FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2001
--------------------------------------------------------------------------------
Common Stock, $0.01 per share par value 220,529,646 Shares
--------------------------------------------------------------------------------
STILWELL FINANCIAL INC.
Form 10-Q/A
June 30, 2001
Index
Page
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 2000 and June 30, 2001 2
Consolidated Condensed Statements of Income -
Three and Six Months Ended June 30, 2000 and 2001 3
Computation of Basic and Diluted Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2000 and 2001 4
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Year Ended December 31, 2000 and Six Months Ended June 30, 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Qualitative and Quantitative Disclosures About Market Risk 28
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
----------
STILWELL FINANCIAL INC.
FORM 10-Q
JUNE 30, 2001
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
INTRODUCTORY COMMENTS
---------------------
Reclassification of Indebtedness in Consolidated Condensed Balance Sheets
-------------------------------------------------------------------------
Stilwell Financial Inc. (the "Company" or "Stilwell") has restated its
Consolidated Condensed Balance Sheet as of June 30, 2001 to present $691.2
million of indebtedness as a current liability. The indebtedness relates to the
Company's zero-coupon convertible securities ("securities") that include a
provision allowing the holders of the securities to put the securities to the
Company on April 30, 2002 (see Note 12 of the Consolidated Condensed Financial
Statements). These amounts had previously been classified as long-term
obligations. This reclassification has no impact on operating income, net
income, earnings per share or stockholders' equity.
General
-------
The Consolidated Condensed Financial Statements included herein have been
prepared by 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 and six months ended June 30, 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, June 30,
2000 2001
--------------- ---------------
(Restated)
Assets
Current assets:
Cash and cash equivalents $ 364.3 $ 438.7
Accounts receivable 194.4 158.4
Investments in advised funds 30.2 30.8
Other current assets 52.2 69.5
--------------- ---------------
Total current assets 641.1 697.4
Investments held for operating purposes 511.1 463.5
Property and equipment (net of $79.4 and $101.7 accumulated
depreciation and amortization, respectively) 137.7 117.0
Intangibles and other assets, net 291.1 1,310.3
--------------- ---------------
Total assets $ 1,581.0 $ 2,588.2
=============== ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 741.2
Accounts payable 27.3 27.6
Accrued compensation and benefits 98.0 54.2
Income taxes payable 9.7 25.2
Accrued liability to third party administrators 33.2 25.6
Other accrued liabilities 27.9 40.1
--------------- ---------------
Total current liabilities 196.1 913.9
Other liabilities:
Deferred income taxes 211.1 361.6
Other liabilities 42.7 35.6
--------------- ---------------
Total liabilities 449.9 1,311.1
--------------- ---------------
Minority interest in consolidated subsidiaries 73.3 35.5
--------------- ---------------
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 219,559,642 shares outstanding) 2.2 2.2
Additional paid-in capital
Retained earnings 952.3 1,184.7
Accumulated other comprehensive income 103.3 54.7
--------------- ---------------
Total stockholders' equity 1,057.8 1,241.6
--------------- ---------------
Total liabilities and stockholders' equity $ 1,581.0 $ 2,588.2
=============== ===============
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 Six months
ended June 30, ended June 30,
----------------------------- ----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Revenues:
Investment management fees $ 462.7 $ 337.8 $ 912.6 $ 705.6
Shareowner servicing fees 85.8 58.2 169.4 122.3
Other 14.5 15.5 26.1 32.1
------------ ------------ ------------ ------------
Total 563.0 411.5 1,108.1 860.0
------------ ------------ ------------ ------------
Operating expenses:
Compensation 124.1 80.5 249.0 179.8
Marketing and promotion 25.9 25.6 54.7 50.0
Third party concession fees 81.4 61.7 153.7 127.7
Depreciation and amortization 19.9 32.1 35.5 57.0
Professional services 16.8 12.2 32.0 24.8
Other 39.1 31.3 82.5 68.9
Severance, facility closing and other costs 39.4 40.3
------------ ------------ ------------ ------------
Total 307.2 282.8 607.4 548.5
------------ ------------ ------------ ------------
Operating income 255.8 128.7 500.7 311.5
Equity in earnings of unconsolidated affiliates 15.8 24.4 34.6 42.2
Interest expense - Kansas City Southern Industries, Inc. (0.7)
Interest expense - third parties (1.3) (9.8) (3.2) (14.8)
Gain on litigation settlement 44.2
Gain on sale of Janus Capital Corporation
common stock 15.1
Other, net 11.5 6.3 21.4 13.1
------------ ------------ ------------ ------------
Income before taxes and minority 281.8 149.6 612.1 352.0
interest
Income tax provision 102.3 51.3 216.6 123.5
Minority interest in consolidated earnings 27.8 7.9 55.1 26.7
------------ ------------ ------------ ------------
Net income $ 151.7 $ 90.4 $ 340.4 $ 201.8
============ ============ ============ ============
Per Share Data (Note 3):
Weighted Average Common shares
outstanding (in thousands) 223,000 219,387 223,000 219,223
Basic Earnings per share $ 0.68 $ 0.41 $ 1.53 $ 0.92
Diluted Common shares
outstanding (in thousands) 223,000 224,615 223,000 224,649
Diluted Earnings per share $ 0.67 $ 0.39 $ 1.50 $ 0.88
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)
Six months ended June 30,
-------------------------------------
2000 2001
--------------- --------------
Cash flows provided by (used for):
Operating activities:
Net income $ 340.4 $ 201.8
Adjustments to net income:
Depreciation and amortization 35.5 57.0
Deferred income taxes 27.9 29.1
Minority interest in consolidated earnings 55.1 26.7
Equity in undistributed earnings of unconsolidated affiliates (34.6) (42.2)
Lease and equipment charges associated with facility closing 9.1
Gain on sale of Janus Capital Corporation common stock (15.1)
Employee deferred compensation 2.8 (2.6)
Deferred commissions (54.7) (2.2)
Changes in other assets (9.0) (28.2)
Changes in working capital items:
Accounts receivable (55.6) 35.8
Other current assets (3.8) (8.2)
Accounts payable and accrued compensation and benefits 11.8 (30.2)
Income taxes payable, accrued liability to third party administrators
and other accrued liabilities 29.3 40.5
Other, net (2.0) 5.6
-------------- --------------
Net operating 328.0 292.0
-------------- --------------
Investing activities:
Property acquisitions (75.8) (20.2)
Investments in affiliates (3.0) (840.9)
Sale of investments in advised funds 11.8 0.2
Purchase of investments in advised funds (17.6) (4.3)
Other, net 8.4 6.1
-------------- --------------
Net investing (76.2) (859.1)
-------------- --------------
Financing activities:
Proceeds from borrowing under credit facilities 225.0
Proceeds from issuance of zero-coupon convertible notes 690.0
Repayment of long-term debt - third parties (125.0) (175.0)
Debt issuance costs (16.4)
Proceeds from stock plans 7.4
Amounts treated as transfers from Parent 6.4
Distributions to minority interest (16.9) (87.1)
Dividends paid to shareholders (4.4)
Other, net 3.1 2.0
-------------- --------------
Net financing (132.4) 641.5
-------------- --------------
Cash and cash equivalents:
Net increase 119.4 74.4
At beginning of year 324.1 364.3
-------------- --------------
At end of period $ 443.5 $ 438.7
============== ==============
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 2.2 (2.2) -
Stock dividend by Parent 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 201.8
Net unrealized loss on investments (44.4)
Less: reclassification adjustment
for gains included in net income (0.8)
Foreign currency translation
adjustment (3.4)
Comprehensive income 153.2
Common stock options and
benefit plans 32.8 32.8
Common stock dividends (2.2) (2.2)
---------- ------------- ------------- ----------- ------------ -----------
Balance at June 30, 2001 $ 2.2 $ - $ - $ 1,184.7 $ 54.7 $ 1,241.6
========== ============= ============= =========== ============ ===========
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. Stilwell Financial Inc. (the "Company" or "Stilwell") has restated its
Consolidated Condensed Balance Sheet as of June 30, 2001 to present $691.2
million of indebtedness as a current liability. The indebtedness relates to
the Company's zero-coupon convertible securities ("securities") that
include a provision allowing the holders of the securities to put the
securities to the Company on April 30, 2002 (see Note 12). These amounts
had previously been classified as long-term obligations. This
reclassification has no impact on operating income, net income, earnings
per share or stockholders' equity.
In the opinion of the management of 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 June 30, 2001, the results of operations for the
three and six months ended June 30, 2000 and 2001, and the cash flows for
the six months ended June 30, 2001.
The primary entities comprising Stilwell as of June 30, 2001 were: Janus
Capital Corporation ("Janus"), an approximate 90.3% 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 87% 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 June 30, 2001, and 95% of revenues and
91% of net income for the six months ended June 30, 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 and six months ended
June 30, 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. 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 six months ended June 30, 2000.
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.
6
Three months ended June 30, Six months ended June 30,
--------------------------------------- ---------------------------------------
2000 2001 2000 2001
----------------- ---------------- ---------------- -----------------
(dollars in millions, except per share data)
Net income $ 151.7 $ 90.4 $ 340.4 $ 201.8
Dilutive securities at
subsidiaries and affiliates (2.7) (2.3) (5.0) (4.6)
----------------- ---------------- ---------------- -----------------
Adjusted net income $ 149.0 $ 88.1 $ 335.4 $ 197.2
----------------- ---------------- ---------------- -----------------
Weighted average common
shares outstanding 223,000,000 219,386,862 223,000,000 219,222,867
Incremental shares from
assumed conversion of stock
options -- 5,228,511 -- 5,426,190
----------------- ---------------- ---------------- -----------------
Diluted average common
shares outstanding 223,000,000 224,615,373 223,000,000 224,649,057
----------------- ---------------- ---------------- -----------------
Basic Earnings per Common
share $ 0.68 $ 0.41 $ 1.53 $ 0.92
================= ================ ================ =================
Diluted Earnings per Common
share $ 0.67 $ 0.39 $ 1.50 $ 0.88
================= ================ ================ =================
For the three and six months ended June 30, 2001, the weighted average of
options to purchase 1,435,006 and 830,136 shares, respectively, 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.
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 June 30, 2001.
Condensed consolidated financial information for DST is shown below:
December 31, 2000 June 30, 2001
----------------------- -----------------------
(dollars in millions)
Percentage ownership 32.5% 32.9%
Carrying value (a) $ 509.3 $ 461.7
Equity in DST net assets $ 509.3 $ 461.7
Fair market value (b) $ 2,717.7 $ 2,137.7
Financial condition:
Current assets $ 590.7 $ 663.0
Non-current assets 1,961.7 1,864.8
---------------- ------------------
Total assets $ 2,552.4 $ 2,527.8
================ ==================
Current liabilities $ 356.2 $ 550.2
Non-current liabilities 630.4 573.2
Stockholders' equity 1,565.8 1,404.4
---------------- ------------------
Total liabilities and stockholders' equity $ 2,552.4 $ 2,527.8
================ ==================
7
Three months Six months
ended June 30, ended June 30,
--------------------------------- --------------------------------
2000 2001 (d) 2000 (c) 2001 (d)
-------------- -------------- --------------- -------------
Operating results:
Revenues $ 337.0 $ 451.6 $ 677.4 $ 822.6
Costs and expenses $ 272.9 $ 374.1 $ 549.6 $ 667.4
Net income $ 47.2 $ 73.8 $ 103.4 $ 128.3
(a) During the six months ended June 30, 2001, the Company recorded
approximately $18.7 million in goodwill relating to the DST investment as a
result of DST stock repurchases. With this additional amount, Stilwell had
approximately $62.0 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 $14.6 million from
settlement of litigation with a former DST equity affiliate and sales of
marketable securities.
(d) Net income includes after-tax gains of approximately $24.4 million from the
sale of DST's portfolio accounting business 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 $206.5
million and $60.5 million at June 30, 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.
Supplemental cash flow information (in millions):
Six months
ended June 30,
--------------------------------
2000 (a) 2001 (b)
-------- ----------
Interest paid $ 2.4 $ 9.3
Income taxes paid $ 174.7 $ 70.9
(a) For the six months ended June 30, 2000, all income tax payments were made
to KCSI.
(b) This total does not include approximately $16.4 million of debt issue costs
paid by Stilwell in connection with the issuance of zero-coupon convertible
debt securities ("Convertible Notes") - see Note 12. These costs were
recorded as a prepaid asset and are being amortized over a period of twelve
months, representing the first point in time at which Stilwell may be
required to purchase the Convertible Notes.
8
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. Similar to the FAS 115 unrealized
gains or losses, foreign currency translation adjustments affect
accumulated other comprehensive income.
Three months ended June 30, Six months ended June 30,
---------------------------------------- ----------------------------------------
2000 2001 2000 2001
-------------- -------------- -------------- --------------
(dollars in millions)
Unrealized gain (loss) recorded
in investments $ 1.6 $ 15.5 $ 9.6 $ (72.7)
Deferred income taxes (0.7) (6.1) (3.7) 28.3
-------------- -------------- -------------- --------------
Unrealized gain (loss) recorded
in accumulated other
comprehensive income
0.9 9.4 5.9 (44.4)
Less: reclassification
adjustment for (gains) losses
included in net income
0.2 (0.4) (1.1) (0.8)
Foreign currency translation
adjustment (2.0) (2.5) (2.6) (3.4)
Net income 151.7 90.4 340.4 201.8
-------------- -------------- -------------- --------------
Comprehensive income $ 150.8 $ 96.9 $ 342.6 $ 153.2
============== ============== ============== ==============
During the six months ended June 30, 2000 and 2001, Stilwell recorded
approximately $3.2 million and $6.6 million, respectively, 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.
9
Summarized financial information concerning the segments is shown in the
following tables (in millions):
Three months ended June 30, 2000
--------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
---------- ---------- ----------
Revenues $ 557.5 $ 5.5 $ 563.0
Operating expenses 298.2 9.0 307.2
---------- ---------- ----------
Operating income (loss) 259.3 (3.5) 255.8
Equity earnings of
unconsolidated affiliates 0.4 15.4 15.8
Interest expense - third parties (1.3) (1.3)
Other, net 6.8 4.7 11.5
----------- ---------- ----------
Pretax income 266.5 15.3 281.8
Income tax provision 101.1 1.2 102.3
Minority interest 27.9 (0.1) 27.8
----------- ---------- ----------
Net income $ 137.5 $ 14.2 $ 151.7
=========== ========== ==========
Three months ended June 30, 2001
--------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ -----
Revenues $ 406.7 $ 4.8 $ 411.5
Operating expenses 260.2 22.6 282.8
----------- ---------- ----------
Operating income (loss) 146.5 (17.8) 128.7
Equity earnings of
unconsolidated affiliates 24.4 24.4
Interest expense - third parties (0.9) (8.9) (9.8)
Other, net 1.5 4.8 6.3
----------- ---------- ----------
Pretax income 147.1 2.5 149.6
Income tax provision (benefit) 54.6 (3.3) 51.3
Minority interest 8.1 (0.2) 7.9
----------- ---------- ----------
Net income $ 84.4 $ 6.0 $ 90.4
=========== ========== ==========
10
Six months ended June 30, 2000
------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- --------
Revenues $ 1,097.4 $ 10.7 $ 1,108.1
Operating expenses 582.8 24.6 607.4
----------- ---------- ----------
Operating income (loss) 514.6 (13.9) 500.7
Equity earnings of
unconsolidated affiliates 1.1 33.5 34.6
Interest expense - Parent (0.7) (0.7)
Interest expense - third parties (3.2) (3.2)
Gain on litigation settlement 44.2 44.2
Gain on sale of Janus common stock 15.1 15.1
Other, net 11.2 10.2 21.4
----------- ---------- ----------
Pretax income 526.9 85.2 612.1
Income tax provision 199.9 16.7 216.6
Minority interest 55.3 (0.2) 55.1
----------- ---------- ----------
Net income $ 271.7 $ 68.7 $ 340.4
----------- ---------- ----------
Six months ended June 30, 2001
------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- --------
Revenues $ 849.9 $ 10.1 $ 860.0
Operating expenses 513.7 34.8 548.5
----------- ---------- ----------
Operating income (loss) 336.2 (24.7) 311.5
Equity earnings of
unconsolidated affiliates 42.2 42.2
Interest expense - third parties (0.9) (13.9) (14.8)
Other, net 6.1 7.0 13.1
----------- ---------- ----------
Pretax income 341.4 10.6 352.0
Income tax provision (benefit) 127.0 (3.5) 123.5
Minority interest 27.1 (0.4) 26.7
----------- ---------- ----------
Net income $ 187.3 $ 14.5 $ 201.8
----------- ---------- ----------
11
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the six months ended June 30 (in millions):
2000 2001
---- ----
Revenues (1):
United States $ 1,072.7 $ 819.5
United Kingdom 35.4 40.5
----------- -----------
Total $ 1,108.1 $ 860.0
=========== ===========
Long-lived assets:
United States $ 292.2 $ 1,388.2
United Kingdom 35.0 39.1
----------- -----------
Total $ 327.2 $ 1,427.3
=========== ===========
(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.
Stilwell funded the purchase price and associated interest with proceeds
received in connection with the issuance of its Convertible Notes. See Note
12 below. Stilwell accounted for the acquisition under the purchase method
of accounting.
Stilwell acquisition of Janus shares from other minority stockholders.
In March and April of 2001, Stilwell acquired 202,042 shares of Janus
common stock from several minority stockholders (other than Mr. Bailey).
Approximately 163,900 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 $203 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 assets acquired and this excess -
approximately $796 million - was recorded as identified intangible assets
and goodwill to be amortized over a period of 20 years. The Company expects
to have an independent valuation completed in order to determine the
12
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 third quarter of 2001.
Net effect of transactions. With the completion of the purchase of the
802,042 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 380,000 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 recruit and add
analysts to its staff. Janus recorded non-recurring charges in first
quarter 2001 of approximately $9.1 million related to severance,
operational and other costs. Partially offsetting the effects of these
charges was a first quarter 2001 reduction of approximately $8.2 million in
stock bonus accruals at Janus that were no longer payable as a result of
the sale of shares of Janus common stock by the various employees discussed
in Note 7.
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. Janus
recorded approximately $39.4 million 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.
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"), 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
13
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 June 30, 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
June 30, 2001, the purchase price would have been approximately $870
million.
As of June 30, 2001, Stilwell had $350 million in credit facilities
available and had cash balances at the Stilwell holding company level in
excess of $350 million. The market value of Stilwell's 33% investment in
DST was more than $2.0 billion using DST's closing price on the New York
Stock Exchange on June 30, 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. Stilwell would record any such acquisitions of shares
under the purchase method of accounting (see Note 7).
12. On April 30, 2001, Stilwell completed an offering of approximately $931
million principal amount at maturity of zero-coupon convertible senior
notes due April 30, 2031 (the Convertible Notes). The Convertible Notes
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 $16.4 million in debt issuance costs). The
total gross proceeds received include approximately $90 million from the
exercise of an over-allotment option by the underwriter. The issue price
represents a yield to maturity of 1% per year. 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.
14
Each $1,000 principal amount at maturity of the Convertible Notes 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 Notes
have been assigned a credit rating, the credit rating assigned is below a
specified level; iii) if Stilwell calls the Convertible Notes 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 Notes for cash on or after April 30, 2006 at their
accreted value. Stilwell may be required to repurchase the Convertible
Notes at the accreted value thereof, at the option of the holders on April
30, 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. A Registration Statement on Form S-3 covering resales by
investors of the Convertible Notes, and the shares of Stilwell's common
stock into which the notes are convertible, was declared effective by the
Securities and Exchange Commission on July 30, 2001.
These amounts are classified as current liabilities in the Consolidated
Condensed Balance Sheet as of June 30, 2001 because the holders of the
Convertible Notes may put the Convertible Notes to Stilwell on April 30,
2002. 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 proceeds are available for general corporate purposes.
13. In July 2001, the FASB issued Statement of Accounting Standards No. 141,
"Business Combinations" ("FAS 141") and Statement of Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 will
become effective for business combinations initiated after June 30, 2001
and requires purchase method accounting. Under FAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized.
Instead, such goodwill and other intangible assets will be tested annually
for impairment. FAS 142 will be effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the impact that
adoption of these provisions will have on its financial statements.
15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reclassification of Indebtedness in Consolidated Condensed Balance Sheets
-------------------------------------------------------------------------
Stilwell Financial Inc. (the "Company" or "Stilwell") has restated its
Consolidated Condensed Balance Sheet as of June 30, 2001
to present $691.2 million of indebtedness as a current liability. The
indebtedness relates to the Company's zero-coupon convertible securities
("securities") that include a provision allowing the holders of the securities
to put the securities to the Company on April 30, 2002 (see Note 12 of the
Consolidated Condensed Financial Statements). These amounts had previously been
classified as long-term obligations. This reclassification has no impact on
operating income, net income, earnings per share or stockholders' equity.
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.
16
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 90.3% 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 87% 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.
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 ("Convertible Notes") due April 30,
2031. The Convertible Notes 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 $16.4 million in debt issuance costs). The total
gross proceeds received include approximately $90 million from the exercise of
an over-allotment option by the underwriter. The issue price represents a yield
to maturity of 1% per year. 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.
Each $1,000 principal amount at maturity of the Convertible Notes 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 Notes have been assigned a credit
rating, the credit rating assigned is below a specified level; iii) if Stilwell
calls the Convertible Notes 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 Notes for cash on or after April
30, 2006 at their accreted value. Stilwell may be required to repurchase the
Convertible Notes at the accreted value thereof, at the option of the holders on
April 30, 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. A Registration Statement on Form S-3 covering resales by investors of the
Convertible Notes, and the shares of Stilwell's common stock into which the
notes are convertible, was declared effective by the Securities and Exchange
Commission on July 30, 2001.
These amounts are classified as current liabilities in the Consolidated
Condensed Balance Sheet as of June 30, 2001 because the holders of the
Convertible Notes may put the Convertible Notes to Stilwell on April 30, 2002.
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 proceeds are available for general corporate purposes.
17
Stilwell Receives Credit Ratings. On June 28, 2001, Stilwell obtained
"A-/A-2" counterparty ratings from Standard & Poor's. On August 9, 2001,
Stilwell was assigned a "Baa1" rating from Moody's Investor Service. Each rating
service indicated that the rating outlook for Stilwell is stable.
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.
Stilwell funded the purchase price and associated interest with proceeds
received from the issuance of the Convertible Notes. See discussion above.
Stilwell recorded 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.
Stilwell acquisition of Janus shares from other minority stockholders. In
March and April of 2001, Stilwell acquired 202,042 shares of Janus common stock
from several minority stockholders. Approximately 163,900 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 $203 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 assets acquired and this excess - approximately
$796 million - was recorded as identified intangible assets and 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
third quarter of 2001.
Net effect of transactions. With the completion of the purchase of the
802,042 shares of Janus common stock, and assuming the maximum number of shares
were purchased under Janus's repurchase offer, Stilwell's
18
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
380,000 shares available at Janus after these transactions - in connection with
the Janus Incentive Plan.
Janus Work Force Reduction and Non-Recurring Items. 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 $9.1 million related to severance, operational and other costs.
Partially offsetting these costs was a first quarter 2001 reduction of
approximately $8.2 million in stock bonus accruals at Janus that were no longer
payable as a result of the sale of shares of Janus common stock by various
employees to Stilwell as discussed above.
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. Janus recorded approximately $39.4
million in second quarter 2001 non-recurring costs associated with severance,
business closing and related expenses.
The reductions in workforce and facility closings saved approximately
$0.02 per diluted share in second quarter 2001 and similar savings are expected
to continue in the future.
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.
19
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared with the Three Months Ended
June 30, 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):
Three months ended June 30,
-----------------------------------------------
2000 (i) 2001 (ii)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 541.0 $ 390.6
SMI and Berger 16.5 16.1
--------------------- --------------------
Sub-total 557.5 406.7
Other 5.5 4.8
--------------------- --------------------
Total $ 563.0 $ 411.5
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 254.4 $ 143.9
SMI and Berger 4.9 2.6
--------------------- --------------------
Sub-total 259.3 146.5
Other (3.5) (17.8)
--------------------- --------------------
Total $ 255.8 $ 128.7
===================== ====================
Net income (loss):
Janus and Berger:
Janus (iii) $ 132.3 $ 82.7
SMI and Berger (iv) 5.2 1.7
--------------------- --------------------
Sub-total 137.5 84.4
--------------------- --------------------
Other:
DST (iv) 14.2 22.5
Other (16.5)
--------------------- --------------------
Sub-total 14.2 6.0
--------------------- --------------------
Total $ 151.7 $ 90.4
===================== ====================
(i) Includes a non-recurring gain of approximately $0.9 million (after-tax)
representing the Company's proportionate share of non-recurring gain items
recorded by DST resulting from sales of marketable securities.
(ii) Includes certain non-recurring items as follows: a) Janus recorded
approximately $39.4 million ($21.6 million after minority interest and
income taxes) in severance, facility closing and related costs associated
with work force reductions and the closing of its Austin location in April
2001; and b) the Company recorded $8.1 million ($7.5 million after-tax) in
equity earnings of DST representing Stilwell's proportionate share of DST
non-recurring gains in connection with the sale of DST's portfolio
accounting business and sales of marketable equity securities during second
quarter 2001.
(iii)Janus net income is reported after minority interest of approximately
$27.9 and $8.1 million for the three months ended June 30, 2000 and 2001,
respectively.
(iv) Stilwell's investment in DST is held by SMI.
20
Assets under management at June 30, 2000, December 31, 2000 and June 30,
2001 were as follows (in billions):
June 30, December 31, June 30,
2000 2000 2001
--------------- ----------------- ---------------
Janus:
Janus Advised Funds:
Janus Investment Fund $ 206.2 $ 162.2 $ 132.3
Janus Aspen Series (i) 25.4 22.7 20.3
Janus Adviser Series (i) 1.8 2.8
Janus Money Market Funds 10.1 12.2 14.8
Janus World Funds plc 3.7 3.6 3.0
--------------- ----------------- ---------------
Total Janus Advised Funds 245.4 202.5 173.2
Janus Sub-Advised Funds and Private
Accounts 58.3 46.3 37.9
--------------- ----------------- ---------------
Total Janus 303.7 248.8 211.1
--------------- ----------------- ---------------
Berger:
Berger Funds 7.2 6.0 6.1
Berger Sub-Advised Funds and Private
Accounts 0.8 1.6 1.6
--------------- ----------------- ---------------
Total Berger 8.0 7.6 7.7
--------------- ----------------- ---------------
Nelson 1.3 1.4 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 313.0 $ 257.8 $ 220.1
=============== ================= ===============
(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 $90.4 million in second quarter 2001 compared to $151.7
million in second quarter 2000. Exclusive of the one-time items in second
quarter 2000 and 2001 as discussed in notes (i) and (ii) in the earnings table
above, earnings decreased approximately 31%. This decrease reflects lower
revenues due to lower assets under management, an increase in amortization
expense associated with purchases of Janus common stock and higher depreciation
resulting from Janus's technology infrastructure development over the last three
years.
Average assets under management decreased 26% compared to prior year's
second quarter (from $304.2 billion to $223.9 billion), leading to a decline in
revenues from $563.0 million to $411.5 million in second quarter 2001. The lower
revenues resulted in a $127.1 million decrease in operating income
quarter-to-quarter ($87.7 million, exclusive of one-time costs). Stilwell
reported a lower operating margin in second quarter 2001 compared to the prior
year, but continued to exceed 40% when removing the one-time costs. Stilwell's
ability to maintain a strong operating margin reflects the savings generated by
Janus in connection with its increased focus on electronic shareowner servicing
and reliance on technology. Furthermore, Stilwell maintained this margin despite
an additional $8.9 million in amortization expense during the quarter associated
with the goodwill and intangible assets recorded in connection with the Janus
share purchases during the first half of the year. Exclusive of one-time gains
recorded by DST, Stilwell's equity in net earnings of DST increased 13% during
second quarter 2001 versus 2000, continuing the strong growth trends experienced
by DST over the last several quarters.
JANUS AND BERGER
Assets under management for Janus and Berger totaled $218.8 billion, an
increase of $14.2 billion since March 31, 2001. This increase reflects net cash
inflows of $2.1 billion and market appreciation of $12.1 billion. Compared to
December 31, 2000 and June 30, 2000, assets under management have declined by
approximately $37.6 billion and $92.9 billion, respectively, substantially due
to market depreciation associated with the general
21
downturn in the various markets and indices. Average assets under management for
Janus and Berger during second quarter 2001 totaled approximately $222.6 billion
compared to $245.2 billion in first quarter 2001 and $302.8 billion in second
quarter 2000. See the brief discussions of Janus and Berger separately below.
Investment management fees for Janus and Berger decreased in second
quarter 2001 compared to prior year's second quarter as a result of 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 $26.6 million
compared to prior year's second quarter, primarily due to declines in assets
under management.
The operating margin for Janus and Berger (exclusive of the severance,
facility closing and related costs) decreased to 45.7% from 46.5% in second
quarter 2000. Operating expenses totaled $260.2 million ($220.8 million
exclusive of one-time costs) for the three months ended June 30, 2001 compared
to $298.2 million in the prior year quarter. Operating expenses with notable
decreases quarter-to-quarter included the following items: i) compensation,
primarily due to a 34% reduction in the average number of employees in second
quarter 2001 versus 2000, as well as to reduced investment performance-based
incentive compensation; ii) third party concession fees resulting from a lower
level of assets distributed through these arrangements; iii) professional
services (due to a lower number of temporary employees in 2001 versus 2000); and
iv) other variable costs reflecting the decline in revenues. Offsetting these
decreases, however, was a $2 million increase in depreciation arising from
Janus's technology and operational infrastructure efforts over the last three
years.
Other income declined during the quarter largely as a result of reduced
interest income (from lower average cash balances and interest rates). In
addition, minority interest in consolidated earnings decreased from $27.9
million in second quarter 2000 to $8.1 million in second quarter 2001,
reflecting Stilwell's increased ownership of Janus and the lower income reported
by Janus quarter-to-quarter.
NELSON, DST AND OTHER
Nelson's assets under management were essentially unchanged from March 31,
2001 and were down slightly from December 31, 2000. The decline from December
31, 2000, however, reflects fluctuations in the currency exchange rate. Assets
under management in British pounds actually increased from (pound)908 million at
December 31, 2000 to (pound)916 million at June 30, 2001. As a result of
increased marketing and brand-awareness initiatives, the number of shareowner
accounts has grown approximately 12% since June 30, 2000. Because of the costs
associated with these initiatives, the net loss from Nelson increased in second
quarter 2001 versus 2000. The Company expects that during this phase of Nelson's
development, Nelson will operate at a loss because 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.
Second quarter 2001 equity earnings from DST were $24.4 million versus
$15.4 million in second quarter 2000. Exclusive of the one-time items discussed
above, equity earnings from DST increased $1.9 million quarter-to-quarter. This
improvement was largely attributable to higher earnings in DST's financial
services segment. Consolidated DST revenues increased 34%, largely due to the
inclusion of revenue from EquiServe Limited Partnership, in which DST acquired
controlling ownership on March 30, 2001. Revenues also increased due to a higher
number of shareowner accounts serviced (totaling 74.8 million at June 30, 2001
compared to 73.5 million at March 31, 2001, 72.1 million at December 31, 2000
and 63.9 million at June 30, 2000) and a higher level of images produced and
statements mailed (increases of 11% and 2%, respectively, since prior year
second quarter).
Other Stilwell operating expenses increased in the second quarter 2001
versus the same period in 2000, primarily due to the higher amortization expense
resulting from the goodwill and intangible assets recorded in connection with
the acquisition of 802,042 shares of Janus common stock during the first half of
2001.
22
Interest expense to third parties increased as a result of interest
associated with the acquisition of shares of Janus common stock from Mr. Bailey,
accreted interest on the Convertible Notes and amortization of 2/12th of the
approximately $16.4 million in debt issue costs paid in connection with the
Convertible Notes.
Six Months Ended June 30, 2001 Compared with the Six Months Ended June 30, 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):
Six months ended June 30,
-----------------------------------------------
2000 (i) 2001 (ii)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 1,064.2 $ 817.6
SMI and Berger 33.2 32.3
--------------------- --------------------
Sub-total 1,097.4 849.9
Other 10.7 10.1
--------------------- --------------------
Total $ 1,108.1 $ 860.0
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 505.0 $ 331.2
SMI and Berger 9.6 5.0
--------------------- --------------------
Sub-total 514.6 336.2
Other (13.9) (24.7)
--------------------- --------------------
Total $ 500.7 $ 311.5
===================== ====================
Net income (loss):
Janus and Berger:
Janus (iii) $ 262.5 $ 183.8
SMI and Berger (iv) 9.2 3.5
--------------------- --------------------
Sub-total 271.7 187.3
--------------------- --------------------
Other:
DST (iv) 30.9 39.0
Other 37.8 (24.5)
--------------------- --------------------
Sub-total 68.7 14.5
--------------------- --------------------
Total $ 340.4 $ 201.8
===================== ====================
(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 $4.3 million
(after-tax) representing the Company's proportionate share of non-recurring
gain items recorded by DST resulting from litigation settlement and sales
of marketable securities.
(ii) Includes certain non-recurring items as follows: a) Janus recorded
approximately $48.5 million ($26.5 million after minority interest and
income taxes) in severance, facility closing and related costs associated
with work force reductions and the closing of its Austin location in April
2001; b) Janus recorded a reduction of approximately $8.2 million ($4.4
million after minority interest and income taxes) in stock bonus accruals
at Janus that were no longer payable as a result of the sale of shares of
Janus common stock by various employees to Stilwell as discussed above; and
c) the Company recorded $8.1 million ($7.5 million after-tax) in equity
earnings of DST representing Stilwell's proportionate share of DST
non-recurring gains in connection with the sale of DST's portfolio
accounting business and sales of marketable equity securities during second
quarter 2001.
23
(iii)Janus net income is reported after minority interest of approximately
$55.3 and $27.1 million for the six months ended June 30, 2000 and 2001,
respectively.
(iv) Stilwell's investment in DST is held by SMI.
The Company earned $201.8 million for the six months ended June 30, 2001
compared to $340.4 million for the six months ended June 30, 2000. Exclusive of
one-time items as noted in (i) and (ii) in the table above, earnings decreased
approximately 26%. This decrease reflects lower revenues due to lower asset
under management levels, an increase in depreciation and amortization (as
discussed in the second quarter above) and interest expense associated with
funding purchases of Janus common stock.
Average assets under management decreased 21% compared to prior year (from
$299.3 billion to $235.2 billion), leading to a $248.1 million (22%) decline in
revenues. Operating income decreased by $189.2 million ($148.9 million exclusive
of one-time costs) period-to-period. Stilwell reported a lower operating margin
in the first half of 2001 compared to 2000, 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. The margin, however, remained above 40%,
reflecting the strong operational flexibility of Stilwell, particularly Janus.
Exclusive of one-time items, Stilwell's equity in net earnings of DST increased
18% during the six months ended June 30, 2001 versus 2000.
JANUS AND BERGER
Average assets under management for Janus and Berger during the six months
ended June 30, 2001 totaled $233.9 billion, approximately 21% lower than
comparable 2000. The lower level of average assets under management for Janus
and Berger was substantially due to market depreciation, which is consistent
with the general downturn in the various markets and indices. See the brief
discussions of Janus and Berger separately below.
Investment management fees, shareowner servicing fees and other revenues
declined period-to-period, reflecting the decrease in average assets under
management. Aggregate revenues continued to total approximately 73 to 74 basis
points of average assets under management.
The operating margin for Janus and Berger decreased to 44.3% (exclusive of
severance, facility closing and other costs) from 46.9% in comparable 2000.
Operating expenses totaled $513.7 million ($473.4 million exclusive of one-time
items) for the six months ended June 30, 2001 compared to $582.8 million in the
prior year period. Reduced operating expenses occurred in the same key
components identified in the second quarter discussion above. Compensation and
third party concession fees - the two largest components of Stilwell's operating
expenses - represented approximately 34% of revenues for the six months ended
June 30, 2001, which is an improvement over the approximately 36% experienced
during the same 2000 period. As noted in the second quarter 2001, depreciation
increased due to Janus's technology and operational infrastructure efforts over
the last three years, thereby pressuring the operating margin.
Other income and minority interest in consolidated earnings declined
during the six months ended June 30, 2001 compared to 2000 for the same reasons
identified in the second quarter discussion above.
NELSON, DST AND OTHER
The net loss from Nelson increased in 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. As noted above, the losses incurred
as Nelson expands are not expected to have a material impact on Stilwell's
results of operations or financial position.
24
Equity earnings from DST for the six months ended June 30, 2001 were $42.2
million versus $33.5 million in 2000. Exclusive of the one-time items discussed
above, equity earnings from DST increased $5.3 million to $34.1 million. This
improvement was largely attributable to higher earnings in DST's financial
services segment, driven by increased revenues.
Other Stilwell operating expenses increased over the comparable prior
year, primarily as a result of higher amortization expense resulting from the
Janus stock purchases. Partially offsetting this increase in amortization
expense, however, was lower consulting and compensation costs.
Interest expense to third parties increased by $10.7 million, primarily as
a result of the items identified in the second quarter discussion.
Subsidiary Information
A brief discussion of significant Janus, Berger and Nelson items during
the six months ended June 30, 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 six months ended
June 30, 2001, assets under management decreased by $37.7 billion due to
market depreciation of $35.7 billion and net cash outflows of $2.0
billion. Significantly, however, Janus experienced net cash inflows
during the second quarter, indicative of the continued appeal of the
Janus investment management approach and its franchise brand. Total Janus
shareowner accounts remained relatively stable during the period,
declining less than 1% since December 31, 2000. While operating margins
declined during the first half of 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 and
the closing of the Austin location in April 2001, Janus realized expense
benefits during the second quarter of 2001. Note, however, that the
aggregate effects of this reorganization will not be realized until a
later date (e.g., after severance agreements have been completed,
sub-leasing arrangements have been finalized). While the number of
full-time employees in the operational and service areas of Janus
declined as a result of these business decisions, Janus has increased its
personnel in the investment area - the competency considered to be most
critical to Janus's ongoing success.
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). In addition, Janus
introduced Janus Global Value Fund in June 2001. These actions, together
with its efforts to provide leading-edge technology for electronic
transaction and servicing capabilities, highlight Janus's ongoing focus
to act in its shareowners' best interests.
Berger
------
Berger assets under management increased by $0.1 billion during the six
months ended June 30, 2001, reflecting net cash inflows of $0.5 billion,
partially offset by market depreciation of $0.4 billion. Berger's ability
to maintain net cash inflows during the year, as well as to increase its
shareowner accounts to more than 268,000, reflects the results of
Berger's efforts to broaden its fund platform to include value products.
Berger experienced a decrease in its operating margin during the second
quarter and year to date 2001, primarily due to increases in third-party
concession costs based on growth in assets through such arrangements.
25
Nelson
------
Nelson continues to focus on building brand awareness through its
relationships with premier corporations and the ongoing presentations to
these corporations' employees. Further, marketing and promotional efforts
developed to secure clients through direct channels are broadening the
Nelson platform of capabilities and opportunities. The number of advisors
working with clients has grown from 25 in 1998 to 44 as of June 30, 2001.
The number of clients during that same period has grown by nearly 50%.
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 half of 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 second
quarter and year to date 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):
Six months ended June 30,
----------------------------------------
2000 2001
---------------- ---------------
Cash flows provided by (used for):
Operating activities $ 328.0 $ 292.0
Investing activities (76.2) (859.1)
Financing activities (132.4) 641.5
---------------- ---------------
Net increase 119.4 74.4
At beginning of year 324.1 364.3
---------------- ---------------
At end of period $ 443.5 $ 438.7
================ ===============
During the six months ended June 30, 2001, the Company's consolidated cash
position increased $74.4 million from December 31, 2000. This increase is
largely attributable to proceeds (approximately $673.6 million)
26
from the issuance of the Convertible Notes and net income, partially offset by
the use of funds for the acquisition of 802,042 shares of Janus common stock and
distributions to minority stockholders.
Net operating cash inflows for the six months ended June 30, 2001 were
$36.0 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.
Net investing cash outflows were $859.1 million during the six months
ended June 30, 2001 compared to $76.2 million during the comparable 2000 period.
This difference results primarily from a $840.9 million increase in investments
in affiliates, largely attributable to the purchase of 802,042 shares of Janus
common stock from various minority stockholders. This increase was partially
offset by a $55.6 million reduction in capital expenditures for the six months
ended June 30, 2001 versus 2000.
Through June 30, 2001, financing cash inflows include the net proceeds
received in connection with the issuance of the Convertible Notes and a net $50
million borrowing under the credit facilities in connection with the purchase of
shares of Janus common stock from various minority stockholders. In first
quarter 2000, Stilwell repaid the $125 million of indebtedness assumed by
Stilwell from KCSI. Distributions to minority stockholders of $87.1 million in
the first half of 2001 exceeded the $16.9 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 during the first
half of 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 three years at Janus.
As noted in "Significant Developments" above, Janus expects to repurchase up to
143,000 shares of its common stock from various employees during third quarter
2001, the total cost of which is expected to be approximately $145 million.
As discussed in "Significant Developments" above, the Company issued its
Convertible Notes in April 2001. The Company is currently evaluating
alternatives for refinancing the Convertible Notes in the event that the holders
exercise their puts. Approximately $610 million of the $673.6 million of
proceeds from the offering were used to fund the acquisition of Janus shares
from Mr. Bailey. The remaining $63.6 million is available for general corporate
purposes. These amounts are classified as current liabilities in the
Consolidated Condensed Balance Sheet as of June 30, 2001 because the holders
of the Convertible Notes may put the Convertible Notes to Stilwell on
April 30, 2002.
The Company has available $350 million at the holding company and $200
million at Janus through its credit facilities. 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.
27
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 the six months ended June 30, 2001. As of June 30, 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.
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. 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 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 June 30, 2001, the purchase price would have been approximately $870
million.
28
As of June 30, 2001, Stilwell had $350 million in credit facilities
available and had cash balances at the Stilwell holding company level in excess
of $350 million. The market value of Stilwell's 33% investment in DST was more
than $2 billion, using DST's closing price on the New York Stock Exchange on
June 30, 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. Stilwell would account for any
such acquisition under the purchase method of accounting.
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.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 141, "Business Combinations" ("FAS 141")
and Statement of Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 141 will become effective for business combinations
initiated after June 30, 2001 and requires purchase method accounting. Under FAS
142, goodwill and intangible assets with indefinite lives will no longer be
amortized. Instead, such goodwill and other intangible assets will be tested
annually for impairment. FAS 142 will be effective for fiscal years beginning
after December 15, 2001. The Company is currently evaluating the impact that
adoption of these provisions will have on its 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
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
29
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 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 - Second Amendment to Five-Year Competitive Advance
and Revolving Credit Facility dated April 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
Exhibit 10.2 - Stilwell Financial Inc. 1998 Long Term Incentive
Stock Plan, as amended and restated effective as of
May 9, 2001, is hereby incorporated by reference as
Exhibit 10.2
b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K, dated April 23, 2001,
under Item 9, to report Stilwell's financial results for the three months ended
March 31, 2001, to report that Stilwell had commenced a zero-coupon convertible
debt offering, to report that Stilwell had entered into a purchase agreement for
the sale of $810 million principal amount of zero-coupon convertible senior
notes due 2031, to report that Stilwell announced that Stilwell had completed
its zero-coupon convertible debt offering and the acquisition of shares of Janus
Capital Corporation common stock, as well as to report the monthly asset under
management information as of April 30, 2001.
The Company furnished a Current Report on Form 8-K, dated May 10, 2001,
under Item 9, to report that Stilwell held its Annual Meeting of Shareholders
and declared a quarterly dividend.
The Company furnished a Current Report on Form 8-K, dated May 31, 2001,
under Item 9, to report ending assets under management on May 31, 2001 and
average assets under management for the two and five months then ended. In
addition, the Current Report on Form 8-K reported that Stilwell named a Chief
Financial Officer.
The Company furnished a Current Report on Form 8-K, dated June 30, 2001,
under Item 9, to report ending assets under management on June 30, 2001 and
average assets under management for the three and six months then ended. In
addition, the Current Report on Form 8-K reported that Stilwell received a
credit rating from Standard & Poor's and providing information on the second
quarter earnings presentation conference call.
30
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 October
31, 2001.
Stilwell Financial Inc.
/s/ Daniel P. Connealy
-----------------------------
Daniel P. Connealy
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Douglas E. Nickerson
-----------------------------
Douglas E. Nickerson
Vice President and Controller
(Principal Accounting Officer)
31