's earnings and cash flows are 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.
Due to the downturn in the financial equity markets during the second half
of 2000 and first quarter 2001, Stilwell's assets under management have declined
from levels experienced during 2000. Accordingly, revenues during 2001 are
expected to decrease from the comparable 2000 periods to the extent that the
markets continue to be unfavorable to equity growth managers. A decrease in
revenues is likely to result in lower operating income and net income.
As a result of the rapid revenue growth during the last two years,
Stilwell's operating margins have been strong. Operating margins in first
quarter 2001 declined from levels experienced throughout 2000. Management
expects that Stilwell will continue to experience margin pressures in the future
as the various subsidiaries strive to ensure that the operational and
administrative infrastructure continues to meet the high standards of quality
and service historically provided to investors.
Stilwell expects to continue to participate in the earnings or losses from
its DST investment.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
Three months ended March 31,
-------------------------------------
2000 2001
-------------- ---------------
Cash flows provided by (used for):
Operating activities $ 189.4 $ 150.0
Investing activities (38.7) (238.7)
Financing activities (124.1) 59.8
-------------- ---------------
Net increase (decrease) 26.6 (28.9)
At beginning of year 324.1 364.3
-------------- ---------------
At end of period $ 350.7 $ 335.4
============== ===============
During the three months ended March 31, 2001, the Company's consolidated
cash position decreased $28.9 million from December 31, 2000. This decrease
resulted primarily from the acquisition of 199,042 shares of Janus common stock
in March 2001 and distributions to minority stockholders, largely offset by
earnings during the quarter and borrowings under the Company's credit
facilities.
Net operating cash inflows for the three months ended March 31, 2001 were
$39.4 million lower than comparable 2000. This decrease was chiefly attributable
to lower net income, decreases in liabilities primarily due to accrued
compensation payments and an increase in other assets resulting from payments
made by Janus on behalf of its employees in connection with a ss.83(b) election
for tax purposes (see "Significant Developments" above). This decrease was
partially offset by a decline in deferred commission payments and lower accounts
receivable balances period to period.
21
Net investing cash outflows were $238.7 million during the three months
ended March 31, 2001 compared to $38.7 million during the comparable 2000
period. This difference results primarily from a $230.8 million increase in
investments in affiliates, largely attributable to the purchase of 199,042
shares of Janus common stock from various minority stockholders (as discussed in
"Significant Developments" above). This increase was partially offset by a
reduced amount of capital expenditures quarter to quarter.
Through March 31, 2001, financing cash inflows reflect the $100 million
borrowing under the credit facility in connection with the purchase of shares of
Janus common stock from various minority stockholders. This amount was repaid in
early April 2001. In first quarter 2000, Stilwell repaid the $125 million of
indebtedness assumed by Stilwell from KCSI. Distributions to minority
stockholders of $43.8 million in first quarter 2001 exceeded the $7.0 million in
2000 due to the timing of dividend payments by Janus.
The Company believes its operating cash flows and available financing
resources are sufficient to fund working capital and other requirements for the
remainder of 2001.
Cash flows from operations are expected to continue during the remainder of
2001 from positive operating income, which has historically resulted in
favorable operating cash flows. Based on activity in first quarter 2001, the
Company does not expect that deferred commission payments will be at the levels
experienced in 2000.
Capital expenditure levels are expected to be lower than in 2000, largely
due to the extensive infrastructure efforts over the last two years at Janus. As
noted in "Significant Developments" above, in May 2001, Stilwell paid
approximately $610 million to purchase an additional 600,000 shares of Janus
common stock. In addition, Janus expects to repurchase up to 143,000 shares of
its common stock from various employees during the second half of 2001, the
total cost of which is expected to be approximately $145 million.
As discussed in "Significant Developments" above, the Company completed a
zero-coupon convertible senior notes offering in April 2001. Approximately $610
million of the $675 million of proceeds from the offering were used to fund the
acquisition of Janus shares from Mr. Bailey. The remaining $65 million is
available for general corporate purposes. The Company has $350 million available
through its credit facilities (after repayment in early April 2001 of the $100
million outstanding at March 31, 2001). Because of certain financial covenants
contained in the credit facilities, however, maximum utilization of the
Company's credit facilities may be restricted. In addition, the covenants may
also limit the amount of other indebtedness incurred by Stilwell. 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 credit facilities and, prior
to expiration of these facilities, expects to either renew the existing
arrangement or negotiate a new facility.
In July 2000, the Company announced a $1 billion stock repurchase program
to be completed over a period of two years. The Company did not repurchase any
shares during first quarter 2001. As of March 31, 2001, the Company had
repurchased approximately 7.2 million shares of its common stock for a total
cost of approximately $323.3 million. While the Company anticipates funding the
repurchases with cash flow from operations, it is possible that the existing
credit facilities, and/or any additional financing alternatives, could be used
for these purposes.
22
OTHER
Minority Purchase Agreements. A stock purchase agreement with Mr. Bailey
and another Janus stockholder (the "Janus Stock Purchase Agreement") contains,
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. 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 all of the mandatory purchase and sale provisions and all the
puts under the Janus Stock Purchase Agreement were implemented, Stilwell would
have been required to pay approximately $613 million as of May 4, 2001 (i.e.,
after consideration of the purchase of 600,000 shares by Stilwell on May 1,
2001). 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.
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 (as to the Janus Stock Purchase Agreement) or KCSI
(as to purchase and restriction agreements), 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 May 4, 2001 (i.e., after consideration of the purchase of 600,000 shares
by Stilwell on May 1, 2001), the purchase price would have been approximately
$903 million.
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 May 4, 2001, Stilwell had $350 million in credit facilities available
and had cash balances at the Stilwell holding company level in excess of $340
million. The market value of Stilwell's 33% investment in DST was approximately
$2 billion using DST's closing price on the New York Stock Exchange on May 4,
2001. To the extent that available credit facilities, existing cash balances and
proceeds from borrowing against or liquidating a portion of Stilwell's
investment in DST (within the covenant limitations pursuant to the credit
facilities) 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. 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. The adoption of FAS 133 did not
have a significant impact on Stilwell's results of operations, financial
position or cash flows.
23
- - --------------------------------------------------------------------------------
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
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
24
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 Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its 2001 Annual Meeting of Shareholders ("Annual Meeting")
on May 10, 2001. A total of 189,016,544 shares of the Common Stock, $0.01
per share par value, or 86.3% of the outstanding voting stock on the record
date (219,061,785 shares), were represented at the Annual Meeting, thereby
constituting a quorum. These shares voted together as a single class.
b) Proxies for the meeting were solicited pursuant to Regulation 14A; there
was no solicitation in opposition to management's nominees for directors as
listed in such Proxy Statement and all such nominees were elected. The
voting was as follows:
Total
Shares
Election of One Director ----------------
Morton I. Sosland
For 185,596,248
Withheld 3,420,296
----------------
Total 189,016,544
================
c) Listed below are the other matters voted on at the Company's Annual
Meeting. This matter is fully described in the Company's Definitive Proxy
Statement. The voting was as follows:
Total
Shares
Ratification of the Board of Directors' ----------------
selection of PricewaterhouseCoopers LLP
as the Company's Independent Accountants for 2001
For 187,157,100
Against 1,006,731
Abstentions 852,713
Non-votes -
---------------
Total 189,016,544
===============
25
Total
Shares
Approval of a Performance-Based Incentive ----------------
Compensation Plan for the Chief Executive
Officer of Janus Capital Corporation
For 184,116,636
Against 3,764,547
Abstentions 1,135,361
Non-votes -
---------------
Total 189,016,544
===============
Based upon the majority of affirmative votes of the shares present at the Annual
Meeting required for approval, these matters passed.
Item 5. Other Information
On May 1, 2001, Stilwell purchased 600,000 shares of Janus Capital
Corporation ("Janus") common stock from Thomas H. Bailey, Janus's Chairman,
President and Chief Executive Officer. The purchase price of the shares totaled
approximately $603 million. In addition, Stilwell paid to Mr. Bailey
approximately $7 million representing interest expense that began to accrue on
the unpaid purchase price 30 days after Stilwell received notice of Mr. Bailey's
decision to exercise his put right.
Stilwell funded the purchase price and associated interest with proceeds
received in connection with its zero-coupon convertible debt offering. See
discussion in Part I Item 1 of this Form 10-Q. Stilwell will account for the
acquisition under the purchase method of accounting. Stilwell expects to have an
independent valuation completed in order to determine the actual allocation of
purchase price for the shares acquired, which will affect the levels of goodwill
and other intangibles, as well as the periods over which these assets are
required to be amortized.
With the closing of this transaction, Stilwell's ownership stake in Janus
has increased to approximately 90.2%. Mr. Bailey continues to hold approximately
6.2% of the Janus common stock and more than 150 other Janus employees own
approximately 3.6% (which will decline to approximately 2.2% after completion of
the pending repurchase of shares by Janus).
In connection with this acquisition, Stilwell will file required pro forma
financial statements. Because it is impracticable to file such required pro
forma financial statements at this time, Stilwell will file them as soon as
practicable, but not later than 60 days after the date of filing of this Form
10-Q with the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 4.1 - Liquid Yield Option (TM) Notes due 2031
Indenture dated April 30, 2001 by and between
Stilwell Financial Inc. and The Chase Manhattan
Bank, as Trustee, is hereby incorporated by
reference as Exhibit 4.1
Exhibit 4.2 - Registration Rights Agreement dated April 30, 2001
by and between Stilwell Financial Inc. and Merrill
Lynch & Co., is hereby incorporated by reference as
Exhibit 4.2
26
Exhibit 10.1 - Waiver and First Amendment to Five-Year Competitive
Advance and Revolving Credit Facility dated February
20, 2001, among Stilwell Financial Inc., Janus
Capital Corporation and Citibank, N.A., as
administrative agent for the lenders named therein,
is hereby incorporated by reference as Exhibit 10.1
b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K, dated January 2, 2001,
under Item 9, to report ending assets under management on December 31, 2000,
average assets under management for the fourth quarter 2000 and average assets
under management for the year ended December 31, 2000. In addition, the Current
Report on Form 8-K reported information concerning the Stilwell quarterly
earnings presentation to occur on January 30, 2001.
The Company furnished a Current Report on Form 8-K, dated January 26, 2001,
under Item 9, to report the following: i) Announcement that Stilwell expects to
purchase 600,000 shares of Janus Capital Corporation ("Janus") common stock from
Thomas H. Bailey, Chairman, President, Chief Executive Officer and founder of
Janus; ii) announcement that Robert Skidelsky was appointed to the Stilwell
Board of Directors; iii) announcement of the Stilwell financial results for the
three months and year ended December 31, 2000; and iv) announcement of ending
assets under management on January 31, 2001 and average assets under management
for the month ended January 31, 2001.
The Company furnished a Current Report on Form 8-K, dated February 21,
2001, to report that Stilwell and Janus Capital Corporation ("Janus") expect to
repurchase approximately 197,000 and 143,000 shares, respectively, of Janus
common stock from various Janus minority stockholders. The Company also provided
an unaudited Stilwell Consolidated Condensed Balance Sheet as of December 31,
2000.
The Company furnished a Current Report on Form 8-K, dated February 28,
2001, to reports ending assets under management on February 28, 2001 and average
assets under management for the two months ended February 28, 2001.
The Company furnished a Current Report on Form 8-K, dated March 31, 2001,
to report ending assets under management on March 31, 2001 and average assets
under management for the three months ended March 31, 2001.
27
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 May 14,
2001.
Stilwell Financial Inc.
/s/ Danny R. Carpenter
-----------------------------
Danny R. Carpenter
Executive Vice President
(Principal Financial Officer)
/s/ Douglas E. Nickerson
-----------------------------
Douglas E. Nickerson
Vice President and Controller
(Principal Accounting Officer)
28