FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 registrant 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
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2002
- --------------------------------------------------------------------------------
Common Stock, $0.01 per share par value 222,354,428 Shares
- --------------------------------------------------------------------------------
STILWELL FINANCIAL INC.
Form 10-Q
March 31, 2002
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 2001 and March 31, 2002 2
Consolidated Condensed Statements of Income -
Three months ended March 31, 2001 and 2002 3
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 2001 and 2002 4
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Year ended December 31, 2001 and Three months ended March 31, 2002 5
Notes to Consolidated Condensed Financial Statements 6
Computation of Basic and Diluted Earnings per share 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
- ----------
STILWELL FINANCIAL INC.
FORM 10-Q
MARCH 31, 2002
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, 2001 and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this Form 10-Q. Results for the three months
ended March 31, 2002 are not necessarily indicative of the results expected for
the full year 2002.
STILWELL FINANCIAL INC.
Consolidated Condensed Balance Sheets
(Dollars in Millions, Except Per Share Data)
(Unaudited)
December 31, March 31,
2001 2002
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 236.7 $ 294.9
Accounts receivable 128.5 138.9
Investments in advised funds 31.0 30.0
Other current assets 81.9 47.1
--------------- ---------------
Total current assets 478.1 510.9
Investments 508.7 539.6
Property and equipment (net of $93.5 and $103.8 accumulated
depreciation and amortization, respectively) 92.9 87.6
Intangibles and other assets, net 1,273.3 1,304.8
Goodwill, net 1,038.6 1,060.5
--------------- ---------------
Total assets $ 3,391.6 $ 3,503.4
=============== ===============
Liabilities and
stockholders' equity
Current liabilities:
Current portion of long-term debt $ 694.7 $ 696.3
Accounts and wages payable 42.5 49.1
Accrued compensation and benefits 56.3 28.0
Accrued liability to third party administrators 18.7 19.5
Other accrued liabilities 68.7 82.8
--------------- ---------------
Total current liabilities 880.9 875.7
Other liabilities:
Long-term debt 399.5 391.2
Deferred income taxes 679.9 686.1
Other liabilities 44.7 50.4
--------------- ---------------
Total liabilities 2,005.0 2,003.4
--------------- ---------------
Minority interest in consolidated subsidiaries 23.3 17.3
--------------- ---------------
Stockholders' equity:
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; 222,101,350 and 222,350,952 shares
outstanding, respectively) 2.2 2.2
Additional paid-in capital
Retained earnings 1,285.3 1,397.2
Accumulated other comprehensive income 75.8 83.3
--------------- ---------------
Total stockholders' equity 1,363.3 1,482.7
--------------- ---------------
Total liabilities and stockholders' equity $ 3,391.6 $ 3,503.4
=============== ===============
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 Data)
(Unaudited)
Three months
ended March 31,
--------------------------------
2001 2002
-------------- --------------
Revenues:
Investment management fees $ 367.8 $ 270.5
Shareowner servicing fees 64.1 42.8
Other 16.6 15.0
-------------- --------------
Total 448.5 328.3
-------------- --------------
Operating Expenses:
Compensation 99.3 70.8
Marketing and promotion 24.4 12.1
Third party concession fees 66.0 49.4
Depreciation and amortization 24.9 17.8
Professional services 12.6 7.8
Other 37.6 32.4
Severance, facility closing and other costs 0.9
-------------- --------------
Total 265.7 190.3
-------------- --------------
Operating Income 182.8 138.0
Equity in earnings of unconsolidated affiliates 17.8 19.4
Interest expense (5.0) (13.4)
Other, net 6.8 3.0
-------------- --------------
Income before taxes and minority interest 202.4 147.0
Income tax provision 72.2 49.2
Minority interest in consolidated earnings 18.8 0.6
-------------- --------------
Net Income $ 111.4 $ 97.2
============== ==============
Per Share Data (Note 3):
Weighted average Common shares
outstanding (in thousands) 219,042 222,243
Basic Earnings per share $ 0.51 $ 0.44
Weighted average Diluted Common shares
outstanding (in thousands) 224,666 224,590
Diluted Earnings per share $ 0.48 $ 0.42
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Cash Flows
(Dollars in Millions)
(Unaudited)
Three months ended March 31,
-------------------------------------
2001 2002
-------------- --------------
Cash flows provided by (used for):
Operating activities:
Net income $ 111.4 $ 97.2
Adjustments to net income:
Depreciation and amortization 24.9 17.8
Deferred income taxes 42.1 1.4
Minority interest in consolidated earnings 18.8 0.6
Equity in undistributed earnings of unconsolidated affiliates (17.8) (19.4)
Employee deferred compensation (5.2) 2.9
Deferred commissions (1.0) (4.1)
Changes in other assets (31.7) (6.9)
Changes in working capital items:
Accounts receivable 29.3 (5.9)
Other current assets (16.3) 27.9
Accounts payable and accrued compensation payable (32.4) (29.8)
Other accrued liabilities 25.2 40.1
Other, net 2.7 8.5
-------------- --------------
Net operating 150.0 130.3
-------------- --------------
Investing activities:
Property acquisitions (13.0) (3.7)
Investments in and loans with affiliates (230.8) (44.5)
Sale of investments in advised funds 7.7
Purchase of investments in advised funds (0.3) (5.0)
Other, net 5.4 0.5
-------------- --------------
Net investing (238.7) (45.0)
-------------- --------------
Financing activities:
Proceeds from borrowing under credit facilities 100.0
Proceeds from stock plans 5.4 2.4
Distributions to minority interest (43.8) (23.5)
Other, net (1.8) (6.0)
-------------- --------------
Net financing 59.8 (27.1)
-------------- --------------
Cash and cash equivalents:
Net increase (decrease) (28.9) 58.2
At beginning of year 364.3 236.7
-------------- --------------
At end of period $ 335.4 $ 294.9
============== ==============
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)
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholders'
stock capital earnings income equity
----- ------- -------- ------ ------
Balance at December 31, 2000 $ 2.2 $ - $ 952.3 $ 103.3 $ 1,057.8
Comprehensive income:
Net income 302.3
Net unrealized loss on investments (23.9)
Reclassification for gains included
in net income (1.6)
Foreign currency translation
adjustment (2.0)
Comprehensive income 274.8
Stock options and benefit
plans 74.8 74.8
Common stock repurchased and
exchanged (35.3) (35.3)
Common stock dividends (8.8) (8.8)
---------- ------------- ----------- ------------ --------------
Balance at December 31, 2001 2.2 - 1,285.3 75.8 1,363.3
Comprehensive income:
Net income 97.2
Net unrealized gain on investments 7.1
Reclassification for losses
included in net income 0.7
Foreign currency translation
adjustment (0.3)
Comprehensive income 104.7
Stock options and benefit
plans 14.7 14.7
---------- ------------- ----------- ------------ --------------
Balance at March 31, 2002 $ 2.2 $ - $ 1,397.2 $ 83.3 $ 1,482.7
========== ============= =========== ============ ==============
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, 2001 and March 31,
2002 and the results of operations and cash flows for the three months
ended March 31, 2001 and 2002. The consolidated condensed balance sheet as
of December 31, 2001 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 March 31, 2002 were: Janus
Capital Corporation ("JCC"), an approximate 98.0% owned subsidiary (prior
to the transfer of JCC's business and operations to a limited liability
company - named Janus Capital Management LLC ("Janus") - and the issuance
of additional ownership interests to various key Janus employees completed
on April 1, 2002 - see Note 12); Stilwell Management, Inc. ("SMI"), a
wholly-owned subsidiary; Berger Financial Group LLC ("Berger"), of which
SMI owns 100% of the preferred limited liability interests and
approximately 90% 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 33%
interest. JCC, now Janus, is the principal business comprising Stilwell,
representing 91% of assets under management at March 31, 2002, and 92% of
revenues and 87% of net income for the three months ended March 31, 2002.
Stilwell's subsidiaries and affiliates are engaged in 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, 2001. Certain
prior year amounts have been reclassified to conform to the current year
presentation. The results of operations for the three months ended March
31, 2002 are not necessarily indicative of the results to be expected for
the full year 2002.
3. The effect of stock options and shares under the Employee Stock Purchase
Plan ("ESPP") represent the only differences 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 March 31,
--------------------------------------
2001 2002
--------------- --------------
(dollars in millions, except per share amounts)
Net income $ 111.4 $ 97.2
Dilutive securities at
subsidiaries and affiliates (2.7) (2.2)
--------------- --------------
Net income for dilutive
computation $ 108.7 $ 95.0
--------------- --------------
Weighted average Common shares
outstanding 219,041,955 222,243,035
Incremental shares from assumed
conversion of stock options
and ESPP shares 5,623,869 2,347,022
--------------- --------------
Weighted average Diluted Common
shares outstanding 224,665,824 224,590,057
--------------- --------------
Basic Earnings per share $ 0.51 $ 0.44
=============== ==============
Diluted Earnings per share $ 0.48 $ 0.42
=============== ==============
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 March 31,
-------------------------------------
2001 2002
---------------- -------------
225,266 2,948,202
The diluted earnings per share computation for the three months ended
March 31, 2002 exclude 15,965,754 shares of common stock reserved for
issuance upon conversion of the zero-coupon convertible notes due 2031
(prior to Stilwell's purchase of substantially all of the convertible notes
- see Note 11 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 March 31, 2002.
Condensed consolidated financial information for DST is shown below (in
millions):
December 31, 2001 March 31, 2002
----------------------- -----------------------
Percentage ownership 33.0% 32.9%
Carrying value (a) $ 486.1 $ 516.8
Equity in DST net assets 486.1 516.8
Fair market value (b) 1,980.0 1,978.3
7
Financial condition:
Current assets $ 604.8 $ 647.1
Non-current assets 2,099.2 2,174.2
---------------- ------------------
Total assets $ 2,704.0 $ 2,821.3
================ ==================
Current liabilities $ 471.4 $ 505.5
Non-current liabilities 760.2 744.2
Stockholders' equity 1,472.4 1,571.6
---------------- ------------------
Total liabilities and stockholders' equity $ 2,704.0 $ 2,821.3
================ ==================
Three months
ended March 31,
---------------------------------
2001 2002
-------------- ---------------
Operating results:
Revenues (c) $ 538.7 $ 620.9
Costs and expenses (c) 461.0 539.6
Net income 54.5 58.8
(a) Excludes goodwill related to Stilwell's investment in DST totaling
$92.6 million at March 31, 2002.
(b) Based on DST's closing price on the New York Stock Exchange.
(c) DST's reported revenues and costs and expenses, beginning January 1,
2002, are affected by DST's required adoption of Emerging Issues Task
Force ("EITF") Issue No. 01-14 ("01-14"), Income Statement
Characterization of Reimbursements received for "Out-of-Pocket"
("OOP") EITF Expenses Incurred. Under EITF 01-14, DST is required to
record the reimbursements received for OOP expenses as revenue,
and the expenses paid as a cost and expense, on an accrual basis.
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 $109.5
million and $99.3 million at March 31, 2001 and 2002, respectively) are
generally used to fund its operations and to pay dividends. Cash paid for
income taxes and interest is summarized as follows (in millions):
Three months
ended March 31,
--------------------------------
2001 2002
----------- ----------
Interest paid $ 0.3 $ 0.1
Income taxes paid 6.9 1.4
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 March 31,
-------------------------------------
2001 2002
--------------- ----------------
(dollars in millions)
Unrealized gain (loss)
recorded in investments $ (88.2) $ 12.0
Deferred income taxes 34.4 (4.9)
--------------- ----------------
Unrealized gain (loss)
recorded in accumulated
other comprehensive income (53.8) 7.1
Reclassification adjustment
for (gains) losses
included in net income (0.4) 0.7
Foreign currency translation
adjustment (0.9) (0.3)
Net income 111.4 97.2
--------------- ----------------
Comprehensive income $ 56.3 $ 104.7
=============== ================
During the three months ended March 31, 2001 and March 31, 2002, 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. Intangible assets and goodwill principally represent the excess of cost
over the fair value of net underlying assets of acquired companies using
purchase accounting. In July 2001, the Financial Accounting Standards Board
(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 in 2001 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 were adopted on January 1, 2002.
9
Identified intangible assets and other assets are summarized as follows (in
millions):
December 31, March 31,
2001 2002
------------------ ------------------
Mutual fund advisory contracts (1) (4) $ 190.3 $ 268.5
Third party advisor and distribution
relationships (1) 712.1 712.1
Marketing-related, such as brand and
trademark (1) (4) 271.1 280.6
Separate account relationships (2) 17.5 40.5
Other identified intangible assets (3)(4) 86.0
Accumulated amortization (45.4) (46.4)
------------------ ------------------
Net 1,231.6 1,255.3
Other assets, net 41.7 49.5
------------------ ------------------
Total $ 1,273.3 $ 1,304.8
================== ==================
(1) Because Stilwell's initial 2001 acquisition of shares of Janus common
stock occurred in late March 2001, no amortization expense was
recorded during first quarter 2001. Pursuant to FAS 142, there will be
no amortization related to these identified intangible assets.
(2) Because Stilwell's initial acquisition of shares of Janus common stock
occurred in late March 2001, no amortization expense was recorded
during first quarter 2001. All amounts were subject to amortization
during the three months ended March 31, 2002 over weighted average
periods of 6 to 9 years, resulting in approximately $1.0 million of
amortization expense.
(3) Amount represents identified intangible assets recorded prior to 2001
and all were subject to amortization during first quarter 2001,
resulting in amortization expense of approximately $1.4 million.
However, upon adoption of FAS 142 on January 1, 2002, amounts were
reclassified to other identified intangible asset components as per
(4), and are no longer subject to amortization.
(4) Certain amounts related to intangible assets recorded prior to 2001
were reclassified to other identified intangible components in
connection with the adoption of FAS 142.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2002 were as follows (in millions):
Balance at January 1, 2002 $ 1,038.6
Goodwill acquired during the quarter 21.9
-------------------
Balance at March 31, 2002 $ 1,060.5
===================
The goodwill acquired during the quarter primarily represents the
acquisition of INTECH by Berger on February 28, 2002 as discussed in Note
8. See Note 7 for information regarding the goodwill recorded in each
reportable segment of the Company.
Aggregate amortization expense is expected to total approximately $1.4
million in each of the next three quarters of 2002 and total approximately
$5.4 million in each of the next five years thereafter.
10
To provide a basis for comparison to current year amounts, the following
tables summarize the impact of the adoption of FAS 142 on prior period
amounts (in millions, except per share data):
Three months ended March 31,
----------------------------------------
2001 2002
-------------------- --------------
Reported net income $ 111.4 $ 97.2
Identified intangible asset amortization 1.4
Goodwill amortization 2.5
-------------------- --------------
Adjusted net income $ 115.3 $ 97.2
==================== ==============
Three months ended March 31,
---------------------------------------
2001 2002
------------------ ---------------
Basic Earnings per share:
Reported net income $ 0.51 $ 0.44
Identified intangible asset amortization 0.01
Goodwill amortization 0.01
------------------ ---------------
Adjusted net income $ 0.53 $ 0.44
================== ===============
Three months ended March 31,
-------------------------------------------
2001 2002
------------------ -------------------
Diluted Earnings per share:
Reported net income $ 0.48 $ 0.42
Identified intangible asset amortization 0.01
Goodwill amortization 0.01
------------------ -------------------
Adjusted net income $ 0.50 $ 0.42
================== ===================
7. 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 JCC (now 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, as well as any identified intangible assets and goodwill
resulting from the acquisition of subsidiaries and affiliates directly
by Stilwell, are aggregated as a separate segment.
11
Summarized financial information concerning the segments is shown in the
following tables (in millions):
Three months ended March 31, 2002
-------------------------------------------------------
Nelson, DST
Janus and and Consolidated
Berger Other Stilwell
--------- ----- --------
Revenues $ 322.6 $ 5.7 $ 328.3
Operating expenses 181.9 8.4 190.3
----------------- ---------------- ------------------
Operating Income (Loss) 140.7 (2.7) 138.0
Equity in earnings
of unconsolidated affiliates 19.4 19.4
Interest expense (1.4) (12.0) (13.4)
Other, net (0.6) 3.6 3.0
----------------- ---------------- ------------------
Pretax income 138.7 8.3 147.0
Income tax provision (benefit) 51.7 (2.5) 49.2
Minority interest 0.6 0.6
----------------- ---------------- ------------------
Net Income $ 86.4 $ 10.8 $ 97.2
================= ================ ===================
Total assets $ 583.6 $ 2,928.1 $ 3,511.7
Capital expenditures 3.7 3.7
Goodwill, net 42.4 1,018.1 1,060.5
Three months ended March 31, 2001
--------------------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- --------
Revenues $ 443.2 $ 5.3 $ 448.5
Operating expenses 253.4 12.3 265.7
------------------ --------------- -----------------
Operating Income (Loss) 189.8 (7.0) 182.8
Equity in earnings
of unconsolidated affiliates 17.8 17.8
Interest expense (5.0) (5.0)
Other, net 4.6 2.2 6.8
------------------ --------------- -----------------
Pretax income 194.4 8.0 202.4
Income tax provision (benefit) 72.3 (0.1) 72.2
Minority interest 19.0 (0.2) 18.8
------------------ --------------- -----------------
Net Income $ 103.1 $ 8.3 $ 111.4
================== =============== =================
Total assets $ 573.7 $ 1,188.9 $ 1,762.6
Capital expenditures 6.1 6.9 13.0
Goodwill, net 320.8 320.8
12
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the three months ended March 31 (in
millions):
2001 2002
----------- -----------
Revenues (1):
United States $ 427.2 $ 309.4
International (2) 21.3 18.9
----------- -----------
Total $ 448.5 $ 328.3
=========== ===========
Long-lived assets:
United States $ 712.1 $ 2,412.9
International (2) 34.7 40.0
----------- -----------
Total $ 746.8 $ 2,452.9
=========== ===========
(1) Revenues are attributed to countries based on location at which
services are performed.
(2) Primarily the United Kingdom.
8. On February 28, 2002, Berger completed the acquisition of Enhanced
Investment Technologies, Inc. ("INTECH"), and, as part of the acquisition,
INTECH was converted to a limited liability company ("INTECH LLC"). INTECH
LLC, which manages approximately $6 billion in assets under management,
uses a proprietary mathematical investment process for institutional and
private clients. Berger expects to use its institutional marketing group to
market the products of INTECH LLC.
If the full amount of the contingent purchase price payments were made,
Berger would pay approximately $68 million for 50.1% of INTECH and has the
right to purchase an additional 30% over the next two years for a
negotiated price. The Company is in the process of completing a valuation
for purposes of determining the actual allocation of purchase price for
INTECH LLC, which may affect the levels of goodwill and identified
intangible assets currently recorded. The terms of the transaction were not
material to Stilwell's results of operation, financial position or cash
flows as of and for the three months ended March 31, 2002.
9. On February 12, 2002, Stilwell entered into a receive-fixed, pay-floating
interest rate exchange agreement with a major investment bank with respect
to Stilwell's $400 million 7% senior notes due November 1, 2006 ("Senior
Notes"). Stilwell will receive from the counterparty a fixed 7% rate on
$400 million, and Stilwell will pay the counterparty based on the six month
LIBOR rate (set in arrears) plus 178 basis points. Stilwell has designated
the interest rate exchange as a hedge that qualifies for the "shortcut"
method for fair value hedges pursuant to Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and the hedge meets the prerequisites for the
assumption of no ineffectiveness under FAS 133. The agreement increases the
Company's exposure to fluctuations in interest rates.
The effect of the hedge in first quarter 2002 was to reduce interest
expense by approximately $1.5 million as a result of a lower floating rate
cost compared to the 7% fixed rate being received by the Company under the
exchange agreement. In addition, long-term debt was reduced by
approximately $8.3 million and an offsetting exchange contract liability
was recorded to reflect the change in the fair value of the exchange
agreement during the quarter.
13
10. During 2001, Janus recorded several non-recurring items that were reflected
in the Consolidated Statement of Income as severance, facility closing and
other costs.
o 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 use of technology to moderate costs. Partially
offsetting these costs was a first quarter 2001 reduction 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
during the quarter.
o 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.
o In December 2001, Janus recorded additional facility closing and lease
costs related to Janus' Austin and Denver facilities and recorded
charges associated with shareowner proxy costs for the Janus group of
mutual funds to obtain shareowner approval of new advisory agreements
in connection with Stilwell's purchase of Thomas H. Bailey's remaining
shares of Janus common stock.
The following table summarizes the activity related to these various
non-recurring items during the three months ended March 31, 2002 (in
millions):
March 31,
December 31, 2001 Reductions 2002
-------------------- ---------------- ---------------
Severance $ 1.6 $ (1.6) $ -
Lease and related costs 24.4 (2.0) 22.4
Fund shareowner proxy costs 11.9 (7.8) 4.1
---------- ---------- ---------
Total $ 37.9 $ (11.4) $ 26.5
========== ========== =========
Of the remaining balance, approximately $11.9 million is included as
current other liabilities and approximately $14.6 million is included as
non-current other liabilities in the consolidated condensed balance sheet
at March 31, 2002. The lease terms generally expire between 2007 and 2010.
11. As previously disclosed, 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 ("Convertible Notes"). The
Convertible Notes resulted in gross proceeds to Stilwell of approximately
$690 million. Pursuant to the terms of the Convertible Notes, on April 30,
2002, holders required Stilwell to repurchase $820.7 million of the
Convertible Notes (approximately $614.5 million of accreted value). On May
1, 2002, Stilwell funded the purchase of the Convertible Notes with $344.5
million in cash and $270.0 million through borrowings under its credit
facilities.
Prior to receiving the repurchase notices from the holders of the
Convertible Notes, Stilwell announced its intention to add a 3% cash
interest payment on the face of the Convertible Notes over the next two
years (to be paid semi-annually beginning on October 30, 2002). For the
$82.4 million of Convertible Notes that remain outstanding as of May 1,
2002, Stilwell will pay this cash interest to holders of record 15 days
prior to the scheduled payment dates. The other terms of the Convertible
Notes remain materially the same.
14
12. On April 1, 2002, Stilwell completed the transfer of the business and
operations of Janus Capital Corporation to a limited liability company
named Janus Capital Management LLC. Concurrent with this transfer of
business and operations, approximately 6.2% of the shares of the limited
liability company were issued to key Janus employees. The issuance of
ownership to Janus employees was accomplished through two grants. The first
grant was a special, one-time share grant equivalent to 5% of Janus, all of
which vests at the end of seven years and includes the opportunity for
accelerated vesting (either 20% or 33% annually) when Janus meets defined
performance targets. The second grant represented the customary long-term
incentive component of the employees' annual compensation package and will
vest at the end of five years, with opportunities for acceleration similar
to the shares for the one-time grant. All vesting is subject to continued
employment by Janus.
The combined grants, which were distributed to approximately 180 key
employees (the majority of which were to the 65-member investment team),
are designed to encourage superior investment performance and long-term
stability at Janus through additional employee ownership in a tax-efficient
organizational structure. The equity program in the limited liability
company includes liquidity provisions that will provide Janus employees the
opportunity to sell up to 50% of their aggregate vested shares to Janus or
Stilwell, with certain restrictions, on scheduled liquidity dates at the
then-current fair value of the shares.
After issuance of the shares of the limited liability company, Stilwell
owns approximately 92% of Janus, with Janus employees owning the remaining
8% of the company. Janus is applying fixed accounting under generally
accepted accounting principles for the grants of shares, with Janus
recognizing a pro rata amount of compensation expense for each year during
the vesting period - approximately $35 million annually for the one-time
grant and approximately $14 million annually for the long-term incentive
grant. Because the grants of shares represent profits interests, which are
considered to have a value of zero for tax purposes, a tax deduction is not
available to the Company with respect to this compensation expense.
The exchange of the Janus Capital Corporation common stock for limited
liability shares terminated the change of control put rights held by
various Janus minority stockholders pursuant to various purchase and
restriction agreements.
On April 2, 2002, management rights held by Mr. Thomas H. Bailey, Janus'
president, chairman and chief executive officer, pursuant to the 1984 Janus
Stock Purchase Agreement, as amended, expired. Mr. Bailey continues as
Janus' chief executive officer.
13. On April 5, 2002, the Company issued $158.1 million of 7.875% senior notes
due April 15, 2032 ("Retail Notes"). The Retail Notes were offered in $25
increments to individual investors through a network of financial
professionals and are listed on the New York Stock Exchange under the
symbol "SVQ." The Retail Notes are not callable for five years; thereafter,
the Retail Notes are callable at any time, in whole or in part, at par plus
accrued and unpaid interest. The Retail Notes pay interest quarterly
beginning on July 31, 2002. The Company received approximately $153.1
million after underwriter discount and certain offering expenses. The
proceeds were used to fund a portion of the Convertible Notes that were
retired on May 1, 2002 (see Note 11).
14. The Company issued a new Shelf Registration Statement ("Shelf
Registration"), which supersedes Stilwell's previous shelf registration
statement and provides 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 Shelf Registration was declared effective by
the Securities and Exchange Commission on April 25, 2002. As of May
14, 2002, the full $800 million of securities are available for issuance
under the Shelf Registration, subject to the covenant limitations pursuant
to the Company's credit facilities.
15
15. 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."
FAS 144 applies a single accounting model for long-lived assets, as well as
addresses the principal implementation issues of FAS 121. 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. The Company adopted FAS
144 on January 1, 2002. The adoption of FAS 144 did not have a material
impact on Stilwell's results of operations or financial position.
16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
The discussion set forth below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are typically identified by the use of words such as
"may," "will," "expect," "believe," "anticipate," "intend," "could,"
"estimate," or "continue" and similar expressions or variations, and are
based on the beliefs and assumptions of the management of Stilwell
Financial Inc. (the "Company" or "Stilwell") based on information currently
available to management. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statements. Important factors that could cause actual
results to differ materially from the forward-looking statements include
the risks identified in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, in Part I Item 1, Business, under "Risk
Factors". Stilwell cautions readers to carefully consider such factors.
Further, such forward-looking statements speak only as of the date on which
such statements are made; Stilwell undertakes no obligation to update any
forward-looking statements to reflect events or circumstances after the
date of such statements.
The discussion herein is intended to clarify and focus on the
Company's results of operations, certain changes in financial position,
liquidity, capital structure and business developments for the periods
covered by the consolidated condensed financial statements included under
Item 1 of this Form 10-Q. This discussion should be read in conjunction
with these consolidated condensed financial statements and the related
notes thereto and is qualified by reference thereto.
Stilwell, a Delaware corporation formed in 1998 by Kansas City
Southern Industries, Inc., is a holding company for a group of businesses
and investments in the financial services industry, including the
following:
o Janus Capital Corporation ("JCC"), an approximately 98.0% owned
subsidiary (prior to the transfer of JCC's business and
operations to a limited liability company - named Janus Capital
Management LLC ("Janus") - and the issuance of additional
ownership interests to various key Janus employees completed on
April 1, 2002 - see below)
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary;
o Berger Financial Group LLC ("Berger"), of which SMI owns 100% of
the preferred limited liability company interests and
approximately 90% 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 33% interest; and
o various other subsidiaries and equity investments.
For purposes of segment reporting, Stilwell reports JCC (now 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, as well as any
identified intangible assets and goodwill resulting from the acquisition of
subsidiaries and affiliates directly by Stilwell, are aggregated as a
separate segment.
17
RECENT DEVELOPMENTS
Zero-Coupon Convertible Debt Offering. As previously disclosed, 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 ("Convertible Notes"). The Convertible Notes
resulted in gross proceeds to Stilwell of approximately $690 million.
Pursuant to the terms of the Convertible Notes, on April 30, 2002, holders
required Stilwell to repurchase $820.7 million of the Convertible Notes
(approximately $614.5 million of accreted value). On May 1, 2002, Stilwell
funded the purchase of the Convertible Notes with $344.5 million in cash
and $270.0 million through borrowings under its credit facilities.
Prior to receiving the repurchase notices from the holders of the
Convertible Notes, Stilwell announced its intention to add a 3% cash
interest payment on the face of the Convertible Notes over the next two
years (to be paid semi-annually beginning on October 30, 2002). For the
$82.4 million of Convertible Notes that remain outstanding as of May 1,
2002, Stilwell will pay this cash interest to holders of record 15 days
prior to the scheduled payment dates. The other terms of the Convertible
Notes remain materially the same.
$158 Million Retail Debt Offering. On April 5, 2002, the Company
issued $158.1 million of 7.875% senior notes due April 15, 2032 ("Retail
Notes"). The Retail Notes were offered in $25 increments to individual
investors through a network of financial professionals and are listed on
the New York Stock Exchange under the symbol "SVQ." The Retail Notes are
not callable for five years; thereafter, the Retail Notes are callable at
any time, in whole or in part, at par plus accrued and unpaid interest. The
Retail Notes pay interest quarterly beginning on July 31, 2002. The Company
received approximately $153.1 million after underwriter discount and
certain offering expenses. The proceeds were used to fund a portion of the
Convertible Notes that were retired on May 1, 2002.
Corporate Restructuring of Janus. On April 1, 2002, Stilwell completed
the transfer of the business and operations of JCC to a limited liability
company named Janus Capital Management LLC ("Janus"). Concurrent with this
transfer of business and operations, approximately 6.2% of the shares of
the limited liability company were issued to key Janus employees. The
issuance of ownership to Janus employees was accomplished through two
grants. The first grant was a special, one-time share grant equivalent to
5% of Janus, all of which vests at the end of seven years and includes the
opportunity for accelerated vesting (either 20% or 33% annually) when Janus
meets defined performance targets. The second grant represented the
customary long-term incentive component of the employees' annual
compensation package and will vest at the end of five years, with
opportunities for acceleration similar to the shares for the one-time
grant. All vesting is subject to continued employment by Janus.
The combined grants, which were distributed to approximately 180 key
employees (the majority of which were to the 65-member investment team),
are designed to encourage superior investment performance and long-term
stability at Janus through additional employee ownership in a tax-efficient
organizational structure. The equity program in the limited liability
company includes liquidity provisions that will provide Janus employees the
opportunity to sell up to 50% of their aggregate vested shares to Janus or
Stilwell, with certain restrictions, on scheduled liquidity dates at the
then-current fair value of the shares.
After issuance of the shares of the limited liability company,
Stilwell owns approximately 92% of Janus, with Janus employees owning the
remaining 8% of the company. Janus is applying fixed accounting under
generally accepted accounting principles for the grants of shares, with
Janus recognizing a pro rata amount of compensation expense for each year
during the vesting period - approximately $35 million annually for the
one-time grant and approximately $14 million annually for the long-term
incentive grant. Because the grants of shares represent profits interests,
which are considered to have a value of zero for tax purposes, a tax
deduction is not available to the Company with respect to this compensation
expense.
18
The exchange of the Janus Capital Corporation common stock for limited
liability shares terminated the change of control put rights held by
various Janus minority stockholders pursuant to various purchase and
restriction agreements.
On April 2, 2002, management rights held by Mr. Thomas H. Bailey,
Janus' president, chairman and chief executive officer, pursuant to the
1984 Janus Stock Purchase Agreement, as amended, expired. Mr. Bailey
continues as Janus' chief executive officer.
SIGNIFICANT DEVELOPMENTS
Berger Acquisition of INTECH. Berger completed the acquisition of
Enhanced Investment Technologies, Inc. ("INTECH") on February 28, 2002 and,
as part of the acquisition, INTECH was converted to a limited liability
company ("INTECH LLC"). INTECH LLC, which manages approximately $6 billion
in assets under management, uses a proprietary mathematical investment
process for institutional and private clients. If the full amount of the
contingent purchase price payments for the acquisition were made, Berger
would pay approximately $68 million for 50.1% of INTECH and has the right
to purchase an additional 30% over the next two years for a negotiated
price. The Company is in the process of completing a valuation for purposes
of determining the actual allocation of the purchase price for INTECH LLC,
which may affect the levels of goodwill and identified intangible assets
currently recorded. The terms of the transaction were not material to
Stilwell's results of operation, financial position or cash flows as of and
for the three months ended March 31, 2002.
Berger expects to use its strong institutional marketing group to
market the products of INTECH LLC. Berger now offers several growth and
value products in the retail, private and institutional channels.
Interest Rate Exchange Agreement. On February 12, 2002, Stilwell
entered into a receive-fixed, pay-floating interest rate exchange agreement
with a major investment bank with respect to Stilwell's $400 million 7%
senior notes due November 1, 2006 ("Senior Notes"). Stilwell will receive
from the counterparty a fixed 7% rate on $400 million and Stilwell will pay
the counterparty based on the six month LIBOR rate (set in arrears) plus
178 basis points. Stilwell has designated the interest rate exchange as a
hedge that qualifies for the "shortcut" method for fair value hedges
pursuant to Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133") and the
hedge meets the prerequisites for the assumption of no ineffectiveness
under FAS 133. The agreement increases the Company's exposure to
fluctuations in interest rates.
The effect of the hedge in first quarter 2002 was to reduce interest
expense by approximately $1.5 million as a result of a lower floating rate
cost compared to the 7% fixed rate being received by the Company under the
exchange agreement. In addition, long-term debt was reduced by
approximately $8.3 million and an offsetting exchange contract liability
was recorded to reflect the change in the fair value of the exchange
agreement during the quarter.
19
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared with the Three Months Ended
March 31, 2001
The Company's revenues, operating income and net income were as
follows (in millions):
March 31,
-----------------------------------------------
2001 2002
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 427.0 $ 302.5
SMI and Berger 16.2 20.1
--------------------- --------------------
Sub-total 443.2 322.6
Other 5.3 5.7
--------------------- --------------------
Total $ 448.5 $ 328.3
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 187.3 $ 136.9
SMI and Berger 2.5 3.8
--------------------- --------------------
Sub-total 189.8 140.7
Other (7.0) (2.7)
--------------------- --------------------
Total $ 182.8 $ 138.0
===================== ====================
Net income (loss):
Janus and Berger:
Janus (i) $ 101.0 $ 84.2
SMI and Berger (ii) (iii) 1.8 2.2
--------------------- --------------------
Sub-total 102.8 86.4
--------------------- --------------------
Other:
DST (ii) 16.5 17.9
Other (7.9) (7.1)
--------------------- --------------------
Sub-total 8.6 10.8
--------------------- --------------------
Total $ 111.4 $ 97.2
===================== ====================
(i) Janus net income is reported after minority interest of approximately
$19.0 and $0.2 million for the three months ended March 31, 2001 and
2002, respectively.
(ii) Stilwell's investment in DST is held by SMI.
(iii)SMI and Berger's net income is reported after minority interest of
approximately $0.4 million for the three months ended March 31, 2002.
20
Assets under management as of March 31, 2001, December 31, 2001 and
March 31, 2002 were as follows (in billions):
March 31, December 31, March 31,
2001 2001 2002
--------------- ----------------- ---------------
Janus:
Janus Advised Funds:
Janus Investment Fund $ 126.1 $ 107.9 $ 102.8
Janus Aspen Series 18.8 18.3 18.1
Janus Adviser Series 2.2 3.9 4.3
Janus Money Market Funds 13.7 18.8 16.5
Janus World Funds Plc 3.0 3.3 3.5
--------------- ----------------- ---------------
Total Janus Advised Funds 163.8 152.2 145.2
Janus Sub-Advised Funds and Private
Accounts 34.3 30.0 28.4
--------------- ----------------- ---------------
Total Janus 198.1 182.2 173.6
--------------- ----------------- ---------------
Berger:
Berger Funds 5.1 6.0 6.7
INTECH 6.0
Bay Isle 1.1 1.2
Berger Sub-Advised Funds and Private
Accounts 1.4 1.5 1.7
--------------- ----------------- ---------------
Total Berger 6.5 8.6 15.6
--------------- ----------------- ---------------
Nelson 1.3 1.4 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 205.9 $ 192.2 $ 190.5
=============== ================= ===============
The Company earned $97.2 million in first quarter 2002, a decline of
13% compared to $111.4 million in first quarter 2001. This decrease is
primarily attributable to lower revenues as a result of lower asset under
management levels, and additional interest expense associated with
Stilwell's funding of the purchases of JCC common stock during 2001.
Average assets under management decreased 23% compared to prior year's
first quarter (from $246.6 billion to $188.8 billion), contributing to a
$120.2 million (27%) decline in revenues and a $44.8 million (25%) decrease
in operating income. Stilwell reported higher operating margins in first
quarter 2002 compared to first quarter 2001 (to 42.0% from 40.8%), as
downward pressures expected on revenues due to the lower level of assets
under management were offset by a 28% decline in operating expenses in
first quarter 2002 compared to 2001 (to $190.3 million from $265.7
million).
Stilwell's equity in net earnings of DST increased 9% during first
quarter 2002 versus first quarter 2001, continuing the growth trends
experienced by DST over the last several quarters.
JANUS AND BERGER
Assets under management for Janus and Berger totaled $189.2 billion at
March 31, 2002, a 1% decrease from December 31, 2001 and an 8% decrease
from March 31, 2001. The decline in assets under management during first
quarter 2002 reflects market depreciation of $3.6 billion and net cash
outflows of $4.0 billion, partially offset by additional assets of
approximately $6.0 billion from Berger's acquisition of INTECH. Average
assets under management for Janus and Berger during first quarter 2002
totaled approximately $187.5 billion compared to $185.0 billion in fourth
quarter 2001 and $245.2 billion in first quarter 2001. See the brief
discussions of Janus and Berger separately below.
21
Investment management fees for Janus and Berger decreased 27% in first
quarter 2002 compared to first quarter 2001, reflecting the decrease in
average assets under management. Aggregate investment management fees for
first quarter 2002 totaled approximately 58 basis points of average assets
under management compared to approximately 60 basis points in first quarter
2001. The decline in basis points reflects a change in the composition of
assets under management, partially attributable to the addition of
institutionally-based INTECH LLC assets. Shareowner servicing fees and
other revenues decreased $22.9 million compared to prior year's first
quarter, primarily due to declines in assets under management.
Operating margins for Janus and Berger increased to 43.6% from 42.8%
in first quarter 2001. Operating expenses totaled $181.9 million for the
three months ended March 31, 2002 compared to $253.4 million in the prior
year quarter. Operating expenses with notable decreases quarter-to-quarter
included the following items: i) compensation, primarily related to reduced
investment performance-based incentive compensation, partially offset by
approximately $3.5 million in severance costs associated with a Janus work
force reduction during first quarter 2002; ii) third party concession fees
resulting from a lower level of assets distributed through these
arrangements; iii) marketing costs as promotion efforts were scaled back to
reflect the current operating, market and performance environment; and iv)
depreciation and amortization due to reduced capital expenditures over the
last two years.
A brief discussion of significant Janus and Berger items during the
quarter ended March 31, 2002 follows:
Janus
-----
Janus revenues are largely dependent on the total value and composition of
assets under management, which are primarily invested in domestic and
international equity and debt securities. During the three months ended
March 31, 2002, assets under management decreased by $8.6 billion due to
market depreciation of $3.8 billion and net cash outflows of $4.8 billion.
The net outflows consisted of approximately $2.5 billion of money market
funds, with the remaining $2.3 billion reflecting outflows in Janus' retail
funds partially offset by net sales in the Janus Adviser Series, Janus
World Funds and Janus Aspen Series. Janus shareowner accounts totaled 5.4
million as of March 31, 2002. Although revenues were lower in first quarter
2002 compared to 2001, operating margins improved during first quarter 2002
due to Janus' efforts to control operating expenses.
Berger
------
Berger assets under management increased by $7.0 billion during the three
months ended March 31, 2002, reflecting $6.0 billion from the acquisition
of INTECH, net sales of $0.7 billion and market appreciation of $0.3
billion. Berger's acquisition of INTECH, continued ability to produce net
cash inflows for the value products, and growth in shareowner accounts to
more than 274,000, reflect the results of Berger's efforts to broaden its
product platform. These efforts also produced a 24% increase in revenues
and an increase in Berger's operating margin quarter-to-quarter.
NELSON, DST AND OTHER
Nelson's assets under management in British pounds increased to (pound)932
million as of March 31, 2002, from (pound)915 million as of December 31,
2001 and (pound)884 million as of March 31, 2001. The number of Nelson's
shareowner accounts grew approximately 7% since March 31, 2001. Nelson's
earnings were essentially breakeven for the first quarter of 2002 versus a
net loss of $1.0 million in prior year's first quarter. This improvement
reflects revenue growth and reduced costs quarter-to-quarter. Nelson
continues its ongoing efforts to expand its existing operations and develop
products and services that complement its core business. The Company
expects that during this phase of Nelson's development, Nelson will operate
at a loss as the rate of growth in expenses will exceed that of revenues
(primarily due to increases in the number of employees, technology
infrastructure development and marketing efforts). These losses, however,
are not expected to have a material impact on Stilwell's results of
operations or financial position.
22
First quarter 2002 equity earnings from DST were $19.4 million versus
$17.8 million in first quarter 2001. This improvement was primarily
attributable to higher earnings in DST's financial services segment.
Consolidated DST revenues increased 15% largely due to the inclusion of
revenue from EquiServe, in which DST acquired controlling ownership on
March 30, 2001. Revenues also increased due to a higher number of
shareowner accounts serviced (totaling 78.4 million at March 31, 2002
versus 75.6 million at December 31, 2001 and 73.5 million at March 31,
2001). Consolidated DST operating margins declined during the three months
ended March 31, 2002 due to the inclusion of EquiServe during 2002.
Interest expense increased by $8.4 million quarter-to-quarter
primarily as a result of accrued interest on Stilwell's Senior Notes,
accreted interest on the Convertible Notes, and amortization of debt issue
costs paid in connection with the Convertible Notes.
STILWELL 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 and the closing of existing funds to new
investors, as well as other factors, including, but not limited to,
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. The growth rates of
Stilwell's subsidiaries and equity investments have varied from
year-to-year, and management does not expect the high average growth rates
sustained in the late 1990's to be repeated in the foreseeable future.
Due to the downturn in the financial equity markets and weak Janus
investment performance during the second half of 2000 and all of 2001,
Stilwell's assets under management declined from levels experienced during
recent prior years. Average assets under management for the three months
ended March 31, 2002 were $188.8 billion and assets under management at
March 31, 2002 totaled $190.5 billion. Average assets under management can
fluctuate based on fund flows and changes in the market value of funds and
accounts managed by Janus, Berger or Nelson. Accordingly, revenues during
2002 are expected to decrease from the comparable 2001 periods to the
extent that the markets continue to be unfavorable to equity growth
investors and result in declines in assets under management. A decrease in
revenues could result in lower operating income and net income.
Operating margins in first quarter 2002 increased from levels
experienced throughout 2001. However, management expects that Stilwell will
continue to experience margin pressures 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. In addition, as discussed in "Recent Developments" above,
compensation costs will increase as a result of the equity grants at Janus
that occurred on April 1, 2002.
Stilwell expects to continue to participate in the earnings or losses
from its DST investment.
23
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
Three months ended March 31,
---------------------------------------
2001 2002
---------------- --------------
Cash flows provided by (used for):
Operating activities $ 150.0 $ 130.3
Investing activities (238.7) (45.0)
Financing activities 59.8 (27.1)
---------------- --------------
Net increase (decrease) (28.9) 58.2
At beginning of year 364.3 236.7
---------------- --------------
At end of period $ 335.4 $ 294.9
================ ==============
During the three months ended March 31, 2002, the Company's
consolidated cash position increased $58.2 million from December 31, 2001.
This increase resulted primarily from earnings, partially offset by funds
used for investment in INTECH and distributions to minority stockholders.
Net operating cash inflows for the three months ended March 31, 2002
were $19.7 million lower than comparable 2001. This decrease was chiefly
attributable to lower net income, partially offset by changes in working
capital and other items (e.g., in 2001, cash was used to fund ss.83(b) (of
the Internal Revenue Code) payments for JCC employees as described in Note
10 to the consolidated financial statements as presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001).
Net investing cash outflows were $45.0 million during the three months
ended March 31, 2002 compared to $238.7 million during the comparable 2001
period. In the first quarter 2002, the cash outflows related primarily to
the purchase of INTECH, while the outflows in the first quarter of 2001
were largely attributable to the purchase of 199,042 shares of JCC common
stock from various minority stockholders.
Through March 31, 2002, financing cash outflows reflect $23.5 million
in distributions to minority stockholders of consolidated subsidiaries
compared to $43.8 million during the three months ended March 31, 2001. In
the first quarter 2001, financing cash inflows reflect a $100 million
borrowing under the credit facility in connection with the purchase of
shares of JCC common stock from various minority stockholders. This amount
was repaid in early April 2001.
The Company believes its operating cash flows and available financing
resources are sufficient to fund working capital and other requirements for
the remainder of 2002. Cash flows from operations are expected to continue
during the remainder of 2002 from positive operating income, which has
historically resulted in favorable operating cash flows. Based on activity
in first quarter 2002, the Company expects that deferred commission
payments will be at similar levels to that experienced in 2001 Capital
expenditure levels are expected to be lower than in 2001, largely due to
the extensive infrastructure efforts at Janus during 1998 through 2000.
Additionally, as discussed in "Significant Developments" above, the Company
has the right to make additional investments in INTECH LLC, which could
require the use of up to approximately $50 million during the first half of
2003.
The Company has a working capital deficit at March 31, 2002 of $356.5
million. As discussed in "Recent Developments" above, Stilwell completed
the Convertible Notes offering on April 30, 2001. The Convertible Notes,
which resulted in gross proceeds to Stilwell of approximately $690 million,
are classified as current liabilities in the consolidated condensed balance
sheet as of March 31, 2002 because holders could require Stilwell to
repurchase the Convertible Notes on April 30, 2002. Pursuant to the terms
of the Convertible Notes, on April 30, 2002, holders put to Stilwell
approximately $820.7 million of the Convertible Notes (approximately $614.5
million of accreted value). Stilwell funded the purchase of the Convertible
Notes with $344.5 million in cash and $270.0 million through borrowings
under its Facilities (as defined below).
24
Stilwell may require additional capital sooner than anticipated to the
extent that Stilwell's operations do not progress as anticipated. Stilwell
would expect to obtain any additional financing for general corporate
purposes from capital market or third party financing sources.
In December 2000, Stilwell and Janus arranged $600 million in credit
facilities - a $300 million 364-Day Competitive Advance and Revolving
Credit Facility ("364-Day Facility") and a $300 million Five-Year
Competitive Advance and Revolving Credit Facility ("Five-Year Facility")
(collectively, the "Facilities"). The Facilities contain a number of
covenants that could restrict maximum utilization of the Facilities, or the
ability of the Company to issue securities that are currently available for
issuance under the Company's Shelf Registration referred to below,
including various financial covenants such as a specified financing
leverage, minimum net worth, minimum unencumbered liquidity, a fixed charge
coverage and minimum average assets under management. Stilwell and Janus
were in compliance with the various provisions of the Facilities, including
the financial covenants, as of March 31, 2002. Neither Janus nor Stilwell
had borrowings under the Facilities at March 31, 2002; however, see
discussion above regarding the Company's use of the Facilities to partially
fund the retirement of the Convertible Notes.
Pursuant to a provision included in the Facilities, if Stilwell's
average assets under management over a rolling three-month period were to
fall below $180 billion, but remain above $170 billion, the aggregate
amount available under the Facilities would be reduced to $500 million. If
the average assets under management were to fall below $170 billion, but
remain above $150 billion, the Facilities would be reduced to $400 million.
If the average assets under management were to fall below $150 billion, the
Facilities would be reduced to $300 million. Further, Stilwell would be
required to repay portions of amounts borrowed under the Facilities in
excess of the reduced credit availability amount. Prior to expiration of
the Facilities, Stilwell expects to either renew the existing arrangement
or negotiate a new facility.
The Company issued a new Shelf Registration Statement ("Shelf
Registration"), which supersedes Stilwell's previous shelf registration
statement and provides 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 Shelf Registration was declared effective by
the Securities and Exchange Commission on April 25, 2002. As of May 14,
2002, the full $800 million of securities are available for issuance under
the Shelf Registration, subject to the covenant limitations pursuant to the
Facilities.
In July 2000, the Company announced a $1 billion stock repurchase
program to be completed over a period of two years. On May 9, 2002, the
Company extended the program an additional two years to expire on July 25,
2004. The Company did not repurchase any shares during 2001 or first
quarter 2002. As of March 31, 2002, the Company had repurchased
approximately 7.2 million shares of its common stock for a total cost of
approximately $323.3 million. The Company anticipates funding future
repurchases with cash flow from operations and may consider additional
financing alternatives for these purposes.
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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,
2001, other than as described below.
Interest Rate Sensitivity
-------------------------
In February 2002, Stilwell entered into a receive-fixed, pay-float
interest rate exchange agreement with a major investment bank with respect
to Stilwell's $400 million senior notes due November 1, 2006 ("Senior
Notes"). Under the agreement, Stilwell will receive from the counterparty a
fixed 7% rate on $400 million and Stilwell will pay the counterparty based
on the six month LIBOR rate (set in arrears) plus 178 basis points.
Stilwell has designated the interest rate exchange as a hedge that
qualifies for the "shortcut" method for fair value hedges pursuant to
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") and the hedge
meets the prerequisites for the assumption of no ineffectiveness under FAS
133. The effect of the exchange agreement is to increase the Company's
exposure to fluctuations in interest rates, primarily to the six month
LIBOR rate.
For example, as of March 31, 2002, the six month LIBOR rate was 2.33%.
Assuming the agreement had been entered into on January 1, 2002, under the
exchange agreement, Stilwell would have paid to the counterparty a rate of
4.11% and would have received a rate of 7%, resulting in a net gain to
Stilwell of 2.89%, or approximately $2.9 million during the quarter.
Stilwell is required to pay to the holders of the Senior Notes an amount
equal to $7.0 million per quarter. Accordingly, the net interest cost to
Stilwell during the quarter would have been $4.1 million under this
hypothetical scenario.
A one percentage point increase in the six month LIBOR rate would
result in a $1 million increase in the net interest cost to Stilwell, while
a one percentage point decrease in the six month LIBOR rate would result in
a $1 million decrease in the net interest cost to Stilwell.
26
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, 2001.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 4.1 - Officers' Certificate pursuant to the Indenture for
Senior Debt Securities, dated November 6, 2001, is
hereby incorporated by reference from Exhibit 4.1 to
the Stilwell Financial Inc. Current Report on Form
8-K, dated April 5, 2002
Exhibit 4.2 - Liquid Yield Option(TM)Notes due 2031, Form Of First
Supplemental Indenture Dated as of April 30, 2002,
Supplement to Indenture dated as of April 30, 2001
between Stilwell Financial Inc. and JPMorgan Chase
Bank, is hereby incorporated by reference from
Exhibit 4.1 to the Stilwell Financial Inc. Current
Report on Form 8-K, dated April 30, 2002
b) Reports on Form 8-K
On January 11, 2002, the Company filed a Current Report on Form 8-K,
dated November 9, 2001, under Item 2, to provide the pro forma financial
information reflecting the various purchases of shares of Janus Capital
Corporation common stock during 2001.
On March 28, 2002, the Company furnished a Current Report on Form 8-K,
dated March 28, 2002, to report the following items: a) that Stilwell
elected to finance any zero-coupon convertible notes due April 30, 2031
(the "Convertible Notes") that are tendered for purchase on April 30, 2002,
in cash; b) that Stilwell agreed to sell 7.875% senior notes totaling
$137.5 million; and c) that Stilwell had provided a notice to the holders
of the Convertible Notes in connection with the proposed purchase, in cash,
of any Convertible Notes tendered for purchase on April 30, 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: May 15, 2002
Stilwell Financial Inc.
by: /s/ Daniel P. Connealy
-----------------------------
Daniel P. Connealy
Vice President and Chief Financial Officer
(Principal Financial Officer)
by: /s/ Douglas E. Nickerson
----------------------------
Douglas E. Nickerson
Vice President, Controller and Treasurer
(Principal Accounting Officer)
28