FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2001
- --------------------------------------------------------------------------------
Common Stock, $0.01 per share per value 221,334,578 Shares
- --------------------------------------------------------------------------------
STILWELL FINANCIAL INC.
-----------------------
Form 10-Q
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September 30, 2001
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Index
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Page
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 2000 and September 30, 2001 2
Consolidated Condensed Statements of Income -
Three and Nine Months Ended September 30, 2000 and 2001 3
Computation of Basic and Diluted Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 2001 4
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Year Ended December 31, 2000 and Nine Months Ended
September 30, 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Qualitative and Quantitative Disclosures About Market Risk 34
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 37
- ----------
STILWELL FINANCIAL INC.
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FORM 10-Q
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SEPTEMBER 30, 2001
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
INTRODUCTORY COMMENTS
- ---------------------
The Consolidated Condensed Financial Statements included herein have been
prepared by Stilwell Financial Inc. (the "Company" or "Stilwell"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These
Consolidated Condensed Financial Statements should be read in conjunction with
the financial statements and the notes thereto, as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000 and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this Form 10-Q. Results for the three and nine
months ended September 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, September 30,
2000 2001
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 364.3 $ 430.4
Accounts receivable 194.4 123.2
Investments in advised funds 30.2 25.2
Other current assets 52.2 61.4
--------------- ---------------
Total current assets 641.1 640.2
Investments held for operating purposes 511.1 438.3
Property and equipment (net of $79.4 and $109.6 accumulated
depreciation and amortization, respectively) 137.7 109.3
Intangibles and other assets, net 170.4 865.6
Goodwill, net 120.7 603.3
--------------- ---------------
Total assets $ 1,581.0 $ 2,656.7
=============== ===============
Liabilities and
stockholders' equity
Current liabilities:
Current portion of long-term debt $ - $ 692.9
Accounts payable 27.3 24.7
Accrued compensation and benefits 98.0 65.5
Income taxes payable 9.7 57.5
Accrued liability to third party administrators 33.2 19.0
Other accrued liabilities 27.9 30.6
--------------- ---------------
Total current liabilities 196.1 890.2
Other liabilities:
Deferred income taxes 211.1 378.0
Other liabilities 42.7 31.0
--------------- ---------------
Total liabilities 449.9 1,299.2
--------------- ---------------
Minority interest in consolidated subsidiaries 73.3 90.9
--------------- ---------------
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 220,895,721 shares outstanding) 2.2 2.2
Additional paid-in capital
Retained earnings 952.3 1,219.4
Accumulated other comprehensive income 103.3 45.0
--------------- ---------------
Total stockholders' equity 1,057.8 1,266.6
--------------- ---------------
Total liabilities and stockholders' equity $ 1,581.0 $ 2,656.7
=============== ===============
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 Nine months
ended September 30, ended September 30,
----------------------------- ------------------------------
2000 2001 2000 2001
------------ ------------- ------------- ------------
Revenues:
Investment management fees $502.3 $296.4 $1,414.9 $ 1,002.0
Shareowner servicing fees 90.2 49.3 259.6 171.6
Other 17.0 15.9 43.1 48.0
------------ ------------ ------------ ------------
Total 609.5 361.6 1,717.6 1,221.6
------------ ------------ ------------ ------------
Operating expenses:
Compensation 138.3 78.0 387.3 257.8
Marketing and promotion 22.3 22.4 77.0 72.4
Third party concession fees 83.4 53.4 237.1 181.1
Depreciation and amortization 21.5 35.0 57.0 92.0
Professional services 17.0 9.9 49.0 34.7
Other 34.6 31.5 117.1 100.4
Severance, facility closing and other costs 40.3
------------ ------------ ------------ ------------
Total 317.1 230.2 924.5 778.7
------------ ------------ ------------ ------------
Operating income 292.4 131.4 793.1 442.9
Equity in earnings of unconsolidated affiliates 14.3 15.8 48.9 58.0
Interest expense - Kansas City Southern Industries, Inc. (0.7)
Interest expense - third parties (1.9) (7.0) (5.1) (21.8)
Gain on litigation settlement 44.2
Gain on sale of Janus Capital Corporation
common stock 15.1
Other, net 10.7 5.0 32.1 18.1
------------ ------------ ------------ ------------
Income before taxes and minority interest 315.5 145.2 927.6 497.2
Income tax provision 114.2 47.2 330.8 170.7
Minority interest in consolidated earnings 31.2 71.2 86.3 97.9
------------ ------------ ------------ ------------
Net income $170.1 $ 26.8 $ 510.5 $ 228.6
============ ============ ============ ============
Per Share Data (Note 3):
Weighted Average Common shares
outstanding (in thousands) 223,407 220,462 223,163 219,685
Basic Earnings per share $0.76 $0.12 $2.29 $1.04
Diluted Common shares
outstanding (in thousands) 229,297 224,390 225,126 224,612
Diluted Earnings per share $ 0.73 $0.11 $2.23 $0.99
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)
Nine months ended September 30,
------------------------------------------
2000 2001
--------------- --------------
Cash flows provided by (used for):
Operating activities:
Net income $ 510.5 $ 228.6
Adjustments to net income:
Depreciation and amortization 57.0 92.0
Deferred income taxes 25.2 25.8
Minority interest in consolidated earnings 86.3 97.9
Equity in undistributed earnings of unconsolidated affiliates (48.9) (58.0)
Lease and equipment charges associated with facility closing 20.5
Gain on sale of Janus Capital Corporation common stock (15.1)
Employee deferred compensation (2.7) (2.9)
Deferred commissions (63.2) (3.1)
Changes in other assets (8.4) (27.9)
Changes in working capital items:
Accounts receivable (69.6) 71.1
Other current assets (6.8) (6.0)
Accounts payable and accrued compensation and benefits 34.4 (42.2)
Income taxes payable, accrued liability to third party administrators
and other accrued liabilities 169.0 59.4
Other, net (3.0) 15.0
-------------- --------------
Net operating 664.7 470.2
-------------- --------------
Investing activities:
Property acquisitions (96.4) (26.7)
Investments in affiliates (89.0) (979.0)
Sale of investments in advised funds 14.0 0.4
Purchase of investments in advised funds (22.6) (4.6)
Other, net 8.5 6.3
-------------- --------------
Net investing (185.5) (1,003.6)
-------------- --------------
(185.5)
Financing activities:
Proceeds from borrowing under credit facilities 225.0
Proceeds from issuance of zero-coupon convertible notes 690.0
Repayment of credit facilities (125.0) (225.0)
Debt issuance costs (16.4)
Common stock repurchased (154.0)
Proceeds from stock plans 22.2 23.1
Amounts treated as transfers from Parent 6.4
Distributions to minority interest (26.9) (87.1)
Dividends paid to shareholders (6.6)
Other, net 2.8 (3.5)
-------------- --------------
Net financing (274.5) 599.5
-------------- --------------
Cash and cash equivalents:
Net increase 204.7 66.1
At beginning of year 324.1 364.3
-------------- --------------
At end of period $ 528.8 $ 430.4
============== ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Changes in Stockholders' Equity
(Dollars in millions)
(Unaudited)
Additional Net investment Accumulated other Total
Common paid-in by Retained comprehensive stockholders'
stock capital Parent earnings income equity
----- ------- ------ -------- ------ ------
Balance at December 31, 1999 $ - $ - $ 106.8 $ 598.9 $ 108.9 $ 814.6
Comprehensive income:
Net income 663.7
Net unrealized gain on investments 1.3
Less: reclassification adjustment
for gains included in net income (5.8)
Foreign currency translation
adjustment (1.1)
Comprehensive income 658.1
Amounts treated as dividends
to Parent (115.4) (115.4)
222,999.786 - to - 1 stock split 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 228.6
Net unrealized loss on investments (58.4)
Less: reclassification adjustment
for gains included in net income (1.7)
Foreign currency translation
adjustment 1.8
Comprehensive income 170.3
Common stock options and
benefit plans 51.2 51.2
Common stock repurchased (8.3) (8.3)
Common stock dividends (4.4) (4.4)
---------- ------------- ------------- ----------- ------------ -----------
Balance at September 30, 2001 $ 2.2 $ - $ - $ 1,219.4 $ 45.0 $ 1,266.6
========== ============= ============= =========== ============ ===========
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. In the opinion of the management of Stilwell Financial Inc. (the "Company"
or "Stilwell"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting of normal closing
procedures) necessary to present fairly the financial position of the
Company and its subsidiary companies as of December 31, 2000 and September
30, 2001, the results of operations for the three and nine months ended
September 30, 2000 and 2001, and the cash flows for the nine months ended
September 30, 2000 and 2001. The consolidated condensed balance sheet as of
December 31, 2000 was derived from the audited financial statements of the
Company, but does not include all disclosures required by generally
accepted accounting principles.
The primary entities comprising Stilwell as of September 30, 2001
were: Janus Capital Corporation ("Janus"), an approximate 91.6% owned
subsidiary (prior to acquisition of additional Janus shares in November
2001 - see Note 15); 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 81% owned subsidiary;
and DST Systems, Inc. ("DST"), an equity investment in which SMI holds an
approximate 34% interest. Janus is the principal business comprising
Stilwell, representing 96% of assets under management at September 30,
2001, and 95% of revenues and 92% of net income for the nine months ended
September 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 nine months ended
September 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. 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 September 30, Nine months ended September 30,
--------------------------------------- ---------------------------------------
2000 2001 2000 2001
----------------- ---------------- ---------------- -----------------
(dollars in millions, except per
share data)
Net income $ 170.1 $ 26.8 $ 510.5 $ 228.6
Dilutive securities at
subsidiaries and affiliates (2.9) (2.2) (7.9) (7.3)
----------------- ---------------- ---------------- -----------------
Adjusted net income $ 167.2 $ 24.6 $ 502.6 $ 221.3
----------------- ---------------- ---------------- -----------------
Weighted average common
shares outstanding 223,407,288 220,461,626 223,162,787 219,684,693
Incremental shares from
assumed conversion of stock
options 5,889,224 3,928,383 1,963,075 4,926,921
----------------- ---------------- ---------------- -----------------
Diluted average common
shares outstanding 229,296,512 224,390,009 225,125,862 224,611,614
----------------- ---------------- ---------------- -----------------
Basic Earnings per Common
share $ 0.76 $ 0.12 $ 2.29 $ 1.04
================= ================ ================ =================
Diluted Earnings per Common
share $ 0.73 $ 0.11 $ 2.23 $ 0.99
================= ================ ================ =================
The following weighted average of options to purchase shares of
Stilwell common stock were excluded from the computation of diluted
earnings per share for the respective period because the exercise prices
were greater than the average market prices of the common shares:
Three months ended September 30, Nine months ended September 30,
---------------------------------- ----------------------------------
2000 2001 2000 2001
---------------- ------------ --------------- ------------
135,350 1,633,006 45,117 1,097,759
In addition, diluted earnings per share exclude 15,965,754 shares of
common stock reserved for issuance upon conversion of the zero-coupon
convertible notes due 2031 (see Note 12 below).
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 September 30, 2001.
Condensed consolidated financial information for DST is shown below:
December 31, 2000 September 30, 2001
----------------------- -----------------------
(dollars in millions)
Percentage ownership 32.5% 33.7%
Carrying value (a) $ 509.3 $ 436.3
Equity in DST net assets $ 509.3 $ 436.3
Fair market value (b) $ 2,717.7 $ 1,754.4
Financial condition:
Current assets $ 590.7 $ 689.3
Non-current assets 1,961.7 1,806.5
---------------- ------------------
Total assets $ 2,552.4 $ 2,495.8
================ ==================
7
Current liabilities $ 356.2 $ 704.8
Non-current liabilities 630.4 496.8
Stockholders' equity 1,565.8 1,294.2
---------------- ------------------
Total liabilities and stockholders' equity $ 2,552.4 $ 2,495.8
================ ==================
Three months Nine months
ended September 30, ended September 30,
--------------------------------- --------------------------------
2000 (c) 2001 (d) 2000 (c) 2001 (d)
-------------- -------------- --------------- -------------
Operating results:
Revenues $ 335.5 $ 420.8 $ 1,012.9 $ 1,243.4
Costs and expenses $ 269.6 $ 350.6 $ 819.2 $ 1,018.0
Net income $ 44.8 $ 48.6 $ 148.2 $ 176.9
(a) During the nine months ended September 30, 2001, the Company recorded
approximately $67.7 million in goodwill relating to the DST investment
as a result of DST stock repurchases. Of this total, approximately
$27.9 million was recorded subsequent to the adoption of FAS 141 and
FAS 142 on July 1, 2001 and, as a result, will not be amortized (see
Note 13 below). Stilwell had approximately $91.1 million in goodwill
(net of accumulated amortization) related to its investment in DST as
of September 30, 2001.
(b) Based on DST's closing price on the New York Stock Exchange.
(c) Net income includes after-tax gains of approximately $0.1 million and
$14.7 million in the three and nine months ended September 30, 2000,
respectively, from settlement of litigation with a former DST equity
affiliate and sales of marketable securities.
(d) Net income includes after-tax gains of approximately $1.2 million and
$25.6 million in the three and nine months ended September 30, 2001,
respectively, 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 $244.7
million and $57.3 million at September 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):
Nine months
ended September 30,
-------------------------
2000 (a) 2001 (b)
--------- ---------
Interest paid $ 3.8 $ 9.6
Income taxes paid $ 175.9 $ 73.2
(a) For the nine months ended September 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 September 30, Nine months ended September 30,
---------------------------------------- ----------------------------------------
2000 2001 2000 2001
-------------- -------------- -------------- --------------
(dollars in
millions)
Unrealized gain (loss) recorded
in investments $ 27.5 $ (23.3) $ 37.1 $ (96.0)
Deferred income taxes (10.5) 9.3 (14.2) 37.6
-------------- ------------- -------------- --------------
Unrealized gain (loss) recorded
in accumulated other
comprehensive income
17.0 (14.0) 22.9 (58.4)
Less: reclassification
adjustment for (gains)
losses included in net
income 0.1 (0.9) (1.0) (1.7)
Foreign currency translation
adjustment (0.6) 5.2 (3.2) 1.8
Net income 170.1 26.8 510.5 228.6
-------------- ------------- -------------- --------------
Comprehensive income $ 186.6 $ 17.1 $ 529.2 $ 170.3
============== ============= ============== ==============
During the nine months ended September 30, 2000 and 2001, Stilwell recorded
approximately $3.6 million and $10.2 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
substantially all 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
September 30, 2000
------------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
----------- ------- ------------
Revenues $ 604.0 $ 5.5 $ 609.5
Operating expenses 307.3 9.8 317.1
---------- --------- ----------
Operating income (loss) 296.7 (4.3) 292.4
Equity earnings of
unconsolidated affiliates 14.3 14.3
Interest expense - third parties (1.9) (1.9)
Other, net 5.4 5.3 10.7
---------- --------- ----------
Pretax income 302.1 13.4 315.5
Income tax provision (benefit) 114.8 (0.6) 114.2
Minority interest 31.3 (0.1) 31.2
---------- --------- ----------
Net income $ 156.0 $ 14.1 $ 170.1
========== ========= ==========
Three months ended
September 30, 2001
-----------------------------------------------
Nelson, DST
Janus and DST and Consolidated
Berger Other Stilwell
--------- ----------- ------------
Revenues $ 357.1 $ 4.5 $ 361.6
Operating expenses 205.3 24.9 230.2
---------- --------- -----------
Operating income (loss) 151.8 (20.4) 131.4
Equity earnings of
unconsolidated affiliates 15.8 15.8
Interest expense - third parties (7.0) (7.0)
Other, net 0.9 4.1 5.0
---------- --------- -----------
Pretax income (loss) 152.7 (7.5) 145.2
Income tax provision (benefit) 54.0 (6.8) 47.2
Minority interest 71.5 (0.3) 71.2
---------- --------- -----------
Net income (loss) $ 27.2 $ (0.4) $ 26.8
==========- ========== ===========
10
Nine months ended
September 30, 2000
------------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
--------- --------- ------------
Revenues $ 1,701.4 $ 16.2 $ 1,717.6
Operating expenses 890.1 34.4 924.5
---------- --------- ----------
Operating income (loss) 811.3 (18.2) 793.1
Equity earnings of
unconsolidated affiliates 1.1 47.8 48.9
Interest expense - Parent (0.7) (0.7)
Interest expense - third parties (5.1) (5.1)
Gain on litigation settlement 44.2 44.2
Gain on sale of Janus common stock 15.1 15.1
Other, net 16.6 15.5 32.1
---------- --------- ----------
Pretax income 829.0 98.6 927.6
Income tax provision 314.7 16.1 330.8
Minority interest 86.6 (0.3) 86.3
---------- --------- ----------
Net income $ 427.7 $ 82.8 $ 510.5
========== ========= ==========
Nine months ended
September 30, 2001
-----------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
--------- ----------- ------------
Revenues $ 1,207.0 $ 14.6 $ 1,221.6
Operating expenses 719.0 59.7 778.7
---------- --------- ----------
Operating income (loss) 488.0 (45.1) 442.9
Equity earnings of
unconsolidated affiliates 58.0 58.0
Interest expense - third parties (0.9) (20.9) (21.8)
Other, net 7.0 11.1 18.1
---------- --------- ----------
Pretax income 494.1 3.1 497.2
Income tax provision (benefit) 181.0 (10.3) 170.7
Minority interest 98.6 (0.7) 97.9
----------- --------- ----------
Net income $ 214.5 $ 14.1 $ 228.6
========== ========= ==========
11
Total assets for each of the segments were as follows (in millions):
December 31, 2000 September 30, 2001
----------------- ------------------
Janus and Berger $ 723.4 $ 442.9
Nelson, DST and Other 857.6 2,213.8
------------------ -----------------
Consolidated Stilwell $ 1,581.0 $ 2,656.7
================== =================
The increase in total assets in the Nelson, DST and Other segment
reflect the goodwill and intangible assets associated with the purchases of
Janus shares of common stock during the nine months ended September 30,
2001 (see Note 7).
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the nine months ended September 30 (in
millions):
2000 2001
---- ----
Revenues (1):
United States $ 1,667.0 $ 1,163.0
United Kingdom 50.6 58.6
----------- -----------
Total $ 1,717.6 $ 1,221.6
=========== ===========
Long-lived assets:
United States $ 372.2 $ 1,537.7
United Kingdom 34.4 40.5
----------- -----------
Total $ 406.6 $ 1,578.2
=========== ===========
(1) Revenues are attributed to countries based on location at which services
are performed.
7. During the nine months ended September 30, 2001, Stilwell completed several
transactions that increased Stilwell's ownership interest in Janus to
approximately 91.6% (see Note 15 for acquisition of additional Janus shares
in November 2001).
Stilwell acquisition of Janus shares from Thomas H. Bailey. On
May 1, 2001, Stilwell acquired 600,000 shares of Janus common stock
from Thomas H. Bailey, Janus' Chairman, Chief Executive Officer and
President, pursuant to the exercise of put rights by Mr. Bailey under
the 1984 Stock Purchase Agreement ("Janus Stock Purchase Agreement").
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 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 by the various minority stockholders. The purchase price for
the shares totaled
12
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.
Janus purchases of shares of Janus common stock from employees. On
September 4, 2001, Janus purchased from employees (other than Mr. Bailey)
approximately 139,000 shares of Janus common stock at a cost of
approximately $139.8 million using available cash. As discussed in Note 13
below, the Company adopted FAS 141 and FAS 142 (both of which are defined
in Note 13) for all transactions occurring on or after July 1, 2001.
Accordingly, the intangible assets and goodwill attributable to this
transaction were recorded as follows (in millions):
Identified intangible assets - subject
to amortization (1) $ 31.7
Identified intangible assets -
not subject to amortization (2) 31.7
Goodwill (3) 87.6
-----------------------
Total $ 151.0
=======================
(1) These amounts, representing customer lists and relationships, and
other contract-based intangible assets, will be amortized over an
estimated weighted average period of 20 years.
(2) These amounts represent retail advisory arrangements with the
various Janus funds, brand name and other non-contractual or legal
right-based intangible assets currently determined to have an
indefinite life
(3) Total includes approximately $24.2 million representing goodwill
associated with deferred income taxes recorded for identifiable
intangible assets based on the difference between the book and tax
bases
As these transactions were completed late in third quarter 2001,
amortization expense that would have otherwise been recorded if the Company
had not adopted FAS 141 and FAS 142 was not material to the consolidated
results of operations or financial position of the Company for the three
and nine months ended September 30, 2001. 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.
Net effect of transactions. With the completion of the purchase of the
802,042 shares of Janus common stock by Stilwell and the approximately
139,000 shares by Janus, Stilwell's ownership of Janus increased to
approximately 91.6%. Mr. Bailey owned approximately 6.2% and more than 150
other Janus employees owned the remaining 2.2% (see Note 15 regarding
Stilwell's acquisition of Mr. Bailey's remaining shares in November 2001).
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' goal of broadening corporate equity ownership, will
be eligible to receive future grants of Janus stock in connection with the
Janus Long Term Incentive Plan.
13
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' 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.
Janus initially recorded accruals in connection with these charges of
approximately $7.2 million for severance, $9.4 million for lease and
related costs and $9.7 million for miscellaneous abandonment costs.
Approximately $2.0 million for severance, $6.5 million for lease and
related costs and $7.0 million for miscellaneous abandonment costs are
included in the consolidated condensed balance sheet at September 30, 2001.
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 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. Certain stock purchase agreements and restriction agreements with minority
stockholders (other than Mr. Bailey) contain provisions whereby upon the
occurrence of a Change in Ownership (as defined in such agreements) of KCSI
or Stilwell (depending on the year of grant), Stilwell may be required to
purchase such holders' Janus stock. 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'
14
Janus common stock after a Change in Ownership as of September 30, 2001,
the purchase price would have been approximately $218 million.
As of September 30, 2001, Stilwell had $350 million in credit
facilities available and had cash balances at the Stilwell holding company
level of approximately $345 million (see Note 15 regarding use of
approximately $200 million of cash in connection with the acquisition of
Janus shares in November 2001). The market value of Stilwell's 34%
investment in DST was more than $1.7 billion using DST's closing price on
the New York Stock Exchange on September 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 to raise additional sums.
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.
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 the credit rating assigned to the Convertible
Notes by either Moody's Investor Services or Standard & Poor's 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 (but not limited to) the 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 ("SEC") on
July 30, 2001.
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 Financial Accounting Standards
No. 141, "Business Combinations" ("FAS 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS
142"). FAS 141 requires the purchase method of accounting for all
acquisitions. 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. Stilwell adopted
the provisions of FAS 141 and FAS 142 for acquisitions occurring on or
after July 1, 2001. With respect to transactions occurring prior to July 1,
2001, FAS 141 and FAS 142 will be adopted on January 1, 2002. The Company
is currently evaluating the impact that adoption of these provisions for
transactions that occurred prior to July 1, 2001 will have on its financial
statements.
15
14. On September 18, 2001, the Company filed with the SEC a Shelf Registration
Statement ("Registration Statement") for the issuance from time to time of
up to $800 million in aggregate issue price of the Company's common stock,
preferred stock and debt securities. The SEC declared the Registration
Statement effective on September 24, 2001. On November 6, 2001, the Company
issued $400 million of 7% senior notes due November 1, 2006 ("Senior
Notes") under the Registration Statement. The Senior Notes are not
redeemable prior to maturity and pay interest semi-annually on the 1st day
of November and May, beginning on May 1, 2002. The Company received
approximately $396.1 million after discount at issuance, underwriters'
discount and certain offering expenses. The proceeds were used to fund a
portion of the cost to acquire the 609,950 shares of Janus shares as
discussed in Note 15. The Company has $400 million of securities available
for issuance under the Registration Statement, subject to the covenant
limitations pursuant to the credit facilities.
15. On November 9, 2001, Stilwell completed the acquisition of 609,950 shares
of Janus common stock owned by Mr. Bailey and one other minority
stockholder. The acquisitions of the common stock by Stilwell, which were
pursuant to put rights held by Mr. Bailey and the other minority
stockholder that were included in the Janus Stock Purchase Agreement, cost
approximately $613 million and were funded using proceeds from Stilwell's
Senior Note issuance and existing cash.
With the completion of these transactions, Stilwell owns approximately
98% of Janus, with the remainder owned by Janus employees. In addition, all
mandatory put rights to Stilwell associated with Janus stock were
eliminated. Mr. Bailey is expected to continue in his senior executive role
with Janus, which will be unaffected by the transaction.
In third quarter 2001, Stilwell recorded a one-time non-cash increase
to minority interest of approximately $64 million in connection with its
commitment to purchase the 609,950 shares of Janus common stock. This
commitment dates back to the initial purchase of Janus common stock in 1984
and results from put rights held by Mr. Bailey and one other minority
stockholder that use Janus' earnings from the prior calendar year to
determine the price of the shares. Therefore, the contractual price to be
paid is computed using the results from Janus' record year in 2000. Based
on the decline in Janus' earnings during 2001 compared to 2000, accounting
guidelines require an evaluation of whether the contractual put price of
the purchase commitment exceeds fair value. After consultation with third
party valuation professionals, this charge was deemed necessary and is
recorded as an increase to minority interest. Upon completion of the
acquisition of the Janus shares, the intangible assets and goodwill to be
recorded were reduced by the amount of this charge.
In connection with the foregoing transactions, a portion of the shares
of restricted Janus common stock held by other minority stockholders became
vested pursuant to stock purchase and restriction agreements that require
the acceleration of vesting upon the sale of Mr. Bailey's remaining Janus
shares.
Most of the revenues of Janus are derived pursuant to investment
advisory agreements with its respectively managed mutual funds and other
separate and private accounts. With respect to agreements with mutual
funds, these investment advisory agreements may be terminated by either
party with notice, or terminated in the event of an "assignment" (as
defined in the Investment Company Act of 1940 as amended (the "1940 Act")),
and must be approved and renewed annually by the disinterested members of
each fund's board of directors or trustees, or its shareowners, as required
by law. In addition, the board of trustees or directors of certain funds
and separate and private accounts of Janus generally may terminate these
investment advisory agreements upon written notice for any reason.
Generally, any change in control of Janus would constitute an "assignment"
under the 1940 Act.
Under the 1940 Act, "control" is defined as the "power to exercise a
controlling influence over the management or policies of a company, unless
such power is solely the result of an official position with the company."
The 1940 Act establishes a presumption that any person who owns less than
25% of the voting securities of a company does not control that company.
Because Mr. Bailey owns less than 25% of Janus, he is
16
presumed to not control Janus. That presumption can be rebutted by
evidence, but under the 1940 Act, it continues until the SEC issues an
order determining that the presumption has been rebutted. The SEC has
issued such an order in the past with regard to a holder of less than 25%
of the voting securities of a company, but on facts much different from Mr.
Bailey's circumstances.
Stilwell and Janus have advised the trustees for the Janus Investment
Fund, the Janus Adviser Series and the Janus Aspen Series (the "Trustees")
that they believe the sale of Mr. Bailey's remaining shares to Stilwell
would not cause an assignment of the advisory agreements with Janus. The
Trustees have, however, carefully considered Mr. Bailey's involvement in
Janus' development since its inception and his significant involvement in
all management decisions at Janus as well as the influence he has exerted
over Janus pursuant to his rights under the Janus Stock Purchase Agreement.
To avoid any uncertainty on this issue, the Trustees, Stilwell and Janus
believe that it is prudent and in the best interest of the trust for each
fund to obtain shareholder approval of new advisory agreements with Janus,
the terms of which are in all material respects the same as the current
advisory agreements with Janus. In addition, Janus has approximately 50
subadvisory relationships and, of these 50, about half have determined to
secure shareholder approval of new advisory agreements with Janus. On
November 8, 2001, Stilwell reached agreement with Mr. Bailey to extend his
above-described rights under the Janus Stock Purchase Agreement to March
28, 2002, which is the date that it is expected the shareholder approval
process will be completed. The required vote is the lesser of (a) 67% or
more of the shares of a fund present at the meeting if the owners of more
than 50% of the fund then outstanding are present in person or by proxy or
(b) more than 50% of the outstanding shares of a fund entitled to vote at
the meeting. Contingent upon receipt of shareholder approval, the new
advisory agreements would be effective March 28, 2002 and would continue in
effect until July 1, 2002. Thereafter, the advisory agreements would
continue in effect for successive annual periods provided their continuance
were approved at least annually by: (1) a majority vote, cast in person and
a meeting called for that purpose, of the trustees, or (2) a vote of the
holders of a majority of the outstanding voting securities (as defined by
the 1940 Act) of each fund and in either event by a majority of the
trustees who are not "interested persons," as defined in the 1940 Act, of
Janus.
While there is nothing to suggest that the required approval will not
be secured, Stilwell cannot assure that approval of the new advisory
agreements with the funds by the shareholders of all funds, or of all
subadvised funds, will be obtained. If the shareholders of a fund do not
approve of that fund's new advisory agreement with Janus, the trustees for
the fund would have to seek to obtain interim advisory services for the
fund from another advisory organization. Thereafter, the trustees would
either negotiate a new investment advisory agreement with a new advisory
organization selected by the trustees or make other appropriate
arrangements, in either event subject to approval by such fund's
shareholders.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
The discussion set forth below and other portions of this Form 10-Q
contain statements concerning potential future events. Such forward-looking
comments are based upon information currently available to management and
management's perception thereof as of the date of this Form 10-Q. Readers can
identify these forward-looking comments by their use of such verbs as expects,
anticipates, believes or similar verbs or conjugations of such verbs. The actual
results of operations of Stilwell Financial Inc. (the "Company" or "Stilwell")
could materially differ from those indicated in forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 and the Information
Statement that was included as an exhibit to the Registration Statement on Form
10 dated June 15, 2000, both of which are on file with the U.S. Securities and
Exchange Commission (File No. 001-15253) and are hereby incorporated by
reference herein. Readers are strongly encouraged to consider these factors when
evaluating any such forward-looking comments. The Company will not update any
forward-looking comments set forth in this Form 10-Q.
The discussion herein is intended to clarify and focus on the Company's
results of operations, certain changes in financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
condensed financial statements included under Item 1 of this Form 10-Q. This
discussion should be read in conjunction with these consolidated condensed
financial statements and the related notes thereto and is qualified by reference
thereto.
Within this Management's Discussion and Analysis of Financial Condition
and Results of Operations, historical transactions and events (i.e., occurring
prior to July 12, 2000) involving the financial services segment of Kansas City
Southern Industries, Inc. ("KCSI"), which is now Stilwell, are discussed as if
Stilwell were the entity involved in the transaction or event, unless otherwise
indicated. In addition, intercompany transactions between Stilwell and KCSI up
to and including July 12, 2000 are reflected as dividends to or transfers from
KCSI. Since the financial services business was operated as part of KCSI prior
to July 12, 2000, such financial information and statements may not necessarily
reflect the results of operations or financial position of Stilwell or what the
results of operations would have been if Stilwell had been a separate,
independent company during those periods.
Stilwell, a Delaware Corporation formed in 1998 by KCSI, is a holding
company for a group of businesses and investments in the financial services
industry, including the following:
o Janus Capital Corporation ("Janus"), an approximately 98% owned subsidiary
(with the completion of the acquisition of shares on November 9, 2001 -
see below);
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary;
o Berger LLC ("Berger"), of which SMI owns 100% of the preferred limited
liability company interests and approximately 87% of the regular
limited liability company interests;
o Nelson Money Managers Plc ("Nelson"), an 81% owned subsidiary;
o DST Systems, Inc. ("DST"), an equity investment in which SMI owns an
approximate 34% 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.
18
SIGNIFICANT DEVELOPMENTS
Stilwell Purchase of Janus Shares from Thomas H. Bailey. On November 9,
2001, Stilwell completed the acquisition of 609,950 shares of Janus common stock
owned by Thomas H. Bailey, Janus' President, Chairman and Chief Executive
Officer, and one other minority stockholder. The acquisitions of the common
stock by Stilwell, which were pursuant to put rights held by Mr. Bailey and the
other minority stockholder that were included in the 1984 Stock Purchase
Agreement (the "Janus Stock Purchase Agreement"), cost approximately $613
million and were funded using proceeds from Stilwell's Senior Note issuance and
existing cash.
With the completion of these transactions, Stilwell owns approximately 98%
of Janus, with the remainder owned by Janus employees. In addition, all
mandatory put rights to Stilwell associated with Janus stock were eliminated.
Mr. Bailey is expected to continue in his senior executive role with Janus,
which will be unaffected by the transaction.
In third quarter 2001, Stilwell recorded a one-time non-cash increase to
minority interest of approximately $64 million in connection with its commitment
to purchase the 609,950 shares of Janus common stock. This commitment dates back
to the initial purchase of Janus common stock in 1984 and results from put
rights held by Mr. Bailey and one other minority stockholder that use Janus'
earnings from the prior calendar year to determine the price of the shares.
Therefore, the contractual price to be paid is computed using the results from
Janus' record year in 2000. Based on the decline in Janus' earnings during 2001
compared to 2000, accounting guidelines require an evaluation of whether the
contractual put price of the purchase commitment exceeds fair value. After
consultation with third party valuation professionals, this charge was deemed
necessary and is recorded as an increase to minority interest. Upon completion
of the acquisition of the Janus shares, the intangible assets and goodwill to be
recorded were reduced by the amount of this charge.
In connection with the foregoing transactions, a portion of the shares of
restricted Janus common stock held by other minority stockholders became vested
pursuant to stock purchase and restriction agreements that require the
acceleration of vesting upon the sale of Mr. Bailey's remaining Janus shares.
Most of the revenues of Janus are derived pursuant to investment advisory
agreements with its respectively managed mutual funds and other separate and
private accounts. With respect to agreements with mutual funds, these investment
advisory agreements may be terminated by either party with notice, or terminated
in the event of an "assignment" (as defined in the Investment Company Act of
1940 as amended (the "1940 Act")), and must be approved and renewed annually by
the disinterested members of each fund's board of directors or trustees, or its
shareowners, as required by law. In addition, the board of trustees or directors
of certain funds and separate and private accounts of Janus generally may
terminate these investment advisory agreements upon written notice for any
reason. Generally, any change in control of Janus would constitute an
"assignment" under the 1940 Act.
Under the 1940 Act, "control" is defined as the "power to exercise a
controlling influence over the management or policies of a company, unless such
power is solely the result of an official position with the company." The 1940
Act establishes a presumption that any person who owns less than 25% of the
voting securities of a company does not control that company. Because Mr. Bailey
owns less than 25% of Janus, he is presumed to not control Janus. That
presumption can be rebutted by evidence, but under the 1940 Act, it continues
until the Securities and Exchange Commission ("SEC") issues an order determining
that the presumption has been rebutted. The SEC has issued such an order in the
past with regard to a holder of less than 25% of the voting securities of a
company, but on facts much different from Mr. Bailey's circumstances.
Stilwell and Janus have advised the trustees for the Janus Investment
Fund, the Janus Adviser Series and the Janus Aspen Series (the "Trustees") that
they believe the sale of Mr. Bailey's remaining shares to Stilwell would not
cause an assignment of the advisory agreements with Janus. The Trustees have,
however, carefully considered Mr. Bailey's involvement in Janus' development
since its inception and his significant involvement in
19
all management decisions at Janus as well as the influence he has exerted over
Janus pursuant to his rights under the Janus Stock Purchase Agreement. To avoid
any uncertainty on this issue, the Trustees, Stilwell and Janus believe that it
is prudent and in the best interest of the trust for each fund to obtain
shareholder approval of new advisory agreements with Janus, the terms of which
are in all material respects the same as the current advisory agreements with
Janus. In addition, Janus has approximately 50 subadvisory relationships and, of
these 50, about half have determined to secure shareholder approval of new
advisory agreements with Janus. Stilwell reached agreement with Mr. Bailey to
extend his above-described rights under the Janus Stock Purchase Agreement to
March 28, 2002, which is the date that it is expected the shareholder approval
process will be completed. The required vote is the lesser of (a) 67% or more of
the shares of a fund present at the meeting if the owners of more than 50% of
the fund then outstanding are present in person or by proxy or (b) more than 50%
of the outstanding shares of a fund entitled to vote at the meeting. Contingent
upon receipt of shareholder approval, the new advisory agreements would be
effective March 28, 2002 and would continue in effect until July 1, 2002.
Thereafter, the advisory agreements would continue in effect for successive
annual periods provided their continuance were approved at least annually by:
(1) a majority vote, cast in person and a meeting called for that purpose, of
the trustees, or (2) a vote of the holders of a majority of the outstanding
voting securities (as defined by the 1940 Act) of each fund and in either event
by a majority of the trustees who are not "interested persons," as defined in
the 1940 Act, of Janus.
While there is nothing to suggest that the required approval will not be
secured, Stilwell cannot assure that approval of the new advisory agreements
with the funds by the shareholders of all funds, or of all subadvised funds,
will be obtained. If the shareholders of a fund do not approve of that fund's
new advisory agreement with Janus, the trustees for the fund would have to seek
to obtain interim advisory services for the fund from another advisory
organization. Thereafter, the trustees would either negotiate a new investment
advisory agreement with a new advisory organization selected by the trustees or
make other appropriate arrangements, in either event subject to approval by such
fund's shareholders.
$400 Million Debt Offering. On November 6, 2001, the Company issued $400
million of 7% senior notes due November 1, 2006 ("Senior Notes"). The Senior
Notes are not redeemable prior to maturity and pay interest semi-annually on the
1st day of November and May, beginning on May 1, 2002. The Company received
approximately $396.1 million after discount at issuance, underwriter's discount
and certain offering expenses. The proceeds were used to fund a portion of the
cost to acquire the 609,950 shares of Janus shares as discussed above.
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 the
credit rating assigned to the Convertible Notes by either Moody's Investor
Services or Standard & Poor's 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 (but not limited to) 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
20
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.
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.
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 the nine months
ended September 30, 2001, Stilwell completed several transactions that increased
Stilwell's ownership interest in Janus to approximately 91.6% (see above
regarding acquisition of additional Janus shares in November 2001).
Stilwell acquisition of Janus shares from Thomas H. Bailey. On May 1,
2001, Stilwell acquired 600,000 shares of Janus common stock from Mr.
Bailey pursuant to the exercise of put rights by Mr. Bailey under the
Janus Stock Purchase Agreement. 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 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 by the various minority stockholders. 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.
21
Janus purchases of shares of Janus common stock from employees. On
September 4, 2001, Janus purchased from employees (other than Mr. Bailey)
approximately 139,000 shares of Janus common stock at a cost of approximately
$139.8 million using available cash. The Company adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("FAS 141") and Statement
of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets"
("FAS 142") for all transactions occurring on or after July 1, 2001.
Accordingly, the intangible assets and goodwill attributable to this transaction
were recorded as follows (in millions):
Identified intangible assets - subject
to amortization (1) $ 31.7
Identified intangible assets -
not subject to amortization (2) 31.7
Goodwill (3) 87.6
----------------------
Total $ 151.0
======================
(1) These amounts, representing customer lists and relationships, and
other contract-based intangible assets, will be amortized over a
weighted average period of 20 years.
(2) These amounts represent retail advisory arrangements with the various
Janus funds, brand name and other non-contractual or legal
right-based intangible assets currently determined to have an
indefinite life.
(3) Total includes approximately $24.2 million representing goodwill
associated with deferred income taxes recorded for identifiable
intangible assets based on the difference between the book and tax
bases
As these transactions were completed late in third quarter 2001,
amortization expense that would have otherwise been recorded if the Company had
not adopted FAS 141 and FAS 142 was not material to the consolidated results of
operations or financial position of the Company for the three and nine months
ended September 30, 2001. 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.
Net effect of transactions. With the completion of the purchase of the
802,042 shares of Janus common stock by Stilwell and the approximately 139,000
shares by Janus, Stilwell's ownership of Janus increased to approximately 91.6
%. Mr. Bailey owned approximately 6.2% and more than 150 other Janus employees
owned the remaining 2.2% (see above regarding Stilwell's acquisition of Mr.
Bailey's remaining shares in November 2001). 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' goal of broadening corporate
equity ownership, will be eligible to receive future grants of Janus stock in
connection with the Janus Long Term 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' 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.
22
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.
Janus initially recorded accruals in connection with these charges of
approximately $7.2 million for severance, $9.4 million for lease and related
costs and $9.7 million for miscellaneous abandonment costs. Approximately $2.0
million for severance, $6.5 million for lease and related costs and $7.0 million
for miscellaneous abandonment costs are included in the consolidated condensed
balance sheet at September 30, 2001.
The reductions in workforce and facility closings saved approximately
$0.03 per diluted share in third 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.
23
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared with the
Three Months Ended September 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 September 30,
-----------------------------------------------
2000 2001 (i)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 584.6 $ 341.0
SMI and Berger 19.4 16.1
--------------------- --------------------
Sub-total 604.0 357.1
Other 5.5 4.5
--------------------- --------------------
Total $ 609.5 $ 361.6
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 289.4 $ 149.5
SMI and Berger 7.3 2.3
--------------------- --------------------
Sub-total 296.7 151.8
Other (4.3) (20.4)
--------------------- --------------------
Total $ 292.4 $ 131.4
===================== ====================
Net income (loss):
Janus and Berger:
Janus (ii) $ 151.0 $ 25.6
SMI and Berger (iii) 5.0 1.6
--------------------- --------------------
Sub-total 156.0 27.2
--------------------- --------------------
Other:
DST (iii) 13.3 14.6
Other 0.8 (15.0)
--------------------- --------------------
Sub-total 14.1 (0.4)
--------------------- --------------------
Total $ 170.1 $ 26.8
===================== ====================
(i) Includes certain non-recurring items as follows: a) a one-time non-cash
$64.0 million increase to minority interest as discussed in "Significant
Developments" above; and b) $0.3 million in additional equity earnings of
DST representing Stilwell's proportionate share of DST non-recurring gains
in connection with sales of marketable equity securities during third
quarter 2001.
(ii) Janus net income is reported after minority interest of approximately $31.3
and $71.5 million for the three months ended September 30, 2000 and 2001,
respectively.
(iii) Stilwell's investment in DST is held by SMI.
24
Assets under management at September 30, 2000, December 31, 2000 and
September 30, 2001 were as follows (in billions):
September 30, December 31, September 30,
2000 2000 2001
--------------- ----------------- ---------------
Janus:
Janus Advised Funds:
Janus Investment Fund $ 203.9 $ 162.2 $ 99.0
Janus Aspen Series (i) 25.8 22.7 16.2
Janus Adviser Series (i) 1.6 1.8 2.6
Janus Money Market Funds 11.4 12.2 17.0
Janus World Funds plc 4.1 3.6 2.6
--------------- ----------------- ---------------
Total Janus Advised Funds 246.8 202.5 137.4
Janus Sub-Advised Funds and Private
Accounts 58.6 46.3 27.1
--------------- ----------------- ---------------
Total Janus 305.4 248.8 164.5
--------------- ----------------- ---------------
Berger:
Berger Funds 7.7 6.0 4.7
Berger Sub-Advised Funds and Private
Accounts 1.1 1.6 1.3
--------------- ----------------- ---------------
Total Berger 8.8 7.6 6.0
--------------- ----------------- ---------------
Nelson 1.3 1.4 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 315.5 $ 257.8 $ 171.8
=============== ================= ===============
(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 $26.8 million in third quarter 2001 compared to $170.1
million in third quarter 2000. Exclusive of the one-time items in third quarter
2001 as discussed in note (i) in the earnings table above, earnings decreased
approximately $79.6 million, or 47%. This decrease reflects lower revenues
resulting from lower assets under management, an $11.9 million increase in
amortization expense associated with purchases of Janus common stock and higher
depreciation resulting from Janus' technology infrastructure development over
the last three years.
Average assets under management decreased 39% compared to prior year's
third quarter (from $324.2 billion to $198.0 billion), leading to a decline in
revenues from $609.5 million to $361.6 million in third quarter 2001. This
revenue decline contributed to a 55% decrease in operating income
quarter-to-quarter. Stilwell reported a consolidated operating margin of 36.3%
in third quarter 2001 compared to 48.0% in the prior year quarter. Despite this
decline, Stilwell's operating margin continues to exceed industry averages.
Stilwell's ability to maintain a strong operating margin reflects the savings
generated by Janus from its substantial reliance on increased electronic
shareowner servicing and earlier work force reductions. If the additional
amortization expense during the quarter associated with the purchase of Janus
shares in the first half of the year were excluded, the ongoing operating margin
for third quarter 2001 would be 39.6%.
25
JANUS AND BERGER
Assets under management for Janus and Berger totaled $170.5 billion, a
decrease of $48.3 billion since June 30, 2001. This decrease reflects market
depreciation of $43.9 billion and net cash redemptions of $4.4 billion. Since
December 31, 2000 and September 30, 2000, assets under management have declined
by approximately $85.9 billion and $143.7 billion, respectively, substantially
due to market depreciation associated with the general downturn in the various
markets and indices. Average assets under management for Janus and Berger during
third quarter 2001 totaled approximately $196.7 billion compared to $222.6
billion in second quarter 2001 and $322.8 billion in third quarter 2000. See the
brief discussions of Janus and Berger separately below.
Investment management fees for Janus and Berger decreased in third quarter
2001 compared to prior year's third 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,
reflecting consistent fee structures and a similar mix of assets under
management. Shareowner servicing fees and other revenues decreased $42.0 million
compared to prior year's third quarter, primarily due to declines in assets
under management and the termination by Janus of account-based fees for
shareowner accounts invested in funds that have been closed to new investors.
The operating margin for Janus and Berger decreased to 42.5% from 49.1% in
third quarter 2000. Operating expenses totaled $205.3 million for the three
months ended September 30, 2001 compared to $307.3 million in the prior year
quarter. Operating expenses with notable decreases quarter-to-quarter included
the following items: i) compensation, primarily due to reduced investment
performance-based incentive compensation and a decline in the average number of
employees quarter-to-quarter; 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. Depreciation and
amortization was relatively unchanged quarter-to-quarter.
Other income declined during the quarter largely as a result of reduced
interest income (from lower average cash balances and interest rates). Minority
interest in consolidated earnings increased from $31.3 million in third quarter
2000 to $71.5 million in third quarter 2001, reflecting the $64.0 million
non-recurring charge in connection with Stilwell's purchase commitment for the
609,950 shares of Janus common stock, partially offset by the decline in Janus
net income quarter-to-quarter.
NELSON, DST AND OTHER
Nelson's assets under management were essentially unchanged from June 30,
2001 and were down slightly from December 31, 2000. Assets under management in
British pounds decreased from (pound)908 million at December 31, 2000 to
(pound)864 million at September 30, 2001. As a result of increased marketing and
brand-awareness initiatives, the number of shareowner accounts has grown
approximately 9% since September 30, 2000. Because of the declining markets in
the United Kingdom, revenues decreased quarter-to-quarter, and, together with
costs associated with growth initiatives, the net loss from Nelson increased in
third 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.
Third quarter 2001 equity earnings from DST were $15.8 million versus
$14.3 million in third quarter 2000. This improvement was largely attributable
to higher earnings in DST's financial services segment. Consolidated DST
revenues increased 25%, primarily due to the inclusion of revenue from EquiServe
Limited Partnership ("EquiServe"), in which DST acquired controlling ownership
on March 30, 2001. Revenues also increased due to a higher number of shareowner
accounts serviced (totaling 75.2 million at September 30, 2001 compared to 74.8
million at June 30, 2001, 72.1 million at December 31, 2000 and 65.1 million at
September 30, 2000) and to
26
increased volumes in DST's Output Solutions segment from the financial
service and video service industries. DST's operating margin declined
quarter-to-quarter, partially due to the inclusion of EquiServe during 2001.
Other Stilwell operating expenses increased in the third 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.
Interest expense to third parties increased as a result of accreted
interest on the Convertible Notes and amortization of 25% of the approximately
$16.4 million in debt issue costs paid in connection with the Convertible Notes.
Nine Months Ended September 30, 2001 Compared with the Nine Months Ended
September 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):
Nine months ended September 30,
-----------------------------------------------
2000 (i) 2001 (ii)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 1,648.7 $ 1,158.6
SMI and Berger 52.7 48.4
--------------------- --------------------
Sub-total 1,701.4 1,207.0
Other 16.2 14.6
--------------------- --------------------
Total $ 1,717.6 $ 1,221.6
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 794.4 $ 480.7
SMI and Berger 16.9 7.3
--------------------- --------------------
Sub-total 811.3 488.0
Other (18.2) (45.1)
--------------------- --------------------
Total $ 793.1 $ 442.9
===================== ====================
Net income (loss):
Janus and Berger:
Janus (iii) $ 413.5 $ 209.4
SMI and Berger (iv) 14.2 5.1
--------------------- --------------------
Sub-total 427.7 214.5
--------------------- --------------------
Other:
DST (iv) 38.4 53.6
Other 44.4 (39.5)
--------------------- --------------------
Sub-total 82.8 14.1
--------------------- --------------------
Total $ 510.5 $ 228.6
===================== ====================
(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.
27
(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; c)
the Company recorded $8.4 million ($7.8 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 2001;
and d) the one-time $64.0 million charge in connection with the purchase
commitment for 609,950 shares of Janus common stock as described in
"Significant Developments" above.
(iii)Janus net income is reported after minority interest of approximately $86.6
and $98.6 million for the nine months ended September 30, 2000 and 2001,
respectively.
(iv) Stilwell's investment in DST is held by SMI.
The Company earned $228.6 million for the nine months ended September 30,
2001 compared to $510.5 million for the nine months ended September 30, 2000.
Exclusive of one-time items as noted in (i) and (ii) in the table above,
earnings decreased approximately $156.9 million, or 34%. This decrease reflects
lower revenues due to lower asset under management levels, an increase in
depreciation and amortization (as discussed in the third quarter above) and
interest expense associated with funding purchases of Janus common stock.
Average assets under management decreased 28% compared to prior year (from
$307.6 billion to $222.7 billion), leading to a $496.0 million (29%) decline in
revenues. Operating income decreased to $442.9 million for the nine months ended
September 30, 2001 (from $793.1 million during the comparable 2000 period).
Exclusive of one-time items, Stilwell reported an operating margin of 39.6% for
the nine months ended September 30, 2001 compared to 46.2% in 2000. This decline
reflects the ongoing pressures expected due to the lower level of assets under
management and resulting lower revenue totals, as well as to higher amortization
expense and certain components of expenses that are fixed.
JANUS AND BERGER
Average assets under management for Janus and Berger during the nine
months ended September 30, 2001 totaled $221.4 billion, approximately 28% 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 43.8% (exclusive of
severance, facility closing and other costs) from 47.7% in comparable 2000.
Operating expenses totaled $719.0 million ($678.7 million exclusive of one-time
items) for the nine months ended September 30, 2001 compared to $890.1 million
in the prior year period. Reduced operating expenses occurred in the same key
components identified in the third quarter discussion above. Compensation and
third party concession fees - the two largest components of Stilwell's operating
expenses - represented approximately 36% of revenues for the nine months ended
September 30, 2001, which is consistent with the experience in 2000.
Depreciation increased due to Janus' technology and operational infrastructure
efforts over the last three years, thereby pressuring the operating margin.
28
Other income declined and minority interest increased during the nine
months ended September 30, 2001 compared to 2000 for the same reasons identified
in the third 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.
Equity earnings from DST for the nine months ended September 30, 2001 were
$58.0 million versus $47.8 million in 2000. Exclusive of the one-time items
discussed above, equity earnings from DST increased $6.4 million to $49.6
million. This improvement was largely attributable to higher earnings in DST's
financial services segment, driven by increased revenues. In addition, during
the nine months ended September 30, 2001, DST purchased approximately 6.4
million shares of its common stock under its previously announced share
repurchase programs, which resulted in an increase in Stilwell's ownership
interest in DST from 33% to 34%.
Other Stilwell operating expenses increased over the comparable prior
year, primarily as a result of higher amortization expense resulting from the
Janus stock purchases. Interest expense to third parties increased by $16.7
million, as a result of the payment of approximately $7.0 million in interest
associated with the acquisition of 600,000 shares of Janus common stock from Mr.
Bailey in May 2001, together with the items identified in the third quarter
discussion.
Subsidiary Information
A brief discussion of significant Janus, Berger and Nelson items during
the nine months ended September 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 nine months ended
September 30, 2001, assets under management decreased by $84.3 billion
due to market depreciation of $77.7 billion and net cash outflows of $6.6
billion. Total Janus shareowner accounts remained relatively stable
during the period, declining less than 5% since December 31, 2000. While
operating margins declined during the nine months ended September 30,
2001 compared to the record levels experienced throughout 2000, Janus'
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 third quarter of 2001. 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' ongoing success.
During 2000, Janus closed five funds to new investors, 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'
ongoing focus to act in its shareowners' best interests.
29
Berger
------
Berger assets under management decreased by $1.6 billion during the nine
months ended September 30, 2001, reflecting net cash inflows of $0.6
billion, partially offset by market depreciation of $2.2 billion.
Berger's ability to maintain net cash inflows during the year, as well as
to increase its shareowner accounts to more than 274,000, 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 third quarter and year to date 2001, primarily due to increases in
third-party concession costs based on growth in assets through such
arrangements.
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 September 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 through the first nine months 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 third
quarter and year to date 2001 declined from the record 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.
30
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
Nine months ended September 30,
------------------------------------------
2000 2001
---------------- -----------------
Cash flows provided by (used for):
Operating activities $ 664.7 $ 470.2
Investing activities (185.5) (1,003.6)
Financing activities (274.5) 599.5
---------------- -----------------
Net increase 204.7 66.1
At beginning of year 324.1 364.3
---------------- -----------------
At end of period $ 528.8 $ 430.4
================ =================
During the nine months ended September 30, 2001, the Company's
consolidated cash position increased $66.1 million from December 31, 2000. This
increase is largely attributable to proceeds (approximately $673.6 million) from
the issuance of the Convertible Notes and net income, partially offset by the
use of funds for the acquisition by Stilwell and Janus of approximately 941,100
shares of Janus common stock and distributions to minority stockholders.
Net operating cash inflows for the nine months ended September 30, 2001
were $194.5 million lower than comparable 2000. This decrease was chiefly
attributable to the following items: i) lower net income, ii) decreases in
liabilities primarily due to accrued compensation payments and the timing of
income tax payments and iii) 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 $1.0 billion during the nine months ended
September 30, 2001 compared to $185.5 million during the comparable 2000 period.
This difference results primarily from an $890.0 million increase in investments
in affiliates period-to-period resulting from the purchase of Janus common stock
from various minority stockholders. This increase was partially offset by a
$69.7 million reduction in capital expenditures for the nine months ended
September 30, 2001 versus 2000.
Through September 30, 2001, financing cash inflows include the net
proceeds received in connection with the issuance of the Convertible Notes to
fund the purchase of Janus shares. In first quarter 2000, Stilwell repaid the
$125 million of indebtedness assumed by Stilwell from KCSI. Also, in third
quarter 2000, the Company repurchased $154.0 million under its stock repurchase
program. Distributions to minority stockholders of $87.1 million in the first
half of 2001 exceeded the $26.9 million in 2000 due to the increase in Janus net
income in the periods for which the distributions were being paid.
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 throughout 2001,
the Company does not expect that deferred commission payments in the foreseeable
future 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.
Certain stock purchase agreements and restriction agreements with minority
stockholders (other than Mr. Bailey) contain provisions whereby upon the
occurrence of a Change in Ownership (as defined in such agreements) of KCSI or
Stilwell (depending on the year of grant), Stilwell may be required to purchase
such holders' Janus stock. 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
31
circumstances as determined by Janus' Stock Option Committee or as determined by
an independent appraisal. If Stilwell had been required to purchase the holders'
Janus common stock after a Change in Ownership as of September 30, 2001, the
purchase price would have been approximately $218 million.
The Company has a working capital deficit at September 30, 2001 of $250.0
million. As discussed in "Significant Developments" above, the Company issued
its Convertible Notes in April 2001 and used approximately $610 million of the
proceeds to fund the acquisition of Janus shares from Mr. Bailey. The
Convertible Notes are classified as current liabilities in the Consolidated
Condensed Balance Sheet as of September 30, 2001 because the holders may put the
Convertible Notes to Stilwell on April 30, 2002. The Company is currently
evaluating alternatives for refinancing the Convertible Notes in the event that
the holders exercise their puts.
As of September 30, 2001, Stilwell had cash balances at the Stilwell
holding company level of approximately $345 million. The market value of
Stilwell's 34% investment in DST was more than $1.7 billion, using DST's closing
price on the New York Stock Exchange on September 30, 2001. The Company also has
available $350 million at the holding company and $250 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. 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.
On September 18, 2001, the Company filed with the SEC a Shelf
Registration Statement ("Registration Statement") for the issuance from time to
time of up to $800 million in aggregate issue price of the Company's common
stock, preferred stock and debt securities. The SEC declared the Registration
Statement effective on September 24, 2001. On November 6, 2001, the Company
issued $400 million of 7% senior notes under the Registration Statement. The
proceeds from the offering - approximately $396.1 million - were used to fund a
portion of the 609,950 shares of Janus common stock to be purchased from Mr.
Bailey and one other minority stockholder. The Company has $400 million of
securities available for issuance under the Registration Statement, subject to
the covenant limitations pursuant to the credit facilities.
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 nine months ended September 30, 2001. As of September 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.
32
OTHER
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 FASB issued FAS 141 and FAS 142. FAS 141 requires the
purchase method of accounting for all acquisitions. 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. Stilwell adopted the provisions of FAS 141 and FAS 142 for
acquisitions occurring on or after July 1, 2001. With respect to acquisitions
occurring prior to July 1, 2001, FAS 141 and FAS 142 will be adopted on January
1, 2002. The Company is currently evaluating the impact that adoption of these
provisions will have on its financial statements.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 supercedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 144 applies to all
long-lived assets (including discontinued operations) and consequently
supercedes Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business" ("APB
30"). FAS 144 applies a single accounting model for long-lived assets, as well
as addresses the principal implementation issues. FAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, FAS 144 expands the
scope of discontinued operations. FAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally, its
provisions are to be applied prospectively.
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33
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, other
than the information provided below.
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. 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 the credit rating assigned to the Convertible
Notes by either Moody's Investor Services or Standard & Poor's 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 (but not limited to) 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.
The Convertible Notes were not entered into by the Company for
trading purposes. Because the price of Stilwell's common stock may trigger
a contingent cash interest payment and/or may cause the Convertible Notes
to be convertible into shares of Stilwell common stock, the Company is
subject to equity price market risk through price fluctuations on the New
York Stock Exchange.
34
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 5. Other Information
On November 9, 2001, Stilwell purchased 600,000 shares of Janus Capital
Corporation ("Janus") common stock from Thomas H. Bailey, Janus' Chairman,
President and Chief Executive Officer. The purchase price of the shares totaled
approximately $603 million.
Stilwell funded the purchase price with proceeds received in connection
with its 7% senior notes offering and with available cash. See discussion in
Part I Item 1 of this Form 10-Q. Stilwell will account for the acquisition
pursuant to Statement of Financial Accounting Standards No. 141, "Business
Combinations" and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets." 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 the intangible assets are required to be
amortized. With the closing of this transaction, Stilwell's ownership stake in
Janus has increased to approximately 98%. More than 150 other Janus employees
own the remaining 2%.
In connection with this acquisition, Stilwell will file required pro
forma financial statements. Because it is impracticable to file such required
pro forma financial statements at this time, Stilwell will file them as soon as
practicable, but not later than 60 days after the date of filing of this Form
10-Q with the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 4.1 - Exhibit 4.1 to Stilwell Financial Inc. Current Report on
Form 8-K, dated November 6, 2001, Indenture, dated as
of November 6, 2001, between Stilwell Financial Inc.
and The Chase Manhattan Bank., is hereby incorporated
by reference as Exhibit 4.1
Exhibit 4.2 - Exhibit 4.2 to Stilwell Financial Inc. Current
Report on Form 8-K, dated November 6, 2001,
Officers' Certificate pursuant to the Indenture (as
per Exhibit 4.1 above), is hereby incorporated by
reference as Exhibit 4.2
Exhibit 10.1 - Sixth Amendment to Stock Purchase Agreement, dated
November 8, 2001, by and among
Stilwell Financial Inc. and Thomas H. Bailey, is
attached to this Form 10-Q as Exhibit 10.1
Exhibit 10.2 - Third Amendment to Five-Year Competitive Advance and
Revolving Credit Facility dated October 24, 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 10.2
35
Exhibit 10.3 - Stilwell Financial Inc. 401(k), Profit
Sharing and Employee Stock Ownership Plan, as
amended and restated effective November 1, 2001, is
attached to this Form 10-Q as Exhibit 10.3
b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K, dated May 1, 2001,
under Item 2 to report the acquisition - during the first five months of 2001 -
of 802,042 shares of Janus Capital Corporation ("Janus") common stock from
several Janus minority stockholders at a total cost of approximately $806
million. Stilwell funded these acquisitions through a combination of cash,
borrowings under existing credit facilities and the issuance of zero-coupon
convertible debt securities. The details of these transactions were set forth in
unaudited pro forma consolidated condensed financial statements.
The Company furnished a Current Report on Form 8-K, dated July 13, 2001,
under Item 9 to report that Stilwell had filed a Registration Statement related
to its zero-coupon convertible debt, to report the financial results for the
three and six months ended June 30, 2001, and to report Stilwell's Registration
Statement related to its zero-coupon convertible debt was declared effective by
the Securities and Exchange Commission.
The Company furnished a Current Report on Form 8-K, dated July 31, 2001,
under Item 9, to report ending assets under management on July 31, 2001 and
average assets under management for the one and seven months then ended.
The Company furnished a Current Report on Form 8-K, dated August 31, 2001,
under Item 9, to report ending assets under management on August 31, 2001 and
average assets under management for the two and eight months then ended.
36
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated on
November 14, 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)