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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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
Commission file number 001-15253
STILWELL FINANCIAL INC.
(Exact name of Company as specified in its charter)
Delaware 43-1804048
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Preferred Stock Purchase Rights 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 11, 2002, 222,300,415 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
$5,713,120,665 (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 2002 Annual Meeting of
Shareholders, which will be filed no
later than 120 days after December 31, 2001
STILWELL FINANCIAL INC.
2001 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 15
Item 3. Legal Proceedings.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Executive Officers of the Company.............................. 16
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters.................................. 18
Item 6. Selected Financial Data........................................ 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 21
Item 7(A). Quantitative and Qualitative Disclosures About Market Risk..... 51
Item 8. Financial Statements and Supplementary Data.................... 54
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 93
PART III
Item 10. Directors and Executive Officers of the Company................ 94
Item 11. Executive Compensation......................................... 94
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 94
Item 13. Certain Relationships and Related Transactions................. 94
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 95
Signatures..................................................... 102
ii
Part I
ITEM 1. BUSINESS
The information set forth in 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.
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
Stilwell Financial Inc. (the "Company" or "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, 2001 were:
o Janus Capital Corporation ("Janus"), an approximate 98% owned
subsidiary (prior to the conversion of Janus to a limited liability
company and the issuance of additional ownership interests to various
key Janus employees that are expected to occur in early second quarter
2002 - see Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Recent Developments,"
of this Form 10-K);
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary of
Stilwell;
o Berger Financial Group 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;
o Nelson Money Managers Plc ("Nelson"), an 81% owned subsidiary; and
o DST Systems, Inc. ("DST"), an approximate 33% equity investment owned
by SMI.
Janus is the principal business comprising Stilwell, representing 95% of
assets under management at December 31, 2001 and 95% of revenues and 91% of net
income for the year ended December 31, 2001. During the year ended December 31,
2001, Stilwell and Janus completed several acquisitions of Janus common stock
that increased Stilwell's ownership interest in Janus from 82.5% to
approximately 98%. These shares were purchased from Thomas H. Bailey, the
chairman, president and chief executive officer of Janus, and one other minority
stockholder pursuant to put rights under the 1984 Janus Stock Purchase Agreement
and from various other employees through put rights under purchase and
restriction agreements. See detailed information in Part II Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Significant Developments - Stilwell's Additional Investment in Janus," of this
Form 10-K, which is incorporated herein by reference.
On June 14, 2000, the board of directors of Kansas City Southern
Industries, Inc. ("KCSI") 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"). Those stockholders received two shares
of Stilwell common stock for every one share of KCSI common stock owned on the
record date.
As previously disclosed, on July 9, 1999, KCSI received a tax ruling from
the Internal Revenue Service ("IRS") that 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 stating that the
assumption of $125 million of KCSI indebtedness by Stilwell had no effect on the
previously issued tax ruling.
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(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
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, as well as any identified intangible assets and
goodwill resulting from the acquisition of subsidiaries and affiliates directly
by Stilwell, are aggregated as a separate segment.
Stilwell reports geographic area information with respect to revenues and
long-lived assets based on where services are performed. Primary locations are
the United States and the United Kingdom. See additional information in Part II
Item 8, Financial Statements and Supplementary Data, under Note 15 - Segment and
Geographic Information, of this Form 10-K.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
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 Janus Investment Fund, Janus Aspen Series and
Janus Adviser Series and as sub-advisor to the Janus World Funds Plc ("Janus
World"), 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. On December 31, 2001,
Berger acquired Berger Bay Isle Financial Corporation ("Bay Isle"). Bay Isle
serves as investment advisor to several separate accounts. 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
preparing for retirement. DST, together with its subsidiaries and joint
ventures, offers information processing, printing and mailing and computer
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.
STILWELL HOLDING COMPANY
The holding company manages its investments in the principal subsidiaries
and equity interests. The functions performed by the holding company include,
among others, managing the equity of Stilwell, supporting and enhancing the
business efforts, development and strategic planning of subsidiaries, analyzing
and accessing capital markets, evaluating and pursuing potential
acquisitions, partnerships, joint ventures and other opportunities and
establishing and supporting stock ownership programs for the management of each
subsidiary.
Stilwell believes each subsidiary is in the best position to evaluate its
particular needs and opportunities. While business decisions are made by each
subsidiaries' management, Stilwell provides assistance in transactions or
activities where help is needed. Providing support to the various Stilwell
subsidiaries is a key element of the Stilwell growth strategy. For example,
during 2001, Stilwell facilitated the acquisitions of two investment management
companies by Berger (see Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Recent Developments").
2
The acquisition of other companies within the financial services industry
continues to be an element of the Stilwell strategy. Stilwell personnel are
responsible for each component of the acquisition process, including
identification of potential partners, execution of transactions and integration
of the new firm (together with the operating subsidiary, as applicable). Key
attributes for an acquisition candidate include strong growth potential, an
exceptional management team with an entrepreneurial approach and a core
infrastructure in place.
A key element to maintaining a streamlined holding company structure
centers on the operational autonomy of subsidiaries. The corporate governance of
each subsidiary is designed to provide each management team with the
responsibility to perform the day-to-day operations and management of the
company. Such day-to-day activities include, among others, the following:
matters related to investment management (including policies and fee
arrangements); product, distribution and brand development; personnel decisions;
and client relationships.
Further, to encourage growth, Stilwell intends to continue compensation
programs with equity incentives for key employees of its principal subsidiaries
to provide incentives through ownership of stock in the enterprises in which
they are employed. Stilwell seeks to facilitate the growth of this employee
ownership through such compensation programs and by making these programs
competitive with, if not superior to, compensation programs at other financial
services companies. As announced on February 15, 2002, Stilwell intends to
convert Janus to a limited liability company and to grant additional equity
ownership to key Janus employees (see Part II Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, "Recent
Developments").
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, 2001, Janus had total assets under management of
$182.2 billion, of which $152.2 billion were in the Janus Advised Funds. Janus
primarily offers equity portfolios to investors, which comprised approximately
88% of total assets under management for Janus at December 31, 2001. At that
date, funds advised by Janus had approximately 5.6 million shareowner accounts.
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 market
pressures. These fees, which are computed based on daily assets under management
and generally billed monthly in arrears, 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 generally paid in arrears on a
monthly basis.
To perform its investment advisory functions, Janus conducts fundamental
investment research and valuation analysis. In general, Janus' investment
philosophy tends to focus on the earnings growth of individual companies
relative to their peers or the economy. For this reason, Janus' proprietary
analysis is geared to understanding the earnings potential of the companies in
which it invests. Further, Janus' general investment approach is to construct
portfolios one security at a time rather than in response to preset regional,
country, economic sector or industry diversification guidelines.
3
Emphasizing the proprietary work of Janus' own analysts, most research is
performed in-house. Research activities include, among others, review of
earnings reports, communication 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.
Examples of fees and expenses paid by the funds 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 assumes the
expenses associated with advertising, promotion and sales of the Janus Advised
Funds.
Janus has four primary operating subsidiaries: Janus Service Corporation
("Janus Service"), Janus Distributors, Inc. ("Janus Distributors"), Janus
Institutional Services, Inc. ("Janus Institutional") and Janus
Capital International Ltd. ("Janus International"). Janus International has two
primary subsidiaries: Janus International (UK) Limited ("Janus UK") 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 Investment Fund and
its 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 Janus' website,
sophisticated telecommunications systems, "intelligent" workstation
applications, document imaging, an automated work distributor and an
automated call management system. Additionally, Janus Service offers direct
access to investor accounts, including the ability to perform certain
transactions, using touch-tone telephones or via the Internet.
o Pursuant to a distribution agreement, Janus Distributors, a limited
broker-dealer registered 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. The mutual fund supermarket or third
party sponsor handles the shareowner accounting and servicing 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 33%, 43% and 41% in assets under management as of December
31, 1999, 2000 and 2001, respectively, that were subject to concessions
through these third party distribution channels.
o Janus Institutional provides marketing and sales services on behalf of
Janus.
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 Janus UK, 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 Financial Services Authority. Janus UK 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 and is a
registered securities dealer with the Hong Kong Securities and Futures
Commission.
4
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, on December 31, 2001, Berger purchased
Bay Isle, which acts as the investment advisor to privately managed separate
accounts. As of December 31, 2001, Berger had approximately $8.6 billion of
assets under management, of which the Berger Advised Funds comprised $6.0
billion, Bay Isle comprised $1.1 billion and the remainder represented Berger
Sub-Advised Funds and Private Accounts. At that date, funds adviseded by Berger
had approximately 274,000 shareowner accounts.
Berger derives its revenues and net income from advisory services provided
to the various funds and accounts. Berger's investment advisory fees, which are
computed based on daily assets under management and generally billed monthly in
arrears, are negotiated separately with each fund and vary depending on the type
of fund. Advisory fees for services provided by Bay Isle and 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.
Certain Berger funds (managed by Berger portfolio investment
personnel) 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.
The Berger value funds that are managed internally and by sub-advisors
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).
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 paid by the funds 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.
Berger marketing efforts are balanced between institutional and retail
distribution opportunities. Certain of the Berger funds sold in retail markets
have approved distribution plans pursuant to Rule 12b-1 ("12b-1 Plans") under
the Investment Company Act of 1940. These 12b-1 Plans provide that Berger is
reimbursed for costs associated with activities (e.g., advertising, marketing
and promotion) that are intended to result in sales of the shares of the funds.
Any fees not spent by Berger must be returned to 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 broker-dealer registered with the SEC. 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
5
channels. The mutual fund supermarket or third party sponsor handles shareowner
accounting and servicing 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%, 26% and 18% of total Berger assets
under management were generated through these third party distribution channels
as of December 31, 1999, 2000 and 2001, respectively.
On February 28, 2002, Berger completed the acquisition of Enhanced
Investment Technologies, Inc.("INTECH"). INTECH uses a proprietary mathematical
investment approach to investments for institutional and private clients.
INTECH manages approximately $6 billion in assets.
Berger also manages the Berger/BIAM Funds, with Bank of Ireland Asset
Management (U.S.) Limited serving as the investment advisor to the funds under a
sub-advisory agreement.
NELSON
Nelson, operating primarily in the United Kingdom, provides fee based
investment advice and investment management services to individuals that
generally are retired or preparing for retirement. 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 and
securities that 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. Nelson's investment
research staff perform various analyses 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 also 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.
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, Australia and Asia. DST has a single
class of common stock that is publicly traded on the New York Stock Exchange and
the Chicago Stock Exchange. 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,
corporations, 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 investment
management systems and a workflow management system. In March 2001, DST
purchased
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a controlling interest in EquiServe, Inc. ("EquiServe"). EquiServe is
one of the nation's largest corporate transfer agency service providers,
maintaining and servicing the records of approximately 27.2 million shareholder
accounts for approximately 1,400 publicly traded companies. DST provides certain
services to Berger and Janus at terms consistent with arms-length transactions.
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, 2001, substantially comprised of
investments in Computer Sciences Corporation and State Street Corporation.
COMPETITION
Stilwell's subsidiaries and equity investments compete with mutual fund
advisors, brokerage and investment banking firms, insurance companies, banks,
and other financial institutions in many aspects of business. The marketplace
for investment products is increasingly fragmented with a growing number of
sophisticated investors and a wide variety of new investment opportunities.
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 ability to achieve superior investment management performance,
the methods of distribution of fund shares, the ability to meet the changing
needs of investors, the type and quality of shareowner services and the success
of marketing efforts.
Nelson competes in the United Kingdom with other financial advisers and
investment 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.
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 marketing and
distribution channels become more creative and complex, alternative product
types - such as hedge funds, exchange traded funds and separate accounts - are
developed 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 products, technologies and services to
facilitate portfolio planning and direct securities investments by customers.
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EMPLOYEES
As of December 31, 2001, Janus had approximately 1,450 employees, SMI and
Berger had approximately 125 employees, Nelson had approximately 255 employees
and Stilwell Financial Inc. had 22 employees. None of these employees are
represented by a labor union.
Relations between Stilwell and the management of Janus have been strained,
primarily as the result of disagreements over the structure of the spin-off from
KCSI. Prior to the spin-off, a number of minority stockholders and employees of
Janus, including members of Janus' management, its chief executive officer, its
former chief investment officer, five of the six directors of Janus and others
proposed that KCSI consider a spin-off of Janus in addition to the spin-off of
Stilwell. The KCSI board of directors ultimately rejected this proposal. Press
reports have appeared in which certain Janus employees expressed objections to
the Stilwell spin-off and other disagreements with the structure and direction.
While Stilwell and Janus have attempted to resolve some of these disagreements,
not all disagreements have been resolved. Continuation of these strained
relations could result in the loss of key Janus employees and Janus management,
which could have a material adverse effect on Stilwell. The portfolio managers
and other key employees of Janus are not subject to any non-compete agreements
that would preclude them from participating in a competing financial services
business, although they are subject to agreements that prohibit them for a
specific period of time following the end of their employment from soliciting
any investment advisory or investment management clients of Janus or hiring or
soliciting employees to leave the employ of Janus. It is also possible that the
publicity surrounding the disagreements between Stilwell and members of Janus'
management and employees could have an adverse effect on Janus' business and on
the ability to attract or retain qualified personnel.
RISK FACTORS
Certain statements provided by Stilwell in this Annual Report on Form 10-K
and in future filings with the SEC, in press releases and in oral statements
made with the approval of an authorized officer of Stilwell, are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are typically identified by the
use of words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate," or "continue" and similar expressions or variations, and
are based on the beliefs and assumptions of Stilwell management based on
information currently available to management. Such forward-looking statements
are subject to risks, uncertainties and other factors that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Important factors that could cause actual results to
differ materially from the forward-looking statements include the risks
described below and elsewhere in this report. Stilwell cautions readers to
carefully consider such factors. Further, such forward-looking statements speak
only as of the date on which such statements are made; Stilwell undertakes no
obligation to update any forward-looking statements to reflect events or
circumstances after the date of such statements.
Any decrease in the value of Stilwell's assets under management would adversely
affect revenues and profits.
Because most of Stilwell's revenues are related directly to the value of
the assets under management by subsidiaries Janus, Berger and Nelson, any
decline in the value or amount of those assets would have an adverse effect on
revenues. Assets under management may decline for various reasons, many of which
are not under Stilwell or its subsidiaries' control. Factors that could decrease
assets under management (and therefore revenues) include the following:
o Declines in the market value of the assets in the funds and accounts
managed by Janus, Berger or Nelson. This could be caused by price
declines in the securities markets generally or in the market segments in
which those assets are concentrated. The assets under management of
Stilwell's subsidiaries are concentrated in the U.S. equity markets and
to a lesser extent in the international equity markets. The effect of
market price declines will be
8
compounded if the funds and accounts managed by Janus, Berger and
Nelson under-perform the applicable market or segment.
o Redemptions and other withdrawals from the funds and accounts managed by
Janus, Berger or Nelson. This could be caused by investors reducing their
investments in mutual funds in general or in the market segments that are
the focus of Stilwell's subsidiaries (in response to adverse market
conditions or to pursue other investment opportunities, for example);
investors taking profits from their investments; or poor investment
performance of the funds and accounts managed by Stilwell's subsidiaries,
which could cause investors to move funds to other investment managers.
Favorable performance by the U.S. securities markets in the late 1990's
attracted a substantial inflow of investments to the U.S. mutual fund industry
and resulted in significant appreciation in the market value of the assets held
by funds during the period. However, markets during 2000 and 2001 retreated from
the record years recently experienced, with the each of the major indices - the
S&P 500 Index, Nasdaq and Dow Jones Industrial Average - falling in 2000 and
2001. The growth rates of Stilwell's subsidiaries and equity investments have
varied from year to year, and management does not currently expect the high
average growth rates sustained in the late 1990's to be repeated in the
foreseeable future. There can be no assurance that decreases in assets under
management similar to those experienced during 2001 will not continue in future
periods. In addition, in 2000, Janus closed five funds to new investors,
including its flagship Janus Fund, and these closings could affect the level of
cash inflows experienced by Janus.
The results of DST are also subject to the performance of the U.S. mutual
fund industry because DST derives a substantial portion of its revenues from the
delivery of services and products to U.S. mutual fund industry clients. Any
event affecting the mutual fund industry that results in a significant decline
in the number of shareowner accounts could have a material adverse effect on
DST's business.
For any period in which revenues decline, Stilwell's profits and profit
margins may decline by a greater proportion because certain expenses remain
relatively fixed.
If Stilwell is unable to attract and retain key personnel, it could have a
material adverse effect on the Company's future success.
Stilwell's business is similar to other investment management businesses in
that it is dependent on the ability to attract, retain and motivate highly
skilled, and often highly specialized, technical and management personnel.
Although Stilwell expects that Mr. Thomas H. Bailey will continue to serve as a
director and chief executive officer of Janus after the termination of his
management rights on April 2, 2002, a formal succession plan in the event of a
departure from Janus by Mr. Bailey has not yet been fully developed. There can
be no assurance that an adequate succession plan will be effected or that the
loss of Mr. Bailey's services, or the services of senior portfolio managers, for
any reason would not have an adverse effect on Janus and Stilwell. Furthermore,
relations between Janus and Stilwell were strained primarily as a result of
disagreements over the structure of the spin-off of Stilwell to KCSI's common
stockholders that was completed on July 12, 2000. Continuation of these strained
relations could result in the loss of key Janus employees or other management
personnel or impair the ability to attract new personnel. See "Employees."
Stilwell may not have the funds necessary to purchase the convertible notes that
were issued in April 2001, which may be put to Stilwell at the option of the
holders or upon a change in control.
On April 30, 2002, 2004, 2006, 2011, 2016, 2021 and 2026, holders of
Stilwell's convertible notes may require Stilwell to purchase all or a portion
of the notes. Based on the recent trading price of the convertible notes,
management believes it is likely that the convertible notes will be put to the
Company on April 30, 2002. It is possible that Stilwell would not have
sufficient funds at the time of each put, including the April 30, 2002 put, to
9
make the required purchase of the notes. Stilwell may need to borrow under its
credit facilities, if available at each put date, if purchase of all the notes
were required; however, and the credit facilities could be unavailable or
limited if covenants or requirements of the credit facilities are not satisfied
(see "Risk Factors - Stilwell's credit facilities impose restrictions on the
ability to conduct business and may not be sufficient to satisfy capital and
operating requirements" below). Stilwell may be required to pay all or a portion
of the purchase price in shares of Stilwell common stock, subject to satisfying
the conditions in the indenture for making such payments, which could have the
effect of diluting existing stockholders. If Stilwell were unable to satisfy the
conditions in the indenture to use common stock to pay the purchase price, and
if sufficient cash were not available to Stilwell to repurchase the notes,
Stilwell could be in default of its obligations on the convertible notes.
In addition, upon the occurrence of certain specific kinds of change in
control events occurring on or before April 30, 2006, Stilwell may be required
to purchase for cash all outstanding convertible notes. However, it is possible
that upon a change in control Stilwell would not have sufficient funds to make
the required purchase or that restrictions in Stilwell's credit facilities or
other indebtedness would not allow those purchases.
Increased competition could reduce the demand for the products and services of
Stilwell's subsidiaries, which could have a material adverse effect on the
respective companies' business, financial condition, results of operations and
business prospects.
Stilwell and its subsidiaries are subject to substantial and growing
competition in all aspects of business. Such competition could reduce the demand
for the products and services of Stilwell's subsidiaries and could have a
material adverse effect on Stilwell's business, financial condition, results of
operations and business prospects. Janus, Berger and Nelson compete with
hundreds of other mutual fund management and distribution companies that
distribute their fund shares through a variety of methods. Although no one
company or group of companies dominates the financial services industry, many
are larger, better known, have greater resources and offer investors a more
diverse group of funds to choose from, than Stilwell and its subsidiaries do.
Stilwell believes that competition in the mutual fund industry will increase as
a result of, among other reasons, the following: a) increased flexibility
afforded to banks and other financial institutions to sponsor mutual funds and
distribute mutual fund shares, b) consolidation and acquisition activity within
the industry, c) marketing and distribution channels becoming more creative and
complex, d) the development of alternative product types, such as hedge funds,
exchange traded funds and separate accounts, and e) investors placing greater
emphasis on published fund recommendations and investment category rankings. The
mutual fund industry as a whole also faces increasing competition from
activities designed to facilitate portfolio planning and direct securities
investments by customers. See "Competition."
Stilwell's credit facilities impose restrictions on the ability to conduct
business and may not be sufficient to satisfy capital and operating
requirements.
Stilwell's credit facilities contain covenants that, among other things,
restrict Stilwell's ability to transfer assets, merge, incur debt, create liens
and enter into transactions with affiliates. The credit facilities require the
Company to maintain specified financial ratios, including maximum leverage,
minimum net worth and fixed charge coverage and minimum unencumbered liquidity.
In addition, Stilwell must maintain a minimum level of assets under management
to ensure full availability of the credit facilities, and reductions in the
amount available would occur if assets under management were to fall below
specified levels, and further, Stilwell would be required to repay portions of
amounts borrowed under the credit facilities in excess of the reduced credit
availability amount. Stilwell's ability to comply with such provisions may be
affected by events beyond its control. The breach of any of these covenants
would result in a default under the credit facilities. In the event of any such
default, lenders party to the credit facilities could elect to declare all
amounts borrowed under the credit facilities, together with accrued interest and
other fees, to be due and payable. If any indebtedness under the credit
facilities were to be accelerated, Stilwell might not have sufficient assets to
repay such indebtedness in full.
10
The timing of future capital requirements will depend on a number of
factors, including the Company's ability to successfully implement its business
strategy. Stilwell may require additional capital sooner than anticipated to the
extent that operations do not progress as anticipated. To the extent credit
facilities and operating cash flows are not sufficient to fund Stilwell's cash
requirements, Stilwell would have to seek additional capital that may not be
available on acceptable terms, or at all. If additional capital were not
available, Stilwell would have to sell some of its assets that could include a
portion of the approximate 33% interest in DST. See Part II Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Liquidity and Capital Structure," of this Form 10-K.
Stilwell's business is subject to pervasive regulation with attendant costs of
compliance and serious consequences for violations.
Virtually all aspects of Stilwell's business are subject to various laws
and regulations. Violations of such laws or regulations could subject Stilwell,
its subsidiaries and/or employees to disciplinary proceedings or civil or
criminal liability, including revocation of licenses, censures, fines or
temporary suspension or permanent bar from the conduct of business. Any such
proceeding or liability could have a material adverse effect upon Stilwell's
business, financial condition, results of operations and business prospects.
These laws and regulations generally grant regulatory agencies and bodies broad
administrative powers, including, in some cases, the power to limit or restrict
the Company from operating in the event of failure to comply with such laws and
regulations. Due to the extensive regulations and laws to which Stilwell and its
subsidiaries are subject, management is required to devote substantial time and
effort to legal and regulatory compliance issues.
In addition, the regulatory environment in which Stilwell and its
subsidiaries operate is subject to change. Stilwell may be adversely affected as
a result of new or revised legislation or regulations or by changes in the
interpretation or enforcement of existing laws and regulations. See Part II Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Other Items - Regulatory Influence," of this Form 10-K.
Stilwell's business is vulnerable to failures in support systems and customer
service functions that could lead to loss of customers or claims against
Stilwell.
The ability to consistently and reliably obtain securities pricing
information, process shareowner transactions and provide reports and other
customer service to the shareowners of funds managed by Janus, Berger and Nelson
and to the customers of DST is essential to Stilwell's continuing success. Any
delays or inaccuracies in obtaining pricing information, processing shareowner
transactions or providing reports, and any inadequacies in other customer
service, could alienate customers and potentially give rise to claims against
Janus, Berger, Nelson or DST. The customer service capability of Janus, Berger,
Nelson and DST, as well as their ability to obtain prompt and accurate
securities pricing information and to process shareowner transactions and
reports, are highly dependent on communications and information systems and on
third party vendors.
These systems could suffer failures or interruptions due to various natural
or man-made causes, and the back-up procedures and capabilities may not be
adequate to avoid extended interruptions in operations. Furthermore, in response
to slowing customer demand, Janus reduced its customer support staff by more
than 1,000 employees during 2001. These reductions will cause Janus to place
greater reliance on its automated customer service systems, thereby increasing
the related risks if such systems were to fail.
11
Certain agreements provide the chief executive officer of Janus substantial
influence over Janus.
Mr. Bailey has substantial influence over Janus, Stilwell's most
significant subsidiary, and his interest may conflict with Stilwell's interests
and the interests of Stilwell's investors. The Janus Stock Purchase Agreement
provides that until April 2, 2002 (March 28, 2002 until recent extension), Mr.
Bailey shall continue to establish and implement policy with respect to the
investment advisory and portfolio management activity of Janus. In furtherance
of such objective, such agreement provides that, until April 2, 2002: 1)
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, and 2) 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. After Stilwell's purchase of Mr. Bailey's shares of Janus common
stock during 2001, Stilwell and Janus extended Mr. Bailey's management rights
through April 2, 2002. After that date, Mr. Bailey's rights as described under
the Janus Stock Purchase Agreement will expire. However, Stilwell expects that
Mr. Bailey will continue to serve as a director and chief executive officer of
Janus subsequent to the termination of his management rights, and, as such, Mr.
Bailey may continue to have substantial influence over Janus.
Stilwell's business is dependent on investment advisory agreements that are
subject to termination or non-renewal.
Most of the revenues of Janus and Berger are derived pursuant to investment
advisory agreements with their respectively managed mutual funds and other
separate and private accounts. Any termination of or failure to renew a
significant number of these agreements could have a material adverse impact on
the revenues, profits and business of Janus or Berger. With respect to
agreements with mutual funds, these investment advisory agreements may be
terminated by either party with notice, or terminated in the event of an
"assignment" (as defined in the Investment Company Act of 1940), and must be
approved and renewed annually by the disinterested members of each fund's board
of directors or trustees, or its shareowners, as required by law. In addition,
the board of trustees or directors of certain funds and separate and private
accounts of Janus and Berger generally may terminate these investment advisory
agreements upon written notice for any reason.
Stilwell's business is subject to international market risks that could have a
material adverse effect on Stilwell's business, financial condition and results
of operations.
Certain portions of the managed portfolios of Janus and Berger as well as
assets managed by Nelson are invested from time to time in various securities of
corporations located or doing business in foreign trading markets and developing
regions of the world commonly known as emerging markets. Stilwell believes that
in the future, investments in international markets will become a larger
percentage of assets under management by its subsidiaries. These portfolios and
assets, and revenues derived from the management of such portfolios and assets,
are subject to various risks that could have a material adverse effect on
Stilwell's business, financial condition and results of operations. Such risks
include unfavorable political and diplomatic developments, currency
fluctuations, social instability and changes in governmental policies,
expropriation, nationalization, confiscation of assets and changes in
legislation relating to foreign ownership. In addition, foreign trading markets,
particularly in some emerging market countries, are often smaller, less liquid,
less regulated and significantly more volatile.
12
Acquisitions, which are part of Stilwell's business strategy, involve inherent
risks that could result in adverse effects on Stilwell's operating results and
financial condition and dilute the holdings of current stockholders.
As part of Stilwell's business strategy, Stilwell intends to consider
acquisitions of similar or complementary businesses. If Stilwell were not
correct when assessing the value, strengths, weaknesses, liabilities and
potential profitability of acquisition candidates or if unsuccessful in
integrating the operations of the acquired businesses, Stilwell may not achieve
the expected return on investment in the acquired businesses, which could have a
material adverse effect on Stilwell's operating results and financial condition.
Any future acquisitions would be accompanied by the risks commonly associated
with acquisitions.
These risks include, among others:
o potential exposure to unknown liabilities of acquired companies
and to acquisition costs and expenses,
o the difficulty and expense of integrating the operations and
personnel of the acquired companies,
o the potential disruption to the business of the combined company
and potential diversion of management's time and attention,
o the impairment of relationships with and the possible loss of key
employees and clients as a result of the changes in management,
and
o dilution to stockholders if the acquisition were made with the
Company's common stock.
In addition, the products and technologies of acquired companies may not be
effectively assimilated into Stilwell's business, and product offerings of the
combined company may not have a positive effect on the combined companies'
revenues or earnings. The combined company may also incur significant expense to
complete the acquisitions and to support the acquired products and businesses.
Further, any such acquisitions may be funded with cash, debt or equity or some
combination of such consideration, which could have the effect of diluting or
otherwise adversely affecting the holdings or the rights of stockholders.
Finally, Stilwell may not be successful in identifying attractive acquisition
candidates or completing acquisitions on favorable terms.
Stilwell's inability to access clients through third party distribution channels
could have a material adverse effect on Stilwell's financial condition, results
of operations and business prospects.
Stilwell's subsidiaries' ability to market their mutual funds, subadvisory
services and investment services is partly dependent on access to the client
base of insurance companies, defined contribution plan administrators,
securities firms, brokers, banks and other intermediaries. These various
intermediaries generally offer their clients various investment products in
addition to, and in competition with, Stilwell and its subsidiaries. Further,
the private account business utilizes referrals from financial planners and
professional investment advisers, accountants, attorneys and other
professionals. Stilwell cannot be certain that it will continue to have access
to these third party distribution channels and an inability to do so could have
a material adverse effect on Stilwell's financial condition, results of
operations and business prospects.
Stilwell's intercompany agreement and tax disaffiliation agreement with KCSI
contain indemnification obligations that Stilwell may not be able to satisfy,
and which may have a material adverse effect on Stilwell.
In connection with the spin-off of Stilwell to KCSI's common stockholders,
Stilwell entered into an intercompany agreement and a tax disaffiliation
agreement with KCSI. These agreements contain provisions that allocate
responsibility between KCSI and Stilwell for various liabilities and
obligations. Among other things, these agreements provide that each party will
indemnify the other against certain claims relating to, or taxes attributable
to, their respective businesses before and after the spin-off. The tax
disaffiliation agreement also addresses the liabilities and obligations of each
party with respect to taxes and claims relating to the tax ruling from the IRS
in
13
connection with the spin-off. Stilwell's ability to indemnify KCSI and KCSI's
ability to indemnify Stilwell should either party be required to do so would
depend on the financial strengths of the respective company. Stilwell may not be
able to fund such indemnities should they arise, and KCSI may not have the funds
to indemnify Stilwell, either of which events could have a material adverse
effect on Stilwell.
Antitakeover provisions of Stilwell's governing documents and the rights plan
could delay or prevent a change in control of the Company, thereby entrenching
current management and possibly depressing the market price of Stilwell's common
stock.
Provisions of Stilwell's certificate of incorporation, bylaws and
shareholders' rights plan are antitakeover in nature and may delay or make more
difficult acquisitions or changes in control of Stilwell, thereby entrenching
current management and possibly depressing the market price of common stock. For
example, Stilwell's certificate of incorporation and bylaws authorize blank
series preferred stock, require a supermajority stockholder vote for approval of
certain types of business combinations, establish a staggered board of directors
and impose certain procedural and other requirements for some corporate actions.
The shareholders' rights plan could significantly dilute the interest in
Stilwell of persons seeking to acquire control without prior approval of
Stilwell's board of directors.
Various factors may prevent Stilwell from declaring or paying dividends.
Stilwell's board of directors has full discretion to determine whether
Stilwell pays dividends in any given year. Various factors may prevent Stilwell
from paying dividends to stockholders. These factors include Stilwell's
financial position, capital requirements and liquidity, the stock repurchase
program, contractual and legal requirements, results of operations and any other
considerations that the board of directors considers relevant. In addition,
Stilwell is a holding company and the ability to pay dividends is dependent on
the dividends and income received from subsidiaries. Currently, the primary
source of cash is dividends received from Janus. Janus is also the primary
source of Stilwell's revenues. The payment of dividends by Janus is subject to
the discretion of its board of directors, the majority of which is nominated by
Mr. Bailey (until termination of those rights on April 2, 2002 as discussed
above). Janus' board of directors could determine in their discretion that Janus
will not pay dividends in any given year.
14
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 approximately one million square feet of office space in
various facilities from non-affiliated companies for administrative, investment
and shareowner servicing operations. Of the total space leased by Janus,
approximately 475,000 square feet of office space is either currently sublet to
third parties or is available for leasing.
Of the one million square feet, approximately 650,000 square feet is
located in the Denver, Colorado area and approximately 320,000 square feet is
located in Austin, Texas, of which approximately 100,000 square feet has been
sublet to third parties. In April 2001, Janus closed its Austin facility due to
reduced shareowner volumes and an emphasis on electronic shareowner processing.
See Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, under "Significant Developments" for additional
information.
The remaining space is comprised of approximately 1,200 square feet of
general office space in Aspen, Colorado, approximately 9,900 square feet of
office space in Westport, Connecticut for sales and marketing activities, 12,000
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.
In 2001, Janus signed a lease agreement for approximately 160,000 square
feet of office space in Denver that is expected to be available for use in
second quarter 2004.
Berger
Berger leases approximately 122,800 square feet of office space in Denver,
Colorado from a non-affiliate for its administrative and corporate functions.
Bay Isle is located in San Francisco, California and leases from a non-affiliate
approximately 5,400 square feet for its investment, operational and
administrative functions.
Nelson
Nelson leases from a non-affiliate 8,000 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
owns approximately 12,000 square feet of corporate office space in Northwich,
England. Also, Nelson leases six branch marketing offices totaling approximately
16,325 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
From time to time Stilwell and its subsidiaries are 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,
management believes (after consultation with legal counsel) that the litigation
reserves of Stilwell and its subsidiaries 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.
15
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, 2001.
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 Stilwell board of directors (or in
the case of Mr. 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 64 Director, Chairman of the Board, President and
Chief Executive Officer
Thomas H. Bailey 64 Chairman, President and Chief Executive Officer
of Janus
Danny R. Carpenter 55 Executive Vice President
Daniel P. Connealy 55 Vice President and Chief Financial Officer
Gwen E. Royle 41 Vice President - Legal and Corporate Secretary
Douglas E. Nickerson 36 Vice President, Controller and Treasurer
Joseph D. Monello 57 Vice President of Development
Anthony P. McCarthy 55 Vice President - Administration
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, Stilwell Management, Inc., Nelson and KCSI.
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 Part II
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Other Items - Janus Capital Corporation," of this Form 10-K.
16
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 of KCSI from November 1996 to July
2000, Vice President - Finance and Tax of KCSI from May 1995 to November 1996
and served as Vice President - Tax and Tax Counsel 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. located in Kansas City, Missouri. Mr. Carpenter is also a director of
Stilwell Management, Inc. and Nelson.
Daniel P. Connealy has been Vice President and Chief Financial Officer
since June 2001. Prior to joining Stilwell, he was a partner for 22 years with
PricewaterhouseCoopers LLP, where he was employed for more than 32 years. While
at PricewaterhouseCoopers, he specialized in service to asset managers and
related fund companies. Mr. Connealy is also a director of Stilwell Management,
Inc. and Nelson.
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, Controller and Treasurer
since May 2001. He served as Vice President and Controller from Stilwell's
inception to May 2001. 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. Prior to October 1995, Mr. Nickerson generally
worked in the accounting and finance service industry.
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 Stilwell
Management, Inc. and Nelson.
Anthony P. McCarthy has been Vice President - Administration since May
2001. He served as Vice President - Finance from Stilwell's inception to May
2001. 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.
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.
17
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. Based on a required minimum net worth as set
forth in the Stilwell and Janus credit facilities, unrestricted retained
earnings at December 31, 2001 totaled $535.3 million.
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 Part II Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, "Other Items," of
this Form 10-K). Mr. Bailey's rights with respect to the selection of the Janus
Board, among others, expire on April 2, 2002.
In December 2001, the Stilwell board of directors also approved a change in
Stilwell's dividend policy. Beginning in 2002, dividends will be paid annually
rather than quarterly. Stilwell anticipates paying the annual dividend -
expected to be $0.04 per share - in July of each year.
As of March 11, 2002, there were 5,004 holders of the Company's common
stock based upon an accumulation of the registered stockholder listing.
18
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, 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 Part II Item 8, Financial Statements and
Supplementary Data, of this Form 10-K, and such data is qualified by reference
thereto.
Year ended December 31,
-----------------------------------------
1997 1998(i) 1999 2000(ii) 2001(iii)
----- ----------- ------ ------------ ---------
(dollars in millions, except per share data)
Financial Data:
Income Statement:
Revenues........................ $ 485.1 $ 670.8 $ 1,212.3 $ 2,248.1 $ 1,555.7
Operating expenses.............. 285.9 390.2 694.0 1,211.8 1,025.3
------- ------- --------- --------- ----------
Operating Income.............. 199.2 280.6 518.3 1,036.3 530.4
Equity in earnings of
unconsolidated affiliates..... 24.9 25.8 46.7 70.8 75.4
Gain on sale of DST common
stock......................... 28.8
Gain on litigation settlement... 44.2
Gain on sale of Janus
common stock.................. 15.1
Reduction in ownership
of DST........................ (29.7)
Interest expense................ (10.4) (6.5) (5.9) (7.7) (34.8)
Other, net...................... 16.2 19.1 27.4 43.7 20.2
------- ------- --------- ---------- ----------
Pretax Income................. 229.9 289.3 586.5 1,202.4 620.0
Income tax provision............ 87.0 103.7 216.1 427.0 217.7
Minority interest............... 24.9 33.4 57.3 111.7 100.0
------- ------- --------- ---------- ----------
Net Income.................... $ 118.0 $ 152.2 $ 313.1 $ 663.7 $ 302.3
======= ======= ========= ========== ==========
EBITDA (iv) $ 228.5 $ 279.2 $ 570.5 $ 1,179.6 $ 685.4
Per Share Data (v):
Weighted average Common shares
outstanding (in
thousands)................... 223,000 223,000 223,000 222,445 220,154
Basic Earnings per share........ $ 0.53 $ 0.68 $ 1.40 $ 2.98 $ 1.37
Weighted average Diluted Common
shares outstanding (in
thousands)................... 223,000 223,000 223,000 225,423 224,424
Diluted Earnings per share...... $ 0.53 $ 0.67 $ 1.38 $ 2.90 $ 1.31
Cash dividends per Common
share (vi)................... n/a n/a n/a $ 0.02 $ 0.04
19
December 31,
------------------------------------------------------
1997 1998 1999 2000 2001
----- ----- ------ ----- ----
(dollars in millions)
Balance Sheet:
Total Assets.................... $ 672.6 $ 822.9 $ 1,231.5 $ 1,581.0 $ 3,391.6
Long term obligations:
Third Parties............... 399.5
KCSI........................ 84.1 16.6
Operating Data:
--------------
Total assets under
management (in billions)...... $ 71.6 $ 113.1 $ 257.4 $ 257.8 $ 192.2
Shareowner accounts
(in millions)................. 2.7 3.0 4.3 6.3 5.9
Ratio of earnings
to fixed 15.04 22.42 47.14 75.45 14.19
charges (vii).................
(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 International, Inc. ("USCS"). DST accounted for the merger under
the pooling of interests method. The charge reflects Stilwell's reduced
ownership of DST, together with Stilwell's proportionate share of DST and
USCS fourth quarter merger-related costs.
(ii) Includes certain non-recurring after-tax items: a) a $27.3 million gain on
the settlement of litigation with a former equity affiliate; b) a $15.1
million 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)Includes certain non-recurring items (after consideration of income taxes
and minority interest): a) Janus recorded a net reduction to net income of
approximately $38.3 million related to severance, facility closing and
related costs associated with work force reductions in February and April
2001, the closing of its Austin location and restructuring of its Denver
locations, partially offset by a reduction relating to stock bonus accruals
that were no longer payable as a result of the sale of shares of Janus
common stock by various minority stockholders; b) approximately $10.4
million in costs that were incurred by Janus to conduct a proxy vote for
each of the Janus funds to obtain, among other things, shareowner approval
of new advisory agreements with Janus; c) a third quarter non-cash increase
to minority interest of approximately $64.0 million in connection with
Stilwell's commitment to purchase 609,950 shares of Janus common stock
representing the excess of the contractual price paid by Stilwell compared
to the current market value of the stock; d) approximately $8.2 million
representing Stilwell's proportionate share of DST net non-recurring gains
during 2001; and e) a gain of $15.9 million resulting from the disposition
of 839,000 shares of DST common stock in December 2001 in connection with
Stilwell's formation of a captive insurance company.
(iv) Represents earnings before interest, income taxes, depreciation and
amortization for each of the years presented. EBITDA is not a measure of
financial performance under generally accepted accounting principles, is
not necessarily comparable to similarly titled measures of other companies
and should not be considered as an alternative to net income as a measure
of performance nor as an alternative to cash flow as a measure of
liquidity.
(v) The per share data presented for the years ended December 31, 1997, 1998,
1999 and 2000 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.
(vi) Stilwell declared dividends of $0.01 per share for each of the third and
fourth quarters of 2000. Stilwell declared dividends of $0.01 per share for
each quarter in 2001.
(vii)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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The discussion set forth below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are typically identified by the use of words such as "may,"
"will," "expect," "believe," "anticipate," "intend," "could," "estimate," or
"continue" and similar expressions or variations, and are based on the beliefs
and assumptions of the management of Stilwell Financial Inc. (the "Company" or
"Stilwell") based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements. Important factors that
could cause actual results to differ materially from the forward-looking
statements include the risks described below, in Part I Item 1, Business, under
"Risk Factors" and elsewhere in this report. Stilwell cautions readers to
carefully consider such factors. Further, such forward-looking statements speak
only as of the date on which such statements are made; Stilwell undertakes no
obligation to update any forward-looking statements to reflect events or
circumstances after the date of such statements.
The discussion herein is intended to clarify and focus on the Company's
results of operations, certain changes in its financial position, liquidity,
capital structure and business developments for the periods covered by the
consolidated financial statements included under Part II Item 8, Financial
Statements and Supplementary Data, 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. Because 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. Stilwell's primary entities are Janus Capital Corporation
("Janus"), an approximate 98% owned subsidiary; Stilwell Management, Inc.
("SMI"), a wholly-owned subsidiary; Berger Financial Group 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 81% 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.
On June 14, 2000, the board of directors of 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 ("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.
21
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") that 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
had no effect on the previously issued tax ruling.
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, as well as the identified intangible assets and
goodwill resulting from the acquisition of subsidiaries and affiliates directly
by Stilwell, are aggregated as a separate segment.
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 are affected by new money investments or redemptions and by
market appreciation or depreciation. Factors that impact the level of net fund
sales or redemptions include 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 reflect fluctuations
in investment values. The level of growth (decline) in shareowner accounts
generally mirrors the recent performance of the various funds within the group
(e.g., positive performance periods are generally followed by growth in
accounts).
RECENT DEVELOPMENTS
Corporate Restructuring of Janus. On February 15, 2002, Stilwell announced
its intention to convert Janus Capital Corporation into a limited liability
company. Concurrent with the structural change in Janus, approximately 6.2% of
the shares of the limited liability company - with a value now estimated at
approximately $300 million - is expected to be issued to key Janus employees in
early second quarter 2002. The issuance of ownership to Janus employees is
expected to occur through two grants.
The first grant will be through a special, one-time share grant equivalent
to 5% of Janus, all of which vest at the end of seven years and include the
opportunity for accelerated vesting (either 20% or 33% annually) when Janus
meets defined performance targets. The second grant will represent the customary
long-term incentive component of the employees' annual compensation package and
will vest at the end of five years, with opportunities for acceleration. All
vesting is subject to continued employment by the limited liability company.
The combined grants, which Janus expects to distribute to approximately
180 key employees (the majority of which will be to the 65-member investment
team), are designed to encourage superior investment performance and long-term
stability at Janus through additional employee ownership in a tax-efficient
organizational structure. The equity program in the limited liability company is
expected to include liquidity provisions that will provide Janus employees the
opportunity to sell up to 50% of their aggregate vested shares to Janus or
Stilwell, with certain restrictions, on scheduled liquidity dates at the
then-current fair value of the shares.
22
Upon issuance of the shares of the limited liability company, Stilwell
will own approximately 92% of Janus, with Janus employees owning the remaining
8% of the company. The grants of shares are expected to qualify for fixed
accounting under generally accepted accounting principles, with Janus
recognizing a pro rata amount of compensation expense for each year during the
vesting period. Using a fixed accounting approach, Stilwell estimates that Janus
would record an additional $45 to $50 million in annual compensation expense
associated with the expected grants of Janus shares. However, the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB")
is currently discussing the accounting treatment of profits interests in a
limited liability company structure. The discussion is focused on whether
profits interests should be recorded under fixed plan accounting similar to
restricted stock grants, on a variable basis such as stock appreciation rights,
or whether accounting should be based on individual facts and circumstances.
Fixed plan accounting would require the current fair value of grants - as
determined on the date of grant - to be charged to compensation expense over the
vesting period. Variable accounting would also require future appreciation or
depreciation of the profits interests and related earnings to be charged to
compensation expense. Stilwell cannot predict the position that the EITF will
ultimately take, or the effect of such position on the ultimate financial
reporting of the initial and future grants.
If, for any reason (e.g., accounting, tax or other issues), the
anticipated limited liability company structure could not be completed as
contemplated, Stilwell would expect that Janus would continue as a corporation
and that common stock would be issued to key Janus employees in a manner similar
to previous years' customary restricted stock grants.
Berger Acquisitions of Bay Isle and INTECH. Berger completed two recent
acquisitions: Bay Isle Financial Corporation ("Bay Isle") on December 31, 2001
and Enhanced Investment Technologies, Inc. ("INTECH") on February 28, 2002. Bay
Isle is a manager of primarily institutional and private accounts through a
value style approach. Bay Isle manages approximately $1.1 billion assets, which
have been included in the consolidated totals at December 31, 2001. The terms of
the transaction were not material to Stilwell's results of operation, financial
position or cash flows as of and for the year ended December 31, 2001.
INTECH uses a proprietary mathematical investment process for
institutional and private clients. INTECH manages approximately $6 billion in
assets. If the full amount of contingent purchase price payments were made,
Berger would pay approximately $68 million for 50.1% of INTECH and has the right
to purchase an additional 30% over the next two years for a negotiated price.
Berger expects to use its strong institutional marketing group to market
the products of Bay Isle and INTECH. With these companies, Berger now offers
several growth and value products in the retail, private and institutional
channels.
Interest Rate Exchange Agreement. On February 12, 2002, Stilwell entered
into a receive-fixed, pay-floating interest rate exchange agreement with a major
investment bank with respect to Stilwell's $400 million Senior Notes (see
below). Stilwell will receive from the counterparty a fixed 7% rate on $400
million and Stilwell will pay the counterparty based on the six month LIBOR rate
(set in arrears) plus 178 basis points. Stilwell has designated the interest
rate exchange as a hedge that qualifies for the "shortcut" method for fair value
hedges pursuant to Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") and
the hedge meets the prerequisites for the assumption of no ineffectiveness under
FAS 133. The effect of this agreement is to increase the Company's exposure to
fluctuations in interest rates.
23
RESULTS OF OPERATIONS
Consolidated operating results from 1999 to 2001 were affected by the
following significant developments.
Significant Developments
Stilwell's Additional Investment in Janus. During the year ended December
31, 2001, Stilwell and Janus completed several purchases of Janus stock that
increased Stilwell's ownership interest in Janus to approximately 98%. The
transactions are summarized in the table and discussions below:
Month of Acquisition Number of Shares Purchase Price
-------------------- ---------------- --------------
(in millions)
March and April.......... 202,042 $ 203.0
May...................... 600,000 603.0
September................ 138,897 139.6
November................. 609,950 613.0
----------- ------------
Total purchased....... 1,550,889 $ 1,558.6
=========== ============
The Company adopted Statement of Financial Accounting Standards No. 141
"Business Combinations" ("FAS 141") and Statement of Financial Accounting
Standards No. 142 "Goodwill and Intangible Assets" ("FAS 142") for all
transactions occurring on or after July 1, 2001. FAS 141 requires the purchase
method of accounting for all acquisitions. Under FAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized. Instead,
such goodwill and other intangible assets will be tested annually for
impairment. With respect to transactions occurring prior to July 1, 2001, FAS
141 and FAS 142 were adopted on January 1, 2002.
Activities prior to July 1, 2001
--------------------------------
March and April 2001 Stilwell acquisition of Janus shares. In
March and April of 2001, Stilwell acquired 202,042 shares of Janus common
stock from several minority stockholders. Certain Janus employees acquired
approximately 163,900 of these shares in 1995 when Janus stock ownership
was first extended to a broader group of key management employees other
than Thomas H. Bailey, Janus' president, chairman and chief executive
officer. The remainder of the shares had been held since 1984 or before.
Stilwell purchased the shares through the exercise of put rights by the
various minority stockholders. The shares cost approximately $203 million,
which was funded through cash and borrowings under the Company's credit
facilities. In connection with the transactions, amounts owed to Stilwell
by certain of the selling minority stockholders with respect to their
Janus stock were repaid.
May 2001 Stilwell acquisition of Janus shares from Mr. Bailey. On May
1, 2001, Stilwell acquired 600,000 shares of Janus common stock from Mr.
Bailey pursuant to the exercise of put rights by Mr. Bailey under the
Janus Stock Purchase Agreement. The purchase price of the shares totaled
$603 million. In addition, Stilwell paid to Mr. Bailey approximately $7
million representing interest expense that began to accrue on the unpaid
purchase price 30 days after Stilwell received notice of Mr. Bailey's
decision to exercise his put right. Stilwell funded the purchase price and
associated interest with proceeds received from the issuance of
Convertible Notes as discussed below.
24
Net effect of Acquisitions Prior to July 1, 2001. Stilwell accounted
for these transactions using the purchase method of accounting. The
following table summarizes the effect of the transactions for purchase
accounting purposes (in millions):
March and
April 2001 May 2001 Total
---------- -------- -----
Net tangible assets acquired........... $ 1.9 $ 8.1 $ 10.0
Identified intangible assets -
subject to amortization (1)........ 157.9 448.1 606.0
Identified intangible assets -
not subject to amortization (2).... - - -
Goodwill (3)........................... 43.2 146.8 190.0
Goodwill - deferred income tax (4)..... 60.4 171.4 231.8
---------- -------- ---------
Total............................. $ 263.4 $ 774.4 $ 1,037.8
========== ======== =========
(1) These amounts represent customer relationships through contracts with
private and separate accounts, marketing identified intangibles (e.g.,
brand name, trademark), advisory contracts with the retail mutual
funds and third party advisory and distribution relationships. These
amounts were amortized over a weighted average period of 20 years. See
discussion below with respect to amortization for fiscal years
beginning on January 1, 2002.
(2) As the purchases occurred prior to July 1, 2001, all identified
intangible assets were required to be amortized. See discussion below
with respect to amortization for fiscal years beginning January 1,
2002.
(3) This amount represents goodwill resulting from the excess of purchase
price over the fair value of net tangible and intangible assets. This
amount was amortized over a weighted average period of 20 years. See
discussion below with respect to amortization for fiscal years
beginning on January 1, 2002.
(4) This amount represents goodwill associated with deferred income taxes
recorded for identifiable intangible assets based on the difference
between the book and tax bases. This amount was amortized over a
weighted average period of 20 years. See discussion below with respect
to amortization for fiscal years beginning on January 1, 2002.
Upon adoption of FAS 141 and FAS 142 effective January 1, 2002
for transactions occurring prior to July 1, 2002, Stilwell will no longer
amortize goodwill and any identified intangible assets with indefinite
lives. Upon completion of a valuation in connection with the purchase
price allocation for the various acquisitions of Janus shares during 2001,
approximately $5.9 million of identified intangible assets will continue
to be amortized in 2002 and beyond. The remaining $600.1 million are
considered to be indefinite lived intangible assets and therefore will not
be amortized. Accordingly, while Stilwell recorded approximately $35.3
million in amortization expense during 2001 associated with the goodwill
and intangible assets resulting from the additional investments in Janus
during March, April and May 2001, amortization expense in 2002 and beyond
related to these assets will be approximately $0.8 million per year.
Activities on July 1, 2001 and Thereafter
-----------------------------------------
September 2001 Janus purchase of shares from employees. On September
4, 2001, Janus used available cash to purchase 138,897 shares of Janus
common stock from employees (other than Mr. Bailey) at a cost of
approximately $139.6 million.
November 2001 Stilwell Purchase of Janus Shares from Mr. Bailey. On
November 9, 2001, Stilwell completed the acquisition of 609,950 shares of
Janus common stock owned by Mr. Bailey and one other minority stockholder.
The acquisitions of the common stock by Stilwell, which were pursuant to
put rights held by Mr. Bailey and the other minority stockholder that were
included in the 1984 Janus Stock Purchase Agreement, cost approximately
$613 million and were funded using proceeds from Stilwell's Senior Note
issuance (see below) and existing cash.
25
With the completion of these transactions, Stilwell owns
approximately 98% of Janus, with the remainder owned by Janus employees.
In addition, all mandatory put rights to Stilwell associated with Janus
stock were eliminated.
In third quarter 2001, Stilwell recorded a one-time non-cash increase
to minority interest of approximately $64.0 million in connection with its
commitment to purchase the 609,950 shares of Janus common stock. This
commitment dated back to the initial purchase of Janus common stock in
1984 and resulted from the put rights held by Mr. Bailey and the other
minority stockholder that use Janus' earnings from the prior calendar year
to determine the price of the Janus shares. Therefore, the contractual
price was computed using the results from Janus' record year in 2000.
Based on the decline in Janus' earnings during 2001 compared to 2000,
accounting guidelines required an evaluation of whether the contractual
put price of the purchase commitment exceeded fair value. Upon completion
of a valuation, this charge was deemed necessary and was recorded as an
increase to minority interest. Once Stilwell completed the acquisition of
the Janus shares, the intangible assets and goodwill were reduced by the
amount of this charge.
Net Effect of Transactions Occurring on July 1, 2001 and Thereafter.
The Company implemented FAS 141 and FAS 142 for all transactions occurring
on or after July 1, 2001. The following table summarizes the effect of the
transaction for purchase accounting purposes (in millions):
September November
2001 2001 Total
--------- -------- -----
Net tangible assets acquired (1)....... $ 12.9 $ 12.7 $ 25.6
Identified intangible assets -
subject to amortization (2)........ 1.0 4.5 5.5
Identified intangible assets -
not subject to amortization (3).... 95.9 457.2 553.1
Goodwill (4)........................... 29.8 74.6 104.4
Goodwill - deferred income tax (5)..... 37.0 176.6 213.6
---------- -------- ----------
Total............................. $ 176.6 $ 725.6 $ 902.2
========== ======== ==========
(1) Amount includes approximately $9.2 million attributable to the
remaining minority stockholders' allocable portion of acquired
shares.
(2) These amounts, representing customer relationships through
contracts with private and separate accounts, are amortized over a
weighted average period of 7.4 years.
(3) These amounts represent marketing identified intangibles (e.g.,
brand name, trademark), advisory contracts with the retail mutual
funds, third party advisory and distribution relationships and
other non-contractual or legal right-based intangible assets.
(4) This amount represents goodwill resulting from the excess of
purchase price over the fair value of net tangible and intangible
assets.
(5) This amount represents goodwill associated with deferred income
taxes recorded for identifiable intangible assets based on the
difference between the book and tax bases.
Stilwell recorded amortization expense of $0.1 million during 2001
associated with the identifiable assets resulting from the September and
November 2001 investments in Janus. Amortization expense in 2002 and
beyond related to these assets will total approximately $0.7 million per
year.
26
In connection with the foregoing transactions, a portion of the
shares of restricted Janus common stock held by other minority
stockholders will become vested pursuant to stock purchase and restriction
agreements that require the acceleration of vesting upon the termination
of certain management rights held by Mr. Bailey under the Janus Stock
Purchase Agreement. Those management rights will terminate on April 2,
2002.
Most of the revenues of Janus are derived pursuant to investment
advisory agreements with its respectively managed mutual funds and other
separate and private accounts. With respect to agreements with mutual
funds, these investment advisory agreements may be terminated by either
party with notice, or terminated in the event of an "assignment" (as
defined in the Investment Company Act of 1940 as amended (the "1940
Act")), and must be approved and renewed annually by the disinterested
members of each fund's board of directors or trustees, or its shareowners,
as required by law. In addition, the board of trustees or directors of
certain funds and separate and private accounts of Janus generally may
terminate these investment advisory agreements upon written notice for any
reason. Generally, any change in control of Janus would constitute an
"assignment" under the 1940 Act.
Under the Janus Stock Purchase Agreement, Mr. Bailey had certain
management rights, which include the right to establish and implement
policy with respect to the investment advisory and portfolio management
activity of Janus, as well as the right to select the majority of the
members of the Janus Board, subject to Stilwell's approval, which approval
may not be unreasonably withheld. In connection with Mr. Bailey's
disposition of Janus shares on November 9, 2001, Mr. Bailey's rights under
the Janus Stock Purchase Agreement would have expired, but Stilwell agreed
with Mr. Bailey to extend those rights to April 2, 2002 (the date by which
it is expected the comprehensive fund shareowner approval process
described below will be completed).
After careful consideration of Mr. Bailey's involvement in Janus'
development since its inception and his significant involvement in all
management decisions at Janus as well as the influence he has exerted over
Janus pursuant to his rights under the Janus Stock Purchase Agreement, the
fund trustees determined that a fund shareowner vote was needed to approve
new advisory agreements with Janus. As of February 20, 2002, the Janus
funds obtained fund shareowner approval of new advisory agreements with
Janus, the terms of which are in all material respects the same as the
current advisory agreements with Janus. In addition, Janus has
approximately 50 subadvisory relationships, of which about one-half have
determined to secure shareowner approval of new advisory agreements with
Janus. As of March 19, 2002, Janus continues the process of obtaining
shareowner approval with respect to the subadvisory relationships.
Upon receipt of fund shareowner approval, the new advisory agreements
would be effective April 2, 2002 and would continue in effect until July
1, 2002. Thereafter, the advisory agreements would continue in effect for
successive annual periods provided their continuance were approved at
least annually by: (1) a majority vote, cast in person and a meeting
called for that purpose, of the trustees, or (2) a vote of the holders of
a majority of the outstanding voting securities (as defined by the 1940
Act) of each fund and in either event by a majority of the trustees who
are not "interested persons," as defined in the 1940 Act, of Janus.
$400 Million Debt Offering. On November 6, 2001, the Company issued $400
million of 7% senior notes due November 1, 2006 ("Senior Notes"). The Senior
Notes are not redeemable prior to maturity and pay interest semi-annually on the
1st day of November and May, beginning on May 1, 2002. The Company received
approximately $396.8 million after discount at issuance, underwriter's discount
and certain offering expenses. The proceeds were used to fund a portion of the
cost to acquire the 609,950 shares of Janus shares as discussed above.
27
Zero-Coupon Convertible Debt Offering. On April 30, 2001, Stilwell
completed an offering of approximately $931 million principal amount at maturity
of zero-coupon convertible senior notes ("Convertible Notes") due April 30,
2031. The Convertible Notes were offered only to qualified institutional buyers
at an initial offering price of $741.37 per $1,000 principal amount at maturity,
resulting in gross proceeds to Stilwell of approximately $690 million (prior to
consideration of approximately $16.8 million in debt issuance costs). The issue
price represents a yield to maturity of 1% per year. Additionally, to the extent
that the average market price of the Convertible Notes exceeds certain
thresholds, Stilwell could be required to pay contingent interest at a rate of
the greater of Stilwell's regular quarterly cash dividend or 0.0625% of the
average market price of the Convertible Notes over a specified time period.
Each $1,000 principal amount at maturity of the Convertible Notes will
initially be convertible into 17.1544 shares of common stock upon the occurrence
of any of the following events: i) if the closing prices of Stilwell's shares of
common stock on the New York Stock Exchange exceed specified levels; ii) if the
credit rating assigned to the Convertible Notes by either Moody's Investor
Services or Standard & Poor's is below a specified level; iii) if Stilwell calls
the Convertible Notes for redemption; or iv) in the event that Stilwell takes
certain corporate actions, such as (but not limited to) declaration of an
extraordinary dividend. Stilwell may redeem the Convertible Notes for cash on or
after April 30, 2006 at their accreted value. Stilwell may be required to
repurchase the Convertible Notes, at the option of the holders, on April 30,
2002, 2004, 2006, 2011, 2016, 2021 and 2026 at the accreted values per $1,000
principal amount at maturity of $748.80, $763.89, $779.28, $819.14, $861.03,
$905.06 and $951.35, respectively. Stilwell may choose to pay the purchase price
for such repurchases in cash or shares of Stilwell common stock. Stilwell may
also be required to repurchase the Convertible Notes, at the option of the
holders, in cash, upon the occurrence of certain specified change of control
events occurring on or prior to April 30, 2006. A Registration Statement on Form
S-3 covering resales by investors of the Convertible Notes, and the shares of
Stilwell's common stock into which the notes are convertible, was declared
effective by the Securities and Exchange Commission ("SEC") on July 30, 2001.
Approximately $610 million of the proceeds received from the offering were
used to purchase 600,000 shares of Janus common stock as discussed above. The
remaining proceeds were available for general corporate purposes.
As mentioned above, pursuant to the terms of the convertible notes,
holders may require Stilwell to purchase all or a portion of their convertible
notes as of April 30, 2002. The purchase price per $1,000 of principal amount at
maturity of the notes properly tendered for purchase in accordance with their
terms is $748.80. If all the notes were tendered, the total purchase price
payable by Stilwell would be approximately $697 million. Stilwell has the right
to elect to pay the purchase price for any notes tendered in cash or in shares
of Stilwell common stock, and the Company is required to give a notice to note
holders by April 2, 2002 as to the manner of payment elected. Stilwell presently
anticipates that it will announce the election to pay the purchase price in cash
for any and all notes tendered. Stilwell believes that it has sufficient
resources, including cash on hand and available borrowing capacity under credit
facilities, to meet the purchase obligations under the notes if all of the notes
were tendered for purchase. However, Stilwell may choose to use other financing
alternatives to finance a portion of the obligation under the notes.
Janus Work Force Reduction, Facility Closings and Other Non-Recurring
Items. In February 2001, Janus eliminated 468 jobs from its operations unit,
Janus Service Corporation, as a result of a lower level of shareowner activity
and its use of technology to moderate costs. The job reduction did not affect
Janus' investment team, which continues to aggressively recruit and add analysts
to its staff. Janus recorded a non-recurring charge in first quarter 2001 of
approximately $9.1 million related to severance, operational and other costs.
Partially offsetting these costs was a first quarter 2001 reduction of
approximately $8.2 million in stock bonus accruals at Janus that were no longer
payable as a result of the sale of shares of Janus common stock by various
employees to Stilwell as discussed above.
28
On April 20, 2001, Janus announced a further work force reduction that
affected approximately 546 employees and resulted in the closing of its Austin,
Texas call center. This action reflects a return to a more normalized level of
shareowner activity, significant technological advancements that provide
capacity to adjust to business fluctuations and the evolution in shareowner
approaches to inquiries and investments. Janus recorded approximately $39.4
million in second quarter 2001 non-recurring costs associated with severance,
facility closing and related expenses.
In December 2001, Janus recorded an additional $25.8 million of facility
closing and lease costs related to Janus' Austin and Denver facilities resulting
primarily from weaker than expected commercial real estate markets. Also, Janus
recorded $16.6 million of charges associated with shareowner proxy costs for the
Janus group of mutual funds to obtain shareowner approval of new advisory
agreements in connection with Stilwell's purchase of Mr. Bailey's remaining
shares of Janus common stock.
The following table summarizes the non-recurring items during 2001 (in
millions):
Balance at Balance at
December 31, December 31,
2000 Additions Reductions 2001
---- --------- ---------- ----
Severance................................ $ - $ 15.5 $ (13.9) $ 1.6
Lease and related costs.................. 36.6 (12.2) 24.4
Fixed asset impairments.................. 14.0 (14.0) -
Fund shareowner proxy costs.............. 16.6 (4.7) 11.9
--------- --------- ---------- ---------
Total................................. $ - $ 82.7 $ (44.8) $ 37.9
========= ========= ========== =========
Approximately $21.8 million is included as current other liabilities and
approximately $16.1 million is included as non-current other liabilities in the
consolidated balance sheet at December 31, 2001. The lease terms generally
expire between 2007 and 2010.
In February 2002, Janus implemented a further work force reduction of
approximately 220 employees in the shareowner servicing area. This action is not
expected to have a material effect on Stilwell's results of operations,
financial position or cash flows.
Janus Issuances of Restricted Stock. In January of 2000 and 2001, certain
Janus employees were granted 35,660 and 64,420 shares of restricted Janus stock,
respectively. Pursuant to the terms of the grant, 20% of the shares vested
immediately in recognition of the employees' contributions during each year. The
fair market value of the restricted stock under the grant was approximately
$18.4 and $64.7 million in 2000 and 2001, respectively. In addition, the related
tax paid by Janus on the behalf of employees totaled $15.6 and $54.7 million in
2000 and 2001, respectively, associated with compensation payments made by Janus
to grantee employees in connection with the decision by each employee to make a
ss.83(b) election under the Internal Revenue Code upon receipt of the Janus
shares. Compensation expense recorded by Janus associated with restricted stock
grants totaled $13.5, $35.4 and $37.7 million in 1999, 2000 and 2001,
respectively.
Stilwell Credit Facility. In December 2000, as amended and restated on
October 24, 2001, 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.
29
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.
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, 2001. Neither Janus nor
Stilwell had borrowings under the Facilities at December 31, 2001.
Concurrent with the completion of the Facilities, Stilwell cancelled the
$200 million 364-day senior unsecured Competitive Advance/Revolving Credit
Facility entered into in January 2000 that was assumed by Stilwell from KCSI.
Stilwell assumed $125 million that was borrowed under the facility, thereby
reducing its stockholders' equity. Stilwell repaid the $125 million in March
2000.
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 purchases 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. No repurchases were made during 2001.
Stilwell expects to fund the share repurchase program from its cash flow and
other available sources of funds.
30
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,
------------------------------------------------
1999 2000 (i) 2001 (ii)
---- --------- ---------
Revenues:
Janus and Berger:
Janus.................. $ 1,155.3 $ 2,157.1 $ 1,473.0
SMI and Berger......... 40.0 69.9 63.8
------------ ------------ ------------
Sub-total........... 1,195.3 2,227.0 1,536.8
Other.................... 17.0 21.1 18.9
------------ ------------ ------------
Total.................... $ 1,212.3 $ 2,248.1 $ 1,555.7
============ ============ ============
Operating income (loss):
Janus and Berger:
Janus.................. $ 539.5 $ 1,039.7 $ 589.6
SMI and Berger......... 2.9 21.9 10.0
------------ ------------ ------------
Sub-total........... 542.4 1,061.6 599.6
Other.................... (24.1) (25.3) (69.2)
------------ ------------ ------------
Total.................... $ 518.3 $ 1,036.3 $ 530.4
============ ============ ============
Net income (loss):
Janus and Berger:
Janus (iii)............ $ 284.1 $ 544.0 $ 275.4
SMI and Berger (iv) ... 4.4 18.0 7.3
------------ ------------ ------------
Sub-total........... 288.5 562.0 282.7
------------ ------------ ------------
Other:
DST (iv) .............. 40.8 64.6 69.6
Other.................. (16.2) 37.1 (50.0)
------------ ------------ ------------
Sub-total........... 24.6 101.7 19.6
------------ ------------ ------------
Total.................... $ 313.1 $ 663.7 $ 302.3
============ ============ ============
(i) Includes certain non-recurring after-tax items: a) a $27.3 million
gain on the settlement of litigation with a former equity affiliate;
b) a $15.1 million 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.
(ii) Includes certain non-recurring items (after consideration of income
taxes and minority interest): a) Janus recorded a net reduction to net
income of approximately $38.3 million related to severance, facility
closing and related costs associated with work force reductions in
February and April 2001, the closing of its Austin location and
restructuring of its Denver locations, partially offset by a reduction
relating to stock bonus accruals that were no longer payable as a
result of the sale of shares of Janus common stock by various minority
stockholders; b) approximately $10.4 million in costs that were
incurred by Janus to conduct a proxy vote for each of the Janus funds
to obtain, among other things, shareowner approval of new advisory
agreements with Janus; c) a third quarter non-cash increase to
minority interest of approximately $64.0 million in connection with
Stilwell's commitment to purchase 609,950 shares of Janus common stock
representing the excess of the contractual price paid by Stilwell
compared to the current market value of the stock; d) approximately
$8.2 million representing Stilwell's proportionate share of DST net
non-recurring gains during 2001; and e) a gain of $15.9 million
resulting from the disposition of 839,000 shares of DST common stock
in December 2001 in connection with Stilwell's formation of a captive
insurance company.
(iii)Janus net income is reported after minority interest of approximately
$57.7, $112.1 and $100.7 million for the year ended December 31, 1999,
2000 and 2001, respectively.
(iv) Stilwell's investment in DST is held by SMI.
31
Assets under management as of December 31, 1999, 2000 and 2001 were as
follows (in billions):
December 31,
----------------------------
1999 2000 2001
---- ---- ----
Janus
Janus Advised Funds
Janus Investment Fund.............................. $ 171.8 $ 162.2 $ 107.9
Janus Aspen Series (i)............................. 17.4 22.7 18.3
Janus Adviser Series (i)........................... - 1.8 3.9
Janus Money Market Funds........................... 9.4 12.2 18.8
Janus World Funds Plc.............................. 1.4 3.6 3.3
--------- --------- ---------
Total Janus Advised Funds..................... 200.0 202.5 152.2
Janus Sub-Advised Funds and Private Accounts............ 49.5 46.3 30.0
--------- --------- ---------
Total Janus................................... 249.5 248.8 182.2
--------- --------- ---------
Berger
Berger Advised Funds.................................... 6.0 6.1 6.0
Bay Isle................................................ 1.1
Berger Sub-Advised Funds and Private Accounts........... 0.6 1.5 1.5
--------- --------- ---------
Total Berger.................................. 6.6 7.6 8.6
--------- --------- ---------
Nelson 1.3 1.4 1.4
--------- --------- ---------
Total Assets Under Management................. $ 257.4 $ 257.8 $ 192.2
========= ========= =========
(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 2001 net income of $302.3 million, a decline of 54%
compared to $663.7 million in 2000. Exclusive of the one-time items in both
years, net income was $390.9 million in 2001 compared to $610.8 million in 2000.
Revenues decreased $692.4 million, or 31%, to $1,555.7 million, which
contributed to lower operating income. The operating margin for the year ended
December 31, 2001 was 34% compared to 46% in 2000. The decline in the operating
margin is primarily attributable to the non-recurring charges discussed in
"Significant Developments" above, as well as to the amortization expense
resulting from the approximate $1.6 billion additional investment in Janus
during 2001. Exclusive of non-recurring items and amortization associated with
the additional Janus investment during the year, the 2001 operating margin was
41.8%. Total assets under management decreased from $257.8 billion at December
31, 2000 to $192.2 billion at December 31, 2001. Shareowner accounts totaled
approximately 5.9 million as of December 31, 2001, a 6% decrease from 2000.
Equity earnings from DST for the year ended December 31, 2001 increased 8%
versus 2000.
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 $25.3 million, or 57%, versus
comparable 1999.
32
JANUS AND BERGER
Janus Capital Corporation
2001
Janus contributed $275.4 million to Stilwell net income during 2001, a
decrease of $268.6 million from 2000. Investment management, shareowner
servicing and fund administration revenue decreased $684.1 million, or 32% in
2001, to $1,473.0 million as a result of a decline in average assets under
management. Aggregate fee rates declined slightly from 2000 to 2001 as a result
of a higher proportion of money market assets, on which lower fees are earned.
Janus' operating margin declined from 48.2% in 2000 to 40.0% in 2001, primarily
as a result of reduced revenues year-to-year and non-recurring costs (as
discussed in "Significant Developments") during 2001.
In 2001, assets under management decreased 27% to $182.2 billion from
$248.8 billion, as a result of market depreciation of $59.7 billion and net
redemptions of $6.9 billion. Equity portfolios comprised approximately 88% of
all assets under management at the end of 2001. Net redemptions in the Janus
Investment Fund were partially offset by net cash inflows in the Janus Money
Market Funds, Janus Aspen Series ("Aspen") and Janus Adviser Series ("Adviser").
Total Janus shareowner accounts decreased 6.7% to approximately 5.6 million as
of December 31, 2001.
Operating expenses decreased 21% from $1,117.4 million to $883.4 million in
2001. This decrease resulted primarily from the decline in assets under
management, reduction in total employees, facility closing and lease charges and
other variable costs. Exclusive of the $82.7 million in net non-recurring costs
associated with severance, facility closing and related costs, operating
expenses declined 28%. Nearly 50% of Janus' 2001 operating expenses consisted of
variable costs that generally increase or decrease with fluctuations in
management fee revenue. An additional 14% 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 2001 from 2000:
o Employee compensation decreased $170.2 million, or 37%, primarily
attributable to decreases in the number of employees and
performance-based incentive compensation, as well as to lower base,
bonus and overtime pay. Incentive compensation decreased due to lower
management fee revenue and fewer performance targets achieved. During
2001, Janus reduced the number of full-time employees by approximately
1,500. Additionally, Janus experienced significant overtime
compensation in 2000 as a result of the rapid growth in early 2000
investor activity.
o Concession fees paid to alliance partners and mutual fund supermarkets
decreased $90.6 million, or 30%, due principally to the decline in
assets under management being distributed through these channels.
Assets under management subject to third party concessions decreased
from $107.3 billion at December 31, 2000 to $75.3 billion at December
31, 2001.
o Marketing, promotional and advertising expenditures declined to $74.4
million compared to $86.1 million in 2000, largely due to a decline in
print, television and radio media advertising. Note, however, that the
mix of marketing dollars continued to change as greater focus is
placed on the institutional, adviser and other third party
distribution approaches.
o Depreciation and amortization increased $7.8 million over 2000 as a
result of the infrastructure spending during the 1998 to 2000 period
(see below) and the amortization of sales commissions resulting from
sales of certain fund shares, known as B shares, in Janus World Funds.
These payments declined to $6.3 million from $68.7 million in 2000.
Amortization of these payments amounted to $30.9 million and $30.3
million in 2000 and 2001, respectively.
33
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' 2000 operating expenses consisted 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) were 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 reflected 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 assets under
management being distributed through these channels from $82.4 billion
at December 31, 1999 to $107.3 billion at December 31, 2000.
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'
infrastructure spending (discussed below).
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' web development and maintenance
efforts.
34
General
Markets, Funds and Fund Flows. During 2001, weakness in the various
financial markets, and in particular a downturn in the equity growth style of
investing, resulted in market depreciation of Janus' assets under management.
Janus also experienced net outflows of cash for the first time in several years,
generally considered to be attributable to the weaker performance of the various
Janus funds compared to peers. Net redemptions in the Janus Investment Fund
("JIF") of approximately $14.6 billion were partially offset by inflows in the
Janus Money Market Funds, Aspen and Adviser resulting in net redemptions for all
of Janus of approximately $6.9 billion. The positive flows in Aspen and Adviser
reflect the growing emphasis on third party distribution channels for Janus
products.
Prior to 2001, the Janus' assets under management grew significantly as a
result of several factors including, among others: (i) exceptional 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 several new domestic funds in the JIF and
in Aspen. In addition, Janus separated Adviser from Aspen, which has provided
Janus an opportunity to access intermediated distribution channels more
effectively. In an effort to continue to achieve desired results for investors,
Janus closed eight of its funds during the last three years. In 2000, Janus
closed five funds, the most recent of which was the flagship Janus 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. Note, however,
that the closing of these funds may have an impact on the level of flows in the
future.
Operations and Capital Expenditures. As a result of the work force
reductions in February and April 2001 and the closing of the Austin location in
April 2001, Janus realized expense benefits during the second half of 2001.
While the number of full-time employees in the operational and service areas of
Janus declined as a result of these business decisions, Janus has increased its
personnel in the investment area - the competency considered to be most critical
to Janus' ongoing success.
International operations experienced a decline in assets under management
by $0.3 billion in 2001. In 2000, assets under management grew $2.2 billion from
1999 due to $2.9 billion in net sales, partially offset by $698 million in
market depreciation. This international activity occurred in the Janus World
Funds, which is a group of offshore multi-class funds introduced in December
1998 modeled after certain of the funds in the Janus Investment Fund and
domiciled in Dublin, Ireland. While activity in 2001 was limited, approximately
one-half of Janus World Funds sales during 2000 were 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.
Capital expenditures in 2001 totaled $25 million. 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. As noted in "Significant
Developments" above, an asset impairment charge was recorded for a portion of
the property and equipment added during this period in connection with the
closing of the Austin facility and Denver restructuring during 2001.
Infrastructure efforts in 1999 and 2000 focused on the following:
o Development during 2000 of "personalized performance" features - those
that enable shareowners to review the current year and
inception-to-date performance of their investments - to the web site
and quarterly statements. Further, Janus launched the redesigned
Janus.com web site on December 1, 2000, which features a more direct
and user-friendly design. New functionality includes the ability to
open accounts, to change an address and to have daily prices delivered
to an investor's e-mail address or wireless
35
device. In 1999, features were added to allow investors to execute
most transactions (purchases, redemptions and exchanges) on-line and
to provide information for institutional relationships.
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' automated call system, was expanded to handle 218,000 calls per
day and 35,000 calls per hour.
During 2000 and 2001, Janus used approximately $100 and $152 million,
respectively, of cash to purchase shares of Janus common stock from employees at
the fair market value as set forth in stock restriction agreements. Upon Janus'
repurchase of these shares, Stilwell's ownership percentage of Janus increased
and Stilwell recorded intangibles and goodwill. For those transactions occurring
prior to July 1, 2001, Stilwell amortized the intangible assets and goodwill
over a weighted average period of 20 years.
Berger, excluding DST
2001
Berger reported 2001 net earnings of $7.3 million compared to $18.0 million
in 2000. Total assets under management held by the Berger funds as of December
31, 2001 increased to $8.6 billion, up from the $7.6 billion as of December 31,
2000. This increase resulted from the addition of the Bay Isle assets under
management (approximately $1.1 billion) and net sales of $0.7 billion, partially
offset by market depreciation of $0.8 billion. Total Berger shareowner accounts
increased approximately 2% during 2001. The growth in shareowner accounts during
the year occurred primarily in Berger's value funds reflecting the stronger
relative performance of these funds compared to peers.
While total assets under management were higher year-to-year, the average
assets under management declined from approximately $7.6 billion during 2000 to
$7.1 billion during 2001. This decline in average assets under management
resulted in reduced revenues compared to 2000 ($63.8 million in 2001 versus
$69.9 million in 2000). Operating expenses increased approximately $5.8 million
over 2000, resulting in a lower operating margin in 2001 (15.7%) versus 2000
(31.3%). This increase in operating expenses was primarily attributable to
higher fee payments to sub-advisors of the value funds (as a result of increases
in assets under management in those funds). Other expense components generally
declined from the prior year but not at the same rate as the decline in
revenues.
2000
Berger's 2000 net income of $18.0 million exceeded the $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.
36
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,
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 receive fees under a
sub-advisory agreement with the Bank of Ireland Asset Management (U.S.) Limited
with respect to the Berger/BIAM Funds.
General
Berger's ability to maintain net cash inflows during the year, as well as
to increase its shareowner accounts to more than 274,000, reflects the results
of Berger's efforts to broaden its fund platform to include value products.
Further, as noted in "Significant Developments" above, Berger recently completed
the acquisitions of Bay Isle and INTECH. These acquisitions broaden the product
offering of Berger and provide opportunity for the institutional sales force to
leverage existing, and develop new, relationships.
During 1999 and 2000, Berger appointed a new president and chief executive
officer, hired a Chief Investment Officer and realigned the management of
several of its advised funds to improve its opportunity for growth in the
future.
At December 31, 1999, 2000 and 2001, approximately 28%, 26% and 18%,
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
2001
For the year ended December 31, 2001, Nelson reported a net loss of $2.6
million versus a loss of $0.7 million in 2000. The higher loss in 2001 reflects
reduced revenues (from $21.1 million in 2000 to $18.9 million in 2001) primarily
as a result of lower average assets under management. Nelson managed
approximately (pound)915 million ($1.4 billion) in assets at December 31, 2001
compared to (pound)908 million ($1.4 billion) at December 31, 2000. Despite the
slight increase in assets as of the end of each year, average assets under
management were lower in 2001 as a result of difficult global market conditions.
Operating expenses were essentially even with 2000. Operating expenses did not
decline with revenues during 2001 as Nelson continues its efforts to expand its
operations and develop products and services that complement its core advisory
and investment management business.
37
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.
General
Nelson continues to focus on building brand awareness through its
relationships with premier corporations and public entities and ongoing
presentations to employees of these corporations and entities. Further,
marketing and promotional efforts developed to secure clients through direct
channels are broadening the Nelson platform of capabilities and opportunities.
The number of advisors working with clients has grown from 25 in 1998 to 45 as
of December 31, 2001. The number of clients during that same period has grown by
nearly 50%.
Equity in Earnings of DST
Equity earnings from DST totaled $75.4 million for the year ended December
31, 2001 compared to $69.7 million in 2000. Exclusive of one-time items recorded
by DST in both years, equity earnings from DST improved $8.2 million to $66.5
million. This improvement was largely attributable to higher earnings in DST's
financial services segment. Consolidated DST revenues increased 22%, largely due
to the inclusion of revenue from EquiServe, in which DST acquired controlling
ownership on March 30, 2001. Revenues also increased due to a higher number of
shareowner accounts serviced (totaling 75.6 million at December 31, 2001 versus
72.1 million at December 31, 2000). DST's operating margin declined
year-to-year, partially due to the inclusion of EquiServe during 2001.
Stilwell recorded $69.7 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.
Interest Expense, Non-recurring Gains and Other, Net
Interest expense in 2001 exceeded 2000 by $27.1 million, primarily as a
result of the amortization of approximately $11.0 million of the $16.8 million
in debt issue costs paid in connection with the Convertible Notes, approximately
$7.2 million in interest associated with the acquisition of Janus common stock
from Mr. Bailey, two months of accrued interest on Stilwell's Senior Notes and
accreted interest on the Convertible Notes.
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.
38
In December 2001, Stilwell recorded a non-recurring gain of approximately
$28.8 million in connection with the sale to DST of 839,000 shares of DST common
stock at the then-current market price of DST common stock as reported on the
New York Stock Exchange. The $40.0 million of proceeds resulting from the sale
of this stock was used to form a captive insurance company for the purpose of
providing efficiencies in insurance coverage to the various Stilwell
subsidiaries.
In the first quarter of 2000, Stilwell sold to Janus 192,408 shares of
Janus common stock. 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 the various purchases of Janus
common stock as described in "Significant Developments").
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.
Other income declined by $23.5 million from 2000 as a result of a decrease
in interest income due to lower average cash balances and a decline in
short-term interest rates. Other income of $43.7 million for the year ended
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.
STILWELL TRENDS AND OUTLOOK
Stilwell's earnings and cash flows are heavily dependent on prevailing
financial market conditions. Significant increases or decreases in the various
securities markets, particularly the equity markets, can have a material impact
on Stilwell's results of operations, financial condition and cash flows.
Additionally, Stilwell results are affected by the relative performance of
Janus, Berger and Nelson products, introduction and market reception of new
products and the closing of existing funds to new investors, as well as other
factors, including increases in the rate of return of alternative investment
products, increasing competition as the number of mutual funds continues to grow
and changes in marketing and distribution channels. The growth rates of
Stilwell's subsidiaries and equity investments have varied from year-to-year,
and management does not currently expect the high average growth rates sustained
in the late 1990's to be repeated in the foreseeable future.
Due to the downturn in the financial equity markets and weak Janus
investment performance during the second half of 2000 and all of 2001,
Stilwell's assets under management declined from levels experienced during 2000.
Average assets under management for 2001 were $213.5 billion and assets under
management at December 31, 2001 totaled $192.2 billion. Average assets under
management can fluctuate based on fund flows and changes in the market value of
funds and accounts managed by Janus, Berger or Nelson. Accordingly, revenues
during 2002 are expected to decrease from the comparable 2001 periods to the
extent that the markets continue to be unfavorable to equity growth investors
and result in declines in assets under management. A decrease in revenues could
result in lower operating income and net income.
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. In addition, as discussed in
"Recent Developments" above, compensation costs will increase as a result of the
equity grants at Janus that are expected to occur in second quarter 2002.
Stilwell expects to continue to participate in the earnings or losses from
its DST investment.
39
LIQUIDITY AND CAPITAL STRUCTURE
LIQUIDITY
Summary cash flow data is as follows (in millions):
Year ended December 31,
----------------------------------------
1999 2000 2001
------- ------- ----
Cash flows provided by (used for):
Operating activities................................. $ 360.4 $ 731.3 $ 501.2
Investing activities................................. (47.4) (219.6) (1,616.2)
Financing activities................................. (127.4) (471.5) 987.4
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents.... 185.6 40.2 (127.6)
Cash and cash equivalents at beginning of year.......... 138.5 324.1 364.3
------------- ------------- -------------
Cash and cash equivalents at end of year................ $ 324.1 $ 364.3 $ 236.7
============= ============= =============
During the year ended December 31, 2001, the Company's consolidated cash
position decreased by $127.6 million. This decrease is largely attributable to
Stilwell's additional investment in Janus during 2001 (see "Significant
Developments" above), partly offset by cash provided by operating activities
resulting from net income and proceeds received from the issuance of the
Convertible Notes and the Senior Notes.
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,
---------------------------------------
1999 2000 2001
---- ---- ----
Net income...................................... $ 313.1 $ 663.7 $ 302.3
Depreciation and amortization................ 35.4 81.2 130.6
Equity in undistributed earnings............. (46.4) (70.8) (75.4)
Gain on sale of DST common stock............. (28.8)
Facility closing lease and
equipment charges.......................... 51.9
Gain on sale of Janus common stock........... (15.1)
Deferred income taxes........................ 11.8 17.8 5.6
Minority interest in consolidated earnings... 57.3 111.7 100.0
Change in working capital items................. 10.4 23.0 29.6
Deferred commissions............................ (29.5) (68.7) (6.3)
Other........................................... 8.3 (11.5) (8.3)
------------ ------------ ------------
Net operating cash flow......................... $ 360.4 $ 731.3 $ 501.2
============ ============ ============
Operating cash flow for the year ended December 31, 2001 declined from 2000
by $230.1 million. This decline was primarily attributable to lower net income
in 2001 and decreases in accrued compensation liabilities, partially offset by
lower accounts receivable balances year-to-year and a decrease in deferred
commission payments. Operating cash flow for the year ended December 31, 2000
exceeded comparable 1999 by $370.9 million, primarily due to higher net income,
partially offset by deferred commission payments by Janus from sales of Janus
World Fund shares during 2000.
40
Investing Cash Flows. Stilwell used cash for property acquisitions of
$50.5, $107.1 and $34.3 million in 1999, 2000 and 2001, respectively. The level
of capital expenditures in 2001 declined from 2000 because the majority of
significant infrastructure enhancements at Janus were completed during the
period from 1998 to 2000 (see "Year-to-Year Discussions - Janus and Berger"
above). Investments in and loans with affiliates totaled $17.5, $110.6 and
$1,620.9 million during 1999, 2000 and 2001, respectively. The activity during
the period from 1999 to 2001 relates to Stilwell's additional investment in
Janus and repurchases of Janus common stock by Janus, which resulted in
identified intangible assets and additional goodwill associated with the
Stilwell investment in Janus - see "Significant Developments" above. Investing
activities also include a $40.0 million cash inflow resulting from Stilwell's
disposition of 839,000 shares of DST common stock as noted above. Stilwell
reported net purchases of investments in advised funds of $11.0 and $7.0 million
during 2000 and 2001, respectively, compared to net sales in 1999 of $16.6
million.
Financing Cash Flows. During 2001, Stilwell borrowed $1,089.5 million in
the aggregate under the Convertible Notes and Senior Notes. All borrowings under
Stilwell and Janus' credit facilities were repaid within the year. For the year
ended December 31, 2000, the net activity with KCSI resulted in cash receipts
from KCSI of $6.4 million. For the year ended December 31, 1999, the net
activity with KCSI resulted in cash payments to KCSI of $89.3 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 in 2000 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 each successive year from 1999 through 2001 due
to higher net income on which distributions were based; and
o Proceeds from stock plans of $23.8 and $12.5 million in 2000 and 2001,
respectively.
See discussion under "Capital Structure - Capital Requirements" 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. See discussion above under "Results of Operations - Zero-Coupon
Convertible Debt Offering".
CAPITAL STRUCTURE
Capital Requirements. Capital requirements, when necessary, for Janus,
Berger, Nelson and other subsidiaries have been funded with cash flows from
operations and Stilwell's third party financing sources.
Throughout the period from 1999 to 2001, 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 expenditure levels in 2002 are expected to be relatively
consistent with 2001, which were significantly lower than in 2000 (due to the
extensive infrastructure efforts at Janus from 1998 to 2000).
41
Certain stock purchase agreements and restriction agreements with minority
stockholders contain provisions whereby upon the occurrence of a Change in
Ownership (as defined in such agreements) of KCSI or Stilwell (depending on the
year of grant), Stilwell may be required to purchase such holders' Janus stock.
The fair market value price for such purchase or sale would be equal to fifteen
times the net after-tax earnings over the period indicated in the relevant
agreement, in some circumstances as determined by Janus' Stock Option Committee
or as determined by an independent appraisal. If Stilwell had been required to
purchase the holders' Janus common stock after a Change in Ownership as of
December 31, 2001, the purchase price would have been approximately $93 million.
The Company has a working capital deficit at December 31, 2001 of $402.8
million. As discussed in "Significant Developments" above, the Company issued
its Convertible Notes in April 2001 and used approximately $610 million of the
proceeds to fund the acquisition of Janus shares from Mr. Bailey. The
Convertible Notes are classified as current liabilities in the Consolidated
Balance Sheet as of December 31, 2001 because the holders may put the
Convertible Notes to Stilwell on April 30, 2002. Based on the recent trading
price of the Convertible Notes, Stilwell's volatility and current interest
rates, management believes it is likely that the Convertible Notes will be put
to the Company. The Company is currently evaluating alternatives to improve the
terms of the convertible notes to provide incentive for the holders to retain
them and to refinance the Convertible Notes in the event that the holders
exercise their put rights to Stilwell.
As of December 31, 2001, Stilwell had a number of resources available were
the holders of the Convertible Notes to exercise the put rights to Stilwell.
Stilwell has cash balances at the holding company level of approximately $120
million. Stilwell has the right to its proportional share (approximately $305
million) of dividends from Janus based on 2001 earnings. The Company also has
available $350 million at the holding company and $250 million at Janus through
its credit facilities. Because of certain financial covenants contained in the
credit facilities, however, maximum utilization of the Company's credit
facilities may be restricted. In addition, the covenants may also limit the
amount of other indebtedness incurred by Stilwell. In addition, the market value
of Stilwell's 33% investment in DST was more than $1.9 billion, using DST's
closing price on the New York Stock Exchange on December 31, 2001.
Purchases of class B shares in the Janus World Funds require a commission
to be advanced by Janus. Funding of the commissions during the years ended
December 31, 1999, 2000 and 2001 totaled $29.5, $68.7 and $6.3 million,
respectively. Management expects that such class B share purchases will be more
consistent with the level experienced in 2001 as international investors
continue to focus on alternative share classes.
Stilwell may require additional capital sooner than anticipated to the
extent that Stilwell's operations do not progress as anticipated. Stilwell
intends to obtain any additional financing for general corporate purposes from
capital market or other third party financing sources.
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.
The Facilities contain a number of covenants that could restrict maximum
utilization of the Facilities, or the ability of the Company to issue securities
that are currently available for issuance under the Company's Registration
Statement referred to under "Capital" below, including various financial
covenants such as a specified financing leverage, minimum net worth, minimum
unencumbered liquidity, a fixed charge coverage and minimum average assets under
management. Stilwell and Janus were in compliance with the various provisions of
the Facilities, including the financial covenants, as of December 31, 2001.
Neither Janus nor Stilwell had borrowings under the Facilities at December 31,
2001.
42
Pursuant to a provision included in the Facilities, if Stilwell's average
assets under management over a rolling three-month period were to fall below
$180 billion, but remain above $170 billion, the aggregate amount available
under the Facilities would be reduced to $500 million. If the average assets
under management were to fall below $170 billion, the Facilities would be
reduced to $400 million. If the average assets under management were to fall
below $150 billion, the Facilities would be reduced to $300 million. Further,
Stilwell would be required to repay portions of amounts borrowed under the
credit facilities in excess of the reduced credit availability amount.
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.
Capital. Prior to 2001, Stilwell maintained minimal average debt balances,
resulting in a low consolidated debt ratio (total debt as a percent of total
debt plus equity). In connection with the additional investments in Janus during
2001, Stilwell incurred indebtedness of $1.1 billion through the issuance of the
Senior Notes and the Convertible Notes. Accordingly, as of December 31, 2001,
Stilwell's consolidated debt ratio was approximately 44.5%.
Management anticipates that the debt ratio in 2002 will decline slightly
as a result of 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 and any acquisitions using debt. Note
that unrealized gains and losses 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.
On September 18, 2001, the Company filed with the SEC a Shelf
Registration Statement ("Registration Statement") for the issuance from time to
time of up to $800 million in aggregate issue price of the Company's common
stock, preferred stock and debt securities. The SEC declared the Registration
Statement effective on September 24, 2001. On November 6, 2001, the Company
issued $400 million of 7% senior notes due November 1, 2006 under the
Registration Statement. The proceeds from the offering - approximately $396.8
million - were used to fund a portion of the 609,950 shares of Janus common
stock purchased from Mr. Bailey and one other minority stockholder. The Company
has $400 million of securities available for issuance under the Registration
Statement (subject to the covenant limitations pursuant to the credit
facilities).
Stilwell's commitments under existing indebtedness, capital lease
obligations and operating leases as of December 31, 2001 were as follows (in
millions):
December 31,
---------------------------------------------------------------------------
Total Current 1 to 3 Years 4 to 5 Years After 5 Years
----- -------- ------------- ------------- -------------
Indebtedness:
Convertible Notes.... $ 694.7 $ 694.7 $ - $ - $ -
Senior Notes......... 399.5 399.5
---------- --------- ----------- ---------- -----------
Sub-total....... 1,094.2 694.7 - 399.5 -
Operating leases........ 101.5 22.1 32.5 22.0 24.9
---------- ---------- ----------- ---------- -----------
Total................ $ 1,195.7 $ 716.8 $ 32.5 $ 421.5 $ 24.9
========== ========== =========== ========== ===========
43
Stilwell does not generally utilize off-balance sheet arrangements,
transactions or other relationships and has no such arrangements, transactions
or other relationships as of December 31, 2001.
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 generally used to
help mitigate Stilwell's floating-rate debt exposure to fluctuations in interest
rates. If all indebtedness under the Facilities has been paid, Stilwell
generally invests cash in a money market or similar account.
The Company believes its operating cash flows and available financing
resources are sufficient to fund working capital and other capital requirements
during 2002, including the potential requirement to repurchase the Convertible
Notes. Cash flows from operations are expected to be positive during 2002 from
positive operating income, which has historically resulted in favorable
operating cash flows. 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"). Historically, Janus has distributed at
least 90% of its net income to its stockholders each year. Stilwell uses its
portion of dividends from Janus (and other subsidiaries) in accordance with
strategic plans, which plans have included, among others, repayment of
indebtedness, funding in connection with Stilwell's common stock repurchase
program, and acquisitions and investments in affiliates. Prior to December 31,
2001, the Janus Board declared a dividend of approximately $329 million, of
which approximately $23.5 million was due to minority stockholders.
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 2002.
OTHER ITEMS
Janus Capital Corporation. The Janus Stock Purchase Agreement - prior to
the sixth amendment entered into on November 8, 2001 - provided that so long as
Mr. Bailey was a holder of at least 5% of the common stock of Janus and
continued 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.
As discussed in "Significant Developments" above, in connection with Mr.
Bailey's disposition of his final 600,000 shares of Janus common stock on
November 9, 2001, Mr. Bailey's rights under the Janus Stock Purchase Agreement
would have expired, but Stilwell agreed with Mr. Bailey to extend those rights
through March 28, 2002 (which was recently extended to April 2, 2002). The
extended terms included the provision that Stilwell would 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 extended 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.
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' 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
44
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 98% 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. Further, after
April 2, 2002, Mr. Bailey's rights under the Janus Stock Purchase Agreement
expire.
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 responsible for the
success of Janus. The consequences of any removal of Mr. Bailey would depend
upon the timing and circumstances of such removal. 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' prominence; (ii) Janus' compensation
scale generally has been at the upper end of its peer group; (iii) some or all
of the shares recently repurchased from Mr. Bailey are available for sale or
grants to other employees and a program has been announced to provide Janus
equity to key employees (see "Recent Developments" above); and (iv) many key
Janus employees must continue to be employed at Janus to become vested in
currently unvested restricted stock. In addition, notwithstanding any removal of
Mr. Bailey, Stilwell would expect to continue its practice of encouraging
autonomy by its subsidiaries so that management of Janus would continue to have
responsibility for Janus' 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.
Certain purchase and restriction agreements with Janus 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. 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.
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 81% owned subsidiary operating in the
United Kingdom, and Janus' investment in Janus International (UK) Limited
("Janus UK") 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 Janus UK'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, 2000 and 2001, the cumulative
translation adjustment relating to these investments was $3.9 and $5.4 million,
respectively.
45
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,
2001, 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 (loss) related to these investments totaled $63.8, $1.9 and
($40.6) million ($39.3, $1.3 and ($23.9) million, net of deferred income taxes)
for the years ended December 31, 1999, 2000 and 2001, respectively.
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.
Regulatory Influence. Stilwell and its subsidiaries operate in the
securities industry, which is subject to extensive federal and state laws and
regulations. These laws and regulations are primarily intended to benefit or
protect the shareowners of the clients of Stilwell's subsidiaries or the clients
themselves. These laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict the
conduct of the business Stilwell's subsidiaries for failure to comply with the
laws and regulations. Possible consequences or sanctions for such failure to
comply include the voiding of investment advisory and sub-advisory agreements,
the suspension of individual employees, limitations on engaging in certain lines
of business for specified periods of time, revocation of registrations, censures
and fines.
The SEC is the federal agency responsible for administering the federal
securities law. Certain subsidiaries of the holding company are registered
investment advisors under the Investment Advisers Act of 1940 (the "Investment
Advisers Act") and, as such, are supervised by the SEC and applicable state
securities agencies. The Investment Advisers Act requires registered investment
advisors to comply with numerous obligations, including record-keeping
requirements, operational procedures and disclosure obligations.
Many of Stilwell's subsidiaries act as advisors or sub-advisors to mutual
funds, which are registered with the SEC pursuant to the 1940 Act. As an advisor
or sub-advisor to a registered investment company, each of these subsidiaries
must comply with the requirements of the 1940 Act and related regulations. The
Investment Advisers Act and the 1940 Act govern the advisor and sub-advisor
agreements discussed in Part I Item 1, Business, "Risk Factors - Stilwell's
business is dependent on investment advisory agreements that are subject to
termination or non-renewal." In addition, the advisor or sub-advisor to a
registered investment company generally has obligations with respect to the
qualification of the registered investment company under the Internal Revenue
Code of 1986, as amended (the "Code").
In general, broker-dealers are required to register with the SEC under the
Securities Exchange Act of 1934. Janus Distributors and Berger Distributors LLC
are registered broker-dealers with the SEC and member firms of the National
Association of Securities Dealers (the "NASD"), the securities industry's
self-regulatory organization. The NASD has established conduct rules for all
securities transactions among broker-dealers and private investors, trading
rules for the over-the-counter markets and operational rules for its member
firms. The NASD conducts examinations of member firms, investigates possible
violations of the federal securities laws and its own rules, and
46
conducts disciplinary proceedings involving member firms and associated
individuals. The NASD administers qualification testing for all securities
principals and registered representatives for its own account and on behalf of
the state securities authorities.
As registered broker-dealers, members of the NYSE and members of the NASD,
certain Stilwell subsidiaries are subject to net capital requirements, including
those of various federal and state regulatory agencies. Stilwell's subsidiaries'
net capital has consistently met or exceeded all minimum requirements. Many of
the non-U.S. securities exchanges and regulatory authorities also may have
imposed rules relating to capital requirements applicable to Stilwell's foreign
subsidiaries. These rules, which specify minimum capital requirements, are
designed to measure general financial integrity and liquidity and require that
at least a minimum amount of assets be kept in relatively liquid form.
Stilwell's broker-dealer subsidiaries are also subject to regulation under
state law in some states. The federal securities laws prohibit states from
imposing substantive requirements on broker-dealers that exceed those under
federal law. This does not preclude the states from imposing registration
requirements on broker-dealers that operate within their jurisdiction or from
sanctioning these broker-dealers and their employees for engaging in misconduct.
Stilwell and certain of Stilwell's subsidiaries are also subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"), and related
regulations, to the extent they are "fiduciaries" under ERISA with respect to
some of their clients. ERISA and related provisions of the Code impose duties on
persons who are fiduciaries under ERISA, and prohibit some transactions
involving the assets of each ERISA plan which is a client of a Stilwell
subsidiary, as well as some transactions by the fiduciaries (and several other
related parties) to such plans.
Certain Stilwell subsidiaries, including Nelson and Janus UK, are
authorized to conduct investment business in the United Kingdom pursuant to the
Financial Services and Markets Act 2000 (the "FSMA"). Their investment
management advisory activities are regulated by the Financial Services Authority
("FSA"), which in addition to broad supervisory powers, may discipline the
businesses its regulates. Disciplinary powers include the power to temporarily
or permanently revoke the authorization to carry on regulated business following
a breach of FSMA and/or regulatory rules, the suspension of registered
employees, censures and fines for both regulated businesses and their registered
employees.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Stilwell's consolidated financial statements and accompanying notes have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis. 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 periods.
Stilwell continually evaluates the accounting policies and estimates it
uses to prepare the consolidated financial statements. In general, management's
estimates are based on historical experience, on information from third party
professionals and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.
47
Stilwell believes its critical accounting policies and estimates include
the accounting for intangible assets and goodwill, value determination for
compensatory fixed accounting stock plans at Janus, accounting for income taxes
and consolidation.
Accounting for Intangible Assets and Goodwill. As a result of Stilwell's
investment of approximately $1.6 billion in Janus during 2001, intangible assets
and goodwill grew significantly. Two issues arise with respect to these assets
that require significant management estimates and judgment: a) the valuation in
connection with the initial purchase price allocation and b) the ongoing
evaluation for impairment.
In connection with these investments, a valuation was completed to
determine a reasonable purchase price allocation. Upon completion of the
allocation process, approximately 80% was assigned to various identified
intangible assets and the remainder was goodwill. Of the identified intangible
assets, less than 1% of the assets acquired were determined to be amortizable
under FAS 141 and 142. The purchase price allocation process requires management
estimates and judgment as to expectations for the various products, distribution
channels and business strategies. For example, certain growth rates were assumed
for different product types. Additionally, different operating margins for each
type of product offering were included in the estimation. If actual growth rates
or operating margins, among other assumptions, differed from the estimates and
judgments used in the purchase price allocation, the amounts recorded in the
financial statements could result in a possible impairment of the intangible
assets and goodwill or require an acceleration in amortization expense.
In addition, FAS 142 requires that goodwill be tested annually using a
two-step process. The first step is to identify a potential impairment. The
second step measures the amount of the impairment loss, if any. Intangible
assets with indefinite lives will be tested for impairment using a one-step
process that compares the fair value to the carrying amount of the asset.
Because 2002 is the initial year for adoption of FAS 142 (for acquisitions on or
after July 1, 2001), there are certain transition provisions that require
analysis of existing goodwill and intangible assets within the first six months
of the year. The Company does not expect these transition impairment tests will
have a material effect on the Company's results of operations and financial
position.
When Stilwell completes its ongoing review of the recoverability of
intangible assets and goodwill, factors that are considered important to
determining whether an impairment might exist include significant continued
under-performance compared to peers, significant changes in the underlying
business and products of the subsidiary, material and ongoing negative industry
or economic trends, or other factors specific to each asset or subsidiary being
evaluated. Because of the significance of the identified intangible assets and
goodwill to Stilwell's consolidated balance sheet, the annual impairment
analysis will be critical. Any changes in key assumptions about the business and
its prospects, or changes in market conditions or other externalities, could
result in an impairment charge and such a charge could have a material adverse
effect on the Company's financial condition and results of operations.
Value Determination for Compensatory Fixed Accounting Stock Plans at Janus.
Since 1997, Janus has granted restricted shares of its common stock to certain
Janus employees pursuant to restricted stock agreements. The shares vest after
seven or ten years, depending on the grant, 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 fair market
value of the restricted stock under the grant was valued using an estimated fair
value as determined by a multiple of fifteen times Janus' rolling four quarters
of net income. Pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), Janus has accounted for
these grants of restricted stock as compensatory fixed accounting plans because
the number of shares and the price per share are known at the date of grant.
Expenses recorded by Janus resulting from the amortization of these restricted
stock grants and associated 83(b) compensation expense totaled $13.5, $35.4 and
$37.7 million in 1999, 2000 and 2001, respectively. In the event that the fair
value estimated upon date of grant for each of the restricted stock awards was
incorrect, the amount of amortization being recorded each year would be
incorrect, therefore affecting the reported net income each year.
48
In addition, as discussed in "Recent Developments" above, Stilwell
announced its intention to convert the Janus organization to a limited liability
company and to issue approximately 6.2% of Janus equity to key Janus investment
and operational employees. In connection with the grants of shares (profits
interests) of the limited liability company, Janus and Stilwell will determine a
value for Janus. Similar to the restricted stock grants in prior years,
estimation of the value of Janus requires management judgment and evaluation.
Stilwell expects to account for the future grants of limited liability
profits interests using compensatory fixed plan accounting as described above.
However, there is a current EITF discussion regarding accounting treatment of
profits interests in a limited liability company structure. The discussion is
focused on whether profits interests should be recorded under fixed plan
accounting similar to restricted stock grants, on a variable basis such as stock
appreciation rights, or whether accounting should be based on individual facts
and circumstances.
Accounting for income taxes. Significant management judgment is required in
developing the Company's provision for income taxes, including the determination
of deferred tax assets and liabilities and any valuation allowances that might
be required against the deferred tax assets. Stilwell has not recorded a
valuation allowance on the deferred tax assets as of December 31, 2001 based on
management's belief that operating income will, more likely than not, be
sufficient to realize the benefit of these assets over time. In the event that
actual results differ from these estimates or if Stilwell's historical trend of
positive operating income changes, Stilwell may be required to record a
valuation allowance on deferred tax assets, which could have a material adverse
effect on Stilwell's consolidated financial condition and results of operations.
In addition, 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, 2001, the cumulative amount of unremitted earnings included in retained
earnings that qualify for this deduction aggregated $311.0 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 proceeds from the stock sale exceeded Stilwell's income tax basis.
Consolidation. Stilwell's financial statements are prepared on a
consolidated basis to include all majority-owned subsidiaries. Investments in
which Stilwell's ownership is less than 50% and where Stilwell does not exert
significant influence are accounted for under the equity method of accounting.
With respect to majority-owned subsidiaries, Issue 96-16 of the EITF addresses
those instances where substantive "participating" minority rights provide a
minority stockholder the right to effectively control significant decisions in
the ordinary course of business. In those instances, EITF 96-16 would require
equity accounting treatment for the majority-owned subsidiary. Stilwell does not
believe Mr. Bailey's rights under the Janus Stock Purchase Agreement are
"substantive," within the meaning EITF 96-16, because Stilwell can terminate
those rights at any time by removing Mr. Bailey as an officer of Janus. In
addition, the management rights held by Mr. Bailey terminate on April 2, 2002 as
a result of his disposition of his ownership interest in Janus during 2001.
In the event that Mr. Bailey's rights were considered to be substantive
"participating" rights, Stilwell would be required to report Janus as an
unconsolidated majority-owned subsidiary under the equity method of accounting.
While each of the asset, liability, revenue and expense components of Janus
would be eliminated from Stilwell's consolidated results, the effect on the
Company's net income would be unchanged as the net income of Janus would be
reported as a single line item under equity in net earnings of unconsolidated
majority-owned subsidiary. Similarly, the net assets of Janus would be reported
as a single investment in the consolidated balance sheet.
49
NEW ACCOUNTING PRONOUNCEMENTS
Intangibles and Goodwill. In July 2001, the FASB issued FAS 141 and FAS
142. FAS 141 requires the purchase method of accounting for all acquisitions.
Under FAS 142, goodwill and intangible assets with indefinite lives will no
longer be amortized. Instead, such goodwill and other intangible assets will be
tested annually for impairment. As noted above, FAS 142 requires that goodwill
be tested annually for impairment using a two-step process and that intangible
assets be tested for impairment using a one-step process. In addition,
transition requirements under FAS 142 require the initial impairment analysis to
be completed by June 30, 2002. Stilwell adopted the provisions of FAS 141 and
FAS 142 for acquisitions occurring on or after July 1, 2001. With respect to
acquisitions occurring prior to July 1, 2001, FAS 141 and FAS 142 will be
adopted on January 1, 2002.
The Company does not expect the transition impairment tests to have a
material effect on the Company's earnings and financial position. The Company
expects annual amortization expense after adoption of FAS 142 to total less than
$3 million per year.
Accounting for the Impairment of Long-Lived Assets. On October 3, 2001, the
FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 supercedes
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"). FAS 144 applies to all long-lived assets (including discontinued
operations) and consequently supercedes Accounting Principles Board Opinion No.
30 "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business." FAS 144 applies a single accounting model for long-lived
assets, as well as addresses the principal implementation issues. FAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. Additionally, FAS
144 expands the scope of discontinued operations. FAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, its provisions are to be applied prospectively. The Company does
not expect the adoption of FAS 144 to have a material impact on its results of
operations or financial position.
Derivative Instruments. In June 1998, the FASB issued FAS 133, which
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. 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.
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. As of December
31, 2001, the Company had no outstanding foreign currency hedges. As discussed
in "Recent Developments" above, the Company entered into an interest rate
exchange agreement to hedge its interest rate exposure with respect to the $400
million Senior Notes.
50
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
At December 31, 1999, 2000 and 2001, Stilwell had no indebtedness
outstanding under any line of credit. Prior to 2002, Stilwell's interest
sensitive liabilities did not include any long-term floating-rate debt
obligations. However, in February 2002, Stilwell entered into a receive-fixed,
pay-float interest rate exchange agreement with a major investment bank with
respect to Stilwell's $400 million Senior Notes - see information in Part II
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operation, "Recent Developments." The effect of this agreement is to increase
the Company's exposure to fluctuations in interest rates.
Foreign Exchange Sensitivity
Stilwell owns 81% of Nelson, a United Kingdom based financial services
corporation and Janus indirectly owns 100% of Janus UK and Janus Asia. With
respect to these investments, matters arise as 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 Janus UK each have earnings of (pound)1,000 and using
ownership interests at December 31, 2001 (the approach is the same when the Hong
Kong dollar is analyzed). The British pound is the functional currency.
Nelson Janus UK
------ --------
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 Janus UK.......... 98.0%
---------- ---------
81.0%
Assumed Earnings.............................................. $ 1,620 $ 1,960
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 Janus UK.......... 98.0%
---------- ---------
81.0%
Assumed Earnings.............................................. $ 1,473 $ 1,782
---------- ---------
Effect of 10% increase in Exchange Rate....................... $ (147) $ (178)
========== =========
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 and Janus UK
as the market and exchange rates fluctuate.
51
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 price 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.
Convertible Notes. On April 30, 2001, Stilwell completed an offering of
approximately $931 million principal amount at maturity of zero-coupon
convertible senior notes due April 30, 2031 (the "Convertible Notes"). The
Convertible Notes were offered only to qualified institutional buyers at an
initial offering price of $741.37 per $1,000 principal amount at maturity. The
issue price represents a yield to maturity of 1% per year. Additionally, to the
extent that the average market price of the Convertible Notes exceeds certain
thresholds, Stilwell could be required to pay contingent interest at a rate of
the greater of Stilwell's regular quarterly cash dividend or 0.0625% of the
average market price of the Convertible Notes over a specified time period.
Under certain circumstances, the market price of the Convertible Notes may be
determined based on the average sale price of Stilwell's common stock during a
specified period.
52
Each $1,000 principal amount at maturity of the Convertible Notes will
initially be convertible into 17.1544 shares of common stock upon the occurrence
of any of the following events: i) if the closing prices of Stilwell's shares of
common stock on the New York Stock Exchange exceed specified levels; ii) if the
credit rating assigned to the Convertible Notes by either Moody's Investor
Services or Standard & Poor's is below a specified level; iii) if Stilwell calls
the Convertible Notes for redemption; or iv) in the event that Stilwell takes
certain corporate actions, such as (but not limited to) declaration of an
extraordinary dividend. Stilwell may redeem the Convertible Notes for cash on or
after April 30, 2006 at their accreted value. Stilwell may be required to
repurchase the Convertible Notes at the accreted value thereof, at the option of
the holders, on April 30, 2002, 2004, 2006, 2011, 2016, 2021 and 2026. Stilwell
may choose to pay the purchase price for such repurchases in cash or shares of
Stilwell common stock. Stilwell may also be required to repurchase the
Convertible Notes, at the option of the holders, in cash, upon the occurrence of
certain specified change of control events occurring on or prior to April 30,
2006.
The Convertible Notes were not entered into by the Company for trading
purposes. Because the price of Stilwell's common stock may trigger a contingent
cash interest payment and/or may cause the Convertible Notes to be convertible
into shares of Stilwell common stock, the Company is subject to equity price
market risk through price fluctuations on the New York Stock Exchange.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
----
Management Report on Responsibility for Financial Reporting........... 55
Financial Statements:
Report of Independent Accountants................................ 55
Consolidated Balance Sheets at December 31, 2000 and 2001........ 56
Consolidated Statements of Income for the three years ended
December 31, 2001.............................................. 57
Consolidated Statements of Cash Flows for the three
years ended December 31, 2001.................................. 58
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 2001............. 59
Notes to Consolidated Financial Statements....................... 60
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, 1999, 2000 and 2001, which are included in the
DST Systems, Inc. Annual Report on Form 10-K for the year ended December
31, 2001 (Commission File No. 1-14036) have been incorporated by reference
in this Form 10-K as Exhibit 99.1.
54
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, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 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 12, 2002
55
STILWELL FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Data)
December 31,
--------------------------
2000 2001
------ ----
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 364.3 $ 236.7
Accounts receivable.................................... 194.4 128.5
Investments in advised funds........................... 30.2 31.0
Other current assets................................... 52.2 81.9
--------- ---------
Total current assets.............................. 641.1 478.1
Investments ................................................ 511.1 508.7
Property and equipment, net................................. 137.7 92.9
Intangibles and other assets, net............................ 117.0 1,273.3
Goodwill, net .............................................. 174.1 1,038.6
--------- ---------
Total assets................................. $ 1,581.0 $ 3,391.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................... $ - $ 694.7
Accounts and wages payable.............................. 27.3 42.5
Accrued compensation and benefits...................... 98.0 56.3
Accrued liability to third party administrators........ 33.2 18.7
Other accrued liabilities.............................. 37.6 68.7
--------- ---------
Total current liabilities......................... 196.1 880.9
Other liabilities:
Long-term debt.......................................... 399.5
Deferred income taxes.................................. 211.1 679.9
Other liabilities...................................... 42.7 44.7
--------- ---------
Total liabilities............................ 449.9 2,005.0
--------- ---------
Commitments and contingencies (Notes 4, 7, 8, 10, 11, 13, 16)
Minority interest in consolidated subsidiaries.............. 73.3 23.3
--------- ---------
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; 218,909,153 and 222,101,350 shares
outstanding, respectively).............................. 2.2 2.2
Additional paid-in capital..................................
Retained earnings 952.3 1,285.3
Accumulated other comprehensive income...................... 103.3 75.8
--------- ---------
Total stockholders' equity........................ 1,057.8 1,363.3
--------- ---------
Total liabilities and stockholders' equity... $ 1,581.0 $ 3,391.6
========= =========
The accompanying notes are an integral part of these financial statements.
56
STILWELL FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions, Except Per Share Data)
For the year ended December 31,
--------------------------------------
1999 2000 2001
--------- --------- ------
Revenues:
Investment management fees......................... $ 992.8 $ 1,850.7 $ 1,275.2
Shareowner servicing fees.......................... 191.4 338.2 216.6
Other.............................................. 28.1 59.2 63.9
-------- -------- --------
Total......................................... 1,212.3 2,248.1 1,555.7
-------- -------- --------
Operating Expenses:
Compensation....................................... 316.5 490.5 319.6
Marketing and promotion............................ 71.5 103.5 90.3
Third party concession fees........................ 143.0 314.9 230.7
Depreciation and amortization...................... 35.4 81.2 130.6
Professional services.............................. 25.8 67.7 43.2
Other.............................................. 101.8 154.0 128.2
Severance, facility closing and other costs........ 82.7
-------- -------- --------
Total......................................... 694.0 1,211.8 1,025.3
-------- -------- --------
Operating Income........................................ 518.3 1,036.3 530.4
Equity in earnings of unconsolidated affiliates......... 46.7 70.8 75.4
Interest expense - Parent............................... (5.9) (0.7)
Interest expense - third parties........................ (7.0) (34.8)
Gain on sale of DST common stock........................ 28.8
Gain on litigation settlement........................... 44.2
Gain on sale of Janus common stock...................... 15.1
Other, net.............................................. 27.4 43.7 20.2
-------- -------- --------
Income before taxes and minority interest.......... 586.5 1,202.4 620.0
Income tax provision.................................... 216.1 427.0 217.7
Minority interest in consolidated earnings.............. 57.3 111.7 100.0
-------- -------- --------
Net Income $ 313.1 $ 663.7 $ 302.3
======== ========= =========
Per Share Data (Notes 1 and 2):
Weighted average Common shares outstanding
(in thousands)..................................... 223,000 222,445 220,154
Basic Earnings per share............................. $ 1.40 $ 2.98 $ 1.37
Weighted average Diluted Common shares
outstanding (in thousands)......................... 223,000 225,423 224,424
Diluted Earnings per share........................... $ 1.38 $ 2.90 $ 1.31
The accompanying notes are an integral part of these financial statements.
57
STILWELL FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
For the year ended December 31,
------------------------------------
1999 2000 2001
------- ------ ----
CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities:
Net income....................................................... $ 313.1 $ 663.7 $ 302.3
Adjustments to net income:
Depreciation and amortization................................ 35.4 81.2 130.6
Deferred income taxes........................................ 11.8 17.8 5.6
Minority interest in consolidated earnings................... 57.3 111.7 100.0
Undistributed earnings of unconsolidated affiliates.......... (46.4) (70.8) (75.4)
Gain on sale of common stock of affiliates................... (15.1) (28.8)
Facility closing lease and equipment charges................. 51.9
Deferred commissions............................................ (29.5) (68.7) (6.3)
Changes in other assets.......................................... 2.2 (7.3) (30.6)
Changes in working capital items:
Accounts receivable.......................................... (79.1) (39.0) 65.7
Other current assets......................................... (1.0) (10.8) (15.7)
Accounts payable and accrued compensation payable............ 61.6 6.1 (83.6)
Other accrued liabilities.................................... 28.9 66.7 63.2
Other, net....................................................... 6.1 (4.2) 22.3
----------- ----------- -----------
Net operating............................................ 360.4 731.3 501.2
----------- ----------- -----------
Investing Activities:
Property acquisitions............................................ (50.5) (107.1) (34.3)
Investments in and loans with affiliates......................... (17.5) (110.6) (1,620.9)
Proceeds from disposal of investments............................ 6.9 40.0
Sale of investments in advised funds............................. 19.0 15.3 8.0
Purchase of investments in advised funds......................... (2.4) (26.3) (15.0)
Other, net....................................................... 4.0 2.2 6.0
----------- ----------- -----------
Net investing............................................ (47.4) (219.6) (1,616.2)
----------- ----------- -----------
Financing Activities:
Change in long-term debt - Parent................................ (16.6)
Proceeds from issuance of long-term debt......................... 1,314.5
Repayment of long-term debt - third parties...................... (125.0) (225.0)
Debt issue costs................................................. (19.5)
Common stock repurchased......................................... (323.3)
Proceeds from stock plans........................................ 23.8 12.5
Amounts treated as transfers from (dividends to) Parent, net..... (72.7) 6.4
Distributions to minority interest............................... (37.8) (53.4) (87.6)
Dividends paid to stockholders................................... (2.2) (8.8)
Other, net....................................................... (0.3) 2.2 1.3
----------- ----------- -----------
Net financing............................................ (127.4) (471.5) 987.4
----------- ----------- -----------
Cash and Cash Equivalents:
Net increase (decrease).......................................... 185.6 40.2 (127.6)
At beginning of year............................................. 138.5 324.1 364.3
----------- ----------- -----------
At end of year................................................... $ 324.1 $ 364.3 $ 236.7
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
58
STILWELL FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Millions)
Accumulated
Additional Net other Total
Common paid-in Investment Retained comprehensive stockholders'
stock capital by Parent earnings income equity
----- -------- --------- -------- ------- -------
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
Reclassification for gains
included in net income............. (4.4)
Foreign currency translation
adjustment......................... (0.9)
Comprehensive income 347.1
Amounts treated as transfers from
Parent, net........................ (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
Reclassification for gains
included in net income............. (5.8)
Foreign currency translation
adjustment......................... (1.1)
Comprehensive income 658.1
Amounts treated as dividends to
Parent, net........................ (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) -
Stock option and benefit plans....... 39.9 39.9
Common stock repurchased and
exchanged.......................... (144.5) (335.0)
(190.5)
Common stock dividends............... (4.4) (4.4)
------ ------- ---------- ------- ------ ---------
Balance at December 31, 2000 2.2 - - 952.3 103.3 1,057.8
Comprehensive income:
Net income...........................
302.3
Net unrealized loss on investments... (23.9)
Reclassification for gains
included in net income............. (1.6)
Foreign currency translation
adjustment......................... (2.0)
Comprehensive income 274.8
Stock option and benefit plans....... 74.8
74.8
Common stock repurchased and
exchanged.......................... (35.3)
(35.3)
Common stock dividends............... (8.8) (8.8)
------ ------- ---------- -------- -------- ---------
Balance at December 31, 2001 $ 2.2 $ - $ - $1,285.3 $ 75.8 $ 1,363.3
====== ======= ========== ======== ======== =========
The accompanying notes are an integral part of these financial statements.
59
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, 2001 include Janus Capital Corporation
("Janus"), an approximately 98% owned subsidiary; Stilwell Management, Inc.
("SMI"), a wholly-owned subsidiary; Berger Financial Group 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 81% 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 95% of assets under management at December 31, 2001 and
95% of revenues and 91% of the net income for the year ended December 31, 2001.
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 stating 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 in the consolidated balance sheet. 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). 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.
60
Nature of Operations. Stilwell's principal operations are the management
of its investments in financial services companies. A summary of Stilwell's
principal operations and investments is as follows:
Janus Capital Corporation and Berger Financial Group 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").
The revenues and operating income of Janus and Berger are derived primarily
by 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, output solutions and customer
management. 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, Australia and Asia. DST has a single class of common
stock that is publicly traded on the New York Stock Exchange and the Chicago
Stock Exchange.
The earnings of DST are dependent in part upon the 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).
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.
61
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.
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' cash and cash equivalents
(totaling $236.2 and $55.4 million at December 31, 2000 and 2001, 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. The cost of property retired, together with accumulated
depreciation thereon, is eliminated from the property accounts and the related
gains or losses are reflected in net income.
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. See Note 6.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 supercedes Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 144 applies to all
long-lived assets (including discontinued operations) and consequently
supercedes Accounting Principles Board Opinion No. 30 "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business." FAS
144 applies a single accounting model for long-lived assets, as well as
addresses the principal implementation issues of FAS 121. FAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, FAS 144 expands the
scope of discontinued operations. FAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally, its
provisions are to be applied prospectively. The Company does not expect the
adoption of FAS 144 to have a material impact on Stilwell's results of
operations or financial position.
62
Software Development and Maintenance. Purchased software is recorded at
cost and amortized over the estimated economic life. Computer software costs
incurred in the preliminary project stage, as well as training and maintenance
costs, are expensed as incurred. Direct and indirect costs associated with the
application development stage of internal use software are 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.
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
("12b-1 Plan") under the Investment Company Act of 1940 (the "1940 Act")
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 shares of Janus World Funds ("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, 2000 and 2001 were $29.5, $68.7 and $6.3
million, respectively, and associated amortization expense for the years then
ended totaled $8.1, $30.9 and $30.3 million, respectively.
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, discontinued 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.
Intangible Assets and Goodwill. Intangible assets and goodwill principally
represent the excess of cost over the fair value of net underlying assets of
acquired companies using purchase accounting. In July 2001, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("FAS 141") and Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142").
FAS 141 requires the purchase method of accounting for all acquisitions. Under
FAS 142, goodwill and intangible assets with indefinite lives will no longer be
amortized. Instead, such goodwill and other intangible assets will be tested
annually for impairment. Stilwell adopted the provisions of FAS 141 and FAS 142
for acquisitions occurring on or after July 1, 2001. With respect to
transactions occurring prior to July 1, 2001, FAS 141 and FAS 142 were adopted
on January 1, 2002.
FAS 142 also requires that goodwill be tested annually using a two-step
process. The first step is to identify a potential impairment. The second step
measures the amount of the impairment loss, if any. Intangible assets with
indefinite lives will be tested for impairment using a one-step process that
compares the fair value to the carrying amount of the asset. Because 2002 is the
initial year for adoption of FAS 142 (for acquisitions on or after July 1,
2001), there are certain transition provisions that require analysis of existing
goodwill and intangible assets within
63
the first six months of the year. The Company does not expect these transition
impairment tests will have a material effect on the Company's results of
operations and financial position.
Intangible assets and goodwill incurred prior to July 1, 2001 are amortized
over periods ranging from 15 to 40 years using the straight-line method.
Intangible assets recorded under FAS 141 and 142 that are subject to
amortization are amortized over a weighted average period of 7.4 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 ownership 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 Stilwell had previously
recognized gains, however, Stilwell will record the gains directly to its equity
and not include the gain in net income. 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). During 2001, Stilwell
recorded approximately $2.4 million in gains resulting directly from affiliated
investee transactions and $28.8 million in connection with the sale by Stilwell
of 839,000 shares of DST common stock (see Note 3).
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 4 and 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 quoted
market rates, if available, and 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"), as interpreted by Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). In October 1995, 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.
64
In March 2000, the FASB issued 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 non-compensatory
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.
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 and shares under the Employee Stock Purchase
Plan ("ESPP") represent the only differences between the weighted average shares
used for the basic earnings per share computation compared to the diluted
earnings per share computation. The only adjustments that currently affect the
numerator of the Company's diluted earnings per share computations include
potentially dilutive securities at subsidiaries and affiliates.
For the year ended December 31,
-------------------------------
1999 2000 2001
---- ---- ----
(dollars in millions, except per share
amounts)
Net income............................ $ 313.1 $ 663.7 $ 302.3
Dilutive securities at
subsidiaries and affiliates....... (4.8) (10.6) (8.8)
----------- ----------- -----------
Net income for dilutive computation... $ 308.3 $ 653.1 $ 293.5
----------- ----------- -----------
Weighted average Common shares
outstanding........................ 222,999,786 222,445,353 220,153,630
Incremental shares from assumed
conversion of stock
options and ESPP shares. - 2,977,601 4,270,375
----------- ----------- -----------
Weighted average Dilutive
Common shares outstanding.......... 222,999,786 225,422,954 224,424,005
----------- ----------- -----------
Basic Earnings per Common share....... $ 1.40 $ 2.98 $ 1.37
=========== =========== ===========
Diluted Earnings per Common share..... $ 1.38 $ 2.90 $ 1.31
=========== =========== ===========
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 year ended December 31, 1999.
For the years ended December 31, 2000 and 2001, the weighted average of options
to purchase 84,079 and 1,253,948 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.
Diluted earnings per share exclude 15,965,754 shares of common stock
reserved for issuance upon conversion of the zero-coupon convertible notes due
2031 (see Note 7).
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.
65
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. As set
forth in the table below, Stilwell issued shares of its common stock in
connection with stock option and benefit plans during 2000 and 2001, and
repurchased shares during 2000 under the $1 billion stock repurchase program
authorized by the Stilwell Board in July 2000 (see Note 4). 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.
Common shares Treasury Common shares
issued shares outstanding
------------ ---------- -----------
Shares immediately after Spin-off 222,999,786 222,999,786
New issuances.......................... 1,790,864 1,790,864
Repurchases............................ (7,574,021) (7,574,021)
Issuances from Treasury................ 1,692,524 1,692,524
------------ ----------- ------------
December 31, 2000 224,790,650 (5,881,497) 218,909,153
Repurchases............................ (1,817,724) (1,817,724)
Issuances from Treasury................ 5,009,921 5,009,921
------------ ----------- ------------
December 31, 2001 224,790,650 (2,689,300) 222,101,350
============ =========== ============
Comprehensive Income. 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 totaled $63.8 and $1.9 million ($39.3 and $1.3 million, net of
deferred income taxes) for the years ended December 31, 1999 and 2000,
respectively. The unrealized loss related to these investments was $40.6 million
($23.9 million, net of deferred income taxes) for the year ended December 31,
2001.
In connection with Stilwell's investment in Nelson and Janus' investment in
Janus International (UK) Limited ("Janus UK") 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 Janus UK'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, 2000 and 2001, the cumulative
translation adjustment relating to these investments was $3.9 and $5.4 million,
respectively.
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 $20.1 million in 1999 and approximately $12.1
million for the period up to and including July 12, 2000.
66
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 resulted from the
timing of cash requirements throughout each year, primarily with respect to
investing activities. Amounts treated as net dividends to KCSI generally
reflected 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.
Statement of Financial Accounting Standards No. 131. Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131") establishes standards for the manner in which
public business enterprises report information about operating segments in
annual financial statements. 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,
as well as any identified intangible assets and goodwill resulting from the
acquisition of subsidiaries and affiliates directly by Stilwell, are aggregated
as a separate segment. 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. However, see Note 16 with respect to an
interest rate exchange agreement entered into by Stilwell to hedge its interest
rate exposure under its $400 million Senior Notes (see Note 7 below). 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 with respect to discussion of Janus).
67
NOTE 3 - INVESTMENT IN DST SYSTEMS, INC.
Summarized Financial Information. Stilwell's investment in DST, together
with certain condensed DST financial information, is summarized as follows.
December 31,
--------------------------------------
1999 2000 2001
---- ---- ----
(in millions)
Percentage ownership.................................. 32.1% 32.5% 33.0%
Carrying value (excluding goodwill - see Note 6)...... $ 470.2 $ 509.3 $ 486.1
Equity in DST net assets.............................. 470.2 509.3 486.1
Fair market value (a)................................. 1,547.7 2,717.7 1,980.0
Financial Condition:
Current assets................................... $ 464.5 $ 590.7 $ 604.8
Non-current assets............................... 1,861.8 1,961.7 2,099.2
---------- ----------- ----------
Total assets................................ $ 2,326.3 $ 2,552.4 $ 2,704.0
========== =========== ==========
Current liabilities.............................. $ 285.8 $ 356.2 $ 471.4
Non-current liabilities.......................... 576.9 630.4 760.2
Stockholders' equity............................. 1,463.6 1,565.8 1,472.4
---------- ----------- ----------
Total liabilities and stockholders' equity.. $ 2,326.3 $ 2,552.4 $ 2,704.0
========== =========== ==========
For the year ended December 31,
--------------------------------------------
1999 2000 (b) 2001 (c)
---- -------- --------
(in millions)
Operating Results:
Revenues......................................... $ 1,227.5 $ 1,362.1 $ 1,660.0
Costs and expenses............................... 1,027.8 1,097.5 1,366.5
Net income....................................... 138.1 215.8 228.2
(a) Based upon DST's closing price on the New York Stock Exchange.
(b) 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.
(c) Net income includes $27.0 million (after-tax) in certain net non-recurring
items: 1) a gain on the sale of DST's portfolio accounting business; 2) a
state tax refund; 3) gains on the sale of marketable securities; 4) charges
related to software and intangible asset impairments, as well as to joint
venture lease abandonment costs.
In December 2001, Stilwell sold 839,000 shares of DST common stock to DST
for approximately $40.0 million based on the then-current market price of DST
common stock as reported on the New York Stock Exchange. The proceeds from the
transaction were used in connection with the formation of a captive insurance
company. The captive insurance company was formed to provide the opportunity for
cost efficiencies related to insurance coverage for Stilwell and its
subsidiaries. Stilwell recorded a gain of $28.8 million ($15.9 million after
consideration of income taxes).
Stilwell did not receive dividends from DST during 1999, 2000 or 2001.
68
NOTE 4 - ACQUISITIONS, DISPOSITIONS AND SIGNIFICANT TRANSACTIONS
Stilwell's Additional Investment in Janus. During the year ended December
31, 2001, Stilwell completed several transactions that increased Stilwell's
ownership interest in Janus to approximately 98%. The transactions are
summarized in the table and discussions below:
Month of Acquisition Number of Shares Purchase Price
-------------------- ---------------- --------------
(in millions)
March and April........... 202,042 $ 203.0
May....................... 600,000 603.0
September................. 138,897 139.6
November.................. 609,950 613.0
----------- ------------
Total purchased........ 1,550,889 $ 1,558.6
=========== ============
Acquisitions of Janus Common Stock Prior to July 1, 2001. In March and
April of 2001, Stilwell acquired 202,042 shares of Janus common stock from
several employees and other minority stockholders. Stilwell purchased the shares
through the exercise of put rights by the various minority stockholders. The
shares cost approximately $203 million, which was funded through cash and
borrowings under the Company's credit facilities. In connection with the
transactions, amounts owed to Stilwell by certain of the selling minority
stockholders were repaid.
On May 1, 2001, Stilwell acquired 600,000 shares of Janus common stock
from Thomas H. Bailey, Janus' president, chairman and chief executive officer,
pursuant to the exercise of put rights by Mr. Bailey under the Janus Stock
Purchase Agreement. The purchase price of the shares totaled $603 million. In
addition, Stilwell paid to Mr. Bailey approximately $7 million representing
interest expense that began to accrue on the unpaid purchase price 30 days after
Stilwell received notice of Mr. Bailey's decision to exercise his put right.
Stilwell funded the purchase price and associated interest with proceeds
received from the issuance of the Convertible Notes (as defined in Note 7).
Stilwell accounted for these transactions using the purchase method of
accounting. The purchase price was in excess of the fair value of the net
tangible assets acquired and this excess was recorded as identified intangible
assets and goodwill. The table below summarizes the purchase accounting (in
millions):
March and
April 2001 May 2001 Total
---------- -------- -----
Net tangible assets acquired........... $ 1.9 $ 8.1 $ 10.0
Identified intangible assets -
subject to amortization (1)........ 157.9 448.1 606.0
Identified intangible assets -
not subject to amortization (2).... - - -
Goodwill (3)........................... 43.2 146.8 190.0
Goodwill - deferred income tax (4)..... 60.4 171.4 231.8
---------- -------- ----------
Total............................. $ 263.4 $ 774.4 $ 1,037.8
========== ======== ==========
(1) These amounts represent customer relationships through contracts with
private and separate accounts, marketing identified intangibles (e.g.,
brand name, trademark), advisory contracts with the retail mutual
funds and third party advisory and distribution relationships. These
amounts were amortized over a weighted average period of 20 years. See
discussion below with respect to amortization for fiscal years
beginning on January 1, 2002.
(2) As the purchases occurred prior to July 1, 2001, all identified
intangible assets were required to be amortized. See discussion below
with respect to amortization for fiscal years beginning January 1,
2002.
69
(3) This amount represents goodwill resulting from the excess of purchase
price over the fair value of net tangible and intangible assets. This
amount was amortized over a weighted average period of 20 years. See
discussion below with respect to amortization for fiscal years
beginning on January 1, 2002.
(4) This amount represents goodwill associated with deferred income taxes
recorded for identifiable intangible assets based on the difference
between the book and tax bases. This amount was amortized over a
weighted average period of 20 years. See discussion below with respect
to amortization for fiscal years beginning on January 1, 2002.
Upon adoption of FAS 141 and FAS 142 effective January 1, 2002 for
transactions occurring prior to July 1, 2002, Stilwell will no longer amortize
goodwill and any identified intangible assets with indefinite lives. Based on
the valuation in connection with the purchase price allocation for the various
acquisitions of Janus shares during 2001, approximately $5.9 million of
identified intangible assets will continue to be amortized in 2002 and beyond.
The remaining $600.1 million are considered to be indefinite lived intangible
assets and therefore will not be amortized. Accordingly, while Stilwell recorded
approximately $35.3 million in amortization expense during 2001 associated with
the goodwill and intangible assets resulting from the additional investments in
Janus during March, April and May 2001, amortization expense in 2002 and beyond
related to these assets will be approximately $0.8 million per year.
See Note 6 for summary of identified intangible assets and goodwill.
Acquisitions of Janus Common Stock subsequent to July 1, 2001. On
September 4, 2001, Janus used available cash to purchase 138,897 shares of Janus
common stock from employees (other than Mr. Bailey) at a cost of approximately
$139.6 million.
On November 9, 2001, Stilwell completed the acquisition of 609,950 shares
of Janus common stock owned by Mr. Bailey and one other minority stockholder.
The acquisitions of the common stock by Stilwell, which were pursuant to put
rights held by Mr. Bailey and the other minority stockholder that were included
in the 1984 Stock Purchase Agreement (the "Janus Stock Purchase Agreement"),
cost approximately $613 million and were funded using proceeds from Stilwell's
Senior Note issuance as discussed in Note 7 and existing cash.
With the completion of these transactions, Stilwell owns approximately 98%
of Janus, with the remainder owned by Janus employees. In addition, all
mandatory put rights to Stilwell associated with Janus stock were eliminated.
In third quarter 2001, Stilwell recorded a one-time non-cash increase to
minority interest of approximately $64.0 million in connection with its
commitment to purchase the 609,950 shares of Janus common stock. This commitment
dated back to the initial purchase of Janus common stock in 1984 and resulted
from put rights held by Mr. Bailey and one other minority stockholder that use
Janus' earnings from the prior calendar year to determine the price of the
shares. Therefore, the contractual price to be paid was computed using the
results from Janus' record year in 2000. Based on the decline in Janus' earnings
during 2001 compared to 2000, accounting guidelines required an evaluation of
whether the contractual put price of the purchase commitment exceeded fair
value. Upon completion of a valuation, this charge was deemed necessary and was
recorded as an increase to minority interest. Once Stilwell completed the
acquisition of the Janus shares, the intangible assets and goodwill were reduced
by the amount of this charge.
70
As discussed in Note 2, the Company adopted FAS 141 and FAS 142 for all
transactions occurring on or after July 1, 2001. Accordingly, the acquisitions
were accounted for pursuant to the purchase method. The following table
summarizes the effect of the transaction for purchase accounting purposes (in
millions):
September November
2001 2001 Total
-------------- ------------- ----------
Net tangible assets acquired (1)....... $ 12.9 $ 12.7 $ 25.6
Identified intangible assets -
subject to amortization (2)........ 1.0 4.5 5.5
Identified intangible assets -
not subject to amortization (3).... 95.9 457.2 553.1
Goodwill (4)........................... 29.8 74.6 104.4
Goodwill - deferred income tax (5)..... 37.0 176.6 213.6
---------- -------- ----------
Total............................. $ 176.6 $ 725.6 $ 902.2
========== ======== ==========
(1) Amount includes approximately $9.2 million attributable to the
remaining minority stockholders' allocable portion of acquired
shares.
(2) These amounts, representing customer relationships through
contracts with private and separate accounts, are amortized over a
weighted average period of 7.4 years.
(3) These amounts represent marketing identified intangibles (e.g.,
brand name, trademark), advisory contracts with the retail mutual
funds, third party advisory and distribution relationships and
other non-contractual or legal right-based intangible assets.
(4) This amount represents goodwill resulting from the excess of
purchase price over the fair value of net tangible and intangible
assets.
(5) This amount represents goodwill associated with deferred income
taxes recorded for identifiable intangible assets based on the
difference between the book and tax bases.
Stilwell recorded amortization expense of $0.1 million during 2001
associated with the identifiable assets resulting from the September and
November 2001 investments in Janus. Amortization expense in 2002 and beyond
related to these assets will total approximately $0.7 million per year.
See Note 6 for summary of identified intangible assets and goodwill.
In connection with the foregoing transactions, a portion of the shares of
restricted Janus common stock held by other minority stockholders will become
vested pursuant to stock purchase and restriction agreements that require the
acceleration of vesting upon the sale of Mr. Bailey's remaining Janus shares and
the termination on April 2, 2002 (as recently extended from March 28, 2002) of
various management rights held by Mr. Bailey under the Janus Stock Purchase
Agreement.
Most of the revenues of Janus are derived pursuant to investment advisory
agreements with its respectively managed mutual funds and other separate and
private accounts. With respect to agreements with mutual funds, these investment
advisory agreements may be terminated by either party with notice, or terminated
in the event of an "assignment" (as defined in the Investment Company Act of
1940 as amended (the "1940 Act")), and must be approved and renewed annually by
the disinterested members of each fund's board of directors or trustees, or its
shareowners, as required by law. In addition, the board of trustees or directors
of certain funds and separate and private accounts of Janus generally may
terminate these investment advisory agreements upon written notice for any
reason. Generally, any change in control of Janus would constitute an
"assignment" under the 1940 Act.
71
Under the Janus Stock Purchase Agreement, Mr. Bailey had certain
management rights, which include the right to establish and implement policy
with respect to the investment advisory and portfolio management activity of
Janus, as well as the right to select the majority of the members of the Janus
Board, subject to Stilwell's approval, which approval may not be unreasonably
withheld. In connection with Mr. Bailey's disposition of Janus shares on
November 9, 2001, Mr. Bailey's rights under the Janus Stock Purchase Agreement
would have expired, but Stilwell agreed with Mr. Bailey to extend those rights
to April 2, 2002 (which is the date that it is expected the comprehensive fund
shareowner approval process described below will be completed).
After careful consideration of Mr. Bailey's involvement in Janus'
development since its inception and his significant involvement in all
management decisions at Janus as well as the influence he has exerted over Janus
pursuant to his rights under the Janus Stock Purchase Agreement, the Janus funds
obtained as of February 21, 2002 fund shareowner approval of new advisory
agreements with Janus, the terms of which are in all material respects the same
as the current advisory agreements with Janus. In addition, Janus has
approximately 50 subadvisory relationships, of which about one-half have
determined to secure shareowner approval of new advisory agreements with Janus.
As of March 19, 2002, Janus continues the process of obtaining shareowner
approval with respect to the subadvisory relationships.
Upon receipt of fund shareowner approval, the new advisory agreements
would be effective April 2, 2002 and would continue in effect until July 1,
2002. Thereafter, the advisory agreements would continue in effect for
successive annual periods provided their continuance were approved at least
annually by: (1) a majority vote, cast in person and a meeting called for that
purpose, of the trustees, or (2) a vote of the holders of a majority of the
outstanding voting securities (as defined by the 1940 Act) of each fund and in
either event by a majority of the trustees who are not "interested persons," as
defined in the 1940 Act, of Janus.
Janus Work Force Reduction, Facility Closings and Non-Recurring Items.
During 2001, Janus recorded several non-recurring items that are reflected in
the Consolidated Statement of Income as Severance, facility closing and other
costs.
In February 2001, Janus eliminated 468 jobs from its operations unit,
Janus Service Corporation, as a result of a lower level of shareowner activity
and its use of technology to moderate costs. The job reduction did not affect
Janus' investment team, which continues to aggressively recruit and add analysts
to its staff. Janus recorded a non-recurring charge in first quarter 2001 of
approximately $9.1 million related to severance, operational and other costs.
Partially offsetting these costs was a first quarter 2001 reduction of
approximately $8.2 million in stock bonus accruals at Janus that were no longer
payable as a result of the sale of shares of Janus common stock by various
employees to Stilwell as discussed above.
On April 20, 2001, Janus announced a further work force reduction that
affected approximately 546 employees and resulted in the closing of its Austin,
Texas call center. This action reflects a return to a more normalized level of
shareowner activity, significant technological advancements that provide
capacity to adjust to business fluctuations and the evolution in shareowner
approaches to inquiries and investments. Janus recorded approximately $39.4
million in second quarter 2001 non-recurring costs associated with severance,
facility closing and related expenses.
In December 2001, Janus recorded an additional $25.8 million of facility
closing and lease costs related to Janus' Austin and Denver facilities resulting
primarily from weaker than expected commercial real estate markets. Also, Janus
recorded $16.6 million of charges associated with shareowner proxy costs for the
Janus group of mutual funds to obtain shareowner approval of new advisory
agreements in connection with Stilwell's purchase of Mr. Bailey's remaining
shares of Janus common stock (see above).
72
The following table summarizes the activity related to the various
non-recurring items during 2001 (in millions):
Balance on Balance at
December 31, December 31,
2000 Additions Reductions 2001
--------- --------- ----------- ----------
Severance................................ $ - $ 15.5 $ (13.9) $ 1.6
Lease and related costs.................. 36.6 (12.2) 24.4
Fixed asset impairments (see Note 6)..... 14.0 (14.0) -
Fund shareowner proxy costs.............. 16.6 (4.7) 11.9
--------- --------- ---------- ---------
Total................................. $ - $ 82.7 $ (44.8) $ 37.9
========= ========= ========== =========
Approximately $21.8 million is included as current other liabilities and
approximately $16.1 million is included as non-current other liabilities in the
consolidated balance sheet at December 31, 2001. The lease terms generally
expire between 2007 and 2010.
In February 2002, Janus implemented a further work force reduction of
approximately 220 employees in the shareowner servicing area. This action is not
expected to have a material effect on Stilwell's results of operations,
financial position or cash flows.
Disposition by Stilwell of Janus Common Stock in 2000. In the first
quarter of 2000, Stilwell sold to Janus, for treasury, 192,408 shares of Janus
common stock. 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 Stilwell and Janus during 2000 and 2001).
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.
During 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. No repurchases were made during 2001. Stilwell
expects to fund the share repurchase program from its cash flow and other
available sources of funds.
Berger Business Activities. On December 31, 2001, Berger completed the
acquisition of Bay Isle Financial Corporation ("Bay Isle"). Bay Isle is a
manager of primarily institutional accounts through a value style approach. Bay
Isle manages approximately $1.1 billion assets, which have been included in the
consolidated totals at December 31, 2001. The terms of the transaction were not
material to Stilwell's results of operation, financial position or cash flows as
of and for the year ended December 31, 2001.
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.
73
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,
-----------------------------------------------------
1999 2000 2001 (1)
-------- -------- --------
Interest (2)............ $ 1.5 $ 4.0 $ 11.2
Income taxes (3)........ 142.9 360.2 179.2
(1) This total does not include the approximately $19.5 million of debt
issue costs paid by Stilwell in connection with the issuance of the
Convertible Notes and the Senior Notes - see Note 7. These costs were
recorded as a prepaid asset and are being amortized over a period of
twelve months with respect to the Convertible Notes (representing the
first point in time at which Stilwell may be required to purchase the
Convertible Notes) and five years with respect to the Senior Notes.
(2) In 1999, cash interest payments were made to KCSI. In 2000, Stilwell
paid $0.7 million in interest directly to KCSI.
(3) In 1999, all income tax payments were made to KCSI. In 2000, Stilwell
paid $195.9 million in income taxes directly to KCSI.
During the years ended December 31, 2000 and 2001, Stilwell recorded
approximately $4.9 and $12.1 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 Janus
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.
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 1999 through 2001. 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,
----------------------
2000 2001
------ ----
Deferred commissions - current........ $ 29.3 $ 22.1
Other .............................. 22.9 59.8
---------- ----------
Total............................ $ 52.2 $ 81.9
========== ==========
Investments in advised funds. Investments in advised funds, which are all
classified as available for sale, are summarized as follows (in millions):
December 31,
-----------------------
2000 2001
------ ----
Cost basis.......................... $ 26.9 $ 33.4
Gross unrealized gains.............. 4.1 0.6
Gross unrealized losses............. (0.8) (3.0)
---------- ---------
Total.......................... $ 30.2 $ 31.0
========== =========
Gross realized gains (losses) with respect to the Janus and Berger
investments in advised funds totaled $5.3, $1.6 and ($0.5) million for the years
ended December 31, 1999, 2000 and 2001, respectively.
74
Property and Equipment, Net. Property and equipment are summarized as
follows (in millions):
December 31,
------------------------
2000 2001
------- ----
Furniture, fixtures and equipment, including computer
equipment and systems.................................. $ 170.7 $ 142.6
Buildings and leasehold improvements...................... 46.4 43.8
--------- ---------
Subtotal................................... 217.1 186.4
Less accumulated depreciation and amortization............ (79.4) (93.5)
--------- ---------
Net property and equipment................................ $ 137.7 $ 92.9
========= =========
As further described in Note 4, during 2001, Janus closed its Austin
facility and restructured its Denver locations. In connection with this process,
certain fixed assets - primarily computer equipment, furniture and fixtures -
were determined to be impaired based on evaluation pursuant to FAS 121 and Janus
recorded an impairment charge of approximately $14.0 million. The likely
realization of these assets, which are expected to be disposed of or sold during
2002, was determined based on previous experience and appraisal and valuation
information.
Depreciation expense totaled $17.6, $38.9 and $48.0 million for the
years ended December 31, 1999, 2000 and 2001, respectively.
Goodwill, Identified Intangible Assets and Other Assets. Goodwill
represents the excess of purchase price over the tangible assets and identified
intangible assets. Gross goodwill totaled $195.2 and $1,084.5 million at
December 31, 2000 and 2001, respectively. Accumulated amortization on goodwill
was $21.1 and $45.9 million at December 31, 2000 and 2001, respectively.
Identified intangible assets and other assets are summarized as follows (in
millions):
December 31,
-----------------------
2000 2001
------- ----
Mutual fund advisory contracts (1)........................ $ - $ 190.3
Third party advisor and distribution relationships (2).... 712.1
Marketing-related, such as brand and trademark (3)........ 271.1
Separate account relationships (4)........................ 17.5
Other identifiable assets (5)............................. 90.4 86.0
Accumulated amortization.................................. (22.9) (45.4)
--------- ---------
Net 67.5 1,231.6
Other assets, net......................................... 49.5 41.7
--------- ---------
Total........................................... $ 117.0 $ 1,273.3
========= =========
(1) Of this total, approximately $97.8 million was subject to
amortization during 2001. However, beginning on January 1, 2002,
there will be no amortization related to these identified
intangible assets pursuant to FAS 142.
(2) Of this total approximately $366.0 million was subject to
amortization during 2001. However, beginning on January 1, 2002,
there will be no amortization related to these identified
intangible assets pursuant to FAS 142.
(3) Of this total approximately $136.3 million was subject to
amortization during 2001. However, beginning on January 1, 2002,
there will be no amortization related to these identified
intangible assets pursuant to FAS 142.
(4) All of the amounts included were subject to amortization in 2001.
All amounts will continue to be amortized over a weighted average
period of 7.4 years in 2002 and beyond.
(5) Amount represents identified intangible assets recorded prior to
2001 and all were subject to amortization during 2001. However,
beginning on January 1, 2002, approximately $85.5 million of the
total will no longer be subject to amortization pursuant to FAS
142.
75
See Note 4 for a description of Stilwell's additional investment in Janus
during 2001. Throughout 2000, Janus purchased shares of Janus common stock from
various minority stockholders at the fair market value as set forth in the
relevant stock restriction or purchase agreements. These share repurchases were
funded from Janus' existing cash. Stilwell recorded these transactions under the
purchase method of accounting and recorded identified intangible assets and
goodwill totaling approximately $83.2 million. These amounts are being amortized
over a weighted average period of 20 years (as these acquisitions occurred prior
to July 1, 2001 - see Note 2).
During the years ended December 31, 2000 and 2001, the Company recorded
approximately $31.3 and $52.3 million, respectively, in goodwill relating to the
DST investment as a result of DST's repurchase of its common stock. This
goodwill was being amortized over a period of 40 years prior to the adoption of
FAS 142 effective January 1, 2002.
Amortization expense related to identifiable intangible assets, goodwill
and other assets (exclusive of amortization on deferred commissions - see Note
2) aggregated $9.7, $11.4 and $52.3 million in 1999, 2000 and 2001,
respectively.
Aggregate amortization expense is expected to total less than $3 million
(unaudited) in each of the next five years.
NOTE 7 - LONG-TERM DEBT
Zero-Coupon Convertible Debt Offering. On April 30, 2001, Stilwell
completed an offering of approximately $931 million principal amount at maturity
of zero-coupon convertible senior notes due April 30, 2031 ("Convertible
Notes"). The Convertible Notes were offered only to qualified institutional
buyers at an initial offering price of $741.37 per $1,000 principal amount at
maturity, resulting in gross proceeds to Stilwell of approximately $690 million
(prior to consideration of approximately $16.8 million in debt issuance costs).
The issue price represents a yield to maturity of 1% per year. Additionally, to
the extent that the average market price of the Convertible Notes exceeds
certain thresholds, Stilwell could be required to pay contingent interest at a
rate of the greater of Stilwell's regular quarterly cash dividend or 0.0625% of
the average market price of the Convertible Notes over a specified time period.
Each $1,000 principal amount at maturity of the Convertible Notes will
initially be convertible into 17.1544 shares of common stock upon the occurrence
of any of the following events: i) if the closing prices of Stilwell's shares of
common stock on the New York Stock Exchange exceed specified levels; ii) if the
credit rating assigned to the Convertible Notes by either Moody's Investor
Services or Standard & Poor's is below a specified level; iii) if Stilwell calls
the Convertible Notes for redemption; or iv) in the event that Stilwell takes
certain corporate actions, such as (but not limited to) declaration of an
extraordinary dividend. Stilwell may redeem the Convertible Notes for cash on or
after April 30, 2006 at their accreted value. Stilwell may be required to
repurchase the Convertible Notes, at the option of the holders, on April 30,
2002, 2004, 2006, 2011, 2016, 2021 and 2026 at the accreted values per $1,000
principal amount at maturity of $748.80, $763.89, $779.28, $819.14, $861.03,
$905.06 and $951.35, respectively. Stilwell may choose to pay the purchase price
for such repurchases in cash or shares of Stilwell common stock. Stilwell may
also be required to repurchase the Convertible Notes, at the option of the
holders, in cash, upon the occurrence of certain specified change of control
events occurring on or prior to April 30, 2006. A Registration Statement on Form
S-3 covering resales by investors of the Convertible Notes, and the shares of
Stilwell's common stock into which the notes are convertible, was declared
effective by the SEC on July 30, 2001.
76
Approximately $610 million of the proceeds received from the offering were
used to purchase 600,000 shares of Janus common stock as discussed in Note 4.
The remaining proceeds were available for general corporate purposes. The
Convertible Notes are classified as a current liability in the consolidated
balance sheet as of December 31, 2001 because the holders may, at their option,
require Stilwell to purchase the Convertible Notes on April 30, 2002. Interest
expense for the year ended December 31, 2001 includes approximately $11.0
million resulting from amortization of debt issue costs.
$400 Million Senior Note Offering under Registration Statement. On
November 6, 2001, the Company issued $400 million of 7% senior notes due
November 1, 2006 ("Senior Notes"). The Senior Notes are not redeemable prior to
maturity and pay interest semi-annually on the 1st day of November and May,
beginning on May 1, 2002. The Company received approximately $396.8 million
after discount at issuance, underwriter's discount and certain offering
expenses. The proceeds were used to fund a portion of the cost to acquire the
609,950 shares of Janus shares as discussed in Note 4. The Senior Notes were
issued under a Shelf Registration Statement ("Registration Statement") that was
declared effective by the SEC on September 24, 2001. The Registration Statement
allowed for the issuance from time to time of up to $800 million in aggregate
issue price of the Company's common stock, preferred stock and debt securities.
As of December 31, 2001, the Company has $400 million of securities available
for issuance under the Registration Statement, subject to the covenant
limitations pursuant to the credit facilities.
See Note 16 for information regarding an interest rate exchange agreement
entered into by the Company in February 2002 to hedge the interest rate exposure
associated with the Senior Notes.
Indebtedness in 1999 and 2000. All third party and Parent indebtedness was
paid in full as of December 31, 1999 and 2000. 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.
Credit Facilities. 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. The Facilities were
amended on February 20, April 20 and October 24, 2001.
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 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 (ranging from 0.30% to 0.55%) computed using LIBOR plus a
spread, which will vary based on Stilwell's consolidated leverage ratio. Under
the competitive loan feature of the Facilities, a different percentage may be
added to or subtracted from LIBOR.
77
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 one-third of the total $600 million commitment.
Stilwell, as a continuation of its practice of providing credit facilities
to its subsidiaries, 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 expired on December 31, 2001.
The Facilities contain a number of covenants that could restrict maximum
utilization of the Facilities, or the ability of the Company to issue securities
that are currently available for issuance under the Company's Registration
Statement, including various financial covenants such as a specified financing
leverage, minimum net worth, fixed charge coverage, minimum unencumbered
liquidity 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, 2001. Stilwell paid approximately $2.5
and $2.3 million in facility, amendment and arrangement fees during 2000 and
2001, respectively, relating to the Facilities. Neither Janus nor Stilwell had
borrowings under the Facilities at December 31, 2000 or 2001. Based on a
required minimum net worth as set forth in the Facilities, unrestricted retained
earnings at December 31, 2001 totaled $535.3 million.
Pursuant to a provision included in the Facilities, if Stilwell's average
assets under management over a rolling three-month period were to fall below
$180 billion, but remain above $170 billion, the aggregate amount available
under the Facilities would be reduced to $500 million. If the average assets
under management were to fall below $170 billion, the Facilities would be
reduced to $400 million. If the average assets under management were to fall
below $150 billion, the Facilities would be reduced to $300 million. Further,
Stilwell would be required to repay portions of amounts borrowed under the
credit facilities in excess of the reduced credit availability amount.
On January 11, 2000, KCSI arranged a $200 million 364-day senior unsecured
competitive Advance / Revolving Credit Facility ("$200 million Facility"). This
facility superseded the $100 million 364-day senior unsecured competitive
advance/revolving credit facility that was previously available to Stilwell.
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.
Aggregate Maturities of Indebtedness. Minimum annual payments under
existing indebtedness are as follows (in millions):
Convertible Notes Senior Notes Total
----------------- ------------ -----
2002.......... $ 694.7 $ - $ 694.7
2003.......... -
2004.......... -
2005.......... -
2006.......... 399.5 399.5
------------ ------------ ---------
Total......... $ 694.7 $ 399.5 $ 1,094.2
============ ============ =========
78
Fair Value of Long-Term Debt. Based upon the borrowing rates currently
available to the Company and its subsidiaries for indebtedness with similar
terms and average maturities, the fair value of long-term debt was approximately
$1,087.6 million at December 31, 2001.
NOTE 8 - INCOME TAXES
Stilwell's provision for income taxes is summarized as follows (in
millions):
December 31,
-------------------------------------------
1999 2000 2001
---- ---- ----
Current:
Federal $ 182.6 $ 367.7 $ 197.6
State and local.................... 21.7 41.5 14.5
---------- ---------- ----------
Total current................. 204.3 409.2 212.1
---------- ---------- ----------
Deferred:
Federal 9.3 16.1 5.0
State and local.................... 2.5 1.7 0.6
---------- ---------- ----------
Total deferred................ 11.8 17.8 5.6
---------- ---------- ----------
Total income tax expense...... $ 216.1 $ 427.0 $ 217.7
========== ========== ==========
Stilwell's deferred income tax liabilities (assets) are summarized as
follows (in millions):
December 31,
----------------------
2000 2001
---- ----
Income Tax Liabilities:
Unconsolidated affiliates............................ $ 186.3 $ 138.2
Identified intangible assets in connection with
investments in Janus .............................. 503.0
Compensation and benefits............................ 34.3 52.0
Deferred commissions................................. 24.1 9.7
Interest on Convertible Notes........................ 13.0
--------- ---------
Gross deferred tax liabilities........ 244.7 715.9
--------- ---------
Income Tax Assets:
Book reserves (10.7) (9.8)
Deferred compensation................................ (15.9) (2.3)
Vacation ............................................ (2.9) (2.2)
Facility closing costs............................... (19.6)
Other ............................................... (5.2) (4.5)
--------- ---------
Gross deferred tax assets............. (34.7) (38.4)
--------- ---------
Net deferred income tax liabilities.................... $ 210.0 $ 677.5
========= =========
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.
79
Stilwell's effective income tax rate differs from the statutory federal
income tax rate as follows (in millions):
December 31,
---------------------------------------------
1999 2000 2001
---- ---- ----
Income tax expense using statutory rate........... $ 205.3 $ 420.9 $ 217.0
State and local income taxes, net................. 15.7 28.1 9.8
Non-deductible goodwill........................... 2.5 2.0 9.4
Equity in earnings of unconsolidated affiliates... (12.4) (19.5) (21.1)
Sale of Janus common stock to Janus............... (5.3)
Other ............................................ 5.0 0.8 2.6
----------- ----------- -----------
Total income tax expense..................... $ 216.1 $ 427.0 $ 217.7
=========== =========== ===========
Effective tax rate................................ 36.8% 35.5% 35.1%
=========== =========== ===========
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, 2001, the
cumulative amount of unremitted earnings included in retained earnings that
qualify for this deduction aggregated $311.0 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 proceeds from the stock
sale exceeded Stilwell's income tax basis. Deferred income taxes provided on
unremitted earnings of unconsolidated affiliates (net of earnings remitted, if
any) aggregated $17.9 and $23.6 million as of December 31, 2000 and 2001,
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 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 no longer joins 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
is determined 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.
80
NOTE 9 - EMPLOYEE BENEFIT PLANS
Substantially all full-time employees of Stilwell and its subsidiaries
participate in the ESOP and the Stilwell Financial Inc. 401(k) and Profit
Sharing Plan (the "Stilwell Plan"). Contributions to the ESOP and the profit
sharing component of the Stilwell 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, 1999, 2000 and 2001. Stilwell, Janus and Berger match
in cash a maximum of 3% of employee compensation deferrals in the 401(k)
component of the Stilwell Plan, subject to a maximum allowable for income tax
purposes. Participants become fully vested in employer contributions under the
ESOP and Stilwell Plan over a five-year period.
Expense related to the various Stilwell qualified plans aggregated $8.1,
$13.4 and $13.1 million in 1999, 2000 and 2001, 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 year ended December 31, 1999, Stilwell would have recorded
compensation for the KCSI stock options granted to its employees and shares
subscribed by its employees under the KCSI ESPP. For the years ended December
31, 2000 and 2001, compensation would have included compensation for Stilwell
stock options granted to its employees and shares subscribed by its employees
under the Stilwell ESPP. 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:
Year ended December 31,
-------------------------------------------
1999 2000 2001
---- ---- ----
Net income (in millions)
As reported.............. $ 313.1 $ 663.7 $ 302.3
Pro forma................ 310.1 659.1 296.7
Earnings per Basic share:
As reported.............. $ 1.40 $ 2.98 $ 1.37
Pro forma................ 1.39 2.96 1.35
Earnings per Diluted share:
As reported.............. $ 1.38 $ 2.90 $ 1.31
Pro forma................ 1.37 2.88 1.27
For the year ended December 31, 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.
81
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 1999 KCSI 2000 Stilwell 2000 Stilwell 2001
--------- --------- ------------- -------------
Dividend yield................ .25% to .36% .05% .09% to .12% .09% to .19%
Expected volatility........... 42% to 43% 50% 48% 40% to 69%
Risk-free interest rate....... 4.67% to 5.75% 6.18% 5.97% to 6.18% 1.79% to 5.27%
Expected life................. 3 years 3 years 3 years 3 years
Stilwell Stock Option Plans. The table below summarizes Stilwell
outstanding options as of December 31, 2000 and 2001 and changes during the
years 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 years ended December 31, 2000 and 2001 is not necessarily
indicative of the number of options and associated activity in the future.
2000 2001
------------------------- -------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at January 1.................. -- $ - 13,385,467 $ 10.83
Granted................................... 16,872,955 16.80 111,403 34.06
Exercised................................. (3,483,388) 9.30 (5,009,921) 3.65
Expired/Canceled.......................... (4,100) 21.25 (33,546) 20.50
---------- ---------
Outstanding at December 31................ 13,385,467 $ 10.83 8,453,403 $ 15.35
========== =========
Exercisable............................... 11,931,801 $ 8.10 7,036,381 $ 11.79
========== =========
Weighted Average Fair Value of Options
granted during the year............... $ 17.49 $ 13.94
The following table summarizes the information about Stilwell stock options
that were outstanding at December 31, 2001:
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 $10................. 4,910,872 4.2 years $ 7.28 4,910,872 $ 7.28
$10 to $20................. 476,830 6.6 12.71 476,830 12.71
$20 to $30................. 1,464,587 4.8 21.45 1,304,587 21.27
$30 to $47................. 1,601,114 4.0 35.32 344,092 38.87
---------- -----------
$ 2 to $47................. 8,453,403 4.4 years $ 15.35 7,036,381 $ 11.79
========== ===========
Shares available for future grants at December 31, 2001 aggregated 15,232,751.
82
Stilwell ESPP. In November 2001, Stilwell initiated the Second Offering of
the Stilwell ESPP under which substantially all full-time employees of Stilwell
and its subsidiaries 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. In July
2000, Stilwell initiated its First Offering under the Stilwell ESPP The weighted
average per share fair value of the stock purchase rights granted to Stilwell
employees under the First Offering and the Second Offering of the Stilwell ESPP
was $13.49 and $6.08, respectively.
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:
First Offering Second Offering
-------------- ---------------
Dividend yield.............. .09% .20%
Expected volatility......... 48% 57%
Risk-free interest rate..... 6.18% 2.06%
Expected life............... 1 year 1 year
Approximately 111,000 shares were issued in January 2002 with respect to
the First Offering. Approximately 188,000 shares were initially subscribed to
under the Second Offering. Approximately, 3.7 million shares remain available
for future grants under the ESPP.
Janus Restricted Stock. During 1999, Janus granted 33,000 restricted shares
of Janus' common stock, respectively, to certain Janus employees pursuant to
restricted stock agreements ("Stock Agreements"). The restricted stock was
recorded at fair market value (approximately $10.8 million) at the time of grant
as a separate component of Janus' stockholders' equity. The restricted stock
vests at the end of 10 years. The Stock Agreements also include 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
compensation expense based on the applicable vesting rate, which was 20% in 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. Because this 1999 issuance was from Janus
shares on which Stilwell had recognized previous gains, the Company records the
gain upon vesting directly to stockholders' equity (see Note 2).
In 2000 and 2001, Janus granted 35,660 and 64,420 restricted shares of its
common stock, respectively, 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 and $64.7 million in
2000 and 2001, respectively. The related tax paid by Janus on the behalf of
employees totaled $15.6 and $54.7 million, respectively. These payments are
recorded as prepaid expenses and amortized over the same period as the
underlying restricted stock. Because the 2000 and 2001 issuances were 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.
83
Expenses recorded by Janus resulting from the restricted stock grants and
related amortization of the 83(b) elections totaled $13.5, $35.4 and $37.7
million in 1999, 2000 and 2001, respectively.
See Note 16 regarding the Stilwell announcement regarding its intention to
convert the Janus organization to a limited liability company and to issue
approximately 6.2% of Janus equity to key Janus investment and operational
employees.
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, 2001, future minimum rental commitments under non-cancelable operating
leases aggregated (in millions):
2002............. $ 22.1
2003............. 19.3
2004............. 13.2
2005............. 11.5
2006............. 10.5
Thereafter ...... 24.9
----------
Total... $ 101.5
==========
Rent expense aggregated $17.4, $22.5 and $19.6 million in 1999, 2000 and
2001, respectively.
Minority Purchase Agreements. A stock purchase agreement with Mr. Bailey
and another Janus stockholder (the "Janus Stock Purchase Agreement") and certain
restriction agreements with other Janus minority stockholders contained, 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.
As described in Note 4, during 2001, the various put rights held by Mr. Bailey
and the other minority stockholders were exercised and the acquisitions
completed by Stilwell.
Certain stock purchase agreements and restriction agreements with minority
stockholders contain provisions whereby upon the occurrence of a Change in
Ownership (as defined in such agreements) of Stilwell or KCSI, Stilwell may be
required to purchase such holders' Janus stock. The fair market value price for
such purchase or sale would be equal to fifteen times the net after-tax earnings
over the period indicated in the relevant agreement, in some circumstances as
determined by Janus' Stock Option Committee or as determined by an independent
appraisal. If Stilwell had been required to purchase the holders' Janus common
stock after a Change in Ownership as of December 31, 2001, the purchase price
would have been approximately $93 million. Stilwell would account for any such
purchase as the acquisition of a minority interest under FAS 141 as discussed in
Note 2.
As of December 31, 2001, Stilwell had $600 million in credit facilities
available ($350 million at the holding company), cash balances at the Stilwell
holding company level in excess of $120 million, securities with a market value
in excess of $1.9 billion and the right to its proportional share (approximately
$305 million) of dividends from Janus based on 2001 earnings. To the extent that
available credit facilities, existing cash balances, expected dividends from
Janus and any proceeds from the liquidation of Stilwell's investment in DST were
insufficient to fund its purchase obligations, Stilwell had access to the
capital markets.
84
Litigation. From time to time Stilwell and its subsidiaries are 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 and its subsidiaries 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 resolved 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 $7.3,
$21.1 and $12.0 million in 1999, 2000 and 2001, respectively. As discussed in
Note 3, Stilwell sold 839,000 shares of DST common stock to DST in December
2001.
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. Also, Berger receives fees under 12b-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
-------------- --------- -----------
1999 $ 1,024.7 $ 129.3 $ 8.6
2000 1,952.9 160.6 14.0
2001 1,335.0 105.5 10.3
As discussed in Note 8 above, Stilwell's retained earnings include equity
in the unremitted earnings of its unconsolidated affiliates of $191.0, $235.6
and $311.0 million as of December 31, 1999, 2000 and 2001, respectively.
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 - prior to the sixth amendment in November 2001 - provided that so long as
Mr. Bailey was a holder of at least 5% of the common stock of Janus and
continued to be employed as President of Janus (or as Chairman of the Janus
Board if James P. Craig, III, 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 provided that, in furtherance of such objective, so
long as both the ownership threshold and officer status conditions
85
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. As discussed in Note 4 above, in connection with Mr.
Bailey's disposition of his final 600,000 shares of Janus common stock on
November 9, 2001, Mr. Bailey's rights under the Janus Stock Purchase Agreement
would have expired, but Stilwell agreed with Mr. Bailey to extend those rights
through April 2, 2002. The extended terms included the provisions relating to
Mr. Bailey's board selection rights and right to direct the investment advisory
and portfolio management policies of Janus.
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' 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. Further, after
April 2, 2002, Mr. Bailey's rights under the Janus Stock Purchase Agreement
expire.
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. 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' prominence; (ii) Janus' compensation
scale generally has been at the upper end of its peer group; (iii) some or all
of the shares purchased from Mr. Bailey are available for sale or grants to
other employees and a program has been announced to provide Janus equity to key
employees (see Note 16); and (iv) many key Janus employees must continue to be
employed at Janus to become vested in currently unvested restricted stock. 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' 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.
Purchase and restriction agreements with Janus 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.
86
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. As
described in Note 4, the Janus funds obtained as of February 21, 2002 fund
shareowner approval of new advisory agreements with Janus, the terms of which
are in all material respects the same as the current advisory agreements with
Janus. In addition, Janus has approximately 50 subadvisory relationships, of
which about one-half have determined to secure shareowner approval of new
advisory agreements with Janus. As of March 19, 2002, Janus continues the
process of obtaining shareowner approval with respect to the subadvisory
relationships.
The Boards of Trustees or Directors of the Janus Advised Funds generally
may terminate the investment advisory agreements upon written notice for any
reason.
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.
87
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 2001, non-recurring items reduced Stilwell's earnings per diluted
share by approximately 39(cent). The following non-recurring items affected net
income during 2001:
i) A first quarter net pretax charge of approximately $0.9 million
resulting from severance charges, substantially offset by a reversal
of a stock bonus accrual in connection with the sale of Janus shares
by various minority stockholders;
ii) A second quarter $39.4 million charge associated with facility,
severance and other costs in connection with Janus' closing of its
Austin facility, partially offset by an $8.1 million gain associated
with Stilwell's proportionate share of DST non-recurring items;
iii) A third quarter non-cash increase to minority interest of
approximately $64.0 million in connection with Stilwell's commitment
to purchase 609,950 shares of Janus common stock representing the
excess of the contractual price paid by Stilwell compared to the
current market value of the stock, slightly offset by a $0.3 million
gain associated with Stilwell's proportionate share of DST
non-recurring items;
iv) A gain of $28.8 million ($15.9 million, after-tax) resulting from the
disposition of 839,000 shares of DST common stock in December 2001;
v) a $42.4 million charge by Janus related to the facility closing and
lease costs, as well as to shareowner proxy costs; and
vi) Approximately $0.5 million in fourth quarter 2001 net gains
representing the Company's proportionate share of DST non-recurring
items during the quarter. See Notes 3 for additional information on
DST and Note 4 for additional information on the non-recurring items
recorded by Janus.
During 2000, non-recurring gains contributed approximately 23(cent) per
diluted share to Stilwell's consolidated net income. These after-tax gains
included the following: i) a first quarter gain of approximately $27.3 million
resulting from the settlement of litigation with a former equity affiliate; ii)
a first quarter $15.1 million gain associated with the Company's sale of 192,408
shares of its Janus common stock to Janus for use in connection with the Janus
incentive programs; iii) approximately $4.3 million 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 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 2000 and 2001 do not necessarily total the Basic and Diluted
Earnings per Common Share for the years ended December 31, 2000 and 2001,
respectively.
88
(in millions, except per share amounts):
During Year 2001
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- ------- --------
Revenues:
Investment management fees.............. $ 367.8 $ 337.8 $ 296.4 $ 273.2
Shareowner servicing fees............... 64.1 58.2 49.3 45.0
Other................................... 16.6 15.5 15.9 15.9
--------- --------- -------- --------
Total............................ 448.5 411.5 361.6 334.1
--------- --------- -------- --------
Operating Expenses:
Compensation............................ 99.3 80.5 78.0 61.8
Marketing and promotion................. 24.4 25.6 22.4 17.9
Third party concession fees............. 66.0 61.7 53.4 49.6
Depreciation and amortization........... 24.9 32.1 35.0 38.6
Professional services................... 12.6 12.2 9.9 8.5
Other................................... 37.6 31.3 31.5 27.8
Severance, facility closing and other 0.9 39.4 42.4
--------- --------- -------- --------
costs......................................
Total............................ 265.7 282.8 230.2 246.6
--------- --------- -------- --------
Operating Income........................... 182.8 128.7 131.4 87.5
Equity earnings of unconsolidated 17.8 24.4 15.8 17.4
affiliates...............................
Interest expense - third parties........... (5.0) (9.8) (7.0) (13.0)
Gain on sale of DST common stock........... 28.8
Other, net................................. 6.8 6.3 5.0 2.1
--------- --------- -------- --------
Income before taxes and minority
interest........................... 202.4 149.6 145.2 122.8
Income tax provision....................... 72.2 51.3 47.2 47.0
Minority interest in consolidated earnings. 18.8 7.9 71.2 2.1
--------- --------- -------- --------
Net Income $ 111.4 $ 90.4 $ 26.8 $ 73.7
========= ========= ======== =========
Per Share Data:
Weighted Average Common shares
outstanding (in thousands)............. 219,042 219,387 220,462 221,511
Basic Earnings per share................ $ 0.51 $ 0.41 $ 0.12 $ 0.33
Weighted Average Diluted Common shares
outstanding (in thousands)............. 224,666 224,615 224,390 223,812
Diluted Earnings per share.............. $ 0.48 $ 0.39 $ 0.11 $ 0.32
Dividends per share..................... $ 0.01 $ 0.01 $ 0.01 $ 0.01
Common Stock Price Ranges:
High ................................. $ 46.38 $ 34.45 $ 33.40 $ 28.20
Low ................................. $ 24.12 $ 23.27 $ 18.20 $ 18.20
89
(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:
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.
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 nearly
all 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, as well as any identified intangible assets and goodwill resulting
from the acquisition of subsidiaries and affiliates directly by Stilwell, are
aggregated as a separate segment. Revenues, expenses and other income items
between segments were not material during 1999, 2000 or 2001.
90
Summarized financial information concerning the segments is shown in
the following tables (in millions):
2001
------------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- --------
Revenues ................................... $ 1,536.8 $ 18.9 $ 1,555.7
Operating expenses.......................... 937.2 88.1 1,025.3
---------- --------- ----------
Operating income (loss)..................... 599.6 (69.2) 530.4
Equity earnings of
unconsolidated affiliates................. 75.4 75.4
Interest expense............................ (0.8) (34.0) (34.8)
Other, net ............................... 6.3 42.7 49.0
---------- --------- ----------
Pretax income............................ 605.1 14.9 620.0
Income tax provision (benefit).............. 221.7 (4.0) 217.7
Minority interest........................... 100.7 (0.7) 100.0
---------- --------- ----------
Net income.................................. $ 282.7 $ 19.6 $ 302.3
========== ========= ==========
Total assets...................................$ 489.6 $ 2,882.0 $ 3,371.6
Capital expenditures...........................$ 26.8 $ 7.5 $ 34.3
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............................ (7.7) (7.7)
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
========== ========= ==========
Total assets...................................$ 723.4 $ 857.6 $ 1,581.0
Capital expenditures...........................$ 103.7 $ 3.4 $ 107.1
91
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............................ (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
========== ========= ==========
Total assets.................................. $ 500.3 $ 731.2 $ 1,231.5
Capital expenditures...........................$ 48.1 $ 2.4 $ 50.5
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the years ended December 31 (in millions):
1999 2000 2001
---- ---- ----
Revenues (1):
- ------------
United States............. $ 1,184.3 $ 2,164.0 $ 1,481.7
International (2)......... 28.0 84.1 74.0
----------- ----------- -----------
Total................. $ 1,212.3 $ 2,248.1 $ 1,555.7
=========== =========== ===========
Long-lived assets:
- ------------------
United States............. $ 196.9 $ 392.8 $ 2,345.4
International (2)......... 35.5 36.0 39.4
----------- ----------- -----------
Total................. $ 232.4 $ 428.8 $ 2,384.8
=========== =========== ===========
(1) Revenues are attributed to countries based on location at which
services are performed
(2) Primarily the United Kingdom
NOTE 16 - SUBSEQUENT EVENTS
Corporate Restructuring of Janus. On February 15, 2002, Stilwell announced
its intention to convert Janus Capital Corporation into a limited liability
company. Concurrent with the structural change in Janus, approximately 6.2% of
the shares of the limited liability company - with a value now estimated at
approximately $300 million - is expected to be issued to key Janus employees in
early second quarter 2002. The issuance of ownership to Janus employees is
expected to occur through two grants.
92
The first grant will be through a special, one-time share grant equivalent
to 5% of Janus, all of which vest at the end of seven years and include the
opportunity for accelerated vesting (either 20% or 33% annually) when Janus
meets defined performance targets. The second grant will represent the customary
long-term incentive component of the employees' annual compensation package and
will vest at the end of five years, with opportunities for acceleration in the
same manner as the one-time grant. All vesting is subject to continued
employment by the limited liability company
The combined grants, which Janus expects to distribute to approximately
180 employees (the majority of which will be to the 65-member investment team),
are designed to encourage superior investment performance and long-term
stability at Janus through additional employee ownership in a tax-efficient
organizational structure. The equity program in the limited liability company is
expected to include liquidity provisions that will provide Janus employees the
opportunity to sell up to 50% of their aggregate vested shares to Janus or
Stilwell, with certain restrictions, on scheduled liquidity dates at the
then-current fair value of the shares.
Upon issuance of the shares of the limited liability company, Stilwell
will own approximately 92% of Janus, with Janus employees owning the remaining
8% of the company. The grants of shares are expected to qualify for fixed
accounting under generally accepted accounting principles, with Janus
recognizing a pro rata amount of compensation expense for each year during the
vesting period. However, there is a current EITF discussion regarding accounting
treatment of profits interests in a limited liability company structure. The
discussion is focused on whether profits interests should be recorded under
fixed plan accounting similar to restricted stock grants, on a variable basis
such as stock appreciation rights, or whether accounting should be based on
individual facts and circumstances. Fixed plan accounting would require the
current fair value of grants - as determined on the date of grant - to be
charged to compensation expense over the vesting period. Variable accounting
would require future appreciation or depreciation of the profits interests and
related earnings to be charged to compensation expense.
Berger Acquisitions. Berger completed two recent acquisitions: Bay Isle
Financial Corporation ("Bay Isle") on December 31, 2001 and Enhanced Investment
Technologies, Inc. ("INTECH") on February 28, 2002. Bay Isle is a manager of
primarily institutional and private accounts through a value style approach. Bay
Isle manages approximately $1.1 billion assets, which have been included in the
consolidated totals at December 31, 2001. The terms of the transaction were not
material to Stilwell's results of operation, financial position or cash flows as
of and for the year ended December 31, 2001.
INTECH uses a proprietary mathematical investment process for
institutional and private clients. INTECH manages approximately $6 billion in
assets. If the full amount of contingent purchase price payments are made,
Berger will pay up to approximately $68 million for 50.1% of INTECH and has the
right to purchase an additional 30% over the next two years for a negotiated
price.
With these companies, Berger now offers several growth and value products
in the retail, private and institutional channels and expects to use its strong
institutional marketing group to market these various products.
Interest Rate Exchange Agreement. On February 12, 2002, Stilwell entered
into a receive-fixed, pay-floating interest rate exchange agreement with a major
investment bank with respect to Stilwell's $400 million Senior Notes. Stilwell
will receive from the counterparty a fixed 7% rate on $400 million and Stilwell
will pay the counterparty based on the six month LIBOR rate (set in arrears)
plus 178 basis points. Stilwell has designated the interest rate exchange as a
hedge that qualifies for the "shortcut" method for fair value hedges pursuant to
FAS 133 and the hedge meets the prerequisites for the assumption of no
ineffectiveness under FAS 133.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
93
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 9, 2002 ("Proxy Statement")
will be filed no later than 120 days after December 31, 2001.
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 Directors" 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 Directors - 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.
94
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 12, 2002, 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.
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
3.1.1 Delaware Certificate of Incorporation of Stilwell Financial
Inc. as Amended and Restated on June 14, 2000, is hereby
incorporated by reference from Exhibit 3.1.1 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253)
3.1.2 Certificate of Designation dated June 15, 2000 establishing
Series A Preferred Stock, is hereby incorporated by reference
from Exhibit 3.1.2 to Stilwell's Registration Statement on Form
10 declared effective on June 15, 2000 (File No. 001-15253)
Bylaws
3.2 Bylaws of Stilwell Financial Inc. as Amended and Restated on June
12, 2000, is hereby incorporated by reference from Exhibit 3.2 to
Stilwell's Registration Statement on Form 10 declared effective on
June 15, 2000 (File No. 001-15253)
3.3 Bylaws of Stilwell Financial Inc. as Amended and Restated on
January 29, 2001 to be effective on May 11, 2001, is hereby
incorporated by reference from Exhibit 10.3 to Stilwell's
Annual Report on Form 10-K for the year ended December 31, 2000
(File No. 001-15253)
95
(4) Instruments Defining the Right of Security Holders, Including Indentures
4.1 Form of Certificate representing Stilwell Financial Inc. Common
Stock, is hereby incorporated by reference from Exhibit 4.1 to
Stilwell's Registration Statement on Form 10 declared effective
on June 15, 2000 (File No. 001-15253)
4.2.1 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 from Exhibit 4.2.1 to
Stilwell's Registration Statement on Form 10 declared effective
on June 15, 2000 (File No. 001-15253)
4.2.2 Certificate of Designation establishing Series A Preferred Stock
of Exhibit 3.1.2, is hereby incorporated by reference
4.3 Article FOURTH, Article FIFTH, Article SIXTH, Article SEVENTH and
Article ELEVENTH of Exhibit 3.1.1 are hereby incorporated by
reference
4.4 Article II, Article III, Section 2 and Article V of Exhibit 3.2
are hereby incorporated by reference
4.5 Indenture, dated as of November 6, 2001, between Stilwell
Financial Inc. and The Chase Manhattan Bank., is hereby
incorporated by reference from Exhibit 4.1 to Stilwell Financial
Inc. Current Report on Form 8-K, dated November 6, 2001
4.6 Officers' Certificate pursuant to the Indenture (as per Exhibit
4.5 above), is hereby incorporated by reference from Exhibit 4.2
to Stilwell Financial Inc. Current Report on Form 8-K, dated
November 6, 2001
4.7 Liquid Yield Option (TM) Notes due 2031 Indenture dated April
30, 2001 by and between Stilwell Financial Inc. and The Chase
Manhattan Bank, as Trustee, (the zero-coupon convertible senior
notes) is hereby incorporated by reference from Exhibit 4.1 to
Stilwell's Form 10-Q for the quarterly period ended March 31,
2001 (File No. 001-15253)
4.8 Registration Rights Agreement dated April 30, 2001 by and between
Stilwell Financial Inc. and Merrill Lynch & Co., is hereby
incorporated by reference from Exhibit 4.2 to Stilwell's Form 10-Q
for the quarterly period ended March 31, 2001 (File No. 001-15253)
(10) Material Contracts
10.1 Representative Director Indemnification Agreement, is hereby
incorporated by reference from Exhibit 10.1 to Stilwell's
Registration Statement on Form 10 declared effective on June
15, 2000 (File No. 001-15253)
10.2 Representative Officer Indemnification Agreement, is hereby
incorporated by reference from Exhibit 10.2 to Stilwell's
Registration Statement on Form 10 declared effective on June
15, 2000 (File No. 001-15253)
10.3 Intercompany Agreement, dated as of August 16, 1999 between
Kansas City Southern Industries, Inc. and Stilwell Financial
Inc., is hereby incorporated by reference from Exhibit 10.3 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253)
96
10.4 Tax Disaffiliation Agreement, dated as of August 16, 1999,
between Kansas City Southern Industries, Inc. and Stilwell
Financial Inc., is hereby incorporated by reference from
Exhibit 10.4 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253)
10.5.1 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 from Exhibit 10.5.1 to Stilwell's
Registration Statement on Form 10 declared effective on June
15, 2000 (File No. 001-15253)
10.5.2 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
from Exhibit 10.5.2 to Stilwell's Registration Statement on
Form 10 declared effective on June 15, 2000
(File No. 001-15253)
10.5.3 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 from Exhibit
10.5.3 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253)
10.6.1 Amended Employment Agreement dated June 12, 2000 by and
between Stilwell Financial Inc. and Landon H. Rowland, is
hereby incorporated by reference from Exhibit 10.6.1 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.6.2 Amended Employment Agreement dated October 20, 2000 by and
between Stilwell Financial Inc. and Joseph D. Monello, is
hereby incorporated by reference from Exhibit 10.1 to
Stilwell's Form 10-Q for the quarter ended September 30, 2000
(File No. 001-15253) *
10.6.3 Amended Employment Agreement dated June 12, 2000 by and
between Stilwell Financial Inc. and Danny R. Carpenter, is
hereby incorporated by reference from Exhibit 10.6.3 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.6.4 Amended Employment Agreement dated June 12, 2000 by and
between Stilwell Financial Inc. and Anthony P. McCarthy, is
hereby incorporated by reference from Exhibit 10.6.4 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.7.1 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 from Exhibit 10.7.1 to Stilwell's Registration
Statement on Form 10 declared effective on June 15, 2000
(File No. 001-15253) *
10.7.2 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 from Exhibit
10.7.2 to Stilwell's Registration Statement on Form 10
declared effective on June 15, 2000 (File No. 001-15253) *
97
10.7.3 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 from Exhibit 10.7.3 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.7.4 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 from Exhibit 10.7.4 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.7.5 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 from Exhibit 10.7.5 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.7.6 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 from Exhibit 10.7.6 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.7.7 Sixth Amendment to Stock Purchase Agreement, dated November 8,
2001, by and among Stilwell Financial Inc. and Thomas H.
Bailey, is hereby incorporated by reference from Exhibit 10.1
to Stilwell's Form 10-Q for the quarterly period ended
September 30, 2001 (File No. 001-15253) *
10.8.1 Stilwell Financial Inc. 1998 Long Term Incentive Stock Plan as
Amended and Restated on August 11, 1999, is hereby
incorporated by reference from Exhibit 10.8 to Stilwell's
Registration Statement on Form 10 declared effective on June
15, 2000 (File No. 001-15253) *
10.8.2 Stilwell Financial Inc. 1998 Long Term Incentive Plan, as
amended and restated effective January 18, 2001, is hereby
incorporated by reference from Exhibit 10.16 to Stilwell's
Annual Report on Form 10-K for the year ended December 31,
2000 (File No. 001-15253) *
10.8.3 Stilwell Financial Inc. 1998 Long Term Incentive Stock Plan,
as amended and restated effective as of May 9, 2001, is hereby
incorporated by reference from Exhibit 10.2 to Stilwell's Form
10-Q for the quarterly period ended June 30, 2001 (File No.
001-15253) *
10.9 Stilwell Executive Plan dated August 11, 1999, is hereby
incorporated by reference from Exhibit 10.9 to Stilwell's
Registration Statement on Form 10 declared effective on June
15, 2000 (File No. 001-15253) *
10.10 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 from Exhibit 10.10 to Stilwell's
Registration Statement on Form 10 declared effective on
June 15, 2000 (File No. 001-15253)
10.11.1 Stilwell Financial Inc. Employee Stock Purchase Plan is hereby
incorporated by reference from Exhibit 10.11 to Stilwell's
Registration Statement on Form 10 declared effective on June
15, 2000 (File No. 001-15253) *
98
10.11.2 Stilwell Financial Inc. Employee Stock Purchase Plan, Amended
and Restated Effective November 16, 2001, is attached to this
Form 10-K as Exhibit 10.11.2 *
10.12 Stilwell Financial Inc. Employee Stock Ownership Plan is
hereby incorporated by reference from Exhibit 10.13 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.13.1 Stilwell Financial Inc. 401(k) and Profit Sharing Plan is
hereby incorporated by reference from Exhibit 10.14 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253) *
10.13.2 Stilwell Financial Inc. 401(k), Profit Sharing and Employee
Stock Ownership Plan, as amended and restated effective
November 1, 2001, is hereby incorporated by reference from
Exhibit 10.3 to Stilwell's Form 10-Q for the quarterly period
ended September 30, 2001 (File No. 001-15253)
10.14.1 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
hereby incorporated by reference from Exhibit 10.15 to
Stilwell's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 001-15253)
10.14.2 Waiver and First Amendment to Five-Year Competitive Advance
and Revolving Credit Facility dated February 20, 2001, among
Stilwell Financial Inc., Janus Capital Corporation and
Citibank, N.A., as administrative agent for the lenders named
therein, is hereby incorporated by reference from Exhibit 10.1
to Stilwell's Form 10-Q for the quarterly period ended March
31, 2001 (File No. 001-15253)
10.14.3 Second Amendment to Five-Year Competitive Advance and
Revolving Credit Facility dated April 20, 2001, among Stilwell
Financial Inc., Janus Capital Corporation and Citibank, N.A.,
as administrative agent for the lenders named therein, is
hereby incorporated by reference from Exhibit 10.1 to
Stilwell's Form 10-Q for the quarterly period ended June 30,
2001 (File No. 001-15253)
10.14.4 Third Amendment to Five-Year Competitive Advance and Revolving
Credit Facility dated October 24, 2001, among Stilwell
Financial Inc., Janus Capital Corporation and Citibank, N.A.,
as administrative agent for the lenders named therein, is
hereby incorporated by reference from Exhibit 10.2 to
Stilwell's Form 10-Q for the quarterly period ended September
30, 2001 (File No. 001-15253)
10.15 Employment Agreement dated June 12, 2000 by and between
Stilwell Financial Inc. and Gwen E. Royle, is hereby
incorporated by reference from Exhibit 10.17 to Stilwell's
Annual Report on Form 10-K for the year ended December 31,
2000 (File No. 001-15253) *
10.16 Employment Agreement dated June 1, 2001 by and between
Stilwell Financial Inc. and Daniel P. Connealy, 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 Douglas E. Nickerson, is attached
to this Form 10-K as Exhibit 10.17 *
* Compensatory Plan or Agreement
99
(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
(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
(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
(99) Additional Exhibits
99.1 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, 1999, 2000 and 2001, which are included in the
DST Systems, Inc. Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No. 1-14036), are
hereby incorporated by reference as Exhibit 99.2.
99.2 Opinion Letter of Rothgerber Johnson & Lyons LLP dated June 8,
2000, is hereby incorporated by reference from Exhibit 99.4 to
Stilwell's Registration Statement on Form 10 declared
effective on June 15, 2000 (File No. 001-15253)
100
(b) Reports on Form 8-K
On November 7, 2001, the Company filed a Current Report on Form 8-K
dated November 6, 2001 under Item 5, to report it had registered for
issuance under the Securities Act of 1933 (the "Securities Act") its
debt securities, shares of its common stock, par value $.01 per share,
and shares of its preferred stock pursuant to Registration Statement
No. 333-69578, to be offered on a delayed or continuous basis pursuant
to Rule 415 under the Securities Act. The terms and provisions of the
Notes are set forth in an officers' certificate (the "Officers'
Certificate") pursuant to the Indenture. Copies of the Indenture and
the Officers' Certificate were filed as exhibits to this report.
On November 2, 2001, the Company furnished a Current Report on Form
8-K, dated October 24, 2001, under Item 9, concerning the announcement
of financial results for the three and nine months ended September 30,
2001 and to report ending assets under management as of October 31,
2001, average assets under management during the month of October 2001
and average assets under management for the ten months ended October
31, 2001.
On October 26, 2001, the Company furnished a Current Report on Form
8-K, dated October 26, 2001, under Item 9 to report that Stilwell's
$300 million five-year revolving credit facility and its $300 million
364-day revolving credit facility were amended as of October 24, 2001.
On October 5, 2001, the Company furnished a Current Report on Form 8-K,
dated August 31, 2001, under Item 9 to report ending assets under
management on August 31, 2001 and average assets under management for
the two and eight months then ended.
On October 3, 2001, the Company filed a Current Report on Form 8-K,
dated October 3, 2001, under Item 5, to report that Stilwell expected
to purchase 600,000 shares of Janus Capital Corporation common stock
from Thomas H. Bailey.
101
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 20, 2002 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 20, 2002.
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/ D.P. Connealy Vice President and Chief Financial Officer
- ------------------------------------- (Principal Financial Officer)
D.P. Connealy
/s/ G.E. Royle Vice President - Legal and Corporate
- ------------------------------------- Secretary
G.E. Royle
/s/ D.E. Nickerson Vice President, Controller and Treasurer
- ------------------------------------- (Principal Accounting Officer)
D.E. Nickerson
/s/ J.D. Monello Vice President of Development
- -------------------------------------
J.D. Monello
/s/ A.P. McCarthy Vice President - Administration
- -------------------------------------
A.P. McCarthy
/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
102
STILWELL FINANCIAL INC.
2001 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 601(b)
No. Document Exhibit No.
- ------- ------------------------------------------------------- -------------
10.11.2 Stilwell Financial Inc. Employee Stock Purchase Plan,
Amended and Restated Effective November 16, 2001 10
10.16 Employment Agreement dated June 1, 2001 by and
between Stilwell Financial Inc. and Daniel P. Connealy 10
10.17 Employment Agreement dated June 12, 2000 by and between
Stilwell Financial Inc. and Douglas E. Nickerson 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
103