Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000
[ ] 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 incorporation (I.R.S. Employer
or organization) Identification No.)
920 Main Street, 21st Floor, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code (816) 218-2400
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------------------------------------- ----------------
Common Stock, $0.01 Per Share Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "SV." As of March 12, 2001, 219,061,785 shares of
common stock were outstanding. On such date, the aggregate market value of the
voting and non-voting common stock held by non-affiliates of the Company was
$6,052,522,000 (based on the closing price of the common stock on New York Stock
Exchange).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:
Document Part of Form 10-K into which incorporated
- ---------------------------------- -----------------------------------------
Company's Definitive Proxy Statement Parts I, III
for the 2001 Annual Meeting of
Shareholders, which will be filed no
later than 120 days after December 31, 2000
STILWELL FINANCIAL INC.
2000 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 8
Item 3. Legal Proceedings.............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............ 8
Executive Officers of the Company.............................. 9
PART II
Item 5. Market for the Company's Common Stock and
Related Shareholder Matters.................................. 11
Item 6. Selected Financial Data........................................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk..... 36
Item 8. Financial Statements and Supplementary Data.................... 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 72
PART III
Item 10. Directors and Executive Officers of the Company................ 73
Item 11. Executive Compensation......................................... 73
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 73
Item 13. Certain Relationships and Related Transactions................. 73
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 74
Signatures..................................................... 81
ii
Part I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
The information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
Stilwell Financial Inc. (the "Company" or "Stilwell") has three primary
business units that produce the revenues and operating income of Stilwell: Janus
Capital Corporation ("Janus"), Berger LLC ("Berger") and Nelson Money Managers
plc ("Nelson"). These units, together with Stilwell's 33% interest in DST
Systems, Inc. ("DST"), comprise over 90% of the net income of the Company. For
purposes of segment reporting, Stilwell reports Janus and Berger as one segment,
representing businesses that derive the majority of their revenues and income
from the provision of investment management under investment advisory
agreements. Nelson, DST, the holding company and the various other subsidiaries
and affiliates of Stilwell are aggregated as a separate segment.
Stilwell reports geographic area information with respect to revenues and
long-lived assets based on where services are performed. These locations are the
United States and the United Kingdom.
The information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 1. See additional information in Note 15 - Segment and
Geographic Information to the consolidated financial statements under Part II
Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 1.
Stilwell, formed on January 23, 1998, is a diversified, global financial
services company with operations through its subsidiaries and affiliates in
North America, Europe and Asia. 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.
The primary entities comprising Stilwell as of December 31, 2000 were:
o Janus, an approximate 82.5% owned subsidiary (prior to Stilwell's expected
acquisition of an additional 8% of Janus common stock in the first half of
2001 - see "Recent Developments" in Part II Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, of this Form
10-K);
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary of Stilwell;
o Berger, of which SMI owns 100% of the Berger preferred limited liability
company interests and approximately 87% of the Berger regular limited
liability company interests;
o Nelson, an 80% owned subsidiary; and
o DST, an approximate 33% equity investment owned by SMI.
1
Janus is the principal business comprising Stilwell, representing 97% of
assets under management at December 31, 2000 and 96% of revenues and 89% of net
income for the year ended December 31, 2000 (exclusive of one-time gains
discussed in Part II Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of this Form 10-K).
On June 14, 2000, the Board of Directors of Kansas City Southern
Industries, Inc. ("KCSI") approved the spin-off of its wholly-owned financial
services subsidiary, Stilwell, to KCSI's common stockholders. On July 12, 2000,
the spin-off was completed through a special dividend of Stilwell common stock
distributed to KCSI common stockholders of record on June 28, 2000 (the
"Spin-off"). Those stockholders received two shares of Stilwell common stock for
every one share of KCSI common stock owned on the record date. The total number
of Stilwell shares distributed was 222,999,786. Immediately prior to the
Spin-off, the Stilwell Board of Directors ("Stilwell Board") declared a
222,999.786-to-1 stock split effected in the form of a stock dividend to provide
a sufficient number of shares for the Spin-off. All share and per share
information has been restated to reflect this stock split, as has the
stockholders' equity information as of December 31, 2000. Additionally, the
Stilwell Board changed the par value of the Stilwell common stock to $0.01 per
share and increased the number of common shares authorized to 1,000,000,000. The
Stilwell Board also authorized 10,000,000 shares of blank series $1.00 par
Preferred Stock, none of which has been issued.
As previously disclosed, on July 9, 1999, KCSI received a tax ruling from
the Internal Revenue Service ("IRS") which states that for United States federal
income tax purposes the Spin-off qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. In February 2000,
KCSI received a favorable supplementary tax ruling from the IRS which states
that the assumption of $125 million of KCSI indebtedness by Stilwell has no
effect on the previously issued tax ruling.
Janus and Berger, each headquartered in Denver, Colorado, are investment
advisors registered with the Securities and Exchange Commission ("SEC"). Janus
serves as an investment advisor to the Janus Investment Funds, Janus Aspen
Series and Janus Adviser Series ("Janus Adviser") and as sub-advisor to the
Janus World Funds plc ("Janus World") and Janus Universal Funds ("Janus
Universal"), collectively the "Janus Advised Funds". Additionally, Janus is the
advisor or sub-advisor to other investment companies and institutional and
individual private accounts, including pension, profit-sharing and other
employee benefit plans, trusts, estates, charitable organizations, endowments
and foundations (referred to as "Janus Sub-Advised Funds and Private Accounts").
Berger is also engaged in the business of providing financial asset management
services and products, principally through a group of registered investment
companies known as the Berger Advised Funds. Berger also serves as investment
advisor or sub-advisor to other registered investment companies and separate
accounts (referred to as "Berger Sub-Advised Funds and Private Accounts").
Nelson, based in the United Kingdom, provides investment advice and investment
management services primarily to individuals who are retired or contemplating
retirement. DST, together with its subsidiaries and joint ventures, offers
information processing and software services and products through three
operating segments: financial services, output solutions and customer
management. Additionally, DST holds certain investments in equity securities,
financial interests and real estate holdings.
JANUS
Janus derives its revenues and net income primarily from advisory services
provided to the Janus Advised Funds and Janus Sub-Advised Funds and Private
Accounts. As of December 31, 2000, Janus had total assets under management of
$248.8 billion, of which $202.5 billion were in the Janus Advised Funds. Janus
primarily offers equity portfolios to investors, which comprised approximately
94% of total assets under management for Janus at December 31, 2000. At that
date, funds advised by Janus had approximately six million shareowner accounts.
2
Pursuant to investment advisory agreements with each of the Janus Advised
Funds and the Janus Sub-Advised Funds and Private Accounts, Janus provides
overall investment management services. These agreements generally provide that
Janus will furnish continuous advice and recommendations concerning investments
and reinvestments in conformity with the investment objectives and restrictions
of the applicable fund or account.
Investment advisory fees are negotiated separately and subject to extreme
market pressures. These fees vary depending on the type of the fund or account
and the size of the assets managed, with fee rates above specified asset levels
being reduced. Fees from institutional and individual private accounts are
generally computed on the basis of the market value of the assets managed at the
end of the preceding month and paid in arrears on a monthly basis.
In order to perform its investment advisory functions, Janus conducts
fundamental investment research and valuation analysis. In general, Janus's
investment philosophy tends to focus on the earnings growth of individual
companies relative to their peers or the economy. For this reason, Janus's
proprietary analysis is geared to understanding the earnings potential of the
companies in which it invests. Further, Janus portfolios are constructed one
security at a time rather than in response to preset regional, country, economic
sector or industry diversification guidelines.
Emphasizing the proprietary work of Janus's own analysts, most research is
performed in-house. Research activities include, among others, review of
earnings reports, direct contacts with corporate management, analysis of
contracts with competitors and visits to individual companies.
The Janus Advised Funds generally bear the expenses associated with the
operation of each fund and the issuance and redemption of its securities, except
that advertising, promotional and sales expenses of the Janus Advised Funds are
assumed by Janus. Examples of fees and expenses include, among others,
investment advisory services, shareowner servicing, transfer agency and
custodial services, legal and auditing, as well as expenses of preparing,
printing and mailing prospectuses and shareowner reports.
Janus has three primary operating subsidiaries: Janus Service Corporation
("Janus Service"), Janus Distributors, Inc. ("Janus Distributors") and Janus
Capital International Ltd. ("Janus International"). Janus International has two
primary subsidiaries: Janus International Limited ("JIL") and Janus
International (Asia) Limited ("Janus Asia").
o Pursuant to transfer agency agreements, which are subject to renewal
annually, Janus Service provides transfer agent record-keeping,
administration and shareowner services to the Janus Advised Funds (except
Janus World and Janus Universal) and their shareowners. Each fund pays
Janus Service fees for these services. To provide a consistent and reliable
level of service, Janus Service maintains a highly trained group of
telephone representatives and utilizes technology to provide immediate data
to support call center and shareowner processing operations. This approach
includes the utilization of sophisticated telecommunications systems,
"intelligent" workstation applications, document imaging, an automated work
distributor and an automated call management system. Additionally, Janus
Service offers to its investors access to their accounts, including the
ability to perform certain transactions, using touch tone telephones or via
the Internet. These customer service related enhancements provide Janus
Service with additional capacity to handle the high shareowner volume that
can be experienced during market volatility.
o Pursuant to a distribution agreement, Janus Distributors, a limited
registered broker-dealer with the SEC, serves as the distributor for the
Janus Advised Funds. Janus expends substantial resources in media
advertising and direct mail communications to its existing and potential
Janus Advised Funds' shareowners and in providing personnel and
telecommunications equipment to respond to inquiries via toll-free
telephone lines. Janus also utilizes mutual fund supermarkets and other
third party distribution channels.
3
Shareowner accounting and servicing is handled by the mutual fund
supermarket or third party sponsor and Janus pays a fee to the respective
sponsor equal to a percentage of the assets under management acquired
through such distribution channels. Janus had approximately $24.5, $54.8
and $118.1 billion in average assets under management for the years ended
December 31, 1998, 1999 and 2000, respectively, that were generated through
these third party distribution channels.
o Janus International is an investment advisor registered with the SEC. Janus
International also provides marketing and client services for Janus World
outside of Europe.
o JIL, an England and Wales company, is an investment advisor for certain
non-U.S. customers, including Janus World, and is registered with the
United Kingdom's Investment Management Regulatory Organization Limited. JIL
also conducts securities trading from London and handles marketing and
client servicing for Janus World in Europe.
o Janus Asia provides marketing and trading services in Hong Kong.
BERGER
Berger is an investment advisor to the Berger Advised Funds, which includes
a series of Berger mutual funds, as well as to the Berger Sub-Advised Funds and
Private Accounts. Additionally, Berger owns 80% of Berger/Bay Isle LLC, which
acts as the investment advisor to privately managed separate accounts. As of
December 31, 2000, Berger had approximately $7.6 billion of assets under
management, of which the Berger Advised Funds comprised $6.1 billion.
Berger derives its revenues and net income from advisory services provided
to the various funds and accounts. Berger's investment advisory fees are
negotiated separately with each fund and vary depending on the type of fund.
Advisory fees for services provided to the Berger Sub-Advised Funds and Private
Accounts vary depending upon the type of fund or account and, in some
circumstances, size of assets managed, with fee rates above specified asset
levels being reduced.
Berger utilizes two methods for securities evaluation. First, certain
Berger funds follow growth-style investing, using a "bottom-up" fundamental
research and valuation analysis. This growth-style approach toward equity
investing requires the companies in which Berger invests to have high relative
earnings per share growth potential, to participate in large and growing
markets, to have strong management and to have above average expected total
returns. Berger's internal staff of research analysts, together with the various
portfolio managers, performs research for these growth-style funds. Primary
research tools include, among others, financial publications, company visits,
corporate rating services and earnings releases.
Certain Berger funds, however, emphasize value-style investing, which
focuses on companies that are out of favor with markets or otherwise are
believed to be undervalued (due to low prices relative to assets, earnings and
cash flows or to competitive advantages not yet recognized by the market).
Investment advice for the value funds is provided by third parties under
sub-advisory agreements.
Berger generally pays most expenses incurred in connection with providing
investment management and advisory services to its respective funds. All charges
and expenses other than those specifically assumed by Berger are paid by the
funds. Examples of fees and expenses include, among others, investment advisory
services, shareowner servicing, transfer agency and custodial services, legal
and auditing, as well as expenses of preparing, printing and mailing
prospectuses and shareowner reports.
4
Berger marketing efforts are balanced between institutional and retail
distribution opportunities. Certain of the Berger funds sold in retail markets
have approved distribution plans ("12b-1 Plans") pursuant to Rule 12b-1 under
the Investment Company Act of 1940. These 12b-1 Plans provide that Berger shall
engage in activities (e.g., advertising, marketing and promotion) that are
intended to result in sales of the shares of the funds.
The Berger Advised Funds have agreements with a trust company to provide
accounting, record-keeping and pricing services, custody services, transfer
agency and other services. The trust company has engaged DST as sub-agent to
provide transfer agency and other services for the Berger Advised Funds. Berger
performs certain administrative and record-keeping services not otherwise
performed by the trust company or its sub-agent. Each of the Berger Advised
Funds pays to Berger fees for these services, which are in addition to the
investment advisory fees paid.
Berger Distributors LLC serves as distributor of the Berger Advised Funds
and is a limited registered broker-dealer. Berger Distributors LLC continuously
offers shares of the Berger funds and solicits orders to purchase shares. Berger
also utilizes mutual fund supermarket and other third party distribution
channels. Shareowner accounting and servicing is handled by the mutual fund
supermarket or third party sponsor and Berger pays a fee to the respective
sponsor equal to a percentage of the assets under management acquired through
such distribution channels. Approximately 28%, 28% and 25% of total Berger
assets under management were generated through these third party distribution
channels as of December 31, 1998, 1999 and 2000, respectively.
Berger formerly owned 50% of a joint venture with the Bank of Ireland Asset
Management (U.S.) Limited ("BIAM"). The joint venture, BBOI Worldwide LLC
("BBOI"), served as the investment advisor and sub-administrator to a series of
funds, referred to as the "Berger/BIAM Funds." Berger sold its interest in BBOI
during second quarter 2000. Berger continues to manage the Berger/BIAM Funds
with BIAM serving as the investment advisor to the funds under a sub-advisory
agreement.
NELSON
Nelson, operating primarily in the United Kingdom, provides two distinct
but interrelated services to individuals that generally are retired or
contemplating retirement: investment advice and investment management. Clients
are assigned a specific investment advisor, who meets with each client
individually and conducts an analysis of the client's investment objectives and
then recommends the development of a portfolio to meet those objectives.
Recommendations for the design and ongoing maintenance of the portfolio
structure are the responsibility of the investment advisor. The selection and
management of the instruments / securities which constitute the portfolio are
the responsibility of Nelson's investment management team. Nelson's investment
managers utilize a "top-down" investment methodology in structuring investment
portfolios, beginning with an analysis of macroeconomic and capital market
conditions. Various analyses are performed by Nelson's investment research staff
to help construct an investment portfolio that adheres to each client's
objectives as well as to Nelson's investment strategy. Through continued
investment in technology, Nelson has developed proprietary systems to allow the
investment managers to develop a balanced portfolio from a broad range of
investment instrument alternatives (e.g., fixed interest securities, tax free
corporate bonds, international and domestic securities).
For providing this initial investment advice, Nelson receives a fee
calculated as a percentage of capital invested into each individual investment
portfolio. Nelson earns annual fees for the ongoing management and
administration of each investment portfolio. These fees are based on the type of
investments and amount of assets contained in each investor's portfolio. The fee
schedules typically provide lower incremental fees for assets under management
above certain levels.
5
DST
DST operates throughout the United States, with operations in Kansas City,
Northern California and various locations on the East Coast, as well as
internationally in Canada, Europe, Africa and the Pacific Rim. DST has a single
class of common stock that is publicly traded on the New York Stock Exchange and
the Chicago Stock Exchange. In December 1998, a wholly-owned subsidiary of DST
merged with USCS International, Inc., resulting in a reduction of Stilwell's
ownership of DST to approximately 32% (which has subsequently increased to
approximately 33% as a result of DST's repurchase of shares of its common
stock). Stilwell reports DST as an equity investment in the consolidated
financial statements.
DST is organized into three operating segments: financial services, output
solutions and customer management.
DST's financial services segment serves primarily mutual funds, investment
managers, insurance companies, banks, brokers and financial planners. DST has
developed a number of proprietary software systems for use by the financial
services industry. Examples of such software systems include, among others,
mutual fund shareowner and unit trust accounting and record-keeping systems, a
securities transfer system, a variety of portfolio accounting and investment
management systems and a workflow management system. DST provides certain
services to Berger and Janus.
DST's output solutions segment provides complete bill and statement
processing services and solutions, including electronic presentment, which
include generation of customized statements that are produced in automated
facilities designed to minimize turnaround time and mailing costs. Output
processing services and solutions are provided to customers of DST's other
segments as well as to other industries.
DST's customer management segment provides customer management and open
billing solutions to the video/broadband, direct broadcast satellite, wireless,
and wire-line and Internet-protocol telephony, internet and utility markets
worldwide.
DST also holds investments in equity securities with a market value of
approximately $1.4 billion at December 31, 2000, including investments in
Computer Sciences Corporation and State Street Corporation.
COMPETITION
Stilwell's subsidiaries and equity investments compete with brokerage and
investment banking firms, insurance companies, banks, and other financial
institutions in all aspects of business. Janus and Berger compete with hundreds
of other mutual fund management distribution and service companies that
distribute their fund shares through a variety of methods including affiliated
and unaffiliated sales forces, broker-dealers and direct sales to the public.
Competition for Janus and Berger is based on the methods of distribution of fund
shares, the ability to meet the changing needs of investors, the ability to
achieve superior investment management performance, the type and quality of
shareowner services, and the success of marketing efforts.
Nelson competes in the United Kingdom with other money managers in
obtaining new client business. Competition for Nelson is based on the ability to
achieve reasonable investment management returns, the quality of investor
services and the success of marketing efforts.
DST competes with third party providers, in-house systems and
broker-dealers for the provision of processing services. DST's ability to
compete is based on, among other things, the quality of service and features
offered, including the ability to handle rapidly changing transaction volumes,
commitment to hardware capacity and software development and price.
6
Competition in the mutual fund industry continues to increase as a result
of greater flexibility afforded to banks and other financial institutions to
sponsor mutual funds and distribute mutual fund shares, and as a result of
consolidation and acquisition activity within the industry. In addition, the
mutual fund industry, in general, faces significant competition as the number of
mutual funds continues to increase, marketing and distribution channels become
more creative and complex, and investors place greater emphasis on published
fund recommendations and investment category rankings. Barriers to entry to the
investment management business are relatively low. The mutual fund industry as a
whole also faces increasing competition from broker-dealers, banks and other
intermediaries that are aggressively promoting various technologies and services
to facilitate portfolio planning and direct securities investments by customers.
EMPLOYEES
As of December 31, 2000, Janus had approximately 3,100 employees (of which
approximately 170 were temporary), SMI and Berger had approximately 110
employees, Nelson had approximately 245 employees and Stilwell Financial Inc.
had 17 employees. None of the employees of Stilwell are represented by a labor
union.
On February 2, 2001, Janus reported that it was eliminating 468 jobs from
its operations unit, Janus Service, as a result of its aggressive use of
technology to moderate costs. The job reduction did not affect Janus's
investment team. See additional information under "Recent Developments" in Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K.
7
ITEM 2. PROPERTIES
In the opinion of management, the various facilities, office space and
other properties owned or leased by the Company (and its subsidiaries and
affiliates) are adequate for existing operating needs.
Janus
Janus leases from non-affiliates 501,000 square feet of office space in
three facilities for investment, administrative, marketing, information
technology and shareowner processing operations, and approximately 108,900
square feet for mail processing and storage requirements. These corporate
offices and mail processing facilities are located in Denver, Colorado. In
September 1998, Janus opened an investor service and data center in Austin,
Texas and currently leases nearly 320,000 square feet at this facility. In first
quarter 2000, Janus opened an additional 138,000 square feet of office space in
Denver to accommodate an increased volume of shareowner activity. Janus has
1,200 square feet of general office space in Aspen, Colorado and leases 5,200
square feet of office space in Westport, Connecticut for sales and marketing
activities, 2,500 square feet of office space in London, England for securities
research and trading and 6,700 square feet in Hong Kong for investment and
marketing operations.
Berger
Berger leases approximately 50,800 square feet of office space in Denver,
Colorado from a non-affiliate for its administrative and corporate functions.
Nelson
Nelson leases 8,300 square feet and owns 2,300 square feet of office space
in Chester, England, the location of its corporate headquarters, investment
operations and one of its marketing offices. Nelson has approximately 12,000
square feet of corporate office space in Northwich, England. Also, Nelson leases
six branch marketing offices totaling approximately 13,800 square feet in the
following locations in the United Kingdom: London, Lichfield, Bath, Durham,
Stirling and York.
Stilwell
Stilwell leases approximately 12,500 square feet of office space in Kansas
City, Missouri from a non-affiliate for its corporate functions.
ITEM 3. LEGAL PROCEEDINGS
The information set forth in response to Item 103 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, "Other Items - Litigation" of this Form 10-K is
incorporated by reference in response to this Item 3. In addition, see
discussion in Part II Item 8, Financial Statements and Supplementary Data, at
Note 11 - Commitments and Contingencies, of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
month period ended December 31, 2000.
8
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-K, the following list is included as
an unnumbered Item in Part I of this Form 10-K in lieu of being included in
Stilwell's Definitive Proxy Statement. All executive officers are elected
annually and serve at the discretion of the Board of Directors (or in the case
of Mr. T. H. Bailey, the Janus Board of Directors). Certain of the executive
officers have employment agreements with the Company.
Name Age Position and Offices
Landon H. Rowland 63 Director, Chairman of the Board, President and
Chief Executive Officer
Thomas H. Bailey 63 Chairman, President and Chief Executive
Officer of Janus
Joseph D. Monello 56 Vice President of Development
Danny R. Carpenter 54 Executive Vice President
Anthony P. McCarthy 54 Vice President - Finance
Gwen E. Royle 40 Vice President - Legal and Corporate Secretary
Douglas E. Nickerson 35 Vice President and Controller
Landon H. Rowland has been Chairman of the Board, President and Chief
Executive Officer of Stilwell since its inception. He was Chairman of the Board
of KCSI from May 1997 to December 2000, President of KCSI from July 1983 to July
2000 and Chief Executive Officer of KCSI from January 1987 to July 2000. Mr.
Rowland is also a director of Janus, SMI, Nelson, KCSI and Grupo Transportacion
Ferroviaria Mexicana, S.A. de C.V.
Thomas H. Bailey has continuously served as Chairman, President and Chief
Executive Officer of Janus since 1978. See information regarding a stock
purchase agreement with Mr. Bailey and another Janus stockholder under "Other
Items" in Part II Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of this Form 10-K.
Joseph D. Monello has been Vice President of Development since October
2000. He served as Vice President and Chief Operating Officer from Stilwell's
inception to October 2000. Mr. Monello served as Chief Financial Officer of KCSI
from March 1994 to July 2000. Mr. Monello is also a director of SMI and Nelson.
Danny R. Carpenter has been Executive Vice President since October 2000. He
served as Vice President - Secretary from Stilwell's inception to October 2000.
Mr. Carpenter was Vice President - Finance and Tax of KCSI from May 1995 to July
2000 and served as Vice President - Tax of KCSI from June 1993 to May 1995.
Prior to June 1993, he was a member in the law firm of Watson & Marshall, L.C.,
Kansas City, Missouri. Mr. Carpenter is also a director of SMI and Nelson.
Anthony P. McCarthy has been Vice President - Finance of Stilwell since its
inception. He served as Vice President and Treasurer of KCSI from May 1996 to
July 2000. He was Treasurer of KCSI from December 1989 to May 1996.
9
Gwen E. Royle has been Vice President - Legal and Corporate Secretary since
October 2000. She served as Vice President - Legal from Stilwell's inception to
October 2000. Ms. Royle served as Senior Assistant Vice President and Tax
Counsel of KCSI from November 1996 to July 2000. She was Tax Counsel of KCSI
from July 1995 to November 1996. She was a member in the law firm Slagle,
Bernard & Gorman, P.C. from 1991 to July 1995.
Douglas E. Nickerson has been Vice President and Controller of Stilwell
since its inception. He served as Assistant Comptroller of KCSI from September
1997 to July 2000 and served as Manager of Financial Reporting of KCSI from
October 1995 to September 1997. From January 1995 to October 1995, Mr. Nickerson
was financial reporting manager of Ferrellgas Partners, L.P., which is engaged
in the sale, distribution, marketing and trading of propane and other natural
gas liquids.
There are no arrangements or understandings between the executive officers
and any other person pursuant to which the executive officer was or is to be
selected as an officer, except with respect to the executive officers who have
employment agreements with Stilwell. No officers are related to one another by
family.
10
Part II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information set forth on the cover (page i) under the heading "Company
Stock," and in Part II Item 8, Financial Statements and Supplementary Data, at
Note 14 - Quarterly Financial Data (Unaudited) of this Form 10-K is incorporated
by reference in partial response to this Item 5.
The payment and amount of dividends will be reviewed periodically and
adjustments considered that are consistent with growth in real earnings and
prevailing business conditions. In July 2000, the Stilwell Board of Directors
authorized a 222,999.786-to-1 stock split effected in the form of a stock
dividend to provide a sufficient number of shares for the Spin-off. Unrestricted
retained earnings at December 31, 2000 totaled $452.3 million.
As a holding company, Stilwell's ability to pay dividends is dependent on
the dividends and income it receives from its subsidiaries. At the present time,
Stilwell's primary source of cash is dividends received from Janus. The payment
of dividends by Janus is subject to the discretion of the Janus Board of
Directors ("Janus Board"). Although Stilwell has a contractual obligation to
cause such payment, Thomas H. Bailey, the Chairman, President and Chief
Executive Officer of Janus, has certain rights to select a majority of the Janus
Board, pursuant to the stock purchase agreement among Stilwell, Mr. Bailey and
another Janus stockholder (see discussion under "Other Items" in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of this Form 10-K).
As of March 12, 2001, there were 4,971 holders of the Company's common
stock based upon an accumulation of the registered stockholder listing.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included under Item 7 of the this Form 10-K and the consolidated
financial statements and the related notes thereto, and the Report of
Independent Accountants thereon, included under Item 8 of this Form 10-K, and
such data is qualified by reference thereto.
Year ended December 31,
------------------------------------------------------------
1996(i) 1997 1998(ii) 1999 2000(iii)
--------- ------- ------- -------- -----------
(dollars in millions, except per share data)
Financial Data:
Income Statement:
Revenues........................ $ 329.6 $ 485.1 $ 670.8 $1,212.3 $ 2,248.1
Operating expenses.............. 197.8 285.9 390.2 694.0 1,211.8
--------- ------- ------- -------- -----------
Operating Income.............. 131.8 199.2 280.6 518.3 1,036.3
Equity in earnings of
unconsolidated affiliates..... 68.6 24.9 25.8 46.7 70.8
Gain on litigation settlement... 44.2
Gain on sale of Janus common
stock......................... 15.1
Reduction in ownership of DST... (29.7)
Other, net...................... 8.2 5.8 12.6 21.5 36.0
--------- ------- ------- -------- -----------
Pretax Income................. 208.6 229.9 289.3 586.5 1,202.4
Income tax provision............ 58.2 87.0 103.7 216.1 427.0
Minority interest............... 15.8 24.9 33.4 57.3 111.7
--------- ------- ------- -------- -----------
Net Income.................... $ 134.6 $ 118.0 $ 152.2 $ 313.1 $ 663.7
========= ======= ======= ======== ===========
Year ended December 31,
------------------------------------------------------------
1996(i) 1997 1998(ii) 1999 2000(iii)
--------- ------- ------- --------- ------------
Per Share Data (iv):
Weighted average Common shares
outstanding (in thousands)... 223,000 223,000 223,000 223,000 222,445
Basic Earnings per share........ $ 0.60 $ 0.53 $ 0.68 $ 1.40 $ 2.98
Weighted average Diluted Common
shares outstanding (in
thousands)................... 223,000 223,000 223,000 223,000 225,423
Diluted Earnings per share...... $ 0.60 $ 0.53 $ 0.67 $ 1.38 $ 2.90
Cash dividends per Common n/a n/a n/a n/a $ 0.02
share (v)....................
12
December 31,
------------------------------------------------------------
1996 1997 1998 1999 2000
--------- ------- ------- -------- ----------
(dollars in millions)
Balance Sheet:
Total Assets.................... $ 548.2 672.6 $ 822.9 $ 1,231.5 $ 1,581.0
Long term obligations:
Third Parties............... 0.1
KCSI........................ 117.3 84.1 16.6
Operating Data:
Total assets under management $ 50.3 $ 71.6 $ 113.1 $ 257.4 $ 257.8
(in billions).................
Total shareowner accounts 2.5 2.7 3.0 4.3 6.3
(in millions).................
Ratio of earnings to fixed
charges (vi).................. 15.98 15.04 22.42 47.14 75.94
(i) Includes a one-time after-tax gain of $47.7 million, representing
Stilwell's proportionate share of the one-time gain recognized by DST
in connection with the merger of The Continuum Company, Inc., formerly
a DST equity affiliate, with Computer Sciences Corporation in a
tax-free share exchange.
(ii) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax) resulting from the merger of a wholly-owned subsidiary of
DST with USCS International, Inc. ("USCS"). DST accounted for the
merger under the pooling of interests method. The charge reflects
Stilwell's reduced ownership of DST (from 41% to approximately 32%),
together with Stilwell's proportionate share of DST and USCS fourth
quarter merger-related costs.
(iii)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 $10.5 million representing the Company's proportionate
share of non-recurring gain items recorded by DST resulting from
litigation settlement and sales of marketable securities.
(iv) The per share data presented for the years ended December 31, 1996,
1997, 1998 and 1999 has been restated to reflect the 222,999.786-to-1
stock split effected in the form of a stock dividend on July 12, 2000.
(v) Stilwell declared dividends of $0.01 per share for each of the third
and fourth quarters of 2000.
(vi) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of pretax income less equity in earnings of
unconsolidated affiliates plus fixed charges and distributed earnings
of unconsolidated affiliates. Fixed charges include gross interest
expense, amortization of deferred financing expenses and an amount
equivalent to interest included in rental charges. Stilwell has
assumed that one-third of rental expense is representative of the
interest factor.
The information set forth in response to Item 301 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 6.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The discussion set forth below, as well as other portions of this Form
10-K, contains comments not based upon historical fact. 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-K. Readers can
identify these forward-looking comments by the 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. ("Stilwell" or the "Company")
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
Registration Statement on Form 10 dated June 15, 2000, which is on file with the
U.S. Securities and Exchange Commission (Files No. 001-15253) and is hereby
incorporated by reference herein. Readers are strongly encouraged to consider
these factors when evaluating any forward-looking comments. The Company will not
update any forward-looking comments set forth in this Form 10-K.
The discussion herein is intended to clarify and focus on the Company's
results of operations, certain changes in its financial position, liquidity,
capital structure and business developments for the periods covered by the
consolidated financial statements included under Item 8 of this Form 10-K. This
discussion should be read in conjunction with these consolidated financial
statements, the related notes and the Report of Independent Accountants thereon,
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 during
the period presented, 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.
On January 23, 1998, KCSI formed Stilwell as a holding company for the
group of businesses and investments that comprised the financial services
segment of KCSI. The primary entities comprising the financial services segment
are Janus Capital Corporation ("Janus"), an 82.5% owned subsidiary; Stilwell
Management, Inc. ("SMI"), a wholly-owned subsidiary; Berger LLC ("Berger"), of
which SMI owns 100% of the Berger preferred limited liability company interests
and approximately 87% of the Berger regular limited liability company interests;
Nelson Money Managers plc ("Nelson"), an 80% owned subsidiary; and DST Systems,
Inc. ("DST"), an equity investment in which SMI holds an approximate 33%
interest. KCSI transferred to Stilwell KCSI's ownership interests in Janus,
Berger, Nelson, DST and certain other financial services-related assets, and
Stilwell assumed all of KCSI's liabilities associated with the assets
transferred, effective July 1, 1999.
For purposes of segment reporting, Stilwell reports Janus and Berger as one
segment, representing businesses that derive the majority of their revenues and
income from the provision of investment management under investment advisory
agreements. Nelson, DST, the holding company and the various other subsidiaries
and affiliates of Stilwell are aggregated as a separate segment.
14
RECENT DEVELOPMENTS
Stilwell to Increase Ownership Interest in Janus. During first quarter
2001, Stilwell announced several transactions that, upon completion, will
increase Stilwell's ownership interest in Janus from 82.5% to approximately 91%,
based on maximum participation of Janus employees in a Janus stock repurchase
program as discussed below.
Stilwell acquisition of Janus shares from Thomas H. Bailey. On January 26,
2001, Stilwell announced that it expected to acquire 600,000 shares of Janus
common stock from Thomas H. Bailey, Janus's Chairman, Chief Executive Officer
and President, through the exercise of put rights by Mr. Bailey. The
acquisition, which is expected to close in second quarter 2001, will cost
approximately $603 million.
Stilwell acquisition of Janus shares from other minority stockholders. On
March 16, 2001, Stilwell acquired an additional 199,042 shares of Janus from
several minority stockholders. Approximately 160,900 of these shares were
acquired by certain Janus employees in 1995 when Janus stock ownership was first
extended to a broader group of key management employees other than Mr. Bailey.
The remainder of the shares have been held since 1984 or before. Stilwell
purchased the shares through the exercise of put rights, virtually eliminating
all mandatory put rights to Stilwell except for those on remaining shares held
by Mr. Bailey (after the purchase by Stilwell of 600,000 shares of Mr. Bailey's
Janus stock as discussed above). The shares cost approximately $200 million,
which was funded through cash and borrowings under the Facilities (see below).
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 this Form 10-K).
Janus offer to purchase shares of Janus common stock from employees. Janus
has offered to purchase from employees (other than Mr. Bailey) up to 50% of
their eligible shares of Janus common stock. If all eligible shares were
purchased under this offer, Janus would acquire approximately 143,000 shares of
its common stock for approximately $145 million. The shares would then be
available for Janus to utilize in connection with its Long Term Incentive Plan
("Janus Incentive Plan").
Net effect of transactions. Upon completion of the purchase of the 799,042
shares of Janus common stock, and assuming the maximum number of shares were
purchased under Janus's planned repurchase offer, Stilwell's ownership of Janus
would increase to approximately 91.4%. Mr. Bailey would continue to own
approximately 6.2% and other Janus employees would own the remaining 2.4%. In
addition, each of the Janus employees participating in these transactions will
continue to own other shares of Janus common stock and, consistent with Janus's
goal of broadening corporate equity ownership, will be eligible to receive
future grants of Janus stock - from the approximately 370,000 shares available
at Janus after these transactions - in connection with the Janus Incentive Plan.
Stilwell and Janus have sufficient resources (i.e., available cash and the
Facilities - see below) to fund these acquisitions. However, Stilwell also is
considering alternative financing methods. Stilwell will account for these
transactions under the purchase method of accounting. Any excess cost over the
fair value of net underlying assets acquired will be amortized in accordance
with Accounting Principles Board No. 17, Intangible Assets.
Janus Reduction in Workforce. On February 2, 2001, Janus reported that it
was eliminating 468 jobs from its operations unit, Janus Service Corporation, as
a result of its aggressive use of technology to moderate costs. The job
reduction did not affect Janus's investment team, which continues to recruit and
add analysts to its staff. Based on initial computations, Stilwell expects Janus
to record a non-recurring charge in first quarter 2001 related to severance
benefits that will reduce Stilwell's diluted earnings per share by approximately
$0.02. The reduction in workforce, however, is expected to save expenses in the
future and to contribute an annual increase of approximately $0.03 to $0.05 per
diluted share.
15
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 this Form 10-K). 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 $24.1
million of compensation expense relating to this grant during 2000.
RESULTS OF OPERATIONS
Significant Developments
Consolidated operating results from 1998 to 2000 were affected by the
following significant developments.
Distribution of Stilwell Common Stock to KCSI Common Stockholders. On June
14, 2000, the Board of Directors of KCSI ("KCSI Board") approved the spin-off of
its wholly-owned financial services subsidiary, Stilwell, to KCSI's common
stockholders. On July 12, 2000, the spin-off was completed through a special
dividend of Stilwell common stock distributed to KCSI common stockholders of
record on June 28, 2000 ("Spin-off"). Those stockholders received two shares of
Stilwell common stock for every one share of KCSI common stock owned on the
record date. The total number of Stilwell shares distributed was 222,999,786.
Immediately prior to the Spin-off, the Stilwell Board of Directors ("Stilwell
Board") declared a 222,999.786-to-1 stock split effected in the form of a stock
dividend to provide a sufficient number of shares for the Spin-off.
Additionally, the Stilwell Board changed the par value of the Stilwell common
stock to $0.01 per share and increased the number of common shares authorized to
1,000,000,000. The Stilwell Board also authorized 10,000,000 shares of blank
series $1.00 par Preferred Stock, none of which has been issued.
As previously disclosed, on July 9, 1999, KCSI received a tax ruling from
the Internal Revenue Service ("IRS") which states that for United States federal
income tax purposes the Spin-off qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. Additionally in
February 2000, KCSI received a favorable supplementary tax ruling from the IRS
that states that the assumption of $125 million of KCSI indebtedness by Stilwell
has no effect on the previously issued tax ruling.
New Stilwell Credit Facility. In 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 proceeds of any borrowings under the
facilities are to be used for working capital and general corporate purposes,
including repurchases of outstanding shares of common stock.
Under the 364-Day Facility, both Stilwell and Janus have available $150
million for use in operations. Under the Five-Year Facility, Janus has available
$100 million and Stilwell $200 million. Stilwell guarantees the Janus portion of
the Facilities. In addition, Janus and Stilwell each have the right to modify
and/or terminate the Facilities pursuant to required notice provisions.
Two borrowing options are available under the credit facilities: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive option is based on rates obtained
from bids as selected by either Stilwell or Janus in accordance with competitive
auction procedures. Interest on the revolving credit option accrues based on the
type of loans with rates computed using LIBOR plus a spread, which will vary
based on Stilwell's consolidated leverage ratio, ranging from 0.30% to 0.55%.
Under the competitive loan feature of the Facilities, a different percentage may
be added to or subtracted from LIBOR.
16
The 364-Day Facility has a facility fee ranging from 0.125% to 0.200% per
annum and the Five-Year Facility has a facility fee of 0.150% to 0.250% per
annum. The Facilities include a utilization fee of 0.175% to 0.375% per annum on
the amount of outstanding loans for each day on which the aggregate utilization
of the Facilities exceeds 50% of the total $600 million commitment.
Stilwell, as a continuation of its practice of providing credit facilities
to its subsidiaries, has provided a $100 million intercompany credit facility to
Janus for use by Janus for general corporate purposes, effectively reducing the
amount of the Facilities that may be available for Stilwell's other purposes.
This intercompany facility expires on December 31, 2001.
The Facilities contain a number of covenants, including various financial
covenants, which could restrict maximum utilization of the Facilities. Stilwell
and Janus were in compliance with the various provisions of the Facilities,
including the financial covenants, as of December 31, 2000. Neither Janus nor
Stilwell had borrowings under the Facilities at December 31, 2000.
Concurrent with the completion of the Facilities, the $200 million Facility
(as defined in a separate discussion below) entered into in January 2000 was
cancelled.
Stilwell Sale of Janus Stock and Janus Issuance of Restricted Stock. In the
first quarter of 2000, Stilwell sold to Janus 192,408 shares of Janus common
stock and such shares will be available for awards under the Janus Incentive
Plan. The sale of those shares resulted in an after-tax gain of approximately
$15.1 million and reduced Stilwell's ownership to approximately 81.5%
(subsequently increased as a result of Janus purchases of its common stock).
Janus has agreed that for so long as it has available shares of Janus common
stock for grant under the Janus Incentive Plan, it will not award phantom stock,
stock appreciation rights or similar rights.
Subsequent to the repurchase of these shares from Stilwell, Janus granted
35,660 restricted shares of its common stock to certain Janus employees pursuant
to restricted stock agreements. This issuance reduced Stilwell's ownership
percentage to slightly below 81.5% (prior to consideration of any shares
repurchased in connection with the expected purchases as discussed above and the
departure of Janus's Chief Investment Officer as discussed below).
Common Stock Repurchase Program. On July 25, 2000, the Stilwell Board
authorized the expenditure of up to $1 billion to repurchase shares of Stilwell
common stock over the next two years. Stilwell has been repurchasing shares
under this program through open market transactions in accordance with
Securities and Exchange Commission ("SEC") rules. The number of shares
repurchased will depend on various factors, including the price of the stock and
market conditions.
Through December 31, 2000, Stilwell repurchased, using existing cash flows,
approximately 7.2 million shares of its common stock for an aggregate cost of
approximately $323.3 million. Stilwell expects to fund the share repurchase
program from its cash flow and other available sources of funds.
Litigation Settlement. In January 2000, Stilwell received approximately
$44.2 million in connection with the settlement of a legal dispute related to a
former equity investment. The settlement agreement resolves all outstanding
issues related to this former equity investment. In the first quarter of 2000,
Stilwell recognized an after-tax gain of approximately $27.3 million as a result
of this settlement.
Departure of Janus's Chief Investment Officer. On September 25, 2000,
Janus's Chief Investment Officer and Director of Research, James P. Craig, III,
left Janus to manage money for a new charitable foundation established by Mr.
Craig and his wife. Mr. Craig's responsibilities were assumed by Janus's
Executive Investment Committee, a group formed by Mr. Craig over a year ago and
comprised of several portfolio managers and
17
Mr. Bailey. Mr. Craig had previously been identified as the successor to Mr.
Bailey in the event that Mr. Bailey left Janus. A revised succession plan has
not yet been developed.
Janus purchased (with existing cash) Mr. Craig's shares of Janus at their
fair market value (approximately $78 million) as set forth in a stock
restriction agreement. Upon Janus's repurchase of these shares, Stilwell's
ownership percentage of Janus increased to approximately 82.3%. Stilwell
recorded this acquisition under the purchase method of accounting and the
resulting intangibles and goodwill are being amortized over a period of 20
years.
Stilwell Stock added to the S&P 500 Index. Effective with the Spin-off,
Standard and Poors (S&P) Financial Information Services announced that it was
adding Stilwell to its S&P 500 index. Management believes that the Company's
inclusion in this index of leading U.S. companies will have a positive long-term
impact on the Stilwell stock and help build the Company's shareholder base.
Stilwell Credit Facility with KCSI. In January 2000, KCSI arranged a $200
million 364-day senior unsecured Competitive Advance/Revolving Credit Facility
("$200 million Facility"). KCSI borrowed $125 million under this facility and
used the proceeds to retire other debt obligations. Stilwell assumed the $200
million Facility, including the $125 million borrowed thereunder, thereby
reducing its stockholders' equity. Upon such assumption, KCSI was released from
all obligations, and Stilwell became the sole obligor, under the $200 million
Facility. Stilwell had the ability to assign and delegate all or a portion of
its rights and obligations under the $200 million Facility to one or more of its
domestic subsidiaries. Stilwell repaid the $125 million in March 2000.
Two borrowing options were available under the $200 million Facility: an
uncommitted competitive advance option and a committed revolving credit option.
Interest on the competitive advance option was based on rates obtained from bids
as selected by Stilwell in accordance with the lender's standard competitive
auction procedures. Interest on the revolving credit option accrued based on the
type of loan (e.g., Eurodollar, Swingline), with rates computed using LIBOR plus
0.35% per annum or, alternatively, the highest of the prime rate, the Federal
Funds Effective Rate plus 0.005%, or the Base Certificate of Deposit Rate plus
1%.
The $200 million Facility included a facility fee of 0.150% per annum and a
utilization fee of 0.125% per annum on the amount of outstanding loans for each
day on which the aggregate utilization of the $200 million Facility exceeded 33%
of the aggregate commitments of the various lenders. The $200 million Facility
contained, among other provisions, various financial covenants.
The $200 million Facility was terminated upon completion of the Facilities
in December 2000 - see "New Stilwell Credit Facility" above.
Additionally, management did not renew the May 14, 1999 364-day senior
unsecured competitive advance/revolving credit facility upon its expiration on
May 13, 2000.
DST Merger. On December 21, 1998, DST and USCS International, Inc. ("USCS")
announced the completion of the merger of USCS with a wholly-owned DST
subsidiary. Under the terms of the merger, USCS became a wholly-owned subsidiary
of DST. The merger, accounted for as a pooling of interests by DST, expands
DST's presence in the output solutions and customer management software and
services industries. DST issued approximately 13.8 million shares of its common
stock in the transaction, reducing Stilwell's ownership interest from 41% to
approximately 32% (which such ownership has subsequently increased to 33% as a
result of DST repurchases of its common stock). Stilwell recorded a one-time
pretax non-cash charge of approximately $36.0 million ($23.2 million after-tax),
reflecting Stilwell's reduced ownership of DST and Stilwell's proportionate
share of DST and USCS costs incurred in the fourth quarter related to the
merger. Stilwell accounts for its investment in DST under the equity method.
18
Year to Year Comparisons
Stilwell's revenues, operating income and net income (with subsidiary
information exclusive of amortization and interest costs attributed to the
respective subsidiary) were as follows (in millions):
December 31,
------------------------------------------------------
1998 (i) 1999 2000 (ii)
------------ ------------ ------------
Revenues:
Janus and Berger:
Janus.................. $ 626.2 $ 1,155.3 $ 2,157.1
SMI and Berger......... 33.5 40.0 69.9
------------ ------------ ------------
Sub-total........... 659.7 1,195.3 2,227.0
Other .................. 11.1 17.0 21.1
------------ ------------ ------------
Total ................... $ 670.8 $ 1,212.3 $ 2,248.1
============ ============ ============
Operating income (loss):
Janus and Berger:
Janus.................. $ 296.7 $ 539.5 $ 1,039.7
SMI and Berger......... 4.9 2.9 21.9
------------ ------------ ------------
Sub-total........... 301.6 542.4 1,061.6
Other .................. (21.0) (24.1) (25.3)
------------ ------------ ------------
Total.................... $ 280.6 $ 518.3 $ 1,036.3
============ ============ ============
Net income (loss):
Janus and Berger:
Janus.................. $ 164.0 $ 284.1 $ 544.0
SMI and Berger (iii) .. 3.9 4.4 18.0
------------ ------------ ------------
Sub-total........... 167.9 288.5 562.0
------------ ------------ ------------
Other:
DST (iii) ............. 22.4 40.8 64.6
Other.................. (38.1) (16.2) 37.1
------------ ------------ ------------
Sub-total........... (15.7) 24.6 101.7
------------ ------------ ------------
Total.................... $ 152.2 $ 313.1 $ 663.7
============ ============ ============
(i) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax) resulting from the merger of a wholly-owned subsidiary of
DST with USCS. DST accounted for the merger under the pooling of
interests method. The charge reflects Stilwell's reduced ownership of
DST (from 41% to approximately 32%), together with Stilwell's
proportionate share of DST and USCS costs in the fourth quarter
related to the merger.
(ii) 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 $10.5 million representing the Company's proportionate
share of non-recurring gain items recorded by DST resulting from
litigation settlement and sales of marketable securities.
(iii) Stilwell's investment in DST is held by SMI.
19
Assets under management as of December 31, 1998, 1999 and 2000 were as
follows (in billions):
December 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
Janus
Janus Advised Funds
Janus Investment Funds............................. $ 75.9 $ 171.8 $ 162.2
Janus Aspen Series (i)............................. 6.2 17.4 22.7
Janus Adviser Series (i)........................... - - 1.8
Janus Money Market Funds........................... 4.8 9.4 12.2
Janus World Funds plc.............................. 0.1 1.4 3.6
--------- --------- ---------
Total Janus Advised Funds..................... 87.0 200.0 202.5
Janus Sub-Advised Funds and Private Accounts............ 21.3 49.5 46.3
--------- --------- ---------
Total Janus................................... 108.3 249.5 248.8
--------- --------- ---------
Berger
Berger Advised Funds.................................... 3.5 6.0 6.1
Berger Sub-Advised Funds and Private Accounts and
B/B Isle Separate Accounts........................... 0.2 0.6 1.5
--------- --------- ---------
Total Berger.................................. 3.7 6.6 7.6
--------- --------- ---------
Nelson ..................................................... 1.1 1.3 1.4
--------- --------- ---------
Total Assets Under Management................. $ 113.1 $ 257.4 $ 257.8
========= ========= =========
(i) On July 31, 2000, shareowners 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.
Stilwell reported 2000 net income of $663.7 million, a 112% increase
compared to the $313.1 million in 1999. Exclusive of the one-time items, 2000
net income totaled $610.8 million, which was 95% higher than 1999. Driven by an
84% increase in average assets under management year to year (from $164.2
billion in 1999 to $301.9 billion in 2000), revenues grew more than $1 billion,
or 85%. The growth in revenues in 2000 compared to 1999, together with
consistent efforts to maintain a competitive cost structure, contributed to a
$518.0 million (100%) increase in operating income. Equity earnings from DST for
the year ended December 31, 2000 increased $25.4 million, or 57%, versus
comparable 1999.
Stilwell reported 1999 net income of $313.1 million, an increase of 106%
compared to $152.2 million in 1998. Exclusive of the one-time charges associated
with the DST merger in 1998, net income was $137.7 million (79%) higher than
1998. Revenues increased $541.5 million, or 81%, over 1998, leading to higher
operating income. Efforts to maintain costs consistent with the level of
revenues resulted in an operating margin of 43%, improved over the 42% in 1998.
Total assets under management increased $144.3 billion (128%) during 1999,
reaching $257.4 billion at December 31, 1999. Total shareowner accounts exceeded
4.3 million as of December 31, 1999, a 43% increase over 1998. Equity earnings
from DST for the year ended December 31, 1999 increased 45% versus comparable
1998 (exclusive of fourth quarter merger-related costs).
Revenues and net income are derived primarily from providing investment
management, administration, distribution and transfer agent services to
individual and institutional investors. Stilwell's revenues are largely
dependent on the total value and composition of assets under management. Assets
under management and shareowner accounts have grown in recent years from new
money investments (i.e., fund sales) and, prior to 2000, market appreciation.
Fund sales have risen in response to marketing efforts, competitive fund
performance, introduction and market reception of new products and the current
popularity of no-load mutual funds. Market appreciation and depreciation
resulted from fluctuations in investment values.
20
JANUS AND BERGER
Janus Capital Corporation
2000
In 2000, average assets under management increased 85% to approximately
$292.9 billion from $158.7 billion in 1999. This increase in average assets
under management resulted in an 87% growth in revenues (from $1.2 billion to a
record $2.2 billion). Aggregate investment management fee rates remained
relatively consistent from 1999 to 2000, averaging approximately 60 basis
points. Driven by the significant revenue growth, and together with effective
cost control by Janus management, operating margins increased to 48.2% in 2000
from 46.7% in 1999.
Net cash inflows of $66.9 billion during the year were offset by market
depreciation of $67.6 billion, resulting in a slight decline in assets under
management from $249.5 billion at December 31, 1999 to $248.8 billion at
December 31, 2000. The Janus Advised Funds received $51.7 billion of the net
sales in 2000, with the remaining $15.2 billion entering the Janus Sub-Advised
Funds and Private Accounts. Equity investments comprised approximately 94% of
all assets under management at the end of 2000. Total Janus shareowner accounts
increased nearly two million, or 48%, to six million.
Operating expenses increased 81% from $615.8 million to $1,117.4 million in
2000 as a result of the significant increase in average assets under management,
additional employees, facilities and other infrastructure-related costs.
Approximately 59% of Janus's 2000 operating expenses consist of variable costs
that generally increase or decrease with fluctuations in management fee revenue.
An additional 11% of operating expenses (principally advertising, promotion,
sponsorships, pension plan and other contributions) are discretionary on a
short-term basis.
The following highlights changes in key expenses in 2000 from 1999:
o Employee compensation and benefits increased 60% due to increases in base
and incentive compensation, employee headcount and expenses related to
equity-based compensation plans. Base compensation increased due to a 33%
increase in full-time employees (primarily to support the shareowner
servicing activities and technology-based operations). Incentive
compensation increased due to the growth in average assets under
management. While performance for the twelve month period was generally
lower than respective peer groups, the thirty-six month period ended
December 31, 2000 reflects the generally favorable performance of the
various Janus funds.
o Concession fees paid to alliance partners, offshore fund sub-distributors
and mutual fund supermarkets increased $164.1 million, or 116%, due
principally to the growth in average assets under management being
distributed through these channels. Such average assets increased from
$54.8 billion at December 31, 1999 to $118.1 billion at December 31, 2000,
reflecting the higher growth rate of assets through these distribution
channels versus complex-wide assets.
o Marketing, promotional and advertising expenditures increased 55% as Janus
continued to promote the Janus brand through print, television and radio
media channels, combined with increased spending for institutional and
international marketing efforts.
o Depreciation and amortization of capital assets increased from $16.7
million in 1999 to $37.5 million in 2000 as a result of Janus's recent
infrastructure spending (discussed below).
21
o Commissions related to sales of certain fund shares, known as B shares, in
Janus World Funds plc ("Janus World Funds") increased by $39.2 million to
$68.7 million in 2000. Amortization of these payments amounted to $8.1
million and $30.9 million in 1999 and 2000, respectively.
o Professional fees increased by $34.5 million in 2000 versus 1999 as a
result of substantial levels of temporary help personnel during the first
half of 2000 and higher consulting costs during the second half of 2000
associated with Janus's web development and maintenance efforts.
1999
Janus's contribution to Stilwell net income increased by $120.1 million in
1999 versus 1998. Investment management, shareowner servicing and fund
administration revenue increased $529.1 million, or 85% in 1999, to $1.2 billion
as a result of the increase in assets under management. Aggregate fee rates
declined slightly from 1998 to 1999.
In 1999, assets under management increased 130% to $249.5 billion from
$108.3 billion, as a result of net sales of $56.3 billion and market
appreciation of $84.9 billion. Equity portfolios comprised 95% of all assets
under management at the end of 1999. Excluding money market funds, 1999 net
sales of Janus Investment Funds, Janus Aspen Series and Janus World Funds were
$42.2 billion and net sales of the Janus Subadvised Funds and Private Accounts
totaled $10.0 billion. Total Janus shareowner accounts increased over 1.3
million, or 49%, to 4.1 million.
Operating expenses increased 87% from $329.5 million to $615.8 million in
1999 as a result of the significant increase in assets under management,
additional employees, facilities and other infrastructure-related costs.
Approximately 56% of Janus's 1999 operating expenses consisted of variable costs
that generally increase or decrease with fluctuations in management fee revenue.
An additional 15% of operating expenses (principally advertising, promotion,
sponsorships, pension plan and other contributions) were discretionary on a
short-term basis.
The following highlights changes in key expenses in 1999 from 1998:
o Employee compensation and benefits increased $144 million, or 91%,
primarily attributable to increased incentive and base compensation.
Additionally, Janus experienced significant overtime compensation, which
was required to manage the rapid growth in investor activity. Incentive
compensation increased due to the growth in management fee revenue and
achievement of investment and financial performance goals. For the twelve
months and thirty-six months ended December 31, 1999, over 99% of assets
under management were ranked within the first quartile of investment
performance as compared to their respective peer groups and over 97%
outperformed their respective index (as defined pursuant to compensation
agreements). Base compensation increased due to a 69% increase in full-time
employees from approximately 1,300 at the end of 1998 to approximately
2,200 at December 31, 1999.
o Concession fees paid to alliance partners and mutual fund supermarkets
increased $77 million, or 124%, due principally to the growth in average
assets under management being distributed through these channels. Such
average assets increased from $24.5 billion at December 31, 1998 to $54.8
billion at December 31, 1999.
o Marketing, promotional and advertising expenditures increased 41% to $56.9
million. Janus continued to promote brand awareness through print,
television and radio media channels.
22
o Depreciation and amortization increased $9.8 million, or 141%, due to
continued infrastructure spending discussed below.
o Sales commissions paid in 1999 related to sales of certain fund shares,
known as B shares, in Janus World Funds. These payments increased by $29.5
million to $31.7 million from $2.2 million in 1998. Amortization of these
payments amounted to $0.2 million and $8.1 million in 1998 and 1999,
respectively.
General
The growth in Janus's assets under management over the past several years
is a function of several factors including, among others: (i) market-leading
investment performance for the three year period and for the life of fund for
most mutual funds under management; (ii) strong equity securities markets
worldwide; (iii) a strong brand awareness fostered through targeted advertising;
and (iv) effective use of third party distribution channels for both retail and
sub-advised products.
Since 1998, Janus has introduced nine new domestic funds - five in the
Janus Investment Funds and four in the Janus Aspen Series. Three of these funds
were introduced in 2000: Janus Strategic Value Fund, Janus Orion Fund and Janus
2 Fund. Additionally, in an effort to continue to achieve optimal results for
investors, Janus has closed eight of its funds during the last three years, the
most recent of which was the flagship Janus Fund. Earlier in 2000, Janus closed
four other funds, including Janus Global Technology Fund, Janus Worldwide Fund,
Janus Global Life Sciences Fund and Janus Olympus Fund. These fund closings
reflect the ongoing focus of Janus to act in its shareowners' best interests by
ensuring that funds do not grow to a size at which the ability to capitalize on
suitable investment opportunities is restricted.
International, or offshore, operations increased assets under management by
$2.2 billion in 2000, due to $2.9 billion in net sales, partially offset by $698
million in market depreciation. Most of this growth was in the Janus World Funds
which is a group of offshore multi-class funds introduced in December 1998
modeled after certain of the Janus Investment Funds and domiciled in Dublin,
Ireland. Approximately one-half of Janus World Funds sales during 2000 were made
into the funds' class B shares, which require Janus to advance sales commissions
to various financial intermediaries. Continued growth in these funds may impact
liquidity and cash resources. See "Liquidity" section below.
In 1999 and 2000, Janus invested more than $56 million and $123 million,
respectively, on infrastructure development to develop and enhance its web site,
to obtain physical space and reconfigure existing space for expansion, to
integrate information systems and to ensure uninterrupted service to
shareowners. Net occupied lease space increased by approximately 725,000 square
feet during 1999 and 2000 to 1.1 million square feet. Infrastructure efforts in
1999 and 2000 focused on the following:
o Development during 2000 of "personalized performance" features to the web
site and quarterly statements. Personalized performance enables shareowners
to review the current year and inception-to-date performance of their
investments, and to track their investments against other funds or
financial indexes. Further, Janus launched the redesigned Janus.com web
site on December 1, 2000. The new Janus web site features a more direct and
user-friendly design, with enhanced information about shareowners' funds
and the Janus investment team. New functionality includes the ability to
open accounts; change an address; or have daily prices delivered to their
e-mail address or wireless device. In 1999, features were added to allow
investors to execute most transactions (purchases, redemptions and
exchanges) on-line, to access account information on-line, to select the
preferred method of statement delivery (paper or electronic), to allow a
Janus Investor Services representative to access copies of shareowner
statements to assist with investor questions, and to provide information
for institutional relationships.
23
o Increases in shareowner servicing capacity. New physical space was
developed in Denver and Austin to accommodate additional telephone
representatives and shareowner processing personnel. Additions to telephone
infrastructure were made during 1999 that allow for over 2,600 concurrent
investor service calls to be received versus approximately 1,600 at the
start of 1999. Additionally, XpressLine, Janus's automated call system, was
expanded to handle 218,000 calls per day and 35,000 calls per hour.
SMI and Berger, excluding DST
2000
Berger's 2000 net income of $18.0 million compared to $4.4 million in 1999.
Total assets under management held by the Berger funds as of December 31, 2000
increased to $7.6 billion, up 15% from the $6.6 billion as of December 31, 1999.
This increase resulted from net sales of $1.3 billion, partially offset by
market depreciation of $0.3 billion. Total Berger shareowner accounts increased
approximately 10% during 2000. Fluctuations in shareowner accounts generally are
indicative of recent performance compared to peer groups.
Due to the increased level of assets under management throughout 2000,
revenues increased approximately 75% compared to 1999. As a result of management
efforts to improve operating efficiency, Berger's 2000 operating expenses
increased approximately $10.9 million (29%) over 1999, resulting in improved
operating margins in 2000 versus 1999 (31% versus 7%). This increase in expenses
was primarily due to the following items: i) compensation and benefits
(exclusive of certain costs in 1999 as discussed below), primarily incentive
compensation resulting from higher assets under management during the first half
of 2000; ii) higher marketing and promotion to capitalize on Berger's
competitive performance during the last two years; and iii) higher third party
concession costs associated with an increased level of assets under management
through such channels.
Berger also recorded a $2.3 million gain in connection with its sale of
BBOI Worldwide LLC ("BBOI"). Berger continues to manage approximately $326
million in assets under a sub-advisory agreement with the Bank of Ireland Asset
Management (U.S.) Limited.
1999
Berger reported 1999 net earnings of $4.4 million compared to $3.9 million
in 1998. Total assets under management held by the Berger funds as of December
31, 1999 increased to $6.6 billion, up 78% from the $3.7 billion as of December
31, 1998. This increase resulted from market appreciation of $2.3 billion and
net sales of $0.6 billion. Total Berger shareowner accounts decreased
approximately 13% during 1999, primarily within Berger funds introduced prior to
1997 (e.g., Berger Growth Fund - formerly the Berger One Hundred Fund and the
Berger Large Cap Growth Fund - formerly Berger Growth & Income Fund). In
contrast, the number of accounts in the funds introduced since 1997 increased
56% year to year. These fluctuations in shareowner accounts generally are
indicative of recent performance compared to peer groups.
Due to the increased level of assets under management throughout 1999,
revenues increased approximately 19% compared to 1998. Berger's 1999 operating
expenses increased approximately $8.5 million (30%) over 1998, resulting in
lower operating margins in 1999 versus 1998. This increase in expenses was
primarily due to higher salaries and wages costs in second and third quarters
associated with management realignment and a change in corporate structure as
discussed below. Without these reorganization costs, margins improved
approximately four percentage points. Higher costs also occurred in third party
distribution costs and investment performance-based incentive compensation.
24
Berger recorded $2.3 million in equity earnings from BBOI for the year
ended December 31, 1999 compared to $1.5 million in 1998. This increase
reflected growth in BBOI assets under management, which totaled $943 million at
December 31, 1999 versus $522 million at December 31, 1998 (including, in both
years, private accounts not reported in Berger's total assets under management).
General
Berger Formation and Ownership History. On September 30, 1999, Berger
Associates, Inc. ("BAI") assigned and transferred its operating assets and
business to its subsidiary, Berger, a limited liability company. In addition,
BAI changed its name to Stilwell Management, Inc. ("SMI"). SMI owns 100% of the
preferred limited liability company interests and approximately 87% of the
regular limited liability company interests in Berger. Key SMI and Berger
employees own the remaining 13% of regular limited liability company interests.
Also, in late 1999 Stilwell contributed to SMI the investment in DST.
The Company's 1994 acquisition of a controlling interest in BAI was
completed under a Stock Purchase Agreement ("BAI SPA") covering a five-year
period ending in October 1999. Pursuant to the BAI SPA, the Company was required
to make additional purchase price payments based upon BAI attaining certain
incremental levels of assets under management up to $10 billion by October 1999.
The Company paid $3.0 million under this BAI SPA in 1999. No payments were made
during 1998. These payments represent adjustments to the purchase price and the
resulting goodwill is being amortized over 15 years.
During the period from 1998 to 2000, Berger introduced two new equity
funds: the Berger Mid Cap Value Fund and the Berger Information Technology Fund.
These funds held approximately $143.5 million of assets under management at
December 31, 2000, a 38% increase from December 31, 1999.
In second quarter 1999, Berger appointed a new president and chief
executive officer and realigned the management of several of its advised funds,
including the Berger Growth Fund, the Berger Balanced Fund and the Berger Select
Fund. In June 2000, Berger hired a Chief Investment Officer to oversee the
direction of the investment strategy. Berger believes these changes improve its
opportunity for growth in the future.
At December 31, 1999 and 2000, approximately 28% and 25%, respectively, of
Berger's total assets under management were generated through mutual fund
supermarkets and other third party distribution channels.
NELSON, DST AND OTHER SUBSIDIARIES AND AFFILIATES
Nelson Money Managers plc
Acquisition of Nelson. On April 20, 1998, Stilwell completed the
acquisition of 80% of Nelson, an investment adviser and manager based in the
United Kingdom. Nelson provides investment advice and investment management
services in the United Kingdom primarily to individuals who are retired or
contemplating retirement. Nelson managed approximately $1.4 billion ((pound)908
million) in assets as of December 31, 2000. The acquisition, which was accounted
for as a purchase, was completed using a combination of cash, KCSI common stock
and notes payable. The KCSI common stock issued in connection with the
transaction has been reflected as a contribution from KCSI to Stilwell in the
consolidated financial statements. The total purchase price was approximately
$33 million, and the amount in excess of the fair market value of the net
tangible and identifiable intangible assets received was recorded as goodwill,
to be amortized over a period of 20 years. If the acquisition of Nelson had been
completed January 1, 1998, inclusion of Nelson's results on a pro forma basis
would not have been material to Stilwell's consolidated results of operations
for the year ended December 31, 1998.
25
2000
For the year ended December 31, 2000, Nelson reported a net loss of $0.7
million versus a loss of $1.4 million in 1999. The lower loss in 2000 reflects
growth in revenues, substantially offset by higher expenses resulting from
Nelson's ongoing efforts to expand its existing operations and develop products
and services that complement its core business. Nelson's revenues, which are
earned based on a percentage of funds under management together with a fee on
the client's initial investment (for investment advice), grew approximately 24%
in 2000 compared to 1999. Expenses increased by 20% during the same period,
resulting in a lower operating loss. Salaries were higher in 2000 than 1999 -
primarily due to a 20% increase in the number of employees - as were general
administration and facilities costs.
1999
For the year ended December 31, 1999, Nelson reported a net loss of $1.4
million compared to net income of $0.6 million for the period from acquisition
to December 31, 1998. This decline resulted from Nelson's marketing efforts
(initiated late in second quarter 1999) to expand its revenue base through the
use of its proprietary investment services in broader markets. Revenues were
higher in 1999 compared to 1998 due to higher assets under management and
inclusion of a full year of Nelson revenues. Costs were higher in 1999,
indicative of Nelson's growth efforts. Specifically, increases occurred in
salaries and wages (reflecting growth in the number of employees),
administration costs (infrastructure and training efforts) and advertising
costs.
Equity in Earnings of DST
Stilwell recorded $69.8 million in equity earnings from DST during 2000
compared to $44.4 million for the year ended December 31, 1999. DST equity
earnings in 2000 include approximately $11.4 million (pretax) in gains
representing the Company's proportionate share of a litigation settlement and
sales of marketable securities recorded by DST. Exclusive of these DST items,
the equity in net earnings of DST improved 32% over 1999. Improvements in
revenues (11% increase year to year) and operating margins (from 16.3% in 1999
to 19.4% in 2000) drove this increase year to year. The increase in DST revenues
is attributable to growth in U.S. mutual fund shareowner accounts serviced -
from 56.4 million as of December 31, 1999 to 72.1 million as of December 31,
2000 - and images produced and statements mailed since prior year.
Equity earnings from DST totaled $44.4 million for 1999 versus $30.6
million in 1998 (exclusive of one-time fourth quarter merger-related charges).
Improvement in revenues, operating margins and DST's equity earnings of
unconsolidated affiliates contributed to this increase year to year, as did the
required capitalization of internal use software development costs totaling
approximately $20.9 million (DST's pretax total). Consolidated DST revenues
increased nearly 10% over the prior year, reflecting higher financial services
and output solutions revenues. U.S. mutual fund shareowner accounts serviced
increased to 56.4 million compared to 49.8 million as of December 31, 1998.
As discussed in the "Significant Developments" section above, fourth
quarter and year ended 1998 include a one-time $23.2 million (after-tax)
non-cash charge resulting from the merger of a wholly-owned subsidiary of DST
and USCS. This charge reflects Stilwell's reduced ownership of DST from 41% to
approximately 32% (prior to DST common stock repurchases in 1999 and 2000 that
increased Stilwell's ownership percentage to 33%), together with Stilwell's
proportionate share of DST and USCS fourth quarter merger-related costs.
26
Interest Expense and Other, Net
Fluctuations in interest expense from 1998 through 2000 reflect the effects
of changes in the average debt balances over the period, as well as the interest
resulting from charges on other interest-bearing balances during the three-year
period. Interest expense for the year ended December 31, 2000 exceeded
comparable 1999, primarily due to interest associated with the $125 million of
indebtedness assumed from KCSI, which was outstanding for the first three months
of 2000. Indebtedness in 1999 declined from 1998, resulting in lower
debt-related interest; this decline, however, was substantially offset by
increased interest resulting from higher average balances for other
interest-bearing items.
Other income of $43.7 million through December 31, 2000 exceeded the prior
year by $16.3 million, primarily due to interest income, gains from sales of
investments in advised funds and a $2.3 million gain resulting from Berger's
sale of BBOI. Other income for full year 1999 increased $17.1 million compared
to 1998, exclusive of the $8.8 million (pretax) gain on the sale of Janus's 50%
interest in IDEX Management, Inc. ("IDEX"). Janus continues as sub-advisor to
several portfolios in the IDEX group of mutual funds. This increase year-to-year
resulted from the following: i) realized gains by Janus and Berger on the sale
of short-term investments; ii) higher interest income resulting from an increase
in cash; iii) an increase in investment income; and iv) gains resulting from the
issuance of Janus shares to certain of its employees.
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, the closing of existing funds to new investors, as well as other
factors, including increases in the rate of return of alternative investment
products, increasing competition as the number of mutual funds continues to
grow, and changes in marketing and distribution channels.
Due to the downturn in the financial equity markets during the second half
of 2000 and first two 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 aggressive equity growth investors. A
decrease in revenues could 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. Management expects that Stilwell
will 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.
27
LIQUIDITY
Summary cash flow data is as follows (in millions):
Year ended December 31,
------------------------------------------------
1998 1999 2000
------------- ------------- -------------
Cash flows provided by (used for):
Operating activities........................... $ 174.5 $ 360.4 $ 731.3
Investing activities........................... (50.4) (47.4) (219.6)
Financing activities........................... (95.3) (127.4) (471.5)
------------- ------------- -------------
Net increase in cash and cash equivalents........... 28.8 185.6 40.2
Cash and cash equivalents at beginning of year...... 109.7 138.5 324.1
------------- ------------- -------------
Cash and cash equivalents at end of year............ $ 138.5 $ 324.1 $ 364.3
============= ============= =============
Operating Cash Flows. Stilwell's cash flow from operations has historically
been positive and sufficient to fund operations, property acquisitions, and
investments in and loans with affiliates.
The following table summarizes consolidated operating cash flow information
(in millions).
Year ended December 31,
------------------------------------------------
1998 1999 2000
------------- ------------- -------------
Net income...................................... $ 152.2 $ 313.1 $ 663.7
Depreciation and amortization................ 16.8 35.4 81.2
Equity in undistributed earnings............. (24.7) (46.4) (70.8)
Reduction in ownership of DST................ 29.7
Gain on sale of Janus common stock........... (15.1)
Deferred income taxes........................ (12.4) 11.8 17.8
Minority interest in consolidated earnings... 33.4 57.3 111.7
Change in working capital items................. (12.3) 10.4 23.0
Deferred Commissions............................ (2.2) (29.5) (68.7)
Other........................................... (6.0) 8.3 (11.5)
------------- ------------- -------------
Net operating cash flow......................... $ 174.5 $ 360.4 $ 731.3
============= ============= =============
Operating cash flow for the year ended December 31, 2000 exceeded
comparable 1999 by $370.9 million, primarily due to higher net income (including
one-time gain from litigation settlement), partially offset by deferred
commission payments by Janus from sales of Janus World Fund shares during 2000.
Operating cash flows for the year ended December 31, 1999 exceeded 1998 by
$185.9 million, primarily due to higher net income, partially offset by deferred
commission payments.
Investing Cash Flows. Stilwell used cash for property acquisitions of
$35.0, $50.5 and $107.1 million in 1998, 1999 and 2000, respectively. The
significant increase in property acquisitions during the period from 1998 to
2000 reflects the infrastructure enhancements at Janus. Investments in and loans
with affiliates totaled $24.3, $17.5 and $110.6 million during 1998, 1999 and
2000, respectively. The 1998 activity reflects the acquisition of Nelson in
April. The 1999 and 2000 activity relates to repurchases of Janus common stock
by Janus, which resulted in additional goodwill associated with the Stilwell
Financial Inc. investment in Janus - see "Significant Developments" above.
Stilwell reported net purchases of investments in advised funds of $11.0 million
during 2000 compared to net sales in 1999 of $16.6 million. Stilwell had $2.2
million in net purchases of such investments during 1998.
28
Financing Cash Flows. For the years ended December 31, 1998 and 1999, the
net activity with KCSI resulted in cash payments to KCSI of $55.1 and $89.3
million, respectively. For the year ended December 31, 2000, the net activity
with KCSI resulted in cash receipts from KCSI of $6.4 million. Generally, net
outflows to KCSI represented dividends received by Stilwell from Janus and
Berger treated as passed through to KCSI (after satisfaction of ongoing Stilwell
operational obligations), as well as repayments of indebtedness to KCSI.
Other financing activities included the following:
o Repayment of indebtedness that was assumed from KCSI in connection with the
$200 million Facility as discussed in "Significant Developments" above;
o Repurchases of Company common stock during 2000 totaling $323.3 million,
which were funded with internally generated cash flows; o Distributions to
minority stockholders of consolidated subsidiaries. Amounts increased in
both 1999 and 2000 compared to the previous year due to higher net income
on which distributions were based; and
o Proceeds from stock plans of $23.8 million in 2000.
See discussion under "Capital Structure - Minority Purchase Agreements" for
information relative to existing contingencies and "Capital Structure - Stilwell
Credit Agreements" for information on the assumption by Stilwell of $125 million
of indebtedness in January 2000 and completion of the Facilities in December
2000.
CAPITAL STRUCTURE
Capital Requirements. Capital requirements, when necessary, for Janus,
Berger, Nelson and other subsidiaries have been funded with cash flows from
operations and negotiated term financing.
During 1998, Janus opened a new facility in Austin, Texas as an investor
service and data center for transfer agent operations, allowing for continuous
service in the event the Denver facility is unavailable. Also, throughout the
period from 1998 to 2000, Janus has continued efforts to upgrade and expand its
information technology and facilities infrastructure (as discussed in detail
above). These efforts were generally funded with existing cash flows.
Capital. During the period from January 1, 1998 to December 31, 2000,
Stilwell maintained minimal average debt balances, resulting in a low
consolidated debt ratio (total debt as a percent of total debt plus equity).
Management anticipates that the debt ratio will increase in 2001 as a
result of the anticipated acquisition of Janus shares from Mr. Bailey and others
(see "Recent Developments" above) and resulting indebtedness, partially offset
by profitable operations and positive operating cash flows. This result is
subject to, among others, any stock repurchases under the $1 billion program
approved by the Stilwell Board, acquisitions using debt and/or any additional
required funding pursuant to put rights under the Janus minority purchase
agreements - see below. Note that unrealized gains on "available for sale"
securities held by Stilwell and DST, which are included net of deferred income
taxes as accumulated other comprehensive income, are contingent on market
conditions and thus, are subject to significant fluctuations in value.
Significant declines in the value of these securities would negatively impact
stockholders' equity and impact Stilwell's debt ratio.
Stilwell Credit Agreements. As discussed in "Significant Developments"
above, in December 2000, Stilwell and Janus arranged $600 million in credit
facilities - the $300 million 364-Day Facility and the $300 million Five-Year
Facility. The proceeds of any borrowings under the Facilities are to be used for
working capital and general corporate purposes, including repurchases of
outstanding shares of common stock.
29
The Facilities contain a number of covenants that could restrict maximum
utilization of the Facilities, including various financial covenants such as a
specified financing leverage, minimum net worth, fixed charge coverage and
minimum assets under management. Stilwell and Janus were in compliance with the
various provisions of the Facilities, including the financial covenants, as of
December 31, 2000. Neither Janus nor Stilwell had borrowings under the
Facilities at December 31, 2000.
On January 11, 2000, KCSI arranged the 364-day $200 million Facility. KCSI
borrowed $125 million under this facility and used the proceeds to retire other
debt obligations. Stilwell assumed the $200 million Facility, including the $125
million borrowed thereunder, thereby reducing its stockholders' equity. Upon
such assumption, KCSI was released from all obligations, and Stilwell became the
sole obligor, under the $200 million Facility. In March 2000, Stilwell repaid
the $125 million borrowed under the $200 million Facility. Upon completion of
the Facilities, the $200 million Facility was canceled.
In May 1998, KCSI established a $100 million Credit Facility assumable by
Stilwell for Stilwell's use upon separation of KCSI's two business segments. On
May 14, 1999, KCSI renewed the $100 million Credit Facility and later
transferred it to Stilwell. At December 31, 1999, the full $100 million was
available under the facility. Management did not renew the $100 million Credit
Facility upon its expiration on May 13, 2000.
Stilwell may require additional capital sooner than anticipated to the
extent that Stilwell's operations do not progress as anticipated or if the
effect of the financing used to fund the expected 2001 acquisitions of Janus
common stock (as discussed in "Recent Developments" above) does not provide
sufficient capital post-acquisition. Stilwell intends to seek any additional
financing for general corporate purposes on substantially the same terms and
conditions as the Facilities. Based on financial information as of December 31,
2000, Stilwell would have the ability to fund the purchase of stock required if
all put rights held by Janus minority stockholders had been exercised without,
in management's judgment, causing a breach of any of Stilwell's current credit
facility restrictions. Stilwell has not obtained the concurrence of its lenders
with this judgment but the existence of the Janus put rights was disclosed to
those lenders at the time they provided the Facilities. See "Recent
Developments" above for discussion regarding exercise of puts by several Janus
minority stockholders during 2001. In any event, if additional capital is needed
for operations or the honoring of the Janus put rights, management would not
necessarily rely on the Facilities, but would likely seek to obtain additional
financing on substantially the same terms and conditions as existing credit
facilities.
Minority Purchase Agreements. A stock purchase agreement with Mr. Bailey,
Janus's Chairman, President and Chief Executive Officer, and another Janus
stockholder (the "Janus Stock Purchase Agreement") and certain restriction
agreements with other Janus minority stockholders contain, among other
provisions, mandatory put rights whereby under certain circumstances, Stilwell
would be required to purchase the minority interests of such Janus minority
stockholders at a fair market value purchase price equal to fifteen times the
net after-tax earnings over the period indicated in the relevant agreement, or
in some circumstances as determined by an independent appraisal. The purchase
price will be determined by independent appraisal if the appraisal process is
elected by either the selling stockholder or Stilwell, except that no appraisal
process is applicable to shares held by Mr. Bailey and one other stockholder.
Under the Janus Stock Purchase Agreement, termination of Mr. Bailey's employment
could require a purchase and sale of the Janus common stock held by him. If
other minority holders terminated their employment, some or all of their shares
also could be subject to mandatory purchase and sale obligations. Certain other
minority holders who continue their employment also could exercise puts. If all
of the mandatory purchase and sale provisions and all the puts under such Janus
minority stockholder agreements were implemented as of December 31, 2000,
Stilwell would have been required to pay approximately $1.42 billion compared to
$789 and $447 million at December 31, 1999 and 1998, respectively. (See "Recent
Developments" above regarding the Stilwell and Janus repurchase of shares of
Janus common stock from various minority stockholders, including Mr. Bailey.
After giving effect to those expected transactions, Stilwell would have been
required to pay approximately $616 million assuming exercises as of December 31,
2000.) In the future these amounts may be higher or lower depending on Janus's
earnings, fair market value and the timing of the exercise. Payment for the
purchase of the
30
respective minority interests is to be made under the Janus Stock Purchase
Agreement within 120 days after receiving notification of exercise of the put
rights. Under the restriction agreements with certain other Janus minority
stockholders, payment for the purchase of the respective minority interests is
to be made 30 days after the later to occur of (i) receiving notification of
exercise of the put rights or (ii) determination of the purchase price through
the independent appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements
and restriction agreements with other minority stockholders also contain
provisions whereby upon the occurrence of a Change in Ownership (as defined in
such agreements) of Stilwell (as to the Janus Stock Purchase Agreement) or KCSI
(as to the other purchase and restriction agreements), Stilwell may be required
to purchase such holders' Janus stock or, as to the stockholders that are
parties to the Janus Stock Purchase Agreement, at such holders' option, to sell
its Janus stock to such minority stockholders. The price for such purchase or
sale would be at a fair market value purchase price equal to fifteen times the
net after-tax earnings over the period indicated in the relevant agreement, or
in some circumstances as determined by Janus's Stock Option Committee or as
determined by an independent appraisal. If Stilwell had been required to
purchase the holders' Janus common stock after a Change in Ownership as of
December 31, 2000, the purchase price would have been approximately $1.67
billion (See "Recent Developments" above regarding the Stilwell and Janus
repurchase of shares of Janus common stock from various minority stockholders,
including Mr. Bailey. After giving effect to those expected transactions,
Stilwell would have been required to pay approximately $871 million assuming
exercises as of December 31, 2000.) See additional information in "Other Items -
Janus Capital Corporation" below and in Note 13 to the Stilwell consolidated
financial statements.
Stilwell would account for any such purchase as the acquisition of a
minority interest under Accounting Principles Board Opinion No. 16, Business
Combinations.
As of December 31, 2000, Stilwell had $350 million in credit facilities
available, cash balances at the Stilwell holding company level in excess of $95
million, securities with a market value of approximately $2.7 billion and the
right to its proportional share (approximately $380 million) of anticipated
dividends from Janus on its 2000 earnings. To the extent that available credit
facilities, existing cash balances, expected dividends from Janus and proceeds
from the liquidation of Stilwell's investment in DST were insufficient to fund
its purchase obligations, Stilwell had access to the capital markets and, with
respect to the Janus Stock Purchase Agreement, had 120 days to raise additional
sums.
Overall Liquidity. Stilwell's cash management approach generally reflects
efforts to minimize cash balances through debt repayment, when applicable. Cash
not required for immediate operating or investing activities will be utilized to
repay indebtedness under lines of credit. This approach is used to help mitigate
Stilwell's floating-rate debt exposure to fluctuations in interest rates. If all
indebtedness has been paid, Stilwell generally invests cash in a money market or
similar account.
As a holding company, Stilwell's ability to pay dividends is dependent on
the dividends and income it receives from its subsidiaries. At the present time
Stilwell's primary source of cash is dividends received from Janus. The payment
of dividends by Janus is subject to the discretion of the Janus Board of
Directors ("Janus Board"). Although Stilwell has a contractual obligation to
cause such payment, Mr. Bailey has certain rights to select a majority of the
Janus Board under the Janus Stock Purchase Agreement. However, pursuant to the
Janus Stock Purchase Agreement, Janus has distributed at least 90% of its net
income to its stockholders each year.
Stilwell uses its portion of such dividends in accordance with its
strategic plans, which plans have included, among others, repayment of
indebtedness, funding in connection with Stilwell's common stock repurchase
program, and investments in affiliates. Prior to December 31, 2000, the Janus
Board declared a dividend of approximately $49 million, of which approximately
$7.1 million was due to minority stockholders. Janus paid this dividend in
January 2001.
31
Purchases of class B shares in the Janus World Funds require a commission
to be advanced by Janus. Deferred commissions were not material to the December
31, 1998 consolidated financial statements. Funding of the commissions during
the years ended December 31, 1999 and 2000 totaled $29.5 and $68.7 million,
respectively, and management expects that such class B share purchases will
continue to grow in future periods.
Stilwell believes it has adequate resources available - including a
sufficient line of credit (within the financial covenants referred to above) and
businesses that have historically been positive cash flow generators - to
satisfy its operating and capital requirements, and the continuing business
needs of Stilwell during 2001.
OTHER ITEMS
Janus Capital Corporation. The Janus Stock Purchase Agreement, as amended,
provides that so long as Mr. Bailey is a holder of at least 5% of the common
stock of Janus and continues to be employed as President of Janus (or as
Chairman of the Janus Board if Mr. Craig, who is no longer employed by Janus,
served as the President of Janus), Mr. Bailey shall continue to establish and
implement policy with respect to the investment advisory and portfolio
management activity of Janus. The agreement also provides that, in furtherance
of such objective, so long as both the ownership threshold and officer status
conditions described above are satisfied, Stilwell will vote its shares of Janus
common stock to elect directors of Janus, at least the majority of whom are
selected by Mr. Bailey, subject to Stilwell's approval, which approval may not
be unreasonably withheld. The agreement further provides that any change in
management philosophy, style or approach with respect to investment advisory and
portfolio management policies of Janus shall be mutually agreed upon by Stilwell
and Mr. Bailey. As discussed in "Recent Developments," Mr. Bailey's ownership is
expected to decrease to approximately 6.2% after completion of the sale of
600,000 shares to Stilwell in the first half of 2001. Accordingly, Mr. Bailey's
rights and obligations under the Janus Stock Purchase Agreement are not
affected.
Stilwell does not believe Mr. Bailey's rights under the Janus Stock
Purchase Agreement are "substantive," within the meaning of Issue 96-16 of the
Emerging Issue Task Force ("EITF 96-16") of the Financial Accounting Standards
Board, because Stilwell can terminate those rights at any time by removing Mr.
Bailey as an officer of Janus. Stilwell also believes that the removal of Mr.
Bailey would not result in significant harm to Stilwell based on the factors
discussed below. Colorado law provides that removal of an officer of a Colorado
corporation may be done directly by its stockholders if the corporation's bylaws
so provide. While Janus's bylaws contain no such provision currently, Stilwell
has the ability to cause Janus to amend its bylaws to include such a provision.
Under Colorado law, Stilwell could take such action at an annual meeting of
stockholders or make a demand for a special meeting of stockholders. Janus is
required to hold a special stockholders' meeting upon demand from a holder of
more than 10% of its common stock and to give notice of the meeting to all
stockholders. If notice of the meeting is not given within 30 days of such a
demand, the District Court is empowered to summarily order the holding of the
meeting. As the holder of more than 80% of the common stock of Janus, Stilwell
has the requisite votes to compel a meeting and to obtain approval of the
required actions at such a meeting.
Stilwell has concluded, supported by an opinion of legal counsel, that it
could carry out the above steps to remove Mr. Bailey without breaching the Janus
Stock Purchase Agreement and that if Mr. Bailey were to challenge his removal by
instituting litigation, his sole remedy would be for damages and not injunctive
relief and that Stilwell would likely prevail in that litigation.
32
Although Stilwell has the ability to remove Mr. Bailey, it has no present
plan or intention to do so, as he is one of the persons regarded as most
responsible for the success of Janus. The consequences of any removal of Mr.
Bailey would depend upon the timing and circumstances of such removal. Mr.
Bailey could be required to sell, and Stilwell could be required to purchase,
his Janus common stock, unless he were terminated for cause. Certain other Janus
minority stockholders would also be able, and, if they terminated employment,
required, to sell to Stilwell their shares of Janus common stock. The amounts
that Stilwell would be required to pay in the event of such purchase and sale
transactions could be material. See Note 11 to the Stilwell consolidated
financial statements. Such removal would have also resulted in acceleration of
the vesting of a portion of the shares of restricted Janus common stock held by
other minority stockholders, having an approximate aggregate value of $32
million as of December 31, 2000.
There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in the
loss of other valuable employees or clients of Janus. The likelihood of
occurrence and the effects of any such employee or client departures cannot be
predicted and may depend on the reasons for and circumstances of Mr. Bailey's
removal. However, Stilwell believes that Janus would be able in such a situation
to retain or attract talented employees because: (i) of Janus's prominence; (ii)
Janus's compensation scale is at the upper end of its peer group; (iii) some or
all of Mr. Bailey's repurchased Janus stock could be then available for sale or
grants to other employees; and (iv) many key Janus employees must continue to be
employed at Janus to become vested in currently unvested restricted stock valued
in the aggregate (after considering additional vesting that would occur upon the
termination of Mr. Bailey) at approximately $99 million as of December 31, 2000.
In addition, notwithstanding any removal of Mr. Bailey, Stilwell would expect to
continue its practice of encouraging autonomy by its subsidiaries and their
boards of directors so that management of Janus would continue to have
responsibility for Janus's day-to-day operations and investment advisory and
portfolio management policies and, because it would continue that autonomy,
Stilwell would expect many current Janus employees to remain with Janus.
As discussed in "Significant Developments" above, on September 25, 2000,
Mr. Craig, Janus's Chief Investment Officer and Director of Research, left
Janus. Mr. Craig's responsibilities were assumed by Janus's Executive Investment
Committee, a group formed by Mr. Craig over a year ago and comprised of several
portfolio managers and Mr. Bailey. Mr. Craig had previously been identified as
the successor to Mr. Bailey in the event that Mr. Bailey left Janus. A revised
succession plan has not yet been developed.
With respect to clients, Janus's investment advisory contracts with its
clients are terminable upon 60 days' notice and in the event of a change in
control of Janus. Under certain circumstances a material reduction in the
ownership of Janus common stock by Mr. Bailey or his departure from Janus by
removal, death, or resignation could be a change of control, resulting in an
assignment, because he has certain rights relating to selection of a majority of
the directors of Janus, pursuant to the rights under the Janus Stock Purchase
Agreement. Under the Investment Company Act of 1940 ("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. Since 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 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. The SEC has not
issued such an order with respect to Mr. Bailey and it is unclear whether it
would do so. If the SEC were to issue such an order, Mr. Bailey's departure from
Janus, or a material reduction in his ownership of Janus common stock, which
eliminated his rights under the Janus Stock Purchase Agreement could be deemed a
change in control of Janus. Such a change in control would result, under the
1940 Act and under the Investment Advisers Act of 1940, as amended ("Advisers
Act") in an assignment and termination of Janus's investment advisory contracts,
requiring approval of fund shareowners and
33
other advisory clients to obtain new agreements. However, in view of Janus's
investment record, Stilwell has concluded it is reasonable to expect that in
such an event most of Janus's clients would renew their investment advisory
contracts, requiring approval of fund shareowners and other advisory clients to
obtain new agreements. This conclusion is reached because (i) Janus relies on a
team approach to investment management and development of investment expertise,
(ii) Mr. Bailey has not served as a portfolio manager for any Janus fund for
several years and (iii) Janus should be able to continue to attract talented
portfolio managers. It is reasonable to expect that Janus's clients' reaction
will depend on the circumstances, including, for example, how much of the Janus
team remained in place and what investment advisory alternatives were available.
The Janus Stock Purchase Agreement and other agreements provide for rights
of first refusal on the part of Janus minority stockholders, Janus and Stilwell,
with respect to certain sales of Janus stock. These agreements also require
Stilwell to purchase the shares of Janus minority stockholders in certain
circumstances. In addition, in the event of a Change in Ownership of Stilwell,
as defined in the Janus Stock Purchase Agreement, Stilwell may be required to
sell its stock of Janus to the stockholders who are parties to such agreement or
to purchase such holders' Janus stock. In the event Mr. Bailey were terminated
for any reason within one year following a Change in Ownership, he would be
entitled to a severance payment, amounting, at December 31, 2000, to
approximately $2 million. Purchase and sales transactions under these agreements
are to be made based upon a multiple of the net earnings of Janus and/or other
fair market value determinations, as defined therein. See Note 11 to the
Stilwell consolidated financial statements.
Some Janus officers and directors serve as officers and/or directors of
certain of the registered investment companies to which Janus acts as investment
advisor.
Foreign Exchange Matters and Other Financial Instruments. In connection
with Stilwell's investment in Nelson, an 80% owned subsidiary operating in the
United Kingdom, and Janus's investment in Janus International Limited ("JIL")
and Janus International (Asia) Limited ("Janus Asia"), matters arise with
respect to financial accounting and reporting for foreign currency transactions
and for translating foreign currency financial statements into U.S. dollars.
Stilwell and Janus follow the requirements outlined in Statement of Financial
Accounting Standards No. 52 "Foreign Currency Translation", and related
authoritative guidance.
Nelson's and JIL's financial statements are accounted for using the British
pound as the functional currency and Janus Asia uses the Hong Kong dollar. Any
gains or losses arising from transactions not denominated in the British pound
or the Hong Kong dollar are recorded as a foreign currency gain or loss and
included in the results of operations of the respective companies. The
translation of those companies' financial statements from the British pound and
Hong Kong dollar into the U.S. dollar results in an adjustment to accumulated
other comprehensive income. At December 31, 1999 and 2000, the cumulative
translation adjustment relating to these investments was $1.1 and $3.9 million,
respectively.
Stilwell continues to evaluate existing 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. At December 31,
2000, Stilwell had no material outstanding foreign currency hedging instruments.
Stilwell intends to respond to evolving business and market conditions in order
to manage risks and exposures associated with Stilwell's various operations.
Comprehensive Income. Stilwell's other comprehensive income consists
primarily of unrealized gains and losses relating to investments held by
Stilwell and DST as "available for sale" securities as defined by Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Stilwell records its proportionate share of any
unrealized gains or losses related to these investments, net of deferred income
taxes, in stockholders' equity as accumulated other comprehensive income. The
unrealized gain related to these investments increased $39.5, $63.8 and $1.9
million ($24.3, $39.3 and $1.3 million, net of deferred income taxes) for the
years ended December 31, 1998, 1999 and 2000, respectively.
34
Minority Rights. In issue 96-16, the EITF of the FASB reached a consensus
that substantive "participating" minority rights which provide the minority
stockholder with the right to effectively control significant decisions in the
ordinary course of an investee's business could impact whether the majority
stockholder should consolidate the investee. After evaluation of the rights of
the minority stockholders of its consolidated subsidiaries and in particular the
contractual rights of Mr. Bailey described in "Other Items - Janus Capital
Corporation," Stilwell management concluded that application of EITF 96-16 did
not affect the Company's consolidated financial statements.
Litigation. From time to time Stilwell is involved in various legal actions
arising in the normal course of business. While the outcome of the various legal
proceedings involving Stilwell cannot be predicted with certainty, it is the
opinion of management (after consultation with legal counsel) that the
litigation reserves of Stilwell are adequate and that legal actions involving
Stilwell and ultimate resolution of these matters will not be material to
Stilwell's consolidated financial position, results of operations or cash flows.
Regulatory Influence. Virtually all aspects of Stilwell's business are
subject to various laws and regulations. Applicable laws include the 1940 Act,
the Advisers Act, the Securities Act of 1933, the Securities Exchange Act of
1934, as amended, the Employee Retirement Income Security Act of 1974, as
amended and various state securities and related laws (including laws in the
United Kingdom). Applicable regulations include, but are not limited to, in the
United States, the rules and regulations of the SEC, the Department of Labor,
securities exchanges and the National Association of Securities Dealers and in
the United Kingdom, the Investment Management Regulatory Organization Limited,
the Personal Investment Authority and the Financial Services Authority. While
management of Stilwell is required to devote substantial time and effort in
regulatory compliance issues, Stilwell does not foresee that such compliance
under present statutes will impair its competitive capability or result in any
material effect on results of operations.
Inflation. Inflation has not had a significant impact on Stilwell's
operations in the past three years. Generally accepted accounting principles
require the use of historical costs. Replacement cost and related depreciation
expense of Stilwell's property would be higher than the historical costs
reported. Any increase in expenses from these fixed costs, coupled with variable
cost increases due to significant inflation, would be difficult to recover
through price increases given the competitive environments of Stilwell's
principal subsidiaries.
NEW ACCOUNTING PRONOUNCEMENTS
Derivative Instruments. 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. Pursuant to
an amendment by the FASB, FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000 and should not be retroactively applied to
financial statements of periods prior to adoption.
While Stilwell does not generally enter into transactions covered by this
statement, the Company continues to evaluate alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
Nelson as market conditions change or exchange rates fluctuate. Currently, the
Company has no outstanding foreign currency hedges. The adoption of FAS 133 on
January 1, 2001 did not have an impact on Stilwell's results of operations,
financial position or cash flows.
35
Stock Compensation. In March 2000, the FASB issued Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") for certain issues. It does not address any issues related to the
application of the fair value method set forth in Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation". Among other issues, FIN 44
addresses the definition of "employee" for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting effects of modifications to the terms of a previously fixed stock
option and the accounting for an exchange of stock compensation awards in a
business combination. For those issues that affect the Company, FIN 44 was
effective July 1, 2000. Application of FIN 44 did not have an impact on
Stilwell's financial statements.
Revenue Recognition. In December 1999, the SEC issued Staff Accounting
Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes some of the SEC's interpretations of generally accepted accounting
principles relating to revenue recognition. The provisions of SAB 101 are
effective in the fourth quarter of fiscal years beginning after December 15,
1999 and the provisions are to be retroactively applied to the entire year. The
adoption of SAB 101 did not have a material impact on Stilwell's financial
statements.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk
Stilwell utilizes various financial instruments that entail certain
inherent market risks. Generally, these instruments have not been entered into
for trading purposes. The following information, together with information
included in other parts of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, describe the key aspects of
certain financial instruments that have market risk to Stilwell.
Interest Rate Sensitivity
Stilwell's interest sensitive liabilities include any long-term
floating-rate debt obligations. At December 31, 1999 and 2000, Stilwell had no
indebtedness outstanding under any line of credit.
Foreign Exchange Sensitivity
Stilwell owns 80% of Nelson, a United Kingdom based financial services
corporation and Janus indirectly owns 100% of JIL and Janus Asia. In connection
with these investments, matters arise with respect to financial accounting and
reporting for foreign currency transactions and for translating foreign currency
financial statements into U.S. dollars. Therefore, Stilwell is exposed to
fluctuations in the value of the British pound and Hong Kong dollar.
As the relative prices of the British pound and Hong Kong dollar fluctuate
versus the U.S. dollar, Stilwell's proportionate share of the earnings or losses
of the respective companies is affected. The following table provides an example
of the potential impact of a 10% change in the price of the British pound
assuming that Nelson and JIL each have earnings of (pound)1,000 and using
ownership interests at December 31, 2000 (the approach is the same when the Hong
Kong dollar is analyzed). The British pound is the functional currency.
36
Nelson JIL
Assumed Earnings before minority interest.............(pound) 1,000 (pound) 1,000
Exchange Rate (to U.S. $)............................. 0.5 to 1 0.5 to 1
---------- -----------
Converted U.S. Dollars................................ $ 2,000 $ 2,000
Stilwell Ownership Percentage of Nelson and JIL....... 80% 82.5%
---------- -----------
Assumed Earnings...................................... $ 1,600 $ 1,650
Assumed 10% increase in Exchange Rate................. 0.55 to 1 0.55 to 1
---------- -----------
Converted to U.S. Dollars............................. $ 1,818 $ 1,818
Stilwell Ownership Percentage of Nelson and JIL....... 80% 82.5%
---------- -----------
Assumed Earnings...................................... $ 1,454 $ 1,500
---------- -----------
Effect of 10% increase in Exchange Rate............... $ (146) $ (150)
========== ===========
The impact of changes in exchange rates on the balance sheet are reflected
in a cumulative translation adjustment account as a part of accumulated other
comprehensive income and do not affect earnings.
While not currently utilizing foreign currency instruments to hedge its
U.S. dollar investment in Nelson, Stilwell continues to evaluate alternatives
with respect to Nelson as the market and exchange rates fluctuate.
Available for Sale Investment Sensitivity
Both Janus and Berger invest a portion of the revenues earned from
providing investment advisory services in certain of their respective non-money
market sponsored funds. These investments are classified as available for sale
securities pursuant to Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities." Accordingly,
these investments are carried in Stilwell's consolidated financial statements at
fair market value and are subject to the investment performance of the
underlying sponsored fund. Any unrealized gain or loss is recognized upon the
sale of the investment.
Additionally, DST, a 33% owned equity investment, holds available for sale
investments that may affect Stilwell's consolidated financial statements.
Similarly to the Janus and Berger securities, any changes to the market value of
the DST available for sale investments are reflected, net of deferred income
tax, in DST's "accumulated other comprehensive income" component of its equity.
Accordingly, Stilwell records its proportionate share of this amount as part of
the investment in DST. While these changes in market value do not result in any
impact to Stilwell's consolidated results of operations currently, upon
disposition by DST of these investments, Stilwell will record its proportionate
share of the gain or loss as a component of equity earnings.
Equity Price Sensitivity
As noted above, Stilwell owns 33% of DST, a publicly traded company. While
changes in the market price of DST are not reflected in Stilwell's consolidated
results of operation or financial position, they may affect the perceived value
of the Stilwell Common Stock. Specifically, the market value of DST shares at
any given point in time multiplied by the number of shares owned by Stilwell
provides an amount, which when divided by the outstanding number of shares of
Stilwell Common Stock, derives a per share "value" presumably attributable to
Stilwell's investment in DST. Fluctuations in this "value" as a result of
changes in the DST market price may affect Stilwell's stock price.
The revenues earned by Janus, Berger and Nelson are dependent on the
underlying assets under management in the funds to which investment advisory
services are provided. These various funds include portfolios of investments
comprised of combinations of equity, bond, annuity and other types of
securities. Fluctuations in the value of these various securities are common and
are generated by numerous factors, including, among others, market volatility,
the overall economy, inflation, changes in investor strategies, availability of
alternative investment vehicles, government regulations and others. Accordingly,
declines in any one or a combination of these factors, or other factors not
separately identified, may reduce the value of investment securities and, in
turn, the underlying assets under management on which Stilwell revenues are
earned.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
Management Report on Responsibility for Financial Reporting...................39
Financial Statements:
Report of Independent Accountants.............................................39
Consolidated Balance Sheets at December 31, 1999 and 2000.....................40
Consolidated Statements of Income for the three years ended December 31, 2000.41
Consolidated Statements of Cash Flows for the three
years ended December 31, 2000...............................................42
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 2000..........................43
Notes to Consolidated Financial Statements....................................44
Financial Statement Schedules:
All schedules are omitted because they are not applicable, insignificant or
the required information is shown in the consolidated financial statements
or notes thereto.
The consolidated financial statements and related notes, together with the
Report of Independent Accountants, of DST Systems, Inc. (an approximate 33%
owned affiliate of the Company accounted for under the equity method) for
the years ended December 31, 1998, 1999 and 2000, which are included in the
DST Systems, Inc. Annual Report on Form 10-K for the year ended December
31, 2000 (Commission File No. 1-14036) have been incorporated by reference
in this Form 10-K as Exhibit 99.2.
38
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements and related notes of Stilwell
Financial Inc. and its subsidiaries were prepared by management in conformity
with generally accepted accounting principles appropriate in the circumstances.
In preparing the financial statements, management has made judgments and
estimates based on currently available information. Management is responsible
for not only the financial information, but also all other information in this
Annual Report on Form 10-K. Representations contained elsewhere in this Annual
Report on Form 10-K are consistent with the consolidated financial statements
and related notes thereto.
The Company has a formalized system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that its financial
records are reliable. Management monitors the system for compliance, and the
Company's internal auditors measure its effectiveness and recommend possible
improvements thereto. In addition, as part of their audit of the consolidated
financial statements, the Company's independent accountants, who are selected by
the stockholders, review and test the internal accounting controls on a
selective basis to establish the extent of their reliance thereon in determining
the nature, extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee. This
committee, composed solely of non-management directors, meets regularly with the
independent accountants, management and internal auditors to monitor the proper
discharge of responsibilities relative to internal accounting controls and to
evaluate the quality of external financial reporting.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Stilwell Financial Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Stilwell
Financial Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
March 14, 2001
39
STILWELL FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Data)
December 31,
----------------------------
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 324.1 $ 364.3
Accounts receivable.................................... 155.7 194.4
Investments in advised funds........................... 23.9 30.2
Other current assets................................... 21.3 52.2
--------- ---------
Total current assets.............................. 525.0 641.1
Investments held for operating purposes..................... 474.1 511.1
Property and equipment, net................................. 70.4 137.7
Intangibles and other assets, net........................... 162.0 291.1
--------- ---------
Total assets................................. $ 1,231.5 $ 1,581.0
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and wages payable............................. $ 21.0 $ 27.3
Accrued compensation and benefits...................... 80.9 98.0
Income taxes payable................................... 28.3 9.7
Accrued liability to third party administrators........ 19.7 33.2
Other accrued liabilities.............................. 12.6 27.9
--------- ---------
Total current liabilities......................... 162.5 196.1
Other liabilities:
Deferred income taxes.................................. 151.8 211.1
Other liabilities...................................... 45.3 42.7
--------- ---------
Total liabilities................................. 359.6 449.9
--------- ---------
Commitments and contingencies (Notes 7, 8, 9, 10, 11, 13, 16)
Minority interest in consolidated subsidiaries.............. 57.3 73.3
--------- ---------
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 and
218,909,153 shares outstanding)......................... 2.2
Additional paid-in capital..................................
Net investment by Parent.................................... 106.8
Retained earnings 598.9 952.3
Accumulated other comprehensive income...................... 108.9 103.3
--------- ---------
Total stockholders' equity........................ 814.6 1,057.8
--------- ---------
Total liabilities and stockholders' equity... $ 1,231.5 $ 1,581.0
========= =========
The accompanying notes are an integral part of these
financial statements.
40
STILWELL FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions, Except Per Share Data)
For the year ended December 31,
-----------------------------------------
1998 1999 2000
--------- --------- ---------
Revenues:
Investment management fees......................... $ 545.1 $ 992.8 $ 1,850.7
Shareowner servicing fees.......................... 108.9 191.4 338.2
Other ........................................... 16.8 28.1 59.2
--------- --------- ---------
Total......................................... 670.8 1,212.3 2,248.1
--------- --------- ---------
Operating Expenses:
Compensation....................................... 167.8 316.5 490.5
Marketing and promotion............................ 50.8 71.5 103.5
Third party concession fees........................ 64.0 143.0 314.9
Depreciation and amortization...................... 16.8 35.4 81.2
Professional services.............................. 19.7 25.8 67.7
Other ........................................... 71.1 101.8 154.0
--------- --------- ---------
Total......................................... 390.2 694.0 1,211.8
--------- --------- ---------
Operating Income........................................ 280.6 518.3 1,036.3
Equity in earnings of unconsolidated affiliates......... 25.8 46.7 70.8
Interest expense - Parent............................... (6.5) (5.9) (0.7)
Interest expense - third parties........................ (7.0)
Gain on litigation settlement........................... 44.2
Gain on sale of Janus common stock...................... 15.1
Reduction in ownership of DST Systems, Inc.............. (29.7)
Other, net ........................................... 19.1 27.4 43.7
--------- --------- ---------
Income before taxes and minority interest.......... 289.3 586.5 1,202.4
Income tax provision.................................... 103.7 216.1 427.0
Minority interest in consolidated earnings.............. 33.4 57.3 111.7
--------- --------- ---------
Net Income $ 152.2 $ 313.1 $ 663.7
========= ========= =========
Per Share Data (Notes 1 and 2):
Weighted average Common shares
outstanding (in thousands).................... 223,000 223,000 222,445
Basic Earnings per share............................. $ 0.68 $ 1.40 $ 2.98
Weighted average Diluted Common
shares outstanding (in thousands).................. 223,000 223,000 225,423
Diluted Earnings per share........................... $ 0.67 $ 1.38 $ 2.90
The accompanying notes are an integral part of these
financial statements.
41
STILWELL FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
For the year ended December 31,
--------------------------------------------
1998 1999 2000
------- ----------- -----------
CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities:
Net income..................................................... $ 152.2 $ 313.1 $ 663.7
Adjustments to net income:
Depreciation and amortization.............................. 16.8 35.4 81.2
Deferred income taxes...................................... (12.4) 11.8 17.8
Minority interest in consolidated earnings................. 33.4 57.3 111.7
Undistributed earnings of unconsolidated affiliates........ (24.7) (46.4) (70.8)
Gain on sale of Janus common stock......................... (15.1)
Reduction in ownership of DST Systems, Inc................. 29.7
Deferred commissions.......................................... (2.2) (29.5) (68.7)
Changes in other assets........................................ (1.5) 2.2 (7.3)
Changes in working capital items:
Accounts receivable........................................ (21.3) (79.1) (39.0)
Other current assets....................................... (5.3) (1.0) (10.8)
Accounts payable and accrued compensation
and benefits payable.................................. 12.8 61.6 6.1
Income taxes payable, accrued liability to third party
administrators and other accrued liabilities.......... 1.5 28.9 66.7
Other, net..................................................... (4.5) 6.1 (4.2)
----------- ----------- -----------
Net operating.......................................... 174.5 360.4 731.3
----------- ----------- -----------
Investing Activities:
Property acquisitions.......................................... (35.0) (50.5) (107.1)
Investments in and loans with affiliates....................... (24.3) (17.5) (110.6)
Sale of investments in advised funds........................... 0.3 19.0 15.3
Purchase of investments in advised funds....................... (2.5) (2.4) (26.3)
Other, net..................................................... 11.1 4.0 9.1
----------- ----------- -----------
Net investing.......................................... (50.4) (47.4) (219.6)
----------- ----------- -----------
Financing Activities:
Change in long-term debt - Parent.............................. (67.5) (16.6)
Repayment of long-term debt - third parties.................... (6.6) (125.0)
Common stock repurchased....................................... (323.3)
Proceeds from stock plans...................................... 23.8
Amounts treated as transfers from
(dividends to) Parent, net................................. 12.4 (72.7) 6.4
Distributions to minority interest............................. (32.8) (37.8) (53.4)
Other, net..................................................... (0.8) (0.3)
----------- ----------- -----------
Net financing.......................................... (95.3) (127.4) (471.5)
----------- ----------- -----------
Cash and Cash Equivalents:
Net increase................................................... 28.8 185.6 40.2
At beginning of year........................................... 109.7 138.5 324.1
----------- ----------- -----------
At end of year................................................. $ 138.5 $ 324.1 $ 364.3
=========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
42
STILWELL FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Millions)
Additional Net investment Accumulated other Total
Common paid-in by Retained comprehensive stockholders'
stock capital Parent earnings income equity
------- ---------- -------------- --------- ---------------- -------------
Balance at December 31, 1997 $ - $ - $ 91.2 $ 206.3 $ 50.8 $ 348.3
Comprehensive income:
Net income.................... 152.2
Net unrealized gain on investments... 24.3
Less: reclassification adjustment
for gains included in net income. (0.2)
Comprehensive income 176.3
Non-cash contribution from
Parent: acquisition of Nelson.. 3.2 3.2
Money Managers Plc (Note 5)....
Amounts treated as transfers
from Parent................ 12.4 12.4
------- ---------- ---------- -------- --------- ----------
Balance at December 31, 1998 - - 106.8 358.5 74.9 540.2
Comprehensive income:
Net income.................... 313.1
Net unrealized gain on investments... 39.3
Less: reclassification adjustment
for gains included in net income. (4.4)
Foreign currency translation
adjustment................. (0.9)
Comprehensive income 347.1
Amounts treated as dividends
to Parent.................. (72.7) (72.7)
------- ---------- ---------- -------- --------- ----------
Balance at December 31, 1999 - - 106.8 598.9 108.9 814.6
Comprehensive income:
Net income.................... 663.7
Net unrealized gain on investments... 1.3
Less: reclassification adjustment
for gains included in net income. (5.8)
Foreign currency translation
adjustment................. (1.1)
Comprehensive income 658.1
Amounts treated as dividends
to Parent.................. (115.4) (115.4)
222,999.786 - to - 1 stock
split (Note 2)............. 2.2 (2.2) -
Stock dividend by Parent (Note
1)............................ 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
======= ========== ========== ======== ========= ==========
The accompanying notes are an integral part of these financial statements.
43
STILWELL FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF THE BUSINESS
Formation of Stilwell Financial Inc. ("Stilwell" or the "Company"). On
January 23, 1998, Stilwell was formed by Kansas City Southern Industries, Inc.
("KCSI" or the "Parent") as a holding company for the group of businesses and
investments that comprised the financial services segment of KCSI. The primary
Stilwell entities at December 31, 2000 include Janus Capital Corporation
("Janus"), an approximately 82.5% owned subsidiary; Stilwell Management, Inc.
("SMI"), a wholly-owned subsidiary; Berger LLC ("Berger"), of which SMI owns
100% of the Berger preferred limited liability company interests and
approximately 87% of the Berger regular limited liability company interests;
Nelson Money Managers plc ("Nelson"), an 80% owned subsidiary; and DST Systems,
Inc. ("DST"), an equity investment in which SMI holds an approximate 33%
interest. KCSI transferred to Stilwell KCSI's ownership interests in Janus,
Berger, Nelson, DST and certain other financial services-related assets, and
Stilwell assumed all of KCSI's liabilities associated with the assets
transferred, effective July 1, 1999. For financial statement purposes, Stilwell
accounted for these transactions at historical cost.
Stilwell's subsidiaries and affiliates offer a variety of asset management
and related financial services to registered investment companies, retail
investors, institutions and individuals. Janus is the largest subsidiary of
Stilwell, representing 97% of assets under management at December 31, 2000 and
96% of revenues and 82% of the net income for the year ended December 31, 2000
(approximately 89% of the net income for the year ended December 31, 2000,
exclusive of the nonrecurring items discussed in Notes 3, 4 and 11 below).
On July 9, 1999, KCSI received a tax ruling from the Internal Revenue
Service ("IRS") which states that for United States federal income tax purposes
the spin-off of Stilwell from KCSI through a pro-rata distribution of Stilwell
common stock to KCSI stockholders qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. Additionally in
February 2000, the Company received a favorable supplementary tax ruling from
the IRS which states that the assumption of $125 million of KCSI indebtedness by
Stilwell would have no effect on the previously issued tax ruling.
On June 14, 2000, the KCSI Board of Directors approved the spin-off of
Stilwell to KCSI's common stockholders. On July 12, 2000, the spin-off was
completed through a special dividend of Stilwell common stock distributed to
KCSI common stockholders of record on June 28, 2000 (the "Spin-off").
Stockholders of record received two shares of Stilwell common stock for every
one share of KCSI common stock owned on the record date. The total number of
Stilwell shares distributed was 222,999,786. Immediately prior to the Spin-off,
the Stilwell Board of Directors ("Stilwell Board") declared a 222,999.786-to-1
stock split effected in the form of a stock dividend to provide a sufficient
number of shares for the Spin-off. All share and per share information has been
restated to reflect this stock split, as has the stockholders' equity
information as of December 31, 2000. Additionally, the Stilwell Board changed
the par value of the Stilwell common stock to $0.01 per share and increased the
number of common shares authorized to 1,000,000,000. The Stilwell Board also
authorized 10,000,000 shares of blank series $1.00 par Preferred Stock, none of
which has been issued.
Within these consolidated financial statements and accompanying notes,
historical transactions and events (i.e., occurring prior to July 12, 2000)
involving the financial services segment of KCSI, which is now Stilwell, are
discussed as if Stilwell were the entity involved in the transaction or event,
unless otherwise indicated. In addition, intercompany transactions between
Stilwell and KCSI up to and including July 12, 2000 are reflected as dividends
to or transfers from KCSI (see Note 2).
44
Nature of Operations. Stilwell's principal operations are the management of
its investments in financial services companies. A summary of Stilwell's
principal operations/investments is as follows:
Janus Capital Corporation and Berger LLC. Janus and Berger provide
investment management, advisory, distribution and transfer agent services
primarily to U.S. based mutual funds, pension plans, and other institutional and
private account investors. Janus also offers mutual fund products to
international markets through the Janus World Funds plc ("Janus World Funds")
and Janus Universal Funds.
The revenues and operating income of Janus and Berger are derived primarily
by growth in assets under management, and a decline in the U.S. and/or
international stock and/or bond markets or an increase in the rate of return of
alternative investments could negatively impact results. In addition, the mutual
fund industry, in general, faces significant competition as the number of mutual
funds continues to increase, marketing and distribution channels become more
creative and complex, and investors place greater emphasis on published fund
recommendations and investment category rankings.
Nelson Money Managers plc. Nelson, operating in the United Kingdom,
provides investment advice and investment management services primarily to
individuals who are retired or are contemplating retirement.
Nelson's revenues are earned based on a fee for initial investment advice
calculated as a percentage of capital invested into each individual investment
portfolio, as well as from an annual fee based on the level of assets under
management for the ongoing management and administration of each investment
portfolio. Declines in international stock markets or fluctuations of the
relative price of the British pound versus the U.S. dollar could negatively
affect the amount of earnings reported for Nelson in the consolidated financial
statements.
DST Systems, Inc. DST, together with its subsidiaries and joint ventures,
offers information processing and software services and products through three
operating segments: financial services, customer management and output
solutions. Additionally, DST holds certain investments in equity securities,
financial interests and real estate holdings. DST operates throughout the United
States, with operations in Kansas City, Missouri, Northern California and
various locations on the East Coast, among others, as well as internationally in
Canada, Europe, Africa and the Pacific Rim. DST has a single class of common
stock that is publicly traded on the New York Stock Exchange and the Chicago
Stock Exchange.
In December 1998, a wholly-owned subsidiary of DST merged with USCS
International, Inc. ("USCS"). The merger, which was accounted for by DST as a
pooling of interests, reduced Stilwell's ownership of DST to approximately 32%
(which such ownership has subsequently increased due to DST stock repurchases -
see Note 6). Stilwell reports DST as an equity investment in the consolidated
financial statements. See Note 3.
The earnings of DST are dependent in part upon the further growth of mutual
fund and other industries, DST's ability to continue to adapt its technology to
meet clients' needs and demands for the latest technology and various other
factors including, but not limited to, reliance on processing facilities; future
international sales; continued equity in earnings from joint ventures; and
competition from other third party providers of similar services and products as
well as from in-house providers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
are presented using the accrual basis of accounting. The financial position,
results of operations and cash flows of Stilwell reflect the combined accounts
of those entities, assets and liabilities that were contributed to Stilwell by
KCSI (as described in Note 1).
45
The financial statements include all majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
The accompanying financial statements were prepared by attributing the
historical data for the financial services segment of KCSI to Stilwell up to and
including July 12, 2000 utilizing accounting policies consistent with those
applied to the preparation of KCSI's historical financial statements. Since the
financial services business was operated as part of KCSI during the periods
presented, such financial information 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.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition. Investment management fees are recognized as services
are provided. These revenues are generally determined in accordance with
contracts between Stilwell's subsidiaries and their customers based upon a
percentage of assets under management. Shareowner servicing fees and other
revenues are recognized as contractual obligations are fulfilled or as services
are provided.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes some of the SEC's interpretations of generally
accepted accounting principles relating to revenue recognition. The provisions
of SAB 101 were effective in the fourth quarter of fiscal years beginning after
December 15, 1999 and the provisions are to be retroactively applied to the
entire year. The adoption of SAB 101 did not have a material impact on
Stilwell's financial statements.
Cash Equivalents. Short-term liquid investments with an initial maturity of
generally three months or less, including investments in money market mutual
funds, are considered cash equivalents. Janus's investments in its money market
funds (totaling $188.7 and $182.3 million at December 31, 1999 and 2000,
respectively) are generally used to fund operations, repurchase Janus common
stock and pay dividends. Pursuant to contractual agreements between Stilwell and
certain Janus minority stockholders, Janus has distributed at least 90% of its
net income to its stockholders each year.
Investments. The equity method of accounting is used for all entities in
which Stilwell has significant influence but not more than a 50% voting
interest; the cost method of accounting is generally used for non-marketable
investments of less than 20%. Investments classified as "available for sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115"), are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported, net of deferred income taxes, in accumulated other comprehensive
income. Investments classified as "trading" securities are reported at fair
value, with unrealized gains and losses included in earnings.
Investments in advised funds are comprised of shares of certain mutual
funds advised by Janus and Berger. Realized gains and losses are determined
using the first-in, first-out method.
Property and Equipment. Property and equipment are stated at cost.
Maintenance and repairs are expensed as incurred. Improvements are capitalized.
Depreciation and amortization are recorded using straight line and accelerated
methods over the estimated useful life of the related assets (or the lease term
if shorter), generally three to seven years for furniture, fixtures and
equipment and three to twenty-one years for buildings and leasehold
improvements.
46
In accordance with Statement of Financial Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", Stilwell periodically evaluates the recoverability of its long-lived assets
based on an estimate of the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest) is lower than the carrying amount of
the asset, an impairment loss must be recognized to the extent that the carrying
amount of the asset exceeds its fair value.
Software Development and Maintenance. Purchased software is recorded at
cost and amortized over the estimated economic life.
In 1998, Stilwell adopted the guidance outlined in American Institute of
Certified Public Accountant's Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 requires that computer software costs incurred in the preliminary
project stage, as well as training and maintenance costs, be expensed as
incurred. This guidance also requires that direct and indirect costs associated
with the application development stage of internal use software be capitalized
until such time that the software is substantially complete and ready for its
intended use. Capitalized costs are amortized on a straight line basis over the
useful life of the software. The adoption of this guidance did not have a
material impact on Stilwell consolidated subsidiaries; however, see Note 3
regarding impact on DST.
Marketing. Stilwell expenses all marketing and promotion costs as incurred.
Direct response advertising for which future economic benefits are probable and
specifically attributable to the advertising is not material. Berger has
marketing agreements with various related mutual funds pursuant to Rule 12b-1
under the Investment Company Act of 1940 ("12b-1 Plan") pursuant to which
certain 12b-1 fees are collected. Under these agreements, which are approved or
renewed on an annual basis by the boards of directors of the respective mutual
funds, Berger must engage in activities that are intended to result in sales of
the shares in the funds. Any fees not spent must be returned to the funds. See
Note 12.
Deferred Commissions. Commissions paid to financial intermediaries on sales
of certain Janus World Funds shares ("B shares") are recorded as deferred
commissions in the accompanying consolidated financial statements. These
deferred commissions are amortized using the sum-of-the-years digits methodology
over four years, or when the B shares are redeemed, if earlier. Early withdrawal
charges received by Janus from redemption of the B shares within four years of
purchase reduce the unamortized deferred commissions balance. Payments of
deferred commissions during 1999 and 2000 were $29.5 and $68.7 million,
respectively, and associated amortization expense for the years then ended
totaled $8.1 and $30.9 million, respectively. Payment of deferred commissions
and associated amortization expense were not material to Stilwell's 1998 results
of operation, financial position or cash flows.
Income Taxes. Prior to the Spin-off, Stilwell joined with KCSI and other
members of the KCSI affiliated group in filing a consolidated federal income tax
return. The consolidated federal income tax was allocated to Stilwell as if
Stilwell filed a separate consolidated federal income tax return, assuming the
utilization of tax-planning strategies consistent with those utilized by KCSI.
Upon completion of the Spin-off, Stilwell ceased to be a member of the KCSI
affiliated group and, as a result, will discontinue filing a consolidated
federal income tax return with KCSI. (See Note 8 with respect to a Tax
Disaffiliation Agreement between KCSI and Stilwell.)
Deferred income tax assets and liabilities are determined based on the
differences between the financial statement and income tax bases of assets and
liabilities as measured by the enacted income tax rates that will be in effect
when these differences reverse. Deferred income tax expense is generally the
result of changes in the deferred tax assets and liabilities.
47
Intangible Assets. Intangible assets principally represent the excess of
cost over the fair value of net underlying assets of acquired companies using
purchase accounting and are amortized over periods ranging from 15 to 40 years
using the straight-line method. Stilwell periodically reviews the recoverability
of intangible assets by comparing the carrying value of the associated
intangible assets to their fair value. The determination of possible impairment
is primarily measured by reference to various valuation techniques commonly used
in the investment management industry, including appraisals, quoted market
values and future cash flows.
Changes of Interest in Subsidiaries and Equity Investees. A change of
Stilwell's interest in a subsidiary or equity investee (collectively, an
"affiliated investee") resulting from an affiliated investee's issuance of its
stock is recorded as a gain or loss in Stilwell's statement of income in the
period that the change of interest occurs. If an issuance of stock by the
affiliated investee is from treasury shares on which gains have been previously
recognized, however, Stilwell will record the gains directly to its equity and
not include the gain in net income. See Note 3 regarding change of interest loss
related to DST in 1998. Gains recorded by Stilwell (included in the Other, net
component in the Statement of Income) for the year ended December 31, 1999
totaled $6.2 million. Stilwell recorded approximately $5.6 million in gains
resulting directly from affiliated investee transactions during 2000 and $15.1
million in connection with the sale by Stilwell of 192,408 shares of Janus
common stock during first quarter 2000 (see Note 4).
A change of interest in an affiliated investee resulting from an affiliated
investee's purchase of its stock increases Stilwell's ownership percentage of
the affiliated investee. Stilwell records this type of transaction under the
purchase method of accounting, whereby any excess of fair market value over the
net tangible and identifiable intangible assets is recorded as goodwill. See
Note 6.
Fair Value of Financial Instruments. Statement of Financial Accounting
Standards No. 107 "Disclosures About Fair Value of Financial Instruments"
requires an entity to disclose the fair value of its financial instruments.
Stilwell's financial instruments include cash and cash equivalents, investments
in advised funds, accounts receivable and payable and long-term debt.
The carrying value of Stilwell's cash equivalents and accounts receivable
and payable approximate their fair values due to their short-term nature. The
carrying value of Stilwell's investments designated as "available for sale" and
"trading" equals their fair value which is based upon quoted prices in active
markets. Stilwell estimates the fair value of long-term debt based upon
borrowing rates available at the reporting date for indebtedness with similar
terms and average maturities.
Stock-Based Compensation. Stilwell accounts for stock options granted to
employees and non-employee directors using the intrinsic value method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). In October 1995, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which permits
companies to use either the APB 25 intrinsic value method or the fair value
method as prescribed by FAS 123. Stilwell uses the APB 25 method and discloses
pro forma net income in the notes to the financial statements. See Note 10 for
pro forma disclosure assuming that Stilwell would have had higher compensation
cost as a result of accounting for existing stock options under FAS 123.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB 25 for
certain issues. It does not address any issues related to the application of the
fair value method set forth in FAS 123. Among other issues, FIN 44 addresses the
definition of "employee" for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
effects of modifications to the terms of a previously fixed stock option and the
accounting for an exchange of stock compensation awards in a business
combination. For those issues that affect the Company, FIN 44 is effective July
1, 2000. Application of FIN 44 did not have an impact on Stilwell's financial
statements.
48
Corporate Allocations. Prior to the Spin-off, KCSI provided certain
managerial, treasury, accounting, tax and legal services to Stilwell.
Additionally, certain other expenses were incurred by KCSI on behalf of Stilwell
(e.g., amortization of identifiable intangible assets and goodwill) prior to the
Spin-off. An allocation of the estimated cost of these services and expenses has
been reflected in the accompanying financial statements based on management's
best estimate of financial services-related assets and liabilities, capital
structure and liquidity. In the opinion of management, the costs and expenses
allocated to Stilwell for these services provided by KCSI are reasonable. These
costs and expenses aggregated $20.9 and $20.1 million in 1998 and 1999,
respectively, and approximately $12.1 million for the period up to and including
July 12, 2000.
Intercompany Agreement With KCSI. Stilwell has entered into an Intercompany
Agreement with KCSI for the purpose of governing certain of the ongoing
relationships during a transitional period after the Spin-off and providing for
an orderly transition of Stilwell to a separate company. The Intercompany
Agreement generally provides for certain indemnification rights, insurance
matters, access to records and information, certain transitional support
services and other matters relating to the Spin-off. This agreement is not
expected to have a material impact on Stilwell's future results of operation,
financial position or cash flows.
Intercompany Transactions with KCSI. Intercompany transactions between
Stilwell and KCSI prior to the Spin-off are reflected as dividends to or
transfers from KCSI within the consolidated financial statements. Amounts
treated as net dividends are recorded as a reduction to Retained Earnings and
amounts treated as net transfers from KCSI are recorded as an increase to the
Net investment by Parent component included in the Consolidated Balance Sheets.
Generally, increases in the Net Investment by Parent component result from the
timing of cash requirements throughout each year, primarily with respect to
investing activities. Amounts treated as net dividends to KCSI generally reflect
the transfer to KCSI of dividends received by Stilwell from subsidiaries, to the
extent such amounts were not required for investing, financing or operating
needs.
Earnings Per Share ("EPS"). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
The effect of stock options represents the only difference between the
weighted average shares used for the basic earnings per share computation
compared to the diluted earnings per share computation. Incremental shares from
assumed conversion of stock options included in the computation of diluted
earnings per share totaled 2,977,601 for the year ended December 31, 2000.
Because there were no Stilwell options issued prior to July 12, 2000, the
computations for the number of shares to be used in the denominator are the same
for basic and diluted earnings per share in the years ended December 31, 1998
and 1999. For the year ended December 31, 2000, the weighted average of options
to purchase 84,079 shares of Stilwell common stock were excluded from the
computation of diluted earnings per share because the exercise prices were
greater than the average market prices of the common shares.
The only adjustments that could affect the numerator of Stilwell's diluted
EPS computation include potentially dilutive securities at Janus, Berger, Nelson
and DST. These adjustments totaled approximately $2.3, $4.8 and $10.6 million
for the years ended December 31, 1998, 1999 and 2000, respectively.
All shares held in the Stilwell Employee Stock Ownership Plan (the "ESOP")
are treated as outstanding for purposes of computing the Company's earnings per
share. See additional information on the ESOP in Note 9.
49
Common Stock and Treasury Stock. Immediately prior to the Spin-off, the
Stilwell Board declared a 222,999.786-to-1 stock split. In connection with the
Spin-off, 222,999,786 shares of Stilwell common stock were distributed. During
the remainder of 2000, Stilwell issued 3,129,667 shares of its common stock in
connection with stock option and benefit plans (of which 1,338,803 were from
Treasury - see below) and repurchased 7,220,300 under the $1 billion stock
repurchase program authorized by the Stilwell Board in July 2000 (see Note 4
below).
Common shares held in Treasury are accounted for as if they were retired
and the excess of cost over par value of such shares is charged to additional
paid-in capital, if available, then to retained earnings.
Comprehensive Income. Stilwell adopted, effective January 1, 1998,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"), which establishes standards for reporting and disclosure of
comprehensive income and its components in the financial statements (the change
in net assets of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources including all changes in
equity other than those resulting from investments by and distributions to
owners). The principal items comprising other comprehensive income are the
effects of DST's investments that are classified as "available for sale," as
defined by FAS 115. The unrealized gain related to these investments increased
$39.5, $63.8 and $1.9 million ($24.3, $39.3 and $1.3 million, net of deferred
income taxes) for the years ended December 31, 1998, 1999 and 2000,
respectively.
Statement of Financial Accounting Standards No. 131. In 1998, Stilwell
adopted the provisions of Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 establishes standards for the manner in which public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. FAS 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers.
For purposes of segment reporting pursuant to FAS 131, 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. See Note 15.
Statement of Financial Accounting Standards No. 133. In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), which establishes
accounting standards for derivative instruments, the derivative portion of
certain other contracts that have similar characteristics and for hedging
activities. It requires recognition of all derivatives as either assets or
liabilities measured at fair value. In June 1999, the FASB issued an amendment
to FAS 133 changing the effective date of FAS 133 to fiscal quarters of fiscal
years beginning after June 15, 2000. Stilwell does not generally enter into
transactions covered by this statement. The adoption of FAS 133 on January 1,
2001 did not have an impact on Stilwell's results of operation, financial
position or cash flows.
Emerging Issues Task Force Issue No. 96-16. In Issue No. 96-16, the
Emerging Issues Task Force ("EITF") of the FASB reached a consensus that
substantive "participating" minority rights which provide a minority stockholder
with the right to effectively control significant decisions in the ordinary
course of an investee's business could impact whether the majority stockholder
should consolidate the investee. Management has evaluated the rights of the
minority stockholders of its consolidated subsidiaries and concluded that
application of EITF 96-16 did not affect Stilwell's consolidated financial
statements (see Note 13).
50
NOTE 3 - INVESTMENT IN DST SYSTEMS, INC.
DST Merger. On December 21, 1998, DST and USCS announced the completion of
the merger of USCS with a wholly-owned DST subsidiary. Under the terms of the
merger, USCS became a wholly-owned subsidiary of DST. The merger, accounted for
as a pooling of interests by DST, expands DST's presence in the output solutions
and customer management software and services industries. DST issued
approximately 13.8 million shares of its common stock in the transaction,
reducing Stilwell's ownership interest from 41% to approximately 32% (which such
ownership has subsequently increased - see Note 6). Stilwell recorded a one-time
pretax non-cash charge of approximately $36.0 million ($23.2 million after-tax),
reflecting Stilwell's reduced ownership of DST and Stilwell's proportionate
share of DST and USCS costs incurred in the fourth quarter related to the
merger. Stilwell accounts for its investment in DST under the equity method.
Summarized Financial Information. Stilwell's investment in DST, together
with certain condensed DST financial information, is summarized as follows.
December 31,
-----------------------------------------
1998 1999 2000
-------- -------- ---------
(Dollars in Millions)
Percentage ownership.................................. 32.2% 32.1% 32.5%
Carrying value (excluding goodwill - see Note 6)...... $ 376.0 $ 470.2 $ 509.3
Equity in DST net assets.............................. 376.0 470.2 509.3
Fair market value (a)................................. 1,156.7 1,547.7 2,717.7
December 31,
----------------------------------------
1998 1999 2000
-------- -------- --------
Financial Condition:
Current assets................................... $ 375.8 $ 464.5 $ 590.7
Non-current assets............................... 1,521.2 1,861.8 1,961.7
-------- -------- --------
Total assets................................ $1,897.0 $2,326.3 $2,552.4
======== ======== ========
Current liabilities.............................. $ 268.6 $ 285.8 $ 356.2
Non-current liabilities.......................... 462.2 576.9 630.4
Stockholders' equity............................. 1,166.2 1,463.6 1,565.8
------- -------- --------
Total liabilities and stockholders' equity.. $1,897.0 $2,326.3 $2,552.4
======== ======== ========
For the year ended December 31,
----------------------------------------
1998(b) 1999(c) 2000(c(d)
-------- -------- --------
Operating Results:
Revenues......................................... $1,119.2 $1,227.5 $1,362.1
Costs and expenses............................... 999.7 1,027.8 1,097.5
Net income....................................... 71.6 138.1 215.8
(a) Based upon DST's closing price on the New York Stock Exchange.
(b) Net income includes $19.4 million, after-tax, of DST/USCS fourth quarter
merger-related charges.
(c) DST's net income for the years ended December 31, 1999 and 2000 increased
by $15.4 and $18.3 million, respectively, as a direct result of DST's
adoption of SOP 98-1 on January 1, 1999.
(d) Net income includes $34.3 million (after-tax) in certain non-recurring
items: 1) a gain on litigation settlement with a former equity affiliate
and 2) gains on the sale of marketable securities.
51
NOTE 4 - ACQUISITIONS, DISPOSITIONS AND SIGNIFICANT TRANSACTIONS
Stilwell Common Stock Repurchase Program. On July 25, 2000, the Stilwell
Board authorized the expenditure of up to $1 billion to repurchase shares of
Stilwell common stock over the next two years. Stilwell has been repurchasing
shares under this program through open market transactions in accordance with
SEC rules. The number of shares repurchased will depend on various factors,
including the price of the stock and market conditions.
Through December 31, 2000, Stilwell repurchased, using existing cash flows,
approximately 7.2 million shares of its common stock for an aggregate cost of
approximately $323.3 million. Stilwell expects to fund the share repurchase
program from its cash flow and other available sources of funds.
Janus Capital Corporation. In the first quarter of 2000, Stilwell sold to
Janus, for treasury, 192,408 shares of Janus common stock and such shares will
be available for awards under the Janus Long Term Incentive Plan ("Janus
Incentive Plan"). Janus has agreed that for so long as it has available shares
of Janus common stock for grant under that plan, it will not award phantom
stock, stock appreciation rights or similar rights. The sale of those shares
resulted in an after-tax gain of approximately $15.1 million and reduced
Stilwell's ownership to approximately 81.5% (prior to consideration of
subsequent repurchases by Janus of its common stock during 2000).
Nelson Money Managers plc. On April 20, 1998, Stilwell completed the
acquisition of 80% of Nelson, an investment adviser and manager based in the
United Kingdom. Nelson provides investment advice and investment management
services primarily to individuals who are retired or contemplating retirement.
The acquisition, which was accounted for as a purchase, was completed using a
combination of cash, KCSI common stock and notes payable. The total purchase
price was approximately $33 million. The KCSI common stock issued in the
transaction has been reflected as a contribution from KCSI to Stilwell in the
accompanying financial statements.
The purchase price was in excess of the fair market value of the net
tangible and identifiable intangible assets received and this excess was
recorded as goodwill to be amortized over a period of 20 years. If the
acquisition of Nelson had been completed January 1, 1998, inclusion of Nelson's
results on a pro forma basis would not have been material to Stilwell's
consolidated results of operations for the year ended December 31, 1998.
Berger LLC. On September 30, 1999, Berger Associates, Inc. ("BAI") assigned
and transferred its operating assets and business to Berger, a limited liability
company. In addition, BAI changed its name to SMI and cancelled all remaining
options on its common stock. SMI owns 100% of the preferred limited liability
company interests and approximately 87% of the regular limited liability company
interests in Berger. Key SMI and Berger employees own the remaining 13% of
regular limited liability company interests. Also, in late 1999 Stilwell
contributed to SMI the investment in DST.
52
NOTE 5 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for income taxes and interest is summarized as follows (in
millions):
For the year ended December 31,
--------------------------------------------
1998 1999 2000
------ ------ ------
Interest (1)............ $ 7.9 $ 1.5 $ 4.0
Income taxes(2)......... 83.1 142.9 360.2
(1) In 1998 and 1999, cash interest payments were made to KCSI. In 2000,
Stilwell paid $0.7 million in interest directly to KCSI.
(2) In 1998 and 1999, all income tax payments were made to KCSI. In 2000,
Stilwell paid $195.9 million in income taxes directly to KCSI.
During the year ended December 31, 2000, Stilwell recorded approximately
$4.9 million directly to stockholders' equity representing Stilwell gains
resulting from issuances of stock by Janus. The shares issued by Janus were
available as a result of repurchases from stockholders. Stilwell had previously
recognized gains (in its Statement of Income) relating to these shares upon
their initial issuance - see Note 2 discussion of accounting policy.
As discussed in Note 4, in connection with Stilwell's acquisition of Nelson
during second quarter 1998, KCSI issued approximately 67,000 shares of KCSI
common stock (valued at $3.2 million) to certain of the sellers of the shares of
Nelson. The use of these shares by Stilwell is reflected as a capital
contribution from KCSI to Stilwell in the accompanying consolidated financial
statements. Also, notes payable of $4.9 million were recorded as part of the
purchase price, payable by March 31, 2005, bearing interest at seven percent.
NOTE 6 - OTHER BALANCE SHEET CAPTIONS
Accounts Receivable. Stilwell's accounts receivable balances do not include
any allowance for doubtful accounts nor has any bad debt expense been recorded
for the years ended 1998 through 2000. The majority of the balances are amounts
due from the investment companies for which Stilwell subsidiaries act as
investment adviser or sub-adviser (see Note 12).
Other Current Assets. Other current assets are comprised of the following
(in millions):
December 31,
----------------------
1999 2000
--------- ---------
Deferred commissions - current........... $ 10.2 $ 29.3
Other ................................. 11.1 22.9
--------- ---------
Total............................... $ 21.3 $ 52.2
========= =========
Investments in advised funds. Investments in advised funds are summarized
as follows (in millions):
December 31,
----------------------
1999 2000
--------- ---------
Available for Sale:
Cost basis.......................... $ 14.3 $ 26.9
Gross unrealized gains.............. 9.6 4.1
Gross unrealized losses............. (0.8)
--------- ---------
Total.......................... $ 23.9 $ 30.2
========= =========
53
Gross realized gains (losses) were not material to Stilwell's consolidated
results of operations for the year ended 1998. Gross realized gains totaled $5.3
and $1.6 million for the years ended December 31, 1999 and 2000, respectively.
Property and Equipment, Net. Property and equipment are summarized as
follows (in millions):
December 31,
---------------------
1999 2000
--------- ---------
Furniture, fixtures and equipment, including computer
equipment and systems.................................. $ 89.1 $ 170.7
Buildings and leasehold improvements...................... 26.6 46.4
--------- ---------
Subtotal................................... 115.7 217.1
Less accumulated depreciation and amortization............ (45.3) (79.4)
--------- ---------
Net property and equipment................................ $ 70.4 $ 137.7
========= =========
Intangibles and Other Assets. Intangibles and other assets are summarized
as follows (in millions):
December 31,
---------------------
1999 2000
--------- ---------
Goodwill........................................... $ 110.1 $ 195.2
Identifiable intangible assets..................... 59.0 90.4
Accumulated amortization........................... (32.6) (44.0)
--------- ---------
Net........................................... 136.5 241.6
Deferred commissions, net ......................... 13.2 31.9
Employee loans (1)................................. 7.7 5.7
Other assets, net.................................. 4.6 11.9
--------- ---------
Total......................................... $ 162.0 $ 291.1
========= =========
(1) See Note 16 for discussion of the Stilwell purchases of stock from minority
stockholders and related repayment of loans.
Identifiable intangible assets include, among others, brand names,
investment advisory relationships and shareowner lists, as well as existing
distribution arrangements.
Janus purchased shares of Janus common stock from various minority
stockholders throughout 2000 at the fair market value as set forth in the
relevant stock restriction or purchase agreements. These share repurchases were
funded from Janus's existing cash. As a result of these repurchases, Stilwell's
ownership percentage of Janus increased to approximately 82.5%. Stilwell
recorded these transactions under the purchase method of accounting and recorded
intangible assets and goodwill totaling approximately $83.2 million, which are
being amortized over 20 years. As of December 31, 2000, more than 265,000 shares
of Janus common stock were available for use in connection with the Janus
Incentive Plan. See Note 16 regarding expected purchases of shares of Janus
common stock by Stilwell and Janus during 2001.
During the years ended December 31, 1999 and 2000, the Company recorded
approximately $5.9 and $31.3 million, respectively, in goodwill relating to the
DST investment as a result of DST's repurchase of its common stock during 2000.
This goodwill is being amortized over a period of 40 years.
54
Amortization expense related to identifiable intangible assets, goodwill
and other assets (exclusive of amortization on deferred commissions - see Note
2) aggregated $8.8, $9.7 and $11.4 million in 1998, 1999 and 2000, respectively.
Other liabilities. Other liabilities are summarized as follows (in
millions):
December 31,
---------------------
1999 2000
--------- ---------
Deferred compensation (See Note 10)............. $ 22.7 $ 16.5
Other ....................................... 22.6 26.2
--------- ---------
Total..................................... $ 45.3 $ 42.7
========= =========
NOTE 7 - LONG-TERM DEBT
All third party and Parent indebtedness had been paid in full as of
December 31, 1999 and 2000. Subsequent to Stilwell's acquisition of Nelson in
April 1998, Nelson repaid approximately $6.6 million in outstanding
indebtedness. Stilwell had $16.6 million of outstanding long-term indebtedness
to KCSI at December 31, 1998, which was repaid during first quarter 1999.
Interest expense related to the indebtedness with KCSI was determined using the
average level of Stilwell debt under a reasonably blended KCSI interest rate,
approximately seven percent.
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 proceeds of any borrowings under the facilities are to be
used for working capital and general corporate purposes, including repurchases
of outstanding shares of common stock.
Under the 364-Day Facility, both Stilwell and Janus have available $150
million for use in operations. Under the Five-Year Facility, Janus has available
$100 million and Stilwell $200 million. Stilwell guarantees the Janus portion of
the Facilities. In addition, Janus and Stilwell each have the right to modify
and/or terminate the Facilities pursuant to required notice provisions.
Two borrowing options are available under the credit facilities: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive option is based on rates obtained
from bids as selected by either Stilwell or Janus in accordance with competitive
auction procedures. Interest on the revolving credit option accrues based on the
type of loans with rates computed using LIBOR plus a spread, which will vary
based on Stilwell's consolidated leverage ratio, ranging from 0.30% to 0.55%.
Under the competitive loan feature of the Facilities, a different percentage may
be added to or subtracted from LIBOR.
The 364-Day Facility has a facility fee ranging from 0.125% to 0.200% per
annum and the Five-Year Facility has a facility fee of 0.150% to 0.250% per
annum. The Facilities include a utilization fee of 0.175% to 0.375% per annum on
the amount of outstanding loans for each day on which the aggregate utilization
of the Facilities exceeds 50% of the total $600 million commitment.
Stilwell, as a continuation of its practice of providing credit facilities
to its subsidiaries, has provided a $100 million intercompany credit facility to
Janus for use by Janus for general corporate purposes, effectively reducing the
amount of the credit facilities available for Stilwell's other purposes. This
intercompany facility expires on December 31, 2001.
55
The Facilities contain a number of covenants that could restrict maximum
utilization of the Facilities, including various financial covenants such as a
specified financing leverage, minimum net worth, fixed charge coverage and
minimum assets under management. Stilwell and Janus were in compliance with the
various provisions of the Facilities, including the financial covenants, as of
December 31, 2000. Stilwell paid approximately $0.7 million in facility and
arrangement fees during 2000 relating to the Facilities. Neither Janus nor
Stilwell had borrowings under the Facilities at December 31, 2000. Unrestricted
retained earnings at December 31, 2000 totaled $452.3 million.
On January 11, 2000, KCSI arranged a $200 million 364-day senior unsecured
competitive Advance / Revolving Credit Facility ("$200 million Facility"). KCSI
borrowed $125 million under this facility and used the proceeds to retire other
debt obligations. Stilwell assumed the $200 million Credit Facility, including
the $125 million borrowed thereunder, thereby reducing its stockholders' equity.
Upon such assumption, KCSI was released from all obligations, and Stilwell
became the sole obligor, under the $200 million Facility. Stilwell repaid the
$125 million in first quarter 2000. Interest under the $200 million Facility was
based on various rates as selected by Stilwell, based on the type of loan
structure, with rates computed using LIBOR plus 0.35% per annum or,
alternatively, the highest of the prime rate, the Federal Funds Effective Rate
plus 0.005% or the Base Certificate of Deposit Rate plus 1%. Stilwell paid
approximately $1.7 million in facility and arrangement fees during 2000 relating
to this facility. The $200 million Facility was cancelled upon completion of the
Facilities.
In May 1998, KCSI established a $100 million 364-day senior unsecured
competitive advance/revolving credit facility (the "$100 million Credit
Facility") that was assumed by Stilwell effective July 1, 1999 for its use upon
separation of KCSI's two business segments. On May 14, 1999, KCSI renewed the
$100 million Credit Facility. The $100 million Credit Facility contained
interest rates below prime. Stilwell paid approximately $0.5 million in facility
and arrangement fees for the year ended December 31, 1999. The $100 million
Credit Facility was cancelled upon completion of the $200 million Facility.
NOTE 8 - INCOME TAXES
Stilwell's provision for income taxes is summarized as follows (in
millions):
December 31,
------------------------------------------------
1998 1999 2000
---------- ---------- ---------
Current:
Federal $ 100.2 $ 182.6 $ 367.7
State and local.................... 15.9 21.7 41.5
---------- ---------- ---------
Total current................. 116.1 204.3 409.2
---------- ---------- ---------
Deferred:
Federal (10.0) 9.3 16.1
State and local.................... (2.4) 2.5 1.7
---------- ---------- ---------
Total deferred................ (12.4) 11.8 17.8
---------- ---------- ---------
Total income tax expense...... $ 103.7 $ 216.1 $ 427.0
========== ========== =========
56
Stilwell's deferred income tax liabilities (assets) are summarized as
follows (in millions):
December 31,
--------------------------
1999 2000
--------- ---------
Income Tax Liabilities:
Unconsolidated affiliates............... $ 171.1 $ 222.7
Deferred commissions.................... 12.2 28.8
--------- ---------
Gross deferred tax liabilities..... 183.3 251.5
--------- ---------
Income Tax Assets:
Book reserves........................... (8.1) (12.7)
Deferred compensation................... (18.7) (19.0)
Vacation................................ (0.9) (3.4)
Deferred revenue........................ (1.8) (1.6)
Other (2.4) (4.8)
--------- ---------
Gross deferred tax assets.......... (31.9) (41.5)
--------- ---------
Net deferred income tax liabilities.......... $ 151.4 $ 210.0
========= =========
Based upon Stilwell's history of operating income and its expectation for
the future, management has determined that operating income of Stilwell will,
more likely than not, be sufficient to recognize fully the gross deferred tax
assets set forth above.
Stilwell's effective income tax rate differs from the statutory federal
income tax rate as follows (in millions):
December 31,
----------------------------------------
1998 1999 2000
----------- ----------- -----------
Statutory U.S. federal rate.................... $ 101.3 $ 205.3 $ 420.9
State and local income taxes, net.............. 8.8 15.7 28.1
Non-deductible goodwill........................ 2.3 2.5 2.0
Equity in earnings of
unconsolidated affiliates................... (6.8) (12.4) (19.5)
Sale of Janus common stock to Janus............ (5.3)
Other.......................................... (1.9) 5.0 0.8
--------- ----------- -----------
Total income tax expense.................. $ 103.7 $ 216.1 $ 427.0
========= =========== ===========
Effective tax rate............................. 35.8% 36.8% 35.5%
========= =========== ===========
In connection with the initial public offering of DST in fourth quarter
1995, Stilwell began providing deferred income taxes for unremitted earnings of
qualifying U.S. unconsolidated affiliates net of the 80% dividends received
deduction provided for under current tax law. As of December 31, 2000, the
cumulative amount of unremitted earnings qualifying for this deduction
aggregated $238.0 million. These amounts would become taxable to Stilwell if
distributed by the affiliates as dividends, in which case Stilwell would be
entitled to the dividends received deduction for 80% of the dividends;
alternatively, these earnings could be realized by the sale of the affiliates'
stock, which would give rise to tax at federal capital gains rate and state
ordinary income tax rates, to the extent the stock sales proceeds exceeded
Stilwell's income tax basis. Deferred income taxes provided on unremitted
earnings of unconsolidated affiliates aggregated $13.3 and $18.6 million as of
December 31, 1999 and 2000, respectively.
Examinations of KCSI's consolidated federal income tax returns for the
years 1993-1996 by the IRS have been initiated. In addition, other taxing
authorities are currently examining years 1990-1998 and have proposed additional
tax assessments for which the Company believes it has adequate reserves.
Inasmuch as most of these
57
asserted tax deficiencies represent temporary differences, subsequent payments
of taxes will not require additional charges to income tax expense. Accruals
have been made for interest (net of related tax benefit) for estimated
settlement of the proposed tax assessments. Thus, management believes that final
settlement of these matters will not have a material adverse effect on the
Company's consolidated results of operations, cash flows or financial position.
As described in Notes 1 and 2, Stilwell will no longer join with KCSI in
filing a consolidated federal income tax return after the Spin-off. As a result,
Stilwell's ability to reduce income taxes currently payable after the Spin-off
will be determined primarily on the basis of the taxable income and income taxes
paid by Stilwell in its separate consolidated return. Stilwell has entered into
a Tax Disaffiliation Agreement with KCSI that establishes, among other things,
the procedures, rights and indemnities between the two entities with respect to
historical tax items. This agreement is not expected to have a material impact
on Stilwell's future results of operations, financial position or cash flows.
NOTE 9 - EMPLOYEE BENEFIT PLANS
Substantially all full-time employees of Stilwell participate in the ESOP
and Stilwell's qualified 401(k) (the "Stilwell 401(k) Plan"). Employees of
Stilwell Financial Inc. participate in Stilwell's qualified profit sharing plan,
which was merged into the Stilwell 401(k) Plan effective January 1, 2000 to
provide participants the ability to self-direct investment alternatives. Janus
and Berger employees participate in the qualified profit sharing plans sponsored
by each of those companies.
Contributions to the ESOP and the profit sharing component of the Stilwell
401(k) Plan are made at the discretion of the Stilwell Board of Directors in
amounts not to exceed the maximum allowable for income tax purposes. The
contribution was 7% of eligible compensation for the years ended December 31,
1998, 1999 and 2000. Stilwell matches a maximum of 3% of employee compensation
deferrals in the Stilwell 401(k) Plan, subject to a maximum allowable for income
tax purposes. Contributions to the Janus and Berger profit sharing plans are
made at the discretion of the respective boards of directors in amounts not to
exceed the maximum allowable for income tax purposes.
Expense related to the Stilwell participants in the qualified plans
aggregated $5.7, $8.1 and $13.4 million in 1998, 1999 and 2000, respectively.
NOTE 10 - STOCK PLANS
Pro Forma Disclosure. Under FAS 123, companies must either record
compensation expense based on the estimated grant date fair value of stock
options granted or disclose the impact on net income as if they had adopted the
fair value method (for grants subsequent to December 31, 1994). If Stilwell had
measured compensation cost under the fair value method prescribed by FAS 123
during the years ended December 31, 1998 and 1999, Stilwell would have recorded
compensation for the KCSI stock options granted to its employees and shares
subscribed by its employees under the KCSI employee stock purchase plan. For the
year ended December 31, 2000, compensation would have included compensation for
Stilwell stock options granted to its employees and shares subscribed by its
employees under the Stilwell employee stock purchase plan. For all years, the
Janus and Berger stock-based compensation plans discussed below would have
resulted in additional compensation. The aggregate effect of the additional
compensation under the fair value based method prescribed by FAS 123 on net
income and earnings per share would have been as follows:
58
Year ended December 31,
-------------------------------------------
1998 1999 2000
----------- ----------- -----------
Net income (in millions)
As reported.............. $ 152.2 $ 313.1 $ 663.7
Pro forma................ 149.0 310.1 659.1
Earnings per Basic share:
As reported.............. $ 0.68 $ 1.40 $ 2.98
Pro forma................ 0.67 1.39 2.96
Earnings per Diluted share:
As reported.............. $ 0.67 $ 1.38 $ 2.90
Pro forma................ 0.66 1.37 2.88
For the years ended December 31, 1998 and 1999, there were no outstanding
stock options for Stilwell common stock. However, at the time of the Spin-off,
in order to provide for the equitable adjustment of existing KCSI stock options
("Options"), KCSI and Stilwell substituted two separately exercisable options -
New KCSI Options and New Stilwell Options (collectively, the "Substituted
Options") - for the Options held by KCSI and Stilwell employees, former KCSI
employees and KCSI directors (including former directors). The issuance of these
Substituted Options resulted in potentially dilutive securities for purposes of
Stilwell's diluted EPS computation.
The fair value of stock options granted to Stilwell employees used to
compute pro forma net income disclosures was estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions:
KCSI 1998 KCSI 1999 KCSI 2000 Stilwell 2000
------------- ------------- ------------- --------------
Dividend yield................ .34% to .56% .25% to .36% .05% .09% to .12%
Expected volatility........... 30% to 42% 42% to 43% 50% 48%
Risk-free interest rate....... 4.74% to 5.64% 4.67% to 5.75% 6.18% 5.97% to 6.18%
Expected life................. 3 to 5 years 3 years 3 years 3 years
Stilwell Stock Option Plans. The table below summarizes Stilwell
outstanding options as of December 31, 2000 and changes during the year then
ended. All Stilwell options were issued upon the Spin-off. These options
generally vest over periods ranging from one to three years with a maximum
exercise term of ten years. The number of options and activity related thereto
for the year ended December 31, 2000 is not necessarily indicative of the number
of options and associated activity in the future.
Weighted
Average
Exercise
Shares Price
----------- -----------
Outstanding at January 1..................... -- $ --
Granted...................................... 16,872,955 16.80
Exercised.................................... (3,483,388) 9.30
Expired/Canceled............................. ( 4,100) 21.25
-----------
Outstanding at December 31................... 13,385,467 $ 10.83
===========
Exercisable.................................. 11,931,801 $ 8.10
===========
Weighted Average Fair Value of Options
granted during the year................... $ 17.49
59
The following table summarizes the information about Stilwell stock options
that were outstanding at December 31, 2000:
Outstanding Exercisable
------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ----------- ----------- ----------- ----------
$ 2 to $5 .............. 4,375,380 1.1 years $ 2.44 4,375,380 $ 2.44
$5 to $10............... 5,292,996 5.3 7.40 5,292,996 7.40
$10 to $20.............. 620,350 7.6 12.67 620,350 12.67
$20 to $30.............. 1,586,138 8.3 21.41 1,435,288 21.26
$30 to $47.............. 1,510,603 4.6 35.30 207,787 40.50
---------- -----------
$ 2 to $47.............. 13,385,467 3.9 years $ 10.83 11,931,801 $ 8.10
========== ===========
Shares available for future grants at December 31, 2000 aggregated
13,484,866.
Stilwell and KCSI ESPP. In July 2000, Stilwell initiated an employee stock
purchase plan ("Stilwell ESPP") under which substantially all full-time
employees of Stilwell were granted the right to subscribe to Stilwell common
stock at a per share price equal to the lesser of 85% of the Stilwell stock
price on the date of grant or the date that such shares are purchased. The
weighted average per share fair value of the stock purchase rights granted to
Stilwell employees under the First Offering of the Stilwell ESPP was $13.49 in
2000.
In 1998, KCSI sponsored an employee stock purchase plan (" KCSI ESPP")
under which substantially all full-time employees of Stilwell were granted the
right to subscribe to KCSI common stock at a per share price equal to the lesser
of 85% of the KCSI stock price on the date of grant or the date that such shares
were purchased. The weighted average per share fair value of the stock purchase
rights granted to Stilwell employees under the Eleventh Offering of the KCSI
ESPP was $10.76. KCSI did not sponsor an ESPP grant for 1999.
The fair value of ESPP purchase rights granted to Stilwell employees used
to compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions:
KCSI ESPP Stilwell ESPP
--------- -------------
1998 2000
--------- -------------
Dividend yield........... 0.95% .09%
Expected volatility...... 42% 48%
Risk-free interest rate.. 4.63% 6.18%
Term..................... 1 year 1 year
Janus Restricted Stock. During 1998 and 1999, Janus granted 125,900 and
33,000 restricted shares of Janus's common stock, respectively, to certain Janus
employees pursuant to restricted stock agreements ("Stock Agreements"). The
restricted stock was recorded at fair market value (approximately $28.9 and
$10.8 million for the 1998 and 1999 grants, respectively) at the time of grant
as a separate component of Janus's stockholders' equity. The restricted stock
vests at the end of 10 years. The Stock Agreements also includes an accelerated
vesting provision whereby the vesting rate will be accelerated to 20% of the
shares in any one year if certain specific investment performance goals are met
(to be effective on January 1st of the following year). Janus records
60
compensation expense based on the applicable vesting rate, which was 20% in 1998
and 1999 based on attainment of investment performance goals. During the vesting
period, a grantee may vote and receive dividends on the shares, although
unvested shares are subject to forfeiture if a grantee terminates. These shares
do not contain mandatory put rights to Stilwell. The impact of subsequent Janus
amortization charges will be partially reduced by gain recognition at Stilwell
Financial Inc., reflecting Stilwell's reduced ownership of Janus upon vesting by
the restricted stockholders.
The shares made available for the 1999 restricted stock grant were obtained
through the purchase of 35,000 shares of Janus stock from an existing minority
owner. In connection with this transaction, which was accounted for under the
purchase method pursuant to Accounting Principles Board Opinion No. 16, Business
Combinations ("APB 16"), Stilwell Financial Inc. recorded approximately $9.5
million of goodwill, which is being amortized over a period of 15 years. Because
this 1999 issuance was from Janus shares on which previous gains had been
recognized by Stilwell, the Company will record any gain upon vesting directly
to stockholders' equity (see Note 2).
In first quarter 2000, Janus granted 35,660 restricted shares of its common
stock to certain Janus employees pursuant to restricted stock agreements. The
shares vest after seven years, but are subject to acceleration to 20% of the
shares in any one year if specific goals are attained (as defined according to
the nature of the service provided by the grantee). The stock was granted with
an immediate 20% vesting. As part of the 2000 grant, the grantees made elections
under section 83(b) of the Internal Revenue Code, the tax payments of which were
made by Janus on behalf of each grantee equal to 100% of the fair value of the
stock upon grant. The fair market value of the restricted stock under the grant
was approximately $18.4 million and the related tax paid by Janus on the behalf
of employees totaled $15.6 million. These payments are recorded as prepaid
expenses and amortized over the same period as the underlying restricted stock.
Because this 2000 issuance was from Janus shares on which previous gains were
recognized by Stilwell, the Company records any gain upon vesting directly to
stockholders' equity - see Note 2.
Expenses recorded by Janus resulting from the amortization of these
restricted stock grants totaled $5.8, $11.0 and $7.7 million in 1998, 1999 and
2000, respectively.
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. 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 $24.1 million of compensation expense
relating to this grant during 2000.
Janus Stock Option Plan. During 1997, Janus adopted a stock option plan to
made available shares of Janus common stock for the grant of awards to Janus
employees. Awards under the plan were granted with an exercise price equal to
the fair value of the underlying common stock on the grant date, vested
immediately and were exercisable during an annual 30 day exercise period. The
options expired after 30 months.
A summary of stock option activity under the Janus stock option plan is as
follows:
1998 1999
------- -------
Janus Options outstanding at January 1 ........... 22,100 8,100
Granted
Exercised ................................... (13,800) (8,000)
Expired/Canceled ............................ (200) (100)
------- -------
Janus Options outstanding at December 31 ......... 8,100 --
======= =======
Janus options may affect Stilwell's dilutive EPS computation (through a
reduced ownership percentage of Janus by Stilwell) if the average fair value of
the Janus stock exceeds the option price.
61
BAI Stock Option Plan. During 1997, BAI adopted a stock option plan that
made available shares of BAI common stock for the grant of awards to BAI
employees. Awards under the plan were granted with an exercise price equal to
the fair value of the underlying common stock on the grant date, vested
generally over periods ranging up to 10 years, and were exercisable for a period
of 10 years. Certain grants under the BAI stock option plan also included
accelerated vesting provisions based upon pre-established BAI performance
criteria. BAI options would have affected Stilwell's dilutive EPS computation
(through a reduced ownership percentage of BAI by Stilwell) if the average fair
value of the BAI stock exceeded the option price.
A summary of stock option activity under the BAI stock option plan is as
follows:
1998
--------
BAI Options outstanding at January 1........... 192,210
Granted................................... 9,500
Expired/Canceled.......................... (69,660)
--------
BAI Options outstanding at December 31......... 132,050
========
Exercisable at December 31..................... 89,290
========
In connection with the formation of Berger, all options were cancelled. See
Note 4.
Janus Stock Purchases. In connection with a 1995 Janus minority group
restructuring transaction, Janus made 274,300 shares of its common stock
available for purchase by certain key Janus employees. These key employees
purchased the Janus shares at fair value and paid for these shares with a
combination of cash (20%) and full recourse loans (80%) from Stilwell which bear
interest at 8.25% and mature in equal annual installments over 10 years. (See
Note 16 for discussion of the Stilwell purchases of stock from minority
stockholders and related repayment of loans).
In 1997, Janus made available an additional 56,400 shares of its common
stock that had been reacquired from current and former employees for purchase by
certain key employees. 47,300 shares were purchased at fair value and paid for
through a combination of cash (10%) and full recourse loans (90%) from a third
party lending institution. The remaining 9,100 shares were purchased by other
employees at fair value for cash.
In connection with each of these Janus stock purchases, Janus entered into
incentive compensation agreements with the key employees under which each
employee would have the opportunity to earn bonuses (based upon pre-established
Janus performance measures) equal to the debt service requirements of the loans
referred to above. As of December 31, 2000, the employees participating in the
1995 and 1997 stock purchases had earned 100% of the potential bonus that will
be paid out over the remaining maturities of the notes. Compensation expense
related to these two bonus plans aggregated $2.7, $7.0 and $1.7 million in 1998,
1999 and 2000, respectively.
62
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases. Stilwell and its subsidiaries rent office space and
equipment under the terms of various operating lease agreements. As of December
31, 2000, future minimum rental commitments under non-cancelable operating
leases aggregated (in millions):
2001 .......... $ 24.6
2002 .......... 25.5
2003 .......... 22.7
2004 .......... 16.3
2005 .......... 15.4
Thereafter..... 52.5
----------
Total $ 157.0
==========
Rent expense aggregated $17.5, $17.4 and $22.5 million in 1998, 1999 and
2000, respectively.
Minority Purchase Agreements. A stock purchase agreement with Thomas H.
Bailey ("Mr. Bailey"), Janus's Chairman, President and Chief Executive Officer,
and another Janus stockholder (the "Janus Stock Purchase Agreement") and certain
restriction agreements with other Janus minority stockholders contain, among
other provisions, mandatory put rights whereby under certain circumstances,
Stilwell would be required to purchase the minority interests of such Janus
minority stockholders at a fair market value purchase price equal to fifteen
times the net after-tax earnings over the period indicated in the relevant
agreement, or in some circumstances as determined by an independent appraisal.
Under the Stock Purchase Agreement, termination of Mr. Bailey's employment could
require a purchase and sale of the Janus common stock held by him. If other
minority holders terminated their employment, some or all of their shares also
could be subject to mandatory purchase and sale obligations. Certain other
minority holders who continue their employment also could exercise puts. If all
of the mandatory purchase and sale provisions and all the puts under such Janus
minority stockholder agreements were implemented, Stilwell would have been
required to pay approximately $1.42 billion as of December 31, 2000, compared to
$789 and $447 million at December 31, 1999 and 1998, respectively. (See Note 16
regarding expected Stilwell repurchases during the first half of 2001 of shares
of Janus common stock from various minority stockholders, including Mr. Bailey.
After giving effect to those expected transactions, Stilwell would have been
required to pay approximately $616 million assuming exercises as of December 31,
2000.) In the future these amounts may be higher or lower depending on Janus's
earnings, fair market value and the timing of the exercise. Payment for the
purchase of the respective minority interests is to be made under the Janus
Stock Purchase Agreement within 120 days after receiving notification of
exercise of the put rights. Under the restriction agreements with certain other
Janus minority stockholders, payment for the purchase of the respective minority
interests is to be made 30 days after the later to occur of (i) receiving
notification of exercise of the put rights or (ii) determination of the purchase
price through the independent appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements
and restriction agreements with other minority stockholders also contain
provisions whereby upon the occurrence of a Change in Ownership (as defined in
such agreements) of Stilwell (as to the Janus Stock Purchase Agreement) or KCSI
(as to the purchase and restriction agreements), Stilwell may be required to
purchase such holders' Janus stock or, as to the stockholders that are parties
to the Janus Stock Purchase Agreement, at such holders' option, to sell its
stock of Janus to such minority stockholders. The fair market value price for
such purchase or sale would be equal to fifteen times the net after-tax earnings
over the period indicated in the relevant agreement, in some circumstances as
determined by Janus's Stock Option Committee or as determined by an independent
appraisal. If Stilwell had been required to purchase the holders' Janus common
stock after a Change in Ownership as of December 31, 2000, the purchase price
would have been approximately $1.68 billion. (See Note 16 regarding expected
Stilwell and Janus repurchases during 2001 of shares of Janus common stock from
various minority stockholders,
63
including Mr. Bailey. After giving effect to those expected transactions,
Stilwell would have been required to pay approximately $871 million assuming a
Change in Ownership as of December 31, 2000.)
Stilwell would account for any such purchase as the acquisition of a
minority interest under APB 16 - see Note 16 regarding Stilwell's expected
acquisition of shares of Janus common stock during 2001.
As of December 31, 2000, Stilwell had $350 million in credit facilities
available, cash balances at the Stilwell holding company level in excess of $95
million, securities with a market value in excess of $2.7 billion and the right
to its proportional share (approximately $380 million) of anticipated dividends
from Janus on its 2000 earnings. To the extent that available credit facilities,
existing cash balances, expected dividends from Janus and proceeds from the
liquidation of Stilwell's investment in DST were insufficient to fund its
purchase obligations, Stilwell had access to the capital markets and, with
respect to the Janus Stock Purchase Agreement, had 120 days to raise additional
sums.
Litigation. From time to time Stilwell is involved in various legal actions
arising in the normal course of business. While the outcome of the various legal
proceedings involving Stilwell cannot be predicted with certainty, it is the
opinion of management (after consultation with legal counsel) that the
litigation reserves of Stilwell are adequate and that legal actions involving
Stilwell and ultimate resolution of these matters will not be material to
Stilwell's consolidated financial position, results of operations or cash flows.
In January 2000, Stilwell received approximately $44.2 million in
connection with the settlement of a legal dispute related to a former equity
investment. The settlement agreement resolves all outstanding issues related to
this former equity investment. In the first quarter of 2000, Stilwell recognized
an after-tax gain of approximately $27.3 million as a result of this settlement.
NOTE 12 - RELATED PARTY TRANSACTIONS
Stilwell and its subsidiaries incurred fees to DST for various shareowner
and portfolio accounting and record-keeping services in the amount of $5.5, $7.3
and $21.1 million in 1998, 1999 and 2000, respectively.
Janus and Berger earn fees from the various registered investment companies
for which they act as investment adviser. Accounts receivable include amounts
due from these investment companies. Additionally, Janus earned $8.9 million in
1998 in sub-advisory fees from IDEX Management, Inc. ("IDEX"), formerly a 50%
joint venture prior to the disposition of IDEX in second quarter 1998. Janus
recognized an $8.8 million pretax gain in connection with this disposition.
Also, Berger receives fees under l2b-1 plans from various registered investment
companies for which it acts as adviser (See Note 2).
The table below presents this related party activity as of and for the
years ended December 31 (in millions):
Accounts
Investment receivable
management and from registered
shareowner investment Berger 12b-1 Plan
servicing fees companies fees earned
-------------- --------------- -----------------
1998 ...... $ 558.4 $ 59.1 $ 6.9
1999 ...... 1,024.7 129.3 8.6
2000 ...... 1,952.9 160.6 14.0
Stilwell's retained earnings include equity in the unremitted earnings of
its unconsolidated affiliates of $112.5, $154.3 and $219.0 million as of
December 31, 1998, 1999 and 2000, respectively.
64
Certain officers and directors of Janus and Berger are also officers,
directors and/or trustees for the various registered investment companies for
which Janus and Berger act as investment adviser.
NOTE 13 - CONTROL
Subsidiaries and Affiliates. In connection with its 1984 acquisition of an
80% interest in Janus, KCSI entered into the Janus Stock Purchase Agreement
which, as amended, provides that so long as Mr. Bailey is a holder of at least
5% of the common stock of Janus and continues to be employed as President of
Janus (or as Chairman of the Janus Board if James P. Craig, III ("Mr. Craig"),
who is no longer employed by Janus, served as the President of Janus), Mr.
Bailey shall continue to establish and implement policy with respect to the
investment advisory and portfolio management activity of Janus. The agreement
also provides that, in furtherance of such objective, so long as both the
ownership threshold and officer status conditions described above are satisfied,
Stilwell will vote its shares of Janus common stock to elect directors of Janus,
at least the majority of whom are selected by Mr. Bailey, subject to Stilwell's
approval, which approval may not be unreasonably withheld. The agreement further
provides that any change in management philosophy, style or approach with
respect to investment advisory and portfolio management policies of Janus shall
be mutually agreed upon by Stilwell and Mr. Bailey. As discussed in Note 16, Mr.
Bailey's ownership is expected to decrease to approximately 6.2% after
completion of the sale of 600,000 shares to Stilwell in the first half of 2001.
Accordingly, Mr. Bailey's rights and obligations under the Janus Stock Purchase
Agreement are not affected.
Stilwell does not believe Mr. Bailey's rights under the Janus Stock
Purchase Agreement are "substantive," within the meaning of EITF 96-16, because
Stilwell can terminate those rights at any time, by removing Mr. Bailey as an
officer of Janus. Stilwell also believes that the removal of Mr. Bailey would
not result in significant harm to Stilwell based on the factors discussed below.
Colorado law provides that removal of an officer of a Colorado corporation may
be done directly by its stockholders if the corporation's bylaws so provide.
While Janus's bylaws contain no such provision currently, Stilwell has the
ability to cause Janus to amend its bylaws to include such a provision. Under
Colorado law, Stilwell could take such action at an annual meeting of
stockholders or make a demand for a special meeting of stockholders. Janus is
required to hold a special stockholders' meeting upon demand from a holder of
more than 10% of its common stock and to give notice of the meeting to all
stockholders. If notice of the meeting is not given within 30 days of such a
demand, the District Court is empowered to summarily order the holding of the
meeting. As the holder of more than 80% of the common stock of Janus, Stilwell
has the requisite votes to compel a meeting and to obtain approval of the
required actions at such a meeting.
Stilwell has concluded, supported by an opinion of legal counsel, that it
could carry out the above steps to remove Mr. Bailey without breaching the Janus
Stock Purchase Agreement and that if Mr. Bailey were to challenge his removal by
instituting litigation, his sole remedy would be for damages and not injunctive
relief and that Stilwell would likely prevail in that litigation.
Although Stilwell has the ability to remove Mr. Bailey, it has no present
plan or intention to do so, as he is one of the persons regarded as most
responsible for the success of Janus. The consequences of any removal of Mr.
Bailey would depend upon the timing and circumstances of such removal. Mr.
Bailey could be required to sell, and Stilwell could be required to purchase,
his Janus common stock, unless he was terminated for cause. Certain other Janus
minority stockholders would also be able, and, if they terminated employment,
required, to sell to Stilwell their shares of Janus common stock. The amounts
that Stilwell would be required to pay in the event of such purchase and sale
transactions could be material. See Note 11. Such removal would have also
resulted in acceleration of the vesting of a portion of the shares of restricted
Janus common stock held by other minority stockholders, having an approximate
aggregate value of $32 million as of December 31, 2000.
65
There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in the
loss of other valuable employees or clients of Janus. The likelihood of
occurrence and the effects of any such employee or client departures cannot be
predicted and may depend on the reasons for and circumstances of Mr. Bailey's
removal. However, Stilwell believes that Janus would be able in such a situation
to retain or attract talented employees because: (i) of Janus's prominence; (ii)
Janus's compensation scale is at the upper end of its peer group; (iii) some or
all of Mr. Bailey's repurchased Janus stock could be then available for sale or
grants to other employees; and (iv) many key Janus employees must continue to be
employed at Janus to become vested in currently unvested restricted stock valued
in the aggregate (after considering additional vesting that would occur upon the
termination of Mr. Bailey) at approximately $99 million as of December 31, 2000.
In addition, notwithstanding any removal of Mr. Bailey, Stilwell would expect to
continue its practice of encouraging autonomy by its subsidiaries and their
boards of directors so that management of Janus will continue to have
responsibility for Janus's day-to-day operations and investment advisory and
portfolio management policies and, because it would continue that autonomy,
Stilwell would expect many current Janus employees to remain with Janus.
On September 25, 2000, Mr. Craig, Janus's Chief Investment Officer and
Director of Research, left Janus to manage money for a new charitable foundation
established by Mr. Craig and his wife. Mr. Craig's responsibilities were assumed
by Janus's Executive Investment Committee, a group formed by Mr. Craig over a
year ago and comprised of several portfolio managers and Mr. Bailey. Mr. Craig
had previously been identified as the successor to Mr. Bailey in the event that
Mr. Bailey left Janus. A revised succession plan has not been developed.
With respect to clients, Janus's investment advisory contracts with its
clients are terminable upon 60 days' notice and in the event of a change in
control of Janus. Because of his rights under the Janus Stock Purchase
Agreement, Mr. Bailey's departure, whether by removal, resignation or death,
might be regarded as such a change in control. However, in view of Janus's
investment record, Stilwell has concluded it is reasonable to expect that in
such an event most of Janus's clients would renew their investment advisory
contracts. This conclusion is reached because (i) Janus relies on a team
approach to investment management and development of investment expertise, (ii)
Mr. Bailey has not served as a portfolio manager for any Janus fund for several
years and (iii) Janus should be able to continue to attract talented portfolio
managers. It is reasonable to expect that Janus's clients' reaction will depend
on the circumstances, including, for example, how much of the Janus team remains
in place and what investment advisory alternatives are available.
The Janus Stock Purchase Agreement and other agreements provide for rights
of first refusal on the part of Janus minority stockholders, Janus and Stilwell,
with respect to certain sales of Janus stock. These agreements also require
Stilwell to purchase the shares of Janus minority stockholders in certain
circumstances. In addition, in the event of a Change in Ownership of Stilwell,
as defined in the Janus Stock Purchase Agreement, Stilwell may be required to
sell its stock of Janus to the stockholders who are parties to such agreement or
to purchase such holders' Janus stock. In the event Mr. Bailey were terminated
for any reason within one year following a Change in Ownership, he would be
entitled to a severance payment, amounting, at December 31, 2000, to
approximately $2 million. Purchase and sale transactions under these agreements
are to be made based upon a multiple of the net earnings of Janus or other fair
market value determinations, as defined therein. See Note 11.
Generally, any change in control of Janus or Berger would constitute an
"assignment" under the Investment Company Act of 1940. The Spin-off did not
result in a change of control of Janus or Berger and therefore under the
applicable rules of the SEC would not constitute such an assignment. However, a
material reduction in the ownership of Janus common stock by Mr. Bailey may
result in an assignment by virtue of certain provisions in an agreement with
him. The Boards of Trustees or Directors of the Janus Advised Funds generally
may terminate the investment advisory agreements upon written notice for any
reason.
66
Employees. Stilwell Financial Inc. and certain subsidiaries have entered
into agreements with employees whereby, upon defined circumstances constituting
a change in control of Stilwell or the subsidiary, certain stock options or
similar equity instruments become exercisable, certain benefit entitlements are
automatically funded and such employees are entitled to specified cash payments
upon termination of employment.
Debt. The Facilities provide for default in the event of a specified change
in control of Stilwell or certain subsidiaries of Stilwell.
Shareholder Rights Plan ("Rights Plan"). Stilwell entered into the Rights
Plan with UMB Bank, N.A., as rights agent as of June 14, 2000. In connection
with the Rights Plan, the Stilwell Board declared a dividend of one right
("Right") for each outstanding share of Stilwell common stock as of the close of
business on June 14, 2000 (the "Rights Record Date"). Shares of Stilwell common
stock issued in the Spin-off (assuming no triggering event) automatically
receive these Rights upon issuance. The Rights are not exercisable or
transferable separately from the shares of Stilwell common stock until the
earlier of: (1) ten days following a public announcement that a person or group
has acquired or obtained the right to acquire beneficial ownership of 15% or
more of the outstanding shares of Stilwell common stock; or (ii) ten days
following the commencement or announcement of an intention to make a tender or
exchange offer that would result in an acquiring person or group beneficially
owning 15% or more of the outstanding shares of Stilwell common stock (an
"Acquiring Person"), unless the Stilwell Board sets a later date in either event
(the earlier of (i) or (ii) being the "Rights Distribution Date"). Under the
Rights Plan, the Stilwell Board has the option to redeem the Rights at a nominal
cost or prevent the Rights from being triggered by designating certain offers
for all the outstanding Stilwell common stock as a Permitted Offer (as defined
in the Rights Plan). No supplement or amendment may be made to the Rights Plan
which changes the Redemption Price, the Final Expiration Date, the Purchase
Price (as those terms are defined in the Rights Plan) or the number of
1/1,000ths of a share of Preferred Stock for which a Right is exercisable.
Subject to the foregoing, prior to the Rights Distribution Date, Stilwell may
amend or supplement the Rights Plan without the consent of any of the holders of
the Rights. Following the Rights Distribution Date, the Rights Plan may be
amended to cure any ambiguity, to correct or supplement any provision that is
defective or inconsistent with any other provision of the Rights Plan, or to
change or supplement any provision so long as such amendment or supplement does
not adversely affect the holders of the Rights (other than an acquiring person
or group). The Rights expire ten years after the Rights Record Date unless
earlier redeemed by Stilwell.
The Rights, when exercisable, entitle their holders (other than those held
by an Acquiring Person) to purchase 1/1000th of a share of Series A Stilwell
Preferred Stock (subject to adjustment) or, in certain instances, other
securities of Stilwell, including Stilwell common stock, having a market value
equal to twice the exercise price of the Right. In certain circumstances, if
Stilwell is involved in a merger or consolidation and is not the surviving
entity or disposes of more than 50 percent of its assets or earnings power, the
Rights also entitle their holders (other than an acquiring person or group) to
purchase the highest priority voting shares in the surviving entity or its
affiliates having a market value of two times the exercise price of the Rights.
The Rights Plan is intended to encourage a potential acquiring person or
group to negotiate directly with the Stilwell Board, but may have certain
antitakeover effects. The Rights Plan could significantly dilute the interests
in Stilwell of an Acquiring Person. The Rights Plan may therefore have the
effect of delaying, deterring or preventing a change in control of Stilwell.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
During 2000, non-recurring gains contributed approximately 23(cent) per
diluted share to Stilwell's consolidated net income. These gains included the
following: i) a first quarter after-tax gain of approximately $27.3 million
resulting from the settlement of litigation with a former equity affiliate; ii)
a first quarter $15.1 million after-tax gain associated with the Company's sale
of 192,408 shares of its Janus common stock to Janus for use in
67
connection with the Janus incentive programs; iii) approximately $4.3 million
(after-tax) in gains representing the Company's proportionate share of a
litigation settlement and sales of marketable securities recorded by DST in the
first half of 2000; and iv) approximately $6.2 million (after-tax) in fourth
quarter 2000 gains representing the Company's proportionate share of sales of
marketable securities recorded by DST during the quarter. See Notes 3, 4 and 11.
The accumulations of Basic and Diluted Earnings per Common Share for the
four quarters in 1999 and 2000 do not necessarily total the Basic and Diluted
Earnings per Common Share for the year ended December 31, 1999 and 2000,
respectively.
(in millions, except per share amounts):
During Year 2000
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
Revenues:
Investment management fees............ $ 449.9 $ 462.7 $ 502.3 $ 435.8
Shareowner servicing fees............. 83.6 85.8 90.2 78.6
Other................................. 11.6 14.5 17.0 16.1
--------- --------- --------- ----------
Total............................ 545.1 563.0 609.5 530.5
--------- --------- --------- ----------
Operating Expenses:
Compensation.......................... 124.9 124.1 138.3 103.2
Marketing and promotion............... 28.8 25.9 22.3 26.5
Third party concession fees.......... 72.3 81.4 83.4 77.8
Depreciation and amortization......... 15.6 19.9 21.5 24.2
Professional services................. 15.2 16.8 17.0 18.7
Other................................. 43.4 39.1 34.6 36.9
--------- --------- --------- ----------
Total............................ 300.2 307.2 317.1 287.3
--------- --------- --------- ----------
Operating Income........................... 244.9 255.8 292.4 243.2
Equity earnings of unconsolidated 18.8 15.8 14.3 21.9
affiliates...............................
Interest expense - Parent.................. (0.7)
Interest expense - third parties........... (1.9) (1.3) (1.9) (1.9)
Gain on litigation settlement.............. 44.2
Gain on sale of Janus common stock......... 15.1
Other, net................................. 9.9 11.5 10.7 11.6
--------- --------- --------- ----------
Income before taxes and minority
interest........................... 330.3 281.8 315.5 274.8
Income tax provision....................... 114.3 102.3 114.2 96.2
Minority interest in consolidated earnings. 27.3 27.8 31.2 25.4
--------- --------- --------- ----------
Net Income $ 188.7 $ 151.7 $ 170.1 $ 153.2
========= ========= ========= ==========
Per Share Data (Notes 1 and 2):
Weighted Average Common shares
outstanding (in thousands)............. 223,000 223,000 223,407 220,668
Basic Earnings per share................ $ 0.85 $ 0.68 $ 0.76 $ 0.69
Weighted Average Diluted Common shares
outstanding (in thousands)............. 223,000 223,000 229,297 226,689
Diluted Earnings per share.............. $ 0.84 $ 0.67 $ 0.73 $ 0.66
Dividends per share..................... N/A N/A $ 0.01 $ 0.01
Common Stock Price Ranges (a):
High ................................. N/A N/A $ 53.94 $ 50.00
Low ................................. N/A N/A $ 40.88 $ 32.50
(a) since Spin-off.
68
The following table summarizes quarterly information for the year ended
December 31, 1999 (in millions, except per share amounts):
During Year 1999
---------------------------------------------------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
Revenues:
Investment management fees............ $ 191.1 $ 230.8 $ 253.8 $ 317.1
Shareowner servicing fees............. 36.9 45.0 49.2 60.3
Other................................. 5.3 6.4 8.2 8.2
--------- --------- --------- ---------
Total............................ 233.3 282.2 311.2 385.6
--------- --------- --------- ---------
Operating Expenses:
Compensation.......................... 59.8 76.1 82.8 97.8
Marketing and promotion............... 16.3 19.3 16.3 19.6
Third party concession fees.......... 24.3 31.7 40.2 46.8
Depreciation and amortization......... 6.8 7.9 10.0 10.7
Professional services................. 6.2 7.2 5.9 6.5
Other................................. 22.7 24.5 23.2 31.4
--------- --------- --------- ---------
Total............................ 136.1 166.7 178.4 212.8
--------- --------- --------- ---------
Operating Income........................... 97.2 115.5 132.8 172.8
Equity earnings of unconsolidated 11.2 11.3 11.6 12.6
affiliates...............................
Interest expense - Parent.................. (1.0) (0.7) (0.7) (3.5)
Other, net................................. 4.9 4.3 9.3 8.9
--------- --------- --------- ---------
Income before taxes and minority
interest........................... 112.3 130.4 153.0 190.8
Income tax provision....................... 40.1 46.8 55.6 73.6
Minority interest in consolidated earnings. 11.2 12.7 14.7 18.7
--------- --------- --------- ---------
Net Income $ 61.0 $ 70.9 $ 82.7 $ 98.5
========= ========= ========= =========
Per Share Data (Notes 1 and 2):
Weighted Average Diluted Common shares
outstanding (a) (in thousands)......... 223,000 223,000 223,000 223,000
Basic Earnings per share................ $ 0.27 $ 0.32 $ 0.37 $ 0.44
Diluted Earnings per share.............. $ 0.27 $ 0.31 $ 0.36 $ 0.43
Dividends per share (b)................. N/A N/A N/A N/A
Common Stock Price Ranges:
High (b).............................. N/A N/A N/A N/A
Low (b)............................. N/A N/A N/A N/A
(a) The weighted average computations are the same for Basic and Diluted
earnings per share.
(b) Information is not applicable as Stilwell was a member of the KCSI
consolidated group.
NOTE 15- SEGMENT AND GEOGRAPHIC INFORMATION
The Company has three primary business units that produce the revenues and
operating income of Stilwell. These units, together with DST, comprise over 90%
of the net income of the Company. For purposes of segment reporting pursuant to
FAS 131, 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.
69
Summarized financial information concerning the segments is shown in the
following tables (in millions):
2000
------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
---------- --------- ------------
Revenues .................................. $ 2,227.0 $ 21.1 $ 2,248.1
Operating Expenses.......................... 1,165.4 46.4 1,211.8
---------- --------- -----------
Operating Income (Loss)..................... 1,061.6 (25.3) 1,036.3
Equity earnings of unconsolidated
affiliates................................ 1.1 69.7 70.8
Interest expense - Parent................... (0.7) (0.7)
Interest expense - third parties............ (7.0) (7.0)
Gain on litigation settlement............... 44.2 44.2
Gain on sale of Janus common stock.......... 15.1 15.1
Other, net ............................... 23.7 20.0 43.7
---------- --------- -----------
Pretax income............................ 1,086.4 116.0 1,202.4
Income tax provision........................ 412.3 14.7 427.0
Minority interest........................... 112.1 (0.4) 111.7
---------- --------- -----------
Net Income $ 562.0 $ 101.7 $ 663.7
========== ========= ===========
1999
------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
---------- --------- -----------
Revenues ................................... $ 1,195.3 $ 17.0 $ 1,212.3
Operating Expenses........................... 652.9 41.1 694.0
---------- --------- -----------
Operating Income (Loss)...................... 542.4 (24.1) 518.3
Equity earnings of unconsolidated
affiliates.............................. 2.3 44.4 46.7
Interest expense - Parent.................... (0.2) (5.7) (5.9)
Other, net ................................ 16.8 10.6 27.4
---------- --------- -----------
Pretax income............................. 561.3 25.2 586.5
Income tax provision......................... 215.1 1.0 216.1
Minority interest............................ 57.7 (0.4) 57.3
---------- --------- -----------
Net Income $ 288.5 $ 24.6 $ 313.1
========== ========= ===========
70
1998
------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
---------- --------- -----------
Revenues ................................... $ 659.7 $ 11.1 $ 670.8
Operating Expenses........................... 358.1 32.1 390.2
---------- --------- -----------
Compensation
Operating Income (Loss)...................... 301.6 (21.0) 280.6
Equity earnings of unconsolidated
affiliates................................. 1.5 24.3 25.8
Interest expense - Parent.................... (0.3) (6.2) (6.5)
Reduction in ownership of DST................ (29.7) (29.7)
Other, net ................................ 23.8 (4.7) 19.1
--------- --------- -----------
Pretax income (loss)...................... 326.6 (37.3) 289.3
Income tax provision (benefit)............... 125.4 (21.7) 103.7
Minority interest............................ 33.3 0.1 33.4
---------- --------- -----------
Net Income (Loss)............................ $ 167.9 $ (15.7) $ 152.2
========== ========= ===========
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the years ended December 31 (in millions):
1998 1999 2000
----------- ----------- -----------
Revenues (1):
------------
United States............. $ 659.7 $ 1,184.3 $ 2,164.0
United Kingdom............ 11.1 28.0 84.1
----------- ----------- -----------
Total................. $ 670.8 $ 1,212.3 $ 2,248.1
=========== =========== ===========
Long-lived assets:
-----------------
United States............. $ 143.6 $ 192.3 $ 380.9
United Kingdom............ 35.9 35.5 36.0
----------- ----------- -----------
Total................. $ 179.5 $ 227.8 $ 416.9
=========== =========== ===========
(1) Revenues are attributed to countries based on location at which services
are performed.
NOTE 16 - SUBSEQUENT EVENTS
Stilwell to Increase Ownership Interest in Janus. During first quarter
2001, Stilwell announced several transactions that, upon completion, will
increase Stilwell's ownership interest in Janus from 82.5% to approximately 91%,
based on maximum participation of Janus employees in a Janus stock repurchase
program as discussed below.
Stilwell acquisition of Janus shares from Thomas H. Bailey. On January 26,
2001, Stilwell announced that it expected to acquire 600,000 shares of Janus
common stock from Thomas H. Bailey, Janus's Chairman, Chief Executive Officer
and President, through the exercise of put rights by Mr. Bailey. The
acquisition, which is expected to close in second quarter 2001, will cost
approximately $603 million.
71
Stilwell acquisition of shares of Janus common stock from other minority
stockholders. On March 16, 2001, Stilwell acquired an additional 199,042 shares
of Janus from several minority stockholders. Approximately 160,900 of these
shares were acquired by certain Janus employees in 1995 when Janus stock
ownership was first extended to a broader group of key management employees
other than Mr. Bailey. The remainder of the shares have been held since 1984 or
before. Stilwell purchased the shares through the exercise of put rights,
virtually eliminating all mandatory put rights to Stilwell except for those on
remaining shares held by Mr. Bailey (after the purchase by Stilwell of 600,000
shares of Mr. Bailey's Janus stock as discussed above). The shares cost
approximately $200 million, which was funded through cash and borrowings under
the Facilities. In connection with the transactions, amounts owed to Stilwell by
certain of the selling minority stockholders were repaid (see Note 10).
Janus offer to purchase Janus shares from employees. Janus has offered to
purchase from employees (other than Mr. Bailey) up to 50% of their eligible
shares of Janus common stock. If all eligible shares were purchased under this
offer, Janus would acquire approximately 143,000 shares of its common stock for
approximately $145 million. The shares would then be available for Janus to
utilize in connection with the Janus Incentive Plan.
Net effect of transactions. Upon completion of the purchase of the 799,042
shares of Janus common stock, and assuming the maximum number of shares were
purchased under Janus's planned repurchase offer, Stilwell's ownership of Janus
would increase to approximately 91.4%. Mr. Bailey would continue to own
approximately 6.2% and other Janus employees would own the remaining 2.4%.
Accordingly, the operating structure and corporate governance of Janus are
expected to continue unaffected. In addition, each of the Janus employees
participating in these transactions will continue to own other shares of Janus
common stock and, consistent with Janus's goal of broadening corporate equity
ownership, will be eligible to receive future grants of Janus stock - from the
approximately 370,000 shares available after these transactions - in connection
with the Janus Incentive Plan.
Stilwell and Janus have sufficient resources (i.e., available cash and the
Facilities) to fund these acquisitions. However, Stilwell also is considering
alternative financing methods. Stilwell will account for these transactions
under the purchase method of accounting. Any excess cost over the fair value of
net underlying assets acquired will be amortized in accordance with Accounting
Principles Board No. 17, Intangible Assets.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
72
Part III
The Company has incorporated by reference certain responses to the Items of
this Part III pursuant to Rule 12b-23 under the Exchange Act and General
Instruction G(3) to Form 10-K. The Company's definitive proxy statement for the
Annual Meeting of Shareholders scheduled for May 10, 2001 ("Proxy Statement")
will be filed no later than 120 days after December 31, 2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under
the heading "Item 1 - Election of Director" in the Company's Proxy Statement is
incorporated herein by reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Company," an unnumbered Item in Part I (immediately
following Item 4, Submission of Matters to a Vote of Security Holders), of this
Form 10-K is incorporated herein by reference in partial response to this Item
10.
The information set forth in response to Item 405 of Regulation S-K under
the heading "Stock Ownership" in the Company's Proxy Statement is incorporated
herein by reference in partial response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in response to Item 402 of Regulation S-K under
"Executive Compensation" and "Item 1 - Election of Director - Director
Compensation" in the Company's Proxy Statement is incorporated by reference in
response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in response to Item 403 of Regulation S-K under
the heading "Stock Ownership" in the Company's Proxy Statement is hereby
incorporated by reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may
at a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in response to Item 404 of Regulation S-K under
the heading "Certain Relationships and Related Transactions" in the Company's
Proxy Statement is hereby incorporated by reference in response to this Item 13.
73
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
The financial statements and related notes, together with the report of
PricewaterhouseCoopers LLP dated March 14, 2001, appear in Part II Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.
(2) Financial Statement Schedules
The schedules and exhibits for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission appear in Part
II Item 8, Financial Statements and Supplementary Data, under the Index to
Financial Statements of this Form 10-K.
(3) List of Exhibits
(a) Exhibits
The Company has incorporated by reference herein certain exhibits as
specified below pursuant to Rule 12b-32 under the Exchange Act.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession
(Inapplicable)
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
3.1.1 Exhibit 3.1.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Delaware Certificate of Incorporation of Stilwell Financial Inc.
as Amended and Restated on June 14, 2000, is hereby incorporated
by reference as Exhibit 3.1.1.
3.1.2 Exhibit 3.1.2 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Certificate of Designation dated June 15, 2000 establishing
Series A Preferred Stock, is hereby incorporated by reference
as Exhibit 3.1.2.
Bylaws
3.2 Exhibit 3.2 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No.001-15253), Bylaws
of Stilwell Financial Inc. as Amended and Restated on June 12,
2000, is hereby incorporated by reference as Exhibit 3.2.
3.3 Bylaws of Stilwell Financial Inc. as Amended and Restated on
January 29, 2001 to be effective on May 11, 2001, is attached to
this Form 10-K as Exhibit 3.3.
74
(4) Instruments Defining the Right of Security Holders, Including Indentures
4.1 Exhibit 4.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Form of
Certificate representing Stilwell Financial Inc. Common Stock, is
hereby incorporated by reference as Exhibit 4.1.
4.2.1 Exhibit 4.2.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Stockholders' Rights Agreement, dated as of June 14, 2000,
between Stilwell Financial Inc. and UMB Bank, N.A., as Rights
Agent is hereby incorporated by reference as Exhibit 4.2.1.
4.2.2 Certificate of Designation establishing Series A Preferred Stock
of Exhibit 3.1.2, is hereby incorporated by reference as Exhibit
4.2.2.
4.3 Article FOURTH, Article FIFTH, Article SIXTH, Article SEVENTH and
Article ELEVENTH of Exhibit 3.1.1 are hereby incorporated by
reference as Exhibit 4.3.
4.4 Article II, Article III, Section 2 and Article V of Exhibit 3.2
are hereby incorporated by reference as Exhibit 4.4.
(9) Voting Trust Agreement
(Inapplicable)
(10) Material Contracts
10.1 Exhibit 10.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Representative Director Indemnification Agreement, is hereby
incorporated by reference as Exhibit 10.1.
10.2 Exhibit 10.2 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Representative Officer Indemnification Agreement, is hereby
incorporated by reference as Exhibit 10.2.
10.3 Exhibit 10.3 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Intercompany Agreement, dated as of August 16, 1999 between
Kansas City Southern Industries, Inc. and Stilwell Financial
Inc., is hereby incorporated by reference as Exhibit 10.3.
10.4 Exhibit 10.4 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Tax
Disaffiliation Agreement, dated as of August 16, 1999, between
Kansas City Southern Industries, Inc. and Stilwell Financial
Inc., is hereby incorporated by reference as Exhibit 10.4.
10.5.1 Exhibit 10.5.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), The
Registration Rights Agreement, dated October 24, 1995, by and
between DST Systems, Inc. and Kansas City Southern Industries,
Inc., which is attached as Exhibit 4.1 to the DST Systems, Inc.
Registration Statement on Form S-1 dated October 30, 1995, as
amended (Commission file no. 33-96526), is hereby incorporated by
reference as Exhibit 10.5.1.
75
10.5.2 Exhibit 10.5.2 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Amendment to Registration Rights Agreement, dated June 30, 1999,
by and between DST Systems, Inc. and Kansas City Southern
Industries, Inc., is hereby incorporated by reference as Exhibit
10.5.2.
10.5.3 Exhibit 10.5.3 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Assignment, Consent and Acceptance Agreement, dated as of August
11, 1999, by and among DST Systems, Inc. ("DST"), Kansas City
Southern Industries, Inc. and Stilwell Financial Inc. which is
attached as Exhibit 4.15.2 to DST's Form 10-Q for the quarter
ended June 30, 1999 (Commission File No. 1-14036), is hereby
incorporated by reference as Exhibit 10.5.3.
10.6.1 Exhibit 10.6.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Amended
Employment Agreement dated June 12, 2000 by and between Stilwell
Financial Inc. and Landon H. Rowland, is hereby incorporated by
reference as Exhibit 10.6.1. *
10.6.2 Exhibit 10.1 to Stilwell's Form 10-Q for the quarter ended
September 30, 2000 (File No. 001-15253), Amended Employment
Agreement dated October 20, 2000 by and between Stilwell
Financial Inc. and Joseph D. Monello, is hereby incorporated by
reference as Exhibit 10.6.2. *
10.6.3 Exhibit 10.6.3 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Amended
Employment Agreement dated June 12, 2000 by and between Stilwell
Financial Inc. and Danny R. Carpenter, is hereby incorporated by
reference as Exhibit 10.6.3. *
10.6.4 Exhibit 10.6.4 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Amended
Employment Agreement dated June 12, 2000 by and between Stilwell
Financial Inc. and Anthony P. McCarthy, is hereby incorporated by
reference as Exhibit 10.6.4. *
10.7.1 Exhibit 10.7.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Stock
Purchase Agreement, dated April 13, 1984, by and among Kansas
City Southern Industries, Inc., Thomas H. Bailey, William C.
Mangus, Bernard E. Niedermeyer III, Michael Stolper, and Jack R.
Thompson, is hereby incorporated by reference as Exhibit 10.7.1.
*
10.7.2 Exhibit 10.7.2 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Amendment to Stock Purchase Agreement, dated January 4, 1985, by
and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Bernard E. Niedermeyer III, Michael Stolper, and Jack R.
Thompson, is hereby incorporated by reference as Exhibit 10.7.2.
*
10.7.3 Exhibit 10.7.3 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Second
Amendment to Stock Purchase Agreement, dated March 18, 1988, by
and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson, is hereby
incorporated by reference as Exhibit 10.7.3. *
76
10.7.4 Exhibit 10.7.4 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Third
Amendment to Stock Purchase Agreement, dated February 5, 1990, by
and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson, is hereby
incorporated by reference as Exhibit 10.7.4. *
10.7.5 Exhibit 10.7.5 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Fourth
Amendment to Stock Purchase Agreement, dated January 1, 1991, by
and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson, is hereby
incorporated by reference as Exhibit 10.7.5. *
10.7.6 Exhibit 10.7.6 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Assignment and Assumption Agreement and Fifth Amendment to Stock
Purchase Agreement, dated November 19, 1999, by and among Kansas
City Southern Industries, Inc., Stilwell Financial Inc., Thomas
H. Bailey and Michael Stolper, is hereby incorporated by
reference as Exhibit 10.7.6. *
10.8 Exhibit 10.8 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Stilwell Financial Inc. 1998 Long Term Incentive Stock Plan as
Amended and Restated on August 11, 1999, is hereby incorporated
by reference as Exhibit 10.8. *
10.9 Exhibit 10.9 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Stilwell Executive Plan dated August 11, 1999, is hereby
incorporated by reference as Exhibit 10.9. *
10.10 Exhibit 10.10 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Stock
Purchase Agreement, dated November 19, 1999, by and among Kansas
City Southern Industries, Inc., Stilwell Financial Inc. and Janus
Capital Corporation, is hereby incorporated by reference as
Exhibit 10.10.
10.11.1 Exhibit 10.11.1 to Stilwell's Registration Statement on Form
10 declared effective on June 15, 2000 (File No. 001-15253),
364-day Competitive Advance and Revolving Credit Facility
Agreement dated as of January 11, 2000 among Kansas City Southern
Industries, Inc. and the lenders named therein, which is attached
as Exhibit 10.20 to Kansas City Southern Industries, Inc.'s Form
10-K for the year ended December 31, 1999 (Commission File No.
1-4717), is hereby incorporated by reference as Exhibit 10.11.1.
10.11.2 Exhibit 10.11.2 to Stilwell's Registration Statement on Form
10 declared effective on June 15, 2000 (File No. 001-15253),
Assignment, Assumption and Amendment Agreement dated as of
January 11, 2000, among Kansas City Southern Industries, Inc.,
Stilwell Financial Inc. and The Chase Manhattan Bank, as agent
for the lenders named in the 364-day Competitive Advance and
Revolving Credit Facility Agreement, which is attached as Exhibit
10.21 to Kansas City Southern Industries, Inc.'s Form 10-K for
the year ended December 31, 1999 (Commission File No. 1-4717), is
hereby incorporated by reference as Exhibit 10.11.2.
10.12 Exhibit 10.12 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Stilwell Financial Inc. Employee Stock Purchase Plan is hereby
incorporated by reference as Exhibit 10.12. *
77
10.13 Exhibit 10.13 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Stilwell Financial Inc. Employee Stock Ownership Plan is hereby
incorporated by reference as Exhibit 10.13. *
10.14 Exhibit 10.14 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Stilwell Financial Inc. 401(k) and Profit Sharing Plan is hereby
incorporated by reference as Exhibit 10.14. *
10.15 Five-Year Competitive Advance and Revolving Credit Facility
Agreement, dated as of December 7, 2000, among Stilwell Financial
Inc., Janus Capital Corporation and Citibank, N.A., as
administrative agent for the lenders named therein, is attached
to this Form 10-K as Exhibit 10.15.
10.16 Stilwell Financial Inc. 1998 Long Term Incentive Plan, as
amended and restated effective January 18, 2001, is attached to
this Form 10-K as Exhibit 10.16. *
10.17 Employment Agreement dated June 12, 2000 by and between Stilwell
Financial Inc. and Gwen E. Royle, is hereby incorporated by
reference as Exhibit 10.17. *
* Compensatory Plan or Agreement
(11) Statement Re Computation of Per Share Earnings
(Inapplicable)
(12) Statements Re Computation of Ratios
12.1 The Computation of Ratio of Earnings to Fixed Charges prepared
pursuant to Item 601(b)(12) of Regulation S-K is attached to this
Form 10-K as Exhibit 12.1
(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders (Inapplicable)
(16) Letter Re Change in Certifying Accountant
(Inapplicable)
(18) Letter Re Change in Accounting Principles
(Inapplicable)
(21) Subsidiaries of the Company
21.1 The list of the Subsidiaries of the Company prepared pursuant to
Item 601(b)(21) of Regulation S-K is attached to this Form 10-K
as Exhibit 21.1
(22) Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)
(23) Consents of Experts and Counsel
23.1 The Consent of Independent Accountants prepared pursuant to Item
601(b)(23) of Regulation S-K is attached to this Form 10-K as
Exhibit 23.1
78
(24) Power of Attorney
(Inapplicable)
(27) Financial Data Schedule
(Inapplicable)
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities (Inapplicable)
(99) Additional Exhibits
99.1 Exhibit 99.1 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253),
Stilwell Financial Inc. Information Statement, as amended, dated
June 15, 2000 is hereby incorporated by reference as Exhibit
99.1.
99.2 The consolidated financial statements and related notes, together
with the Report of Independent Accountants, of DST Systems, Inc.
(an approximate 33% owned affiliate of Stilwell accounted for
under the equity method) for the years ended December 31, 1998,
1999 and 2000, which are included in the DST Systems, Inc. Annual
Report on Form 10-K for the year ended December 31, 2000
(Commission File No. 1-14036), are hereby incorporated by
reference as Exhibit 99.2.
99.3 Exhibit 99.4 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253), Opinion
Letter of Rothgerber Johnson & Lyons LLP dated June 8, 2000, is
hereby incorporated by reference as Exhibit 99.3.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 2, 2000
under Item 5, to report average assets under management during third
quarter 2000 and ending assets under management as of September 30,
2000. Additionally, the news release announced information concerning
the Stilwell quarterly earnings presentation to occur on October 26,
2000.
The Company furnished a Current Report on Form 8-K, dated October 26,
2000, under Item 9, concerning the announcement of financial results
for the three and nine months ended September 30, 2000 and to report
ending assets under management as of October 31, 2000, average assets
under management during the month of October 2000 and average assets
under management for the ten months ended October 31, 2000.
The Company furnished a Current Report on Form 8-K, dated December 1,
2000, under Item 9, to report ending assets under management as of
November 30, 2000, average assets under management during the first two
months of fourth quarter 2000 and average assets under management for
the eleven months ended November 30, 2000.
The Company furnished a Current Report on Form 8-K, dated December 7,
2000, under Item 9, to report the completion of $600 million in bank
credit facilities and a quarterly dividend.
79
The Company furnished a Current Report on Form 8-K, dated January 2,
2001, under Item 9, to report ending assets under management on
December 31, 2000, average assets under management for the fourth
quarter 2000 and average assets under management for the year ended
December 31, 2000. In addition, the Current Report on Form 8-K reported
information concerning the Stilwell quarterly earnings presentation to
occur on January 30, 2001.
The Company furnished a Current Report on Form 8-K, dated January 26,
2001, under Item 9, to report the following:
i) Announcement that Stilwell expects to purchase 600,000 shares of
Janus Capital Corporation ("Janus") common stock from Thomas H.
Bailey, Chairman, President, Chief Executive Officer and founder
of Janus;
ii) announcement that Robert Skidelsky was appointed to the Stilwell
Board of Directors;
iii) announcement of the Stilwell financial results for the three
months and year ended December 31, 2000;
and
iv) announcement of ending assets under management on January 31,
2001 and average assets under management for the month ended
January 31, 2001.
The Company furnished a Current Report on Form 8-K, dated February 21,
2001, to report that Stilwell and Janus Capital Corporation ("Janus")
expect to repurchase approximately 197,000 and 143,000 shares,
respectively, of Janus common stock from various Janus minority
stockholders. The Company also provided an unaudited Stilwell
Consolidated Condensed Balance Sheet as of December 31, 2000.
The Company furnished a Current Report on Form 8-K, dated February 28,
2001, to reports ending assets under management on February 28, 2001
and average assets under management for the two months ended February
28, 2001.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Stilwell Financial Inc.
March 14, 2001 By: /s/ L.H. Rowland
--------------------------------
L.H. Rowland
Chairman, President,
Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on March 14, 2001.
Signature Capacity
/s/ L.H. Rowland Chairman, President, Chief Executive
- ------------------------------------------ Officer and Director
L.H. Rowland
/s/ D.R. Carpenter Executive Vice President
- ------------------------------------------
D.R. Carpenter
/s/ J.D. Monello Vice President of Development
- ------------------------------------------
J.D. Monello
/s/ A.P. McCarthy Vice President - Finance
- ------------------------------------------ (Principal Financial Officer)
A.P. McCarthy
/s/ G.E. Royle Vice President - Legal and
- ------------------------------------------ Corporate Secretary
G.E. Royle
/s/ D.E. Nickerson Vice President and Controller
- ------------------------------------------ (Principal Accounting Officer)
D.E. Nickerson
/s/ P.F. Balser Director
- ------------------------------------------
P.F. Balser
/s/ J.E. Barnes Director
- ------------------------------------------
J.E. Barnes
/s/ M.I. Sosland Director
- ------------------------------------------
M.I. Sosland
/s/ Lord R. Skidelsky Director
- ------------------------------------------
Lord R. Skidelsky
81
STILWELL FINANCIAL INC.
2000 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 601(b)
No. Document Exhibit No.
- ------- ------------------------------------------------------- -----------
3.3 Bylaws of Stilwell Financial Inc. as Amended and
Restated on January 29, 2001 to be effective on
May 11, 2001 3
10.15 Five-Year Competitive Advance and Revolving Credit
Facility Agreement, dated as of December 7, 2000, among
Stilwell Financial Inc., Janus Capital Corporation
and Citibank, N.A., as administrative agent for the
lenders named therein 10
10.16 Stilwell Financial Inc. 1998 Long Term Incentive Plan,
as amended and restated effective January 18, 2001 10
10.17 Employment Agreement dated June 12, 2000 by
and between Stilwell Financial Inc. and Gwen E. Royle 10
12.1 Computation of Ratio of Earnings to Fixed Charges 12
21.1 Subsidiaries of the Company 21
23.1 Consent of Independent Accountants 23
-----------------------------