FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 001-15253
STILWELL FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1804048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
920 Main Street, 21st Floor, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 218-2400
(Registrant's telephone number, including area code)
Not applicable
Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2002
- --------------------------------------------------------------------------------
Common Stock, $0.01 per share par value 222,414,412 Shares
- --------------------------------------------------------------------------------
STILWELL FINANCIAL INC.
Form 10-Q
June 30, 2002
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 2001 and June 30, 2002 2
Consolidated Condensed Statements of Income -
Three and Six months ended June 30, 2001 and 2002 3
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 2001 and 2002 4
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Year ended December 31, 2001 and Six months ended June 30, 2002 5
Notes to Consolidated Condensed Financial Statements 6
Computation of Basic and Diluted Earnings per share 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
- ----------
STILWELL FINANCIAL INC.
FORM 10-Q
JUNE 30, 2002
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by Stilwell Financial Inc. (the "Company" or "Stilwell"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These
Consolidated Condensed Financial Statements should be read in conjunction with
the financial statements and the notes thereto, as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 and Management's Discussion and Analysis of Financial Condition
and Results of Operations included in this Form 10-Q. Results for the three and
six months ended June 30, 2002 are not necessarily indicative of the results
expected for the full year 2002.
STILWELL FINANCIAL INC.
Consolidated Condensed Balance Sheets
(Dollars in Millions, except per share information)
(Unaudited)
December 31, 2001 June 30, 2002
---------------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 236.7 $ 69.5
Accounts receivable 128.5 122.6
Investments in advised funds 31.0 25.6
Other current assets 81.9 51.5
--------------- ---------------
Total current assets 478.1 269.2
Investments 508.7 552.3
Property and equipment (net of $93.5 and $113.5 accumulated
depreciation and amortization, respectively) 92.9 84.2
Intangibles and other assets, net 1,273.3 1,326.6
Goodwill, net 1,038.6 1,115.1
--------------- ---------------
Total assets $ 3,391.6 $ 3,347.4
=============== ===============
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 694.7 $ 150.0
Accounts and wages payable 42.5 20.5
Accrued compensation and benefits 56.3 43.5
Accrued liability to third party administrators 18.7 15.3
Other accrued liabilities 68.7 39.2
Deferred acquisition liability 43.6
--------------- ---------------
Total current liabilities 880.9 312.1
Other liabilities:
Long-term debt 399.5 767.0
Deferred income taxes 679.9 663.1
Other liabilities 44.7 42.8
--------------- ---------------
Total liabilities 2,005.0 1,785.0
--------------- ---------------
Minority interest in consolidated subsidiaries 23.3 11.5
--------------- ---------------
Stockholders' equity:
Preferred stock ($1.00 par, 10,000,000 shares
authorized, none issued)
Common stock ($0.01 par, 1,000,000,000 shares authorized; 224,790,650 shares
issued; 222,101,350 and 222,409,651 shares
outstanding, respectively) 2.2 2.2
Additional paid-in capital
Retained earnings 1,285.3 1,484.7
Accumulated other comprehensive income 75.8 64.0
--------------- ---------------
Total stockholders' equity 1,363.3 1,550.9
--------------- ---------------
Total liabilities and stockholders' equity $ 3,391.6 $ 3,347.4
=============== ===============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Income
(Dollars in Millions, except per share information)
(Unaudited)
Three months Six months
ended June 30, ended June 30,
---------------------------- -----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenues:
Investment management fees $ 337.8 $ 256.7 $ 705.6 $ 527.2
Shareowner servicing fees 58.2 39.7 122.3 82.5
Other 15.5 14.0 32.1 29.0
------------ ------------ ------------ ------------
Total 411.5 310.4 860.0 638.7
------------ ------------ ------------ ------------
Operating expenses:
Compensation 80.5 80.5 179.8 151.3
Marketing and promotion 25.6 13.6 50.0 25.7
Third party concession fees 61.7 48.5 127.7 97.9
Depreciation and amortization 32.1 17.7 57.0 35.5
Professional services 12.2 12.3 24.8 20.1
Other 31.3 29.8 68.9 62.2
Severance, facility closing and other costs 39.4 40.3
------------ ------------ ------------ ------------
Total 282.8 202.4 548.5 392.7
------------ ------------ ------------ ------------
Operating income 128.7 108.0 311.5 246.0
Equity in earnings of unconsolidated affiliates 24.4 17.7 42.2 37.1
Interest expense (9.8) (13.4) (14.8) (26.8)
Other, net 6.3 2.6 13.1 5.6
------------ ------------ ------------ ------------
Income before taxes and minority interest 149.6 114.9 352.0 261.9
Income tax provision 51.3 40.7 123.5 89.9
Minority interest in consolidated earnings 7.9 0.5 26.7 1.1
------------ ------------ ------------ ------------
Net income $ 90.4 $ 73.7 $ 201.8 $ 170.9
============ ============ ============ ============
Per Share Data (Note 3):
Weighted average Common shares
outstanding (in thousands) 219,387 222,380 219,223 222,306
Basic Earnings per share $ 0.41 $ 0.33 $ 0.92 $ 0.77
Weighted average Diluted Common shares
outstanding (in thousands) 224,615 224,411 224,649 224,495
Diluted Earnings per share $ 0.39 $ 0.30 $ 0.88 $ 0.72
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Cash Flows
(Dollars in millions)
(Unaudited)
Six months ended June 30,
-------------------------------------
2001 2002
-------------- --------------
Cash flows provided by (used for):
Operating activities:
Net income $ 201.8 $ 170.9
Adjustments to net income:
Depreciation and amortization 57.0 35.5
Deferred income taxes 29.1 (6.6)
Minority interest in consolidated earnings 26.7 1.1
Undistributed earnings of unconsolidated affiliates (42.2) (37.1)
Facility closing lease and equipment charges 20.5
Employee deferred compensation (2.6) 17.9
Deferred commissions (2.2) (17.3)
Changes in other assets (28.2) (5.7)
Changes in working capital items:
Accounts receivable 35.9 10.5
Other current assets (8.2) 23.9
Accounts payable and accrued compensation payable (41.6) (41.7)
Other accrued liabilities 40.5 (20.4)
Other, net 5.5 16.5
-------------- --------------
Net operating 292.0 147.5
-------------- --------------
Investing activities:
Property acquisitions (20.2) (10.0)
Investments in and loans with affiliates (840.9) (90.8)
Sale of investments in advised funds 0.2 12.6
Purchase of investments in advised funds (4.3) (6.9)
Other, net 6.1 0.1
-------------- --------------
Net investing (859.1) (95.0)
-------------- --------------
Financing activities:
Proceeds from issuance of long-term debt 915.0 428.1
Repayment of long-term debt (175.0) (614.5)
Debt issuance costs (16.4) (5.3)
Proceeds from stock plans 7.4 3.0
Distributions to minority interest (87.1) (23.6)
Dividends paid to shareholders (4.4) (2.2)
Other, net 2.0 (5.2)
-------------- --------------
Net financing 641.5 (219.7)
-------------- --------------
Cash and cash equivalents:
Net increase (decrease) 74.4 (167.2)
At beginning of year 364.3 236.7
-------------- --------------
At end of period $ 438.7 $ 69.5
============== ==============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Changes in Stockholders' Equity
(Dollars in millions)
(Unaudited)
Additional Accumulated other Total
Common paid-in Retained comprehensive stockholders'
stock capital earnings income equity
----- ------- --------- ------ ------
Balance at December 31, 2000 $ 2.2 $ - $ 952.3 $ 103.3 $ 1,057.8
Comprehensive income:
Net income 302.3
Net unrealized loss on investments (23.9)
Reclassification for gains included
in net income (1.6)
Foreign currency translation
adjustment (2.0)
Comprehensive income 274.8
Stock options and benefit plans 74.8 74.8
Common stock repurchased and
exchanged (35.3) (35.3)
Common stock dividends (8.8) (8.8)
----------- ----------- ------------ ------------ ------------
Balance at December 31, 2001 2.2 - 1,285.3 75.8 1,363.3
Comprehensive income:
Net income 170.9
Net unrealized loss on investments (14.8)
Reclassification for gains included
in net income (0.6)
Foreign currency translation
adjustment 3.6
Comprehensive income 159.1
Stock options and benefit
plans 37.5 37.5
Common stock dividends (9.0) (9.0)
----------- ----------- ------------ ------------ ------------
Balance at June 30, 2002 $ 2.2 $ - $ 1,484.7 $ 64.0 $ 1,550.9
=========== =========== ============ ============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
STILWELL FINANCIAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the management of Stilwell Financial Inc. (the "Company"
or "Stilwell"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting of normal closing
procedures) necessary to present fairly the financial position of the
Company and its subsidiary companies as of December 31, 2001 and June 30,
2002, the results of operations for the three and six months ended June 30,
2001 and 2002 and the cash flows for the six months ended June 30, 2001 and
2002. The consolidated condensed balance sheet as of December 31, 2001 was
derived from the audited financial statements of the Company, but does not
include all disclosures required by generally accepted accounting
principles.
The primary entities comprising Stilwell as of June 30, 2002 were: Janus
Capital Corporation ("JCC"), a wholly-owned subsidiary; Janus Capital
Management LLC ("Janus"), of which JCC owns approximately 92% (see Note
12); Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary; Berger
Financial Group LLC ("Berger"), of which SMI owns 100% of the preferred
limited liability interests and approximately 88% of the regular limited
liability interests; Nelson Money Managers Plc ("Nelson"), an 81% owned
subsidiary; and DST Systems, Inc. ("DST"), an equity investment in which
SMI holds an approximate 33% interest. Janus is the largest subsidiary of
Stilwell, representing 90% of assets under management at June 30, 2002, and
91% of revenues and 86% of net income for the six months ended June 30,
2002. Stilwell's subsidiaries and affiliates are engaged in a variety of
asset management and related financial services to registered investment
companies, retail investors, institutions and individuals.
2. The accompanying consolidated condensed financial statements have been
prepared consistently with the accounting policies described in Note 2 to
the consolidated financial statements that are presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. Certain
prior year amounts have been reclassified to conform to the current year
presentation. The results of operations for the three and six months ended
June 30, 2002 are not necessarily indicative of the results to be expected
for the full year 2002.
3. The effect of stock options and shares under the Employee Stock Purchase
Plan ("ESPP") represent the only differences between the weighted average
shares used for the basic earnings per share computation compared to the
diluted earnings per share computation. The only adjustments that currently
affect the numerator of the Company's diluted earnings per share
computations include potentially dilutive securities at subsidiaries and
affiliates, including unvested shares on which minority stockholders have
rights to distributions.
6
Three months ended June 30, Six months ended June 30,
--------------------------------------- ---------------------------------------
2001 2002 2001 2002
----------------- ---------------- ---------------- -----------------
(dollars in millions, except per
share data)
Net income $ 90.4 $ 73.7 $ 201.8 $ 170.9
Dilutive securities at
subsidiaries and affiliates (2.3) (7.0) (4.6) (9.6)
----------------- ---------------- ---------------- -----------------
Net income for dilutive
computation $ 88.1 $ 66.7 $ 197.2 $ 161.3
----------------- ---------------- ---------------- -----------------
Weighted average Common
shares outstanding 219,386,862 222,379,995 219,222,867 222,305,881
Incremental shares from assumed
conversion of stock options
and ESPP shares 5,228,511 2,030,925 5,426,190 2,188,973
----------------- ---------------- ---------------- -----------------
Weighted average Diluted Common
shares outstanding 224,615,373 224,410,920 224,649,057 224,494,854
----------------- ---------------- ---------------- -----------------
Basic Earnings per share $ 0.41 $ 0.33 $ 0.92 $ 0.77
================= ================ ================ =================
Diluted Earnings per share $ 0.39 $ 0.30 $ 0.88 $ 0.72
================= ================ ================ =================
The following weighted average of options to purchase shares of Stilwell
common stock were excluded from the computation of diluted earnings per
share for the respective period because the exercise prices were greater
than the average market prices of the common shares:
Three months ended June 30, Six months ended June 30,
------------------------------------- --------------------------------
2001 2002 2001 2002
----------------- --------------- ------------ -------------
1,435,006 3,345,295 830,136 3,146,749
The diluted earnings per share computation for the three months and six
months ended June 30, 2002 exclude approximately 1.9 million shares of
common stock reserved for issuance upon conversion of the zero-coupon
convertible notes due 2031 (see Note 11).
4. Investments in unconsolidated affiliates accounted for under the equity
method generally include all entities in which the Company or its
subsidiaries have significant influence, but not more than 50% voting
control. The Company's equity interest in DST was its primary equity
investment at June 30, 2002.
Condensed consolidated financial information for DST is shown below:
December 31, 2001 June 30, 2002
----------------------- -----------------------
(dollars in millions)
Percentage ownership 33.0% 33.1%
Carrying value (a) $ 486.1 $ 488.9
Equity in DST net assets $ 486.1 $ 488.9
Fair market value (b) $ 1,980.0 $ 1,815.8
7
Financial condition:
Current assets $ 604.8 $ 623.7
Non-current assets 2,099.2 2,069.1
---------------- ------------------
Total assets $ 2,704.0 $ 2,692.8
================ ==================
Current liabilities $ 471.4 $ 486.6
Non-current liabilities 760.2 728.1
Stockholders' equity 1,472.4 1,478.1
---------------- ------------------
Total liabilities and stockholders' equity $ 2,704.0 $ 2,692.8
================ ==================
Three months Six months
ended June 30, ended June 30,
--------------------------------- --------------------------------
2001(d) 2002(e) 2001 (d) 2002(e)
-------------- -------------- --------------- -------------
Operating results:
Revenues (c) $ 640.8 $ 580.3 $ 1,179.5 $ 1,201.2
Costs and expenses $ 563.3 $ 509.0 $ 1,024.3 $ 1,048.6
Net income $ 73.8 $ 53.7 $ 128.3 $ 112.5
(a) Excludes goodwill related to Stilwell's investment in DST totaling $106.0
million at June 30, 2002.
(b) Based on DST's closing price on the New York Stock Exchange.
(c) DST's reported revenues and costs and expenses, beginning January 1, 2002,
are affected by DST's required adoption of Emerging Issues Task Force
("EITF") Issue No. 01-14 ("01-14"), Income Statement Characterization of
Reimbursements received for "Out-of-Pocket" ("OOP") EITF Expenses Incurred.
Under EITF 01-14, DST is required to record the reimbursements received for
OOP expenses as revenue, and the expenses paid as a cost and expense, on an
accrual basis.
(d) Net income includes after-tax gains of approximately $24.4 million from the
sale of DST's portfolio accounting business and sales of marketable
securities.
(e) Net income includes after-tax income of $1.6 million, primarily related to
sales of marketable securities and a gain from the sale of a DST Output
presort location, partially offset by costs related to facility
consolidations within DST's Output Solutions Segment.
5. For purposes of the Statement of Cash Flows, the Company considers all
short-term liquid investments with an initial maturity of generally three
months or less, including investments in money market mutual funds, to be
cash equivalents. Cash and cash equivalents of Janus (totaling $60.5
million and $45.1 million at June 30, 2001 and 2002, respectively) are
generally used to fund its operations and to pay dividends.
Cash paid for income taxes and interest is summarized as follows (in
millions):
Six months
ended June 30,
--------------------------------
2001 2002
------------ ----------
Interest paid (a) $ 9.3 $ 13.5
Income taxes paid $ 70.9 $ 95.7
(a) This total does not include the amortization associated with debt issue
costs paid by Stilwell in connection with its various debt offerings.
8
Noncash Investing and Financing Activities:
Company subsidiaries and affiliates hold various investments which are
accounted for as "available for sale" securities as defined by Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115"). The Company records its
proportionate share of any FAS 115 unrealized gains or losses related to
these investments, net of deferred income taxes, in stockholders' equity as
accumulated other comprehensive income. Similar to the FAS 115 unrealized
gains or losses, foreign currency translation adjustments affect
accumulated other comprehensive income.
Three months ended June 30, Six months ended June 30,
------------------------------------ ----------------------------------
2001 2002 2001 2002
--------------- --------------- -------------- --------------
(dollars in
millions)
Unrealized gain (loss) recorded in
investments $ 15.5 $ (35.6) $ (72.7) $ (23.6)
Deferred income taxes (6.1) 13.7 28.3 8.8
--------------- --------------- -------------- --------------
Unrealized gain (loss) recorded in
accumulated other comprehensive income 9.4 (21.9) (44.4) (14.8)
Less: reclassification adjustment for
gains included in net income (0.4) (1.3) (0.8) (0.6)
Foreign currency translation adjustment (2.5) 3.9 (3.4) 3.6
Net income 90.4 73.7 201.8 170.9
--------------- --------------- -------------- --------------
Comprehensive income $ 96.9 $ 54.4 $ 153.2 $ 159.1
=============== =============== ============== ==============
During the three and six months ended June 30, 2001, Stilwell recorded
approximately $3.2 million and $6.6 million, respectively, directly to
stockholders' equity representing Stilwell gains resulting from issuances
of stock by Janus. During the three and six months ended June 30, 2002,
Stilwell recorded approximately $22.9 million and $33.1 million,
respectively, directly to stockholders' equity representing Stilwell gains
resulting from issuances of stock by Janus. The shares issued by Janus were
available as a result of repurchases from stockholders. Stilwell had
previously recognized gains (in its Statement of Income) relating to these
shares upon their initial issuance.
6. Intangible assets and goodwill principally represent the excess of cost
over the fair value of net underlying assets of acquired companies using
purchase accounting. In July 2001, the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Accounting Standards No. 141
"Business Combinations" ("FAS 141") and Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). FAS
141 requires the purchase method of accounting for all acquisitions. Under
FAS 142, goodwill and intangible assets with indefinite lives will no
longer be amortized. Instead, such goodwill and other intangible assets
will be tested annually for impairment. Stilwell adopted in 2001 the
provisions of FAS 141 and FAS 142 for acquisitions occurring on or after
July 1, 2001. With respect to transactions occurring prior to July 1, 2001,
FAS 141 and FAS 142 were adopted on January 1, 2002.
9
Identified intangible assets and other assets are summarized as follows (in
millions):
December 31, June 30,
2001 2002
------------------ ------------------
Mutual fund advisory contracts (1)(4) $ 190.3 $ 268.6
Third party advisor and distribution
relationships (1) 712.1 712.1
Marketing-related, such as brand and
trademark (1)(4) 271.1 280.9
Separate account relationships (2) 17.5 52.5
Other identified intangible assets (3)(4) 86.0
Accumulated amortization (45.4) (48.1)
------------------ ------------------
Net 1,231.6 1,266.0
Other assets, net 41.7 60.6
------------------ ------------------
Total $ 1,273.3 $ 1,326.6
================== ==================
(1) Because Stilwell's initial 2001 acquisition of shares of Janus
common stock occurred in late March 2001, no amortization expense
was recorded during first quarter 2001. Pursuant to FAS 142, there
will be no amortization related to these identified intangible
assets.
(2) Because Stilwell's initial acquisition of shares of Janus common
stock occurred in late March 2001, no amortization expense was
recorded during first quarter 2001. All amounts were subject to
amortization during the six months ended June 30, 2002 over
weighted average periods of 6 to 9 years, resulting in
approximately $2.3 million of amortization expense. See Note 8.
(3) Amount represents identified intangible assets recorded prior to
2001 and all were subject to amortization during 2001, resulting
in amortization expense of approximately $7.4 million. However,
upon adoption of FAS 142 on January 1, 2002, amounts were
reclassified to other identified intangible asset components as
per (4).
(4) Certain amounts related to intangible assets recorded prior to
2001 were reclassified to other identified intangible components
in connection with the adoption of FAS 142.
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 were as follows (in millions):
Balance at January 1, 2002 $ 1,038.6
Goodwill acquired during the year 76.5
-------------------
Balance at June 30, 2002 $ 1,115.1
===================
See Note 7 for information regarding the goodwill recorded in each
reportable segment of the Company. The increase in identified intangible
assets and goodwill during the year primarily resulted from the acquisition
of INTECH by Berger on February 28, 2002 as discussed in Note 8.
Aggregate amortization expense is expected to total approximately $1.7
million in each of the next two quarters of 2002 and total approximately $7
million in each of the next five years thereafter.
10
To provide a basis for comparison to current year amounts, the following tables
summarize the impact of the adoption of FAS 142 on prior period amounts (in
millions, except per share data):
Three months ended June 30, Six months ended June 30,
-------------------------------------- ----------------------------------
2001 2002 2001 2002
----------------- ---------------- ----------------- --------------
Reported net income $ 90.4 $ 73.7 $ 201.8 $ 170.9
Identified intangible asset amortization 6.0 7.4
Goodwill amortization 6.6 9.1
----------------- ---------------- ----------------- --------------
Adjusted net income $ 103.0 $ 73.7 $ 218.3 $ 170.9
================= ================ ================= ==============
Three months ended June 30, Six months ended June 30,
-------------------------------------- ----------------------------------
2001 2002 2001 2002
----------------- ---------------- ----------------- --------------
Basic Earnings per share:
Reported net income $ 0.41 $ 0.33 $ 0.92 $ 0.77
Identified intangible asset amortization 0.03 0.03
Goodwill amortization 0.03 0.04
----------------- ---------------- ----------------- --------------
Adjusted net income $ 0.47 $ 0.33 $ 0.99 $ 0.77
================= ================ ================= ==============
Three months ended June 30, Six months ended June 30,
-------------------------------------- ----------------------------------
2001 2002 2001 2002
----------------- ---------------- ----------------- --------------
Diluted Earnings per share:
Reported net income $ 0.39 $ 0.30 $ 0.88 $ 0.72
Identified intangible asset amortization 0.03 0.03
Goodwill amortization 0.03 0.04
----------------- ---------------- ----------------- --------------
Adjusted net income $ 0.45 $ 0.30 $ 0.95 $ 0.72
================= ================ ================= ==============
7. The Company has three primary business units that produce the revenues and
operating income of Stilwell. 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.
11
Summarized financial information concerning the segments for the three months
ended June 30, 2001 and 2002 is provided in the following tables (in millions):
Three months ended June 30, 2001
------------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------- -------- ----------
Revenues $ 406.7 $ 4.8 $ 411.5
Operating expenses 260.3 22.5 282.8
----------- --------- -----------
Operating income (loss) 146.4 (17.7) 128.7
Equity earnings of
unconsolidated affiliates 24.4 24.4
Interest expense (0.9) (8.9) (9.8)
Other, net 1.5 4.8 6.3
----------- --------- -----------
Pretax income 147.0 2.6 149.6
Income tax provision (benefit) 54.7 (3.4) 51.3
Minority interest 8.1 (0.2) 7.9
----------- --------- -----------
Net income $ 84.2 $ 6.2 $ 90.4
=========== ========= ===========
Three months ended June 30, 2002
---------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
--------- ------- ---------
Revenues $ 304.8 $ 5.6 $ 310.4
Operating expenses 194.1 8.3 202.4
----------- --------- -----------
Operating income (loss) 110.7 (2.7) 108.0
Equity earnings of
unconsolidated affiliates 17.7 17.7
Interest expense (2.6) (10.8) (13.4)
Other, net 1.7 0.9 2.6
----------- --------- -----------
Pretax income 109.8 5.1 114.9
Income tax provision (benefit) 44.9 (4.2) 40.7
Minority interest 0.5 0.5
----------- ---------- -----------
Net income $ 64.4 $ 9.3 $ 73.7
=========== ========= ===========
12
Summarized financial information concerning the segments for the six months
ended June 30, 2001 and 2002 is provided in the following tables (in
millions):
Six months ended June 30, 2001
--------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
--------- -------- ----------
Revenues $ 849.9 $ 10.1 $ 860.0
Operating expenses 513.7 34.8 548.5
----------- --------- -----------
Operating income (loss) 336.2 (24.7) 311.5
Equity earnings of
unconsolidated affiliates 42.2 42.2
Interest expense (0.9) (13.9) (14.8)
Other, net 6.1 7.0 13.1
----------- --------- -----------
Pretax income 341.4 10.6 352.0
Income tax provision (benefit) 127.0 (3.5) 123.5
Minority interest 27.1 (0.4) 26.7
----------- --------- -----------
Net income $ 187.3 $ 14.5 $ 201.8
=========== ========= ===========
Total assets $ 499.5 $ 2,088.7 $ 2,588.2
Capital expenditures 12.8 7.4 20.2
Goodwill, net 608.6 608.6
Six months ended June 30, 2002
------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
----------- --------- -----------
Revenues $ 627.4 $ 11.3 $ 638.7
Operating expenses 376.0 16.7 392.7
----------- ---------- -----------
Operating income (loss) 251.4 (5.4) 246.0
Equity earnings of
unconsolidated affiliates 37.1 37.1
Interest expense (4.0) (22.8) (26.8)
Other, net 1.1 4.5 5.6
----------- ---------- -----------
Pretax income 248.5 13.4 261.9
Income tax provision (benefit) 96.6 (6.7) 89.9
Minority interest 1.1 1.1
----------- ---------- -----------
Net income $ 150.8 $ 20.1 $ 170.9
=========== ========== ===========
Total assets $ 550.5 $ 2,796.9 $ 3,347.4
Capital expenditures 9.8 0.2 10.0
Goodwill, net 81.5 1,033.6 1,115.1
13
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the six months ended June 30 (in millions):
2001 2002
---- ----
Revenues (1): $ 819.5 $ 601.4
United States
International (2) 40.5 37.3
--------- ---------
Total $ 860.0 $ 638.7
========= =========
Long-lived assets:
United States $1,388.2 $2,469.1
International (2) 39.1 56.8
--------- ---------
Total $1,427.3 $2,525.9
========= =========
(1) Revenues are attributed to countries based on location at which
services are performed.
(2) Primarily the United Kingdom.
8. As previously disclosed, on February 28, 2002, Berger acquired a majority
ownership of Enhanced Investment Technologies, Inc. ("INTECH"), and, as
part of the acquisition, INTECH was converted to a limited liability
company ("INTECH LLC"). INTECH LLC, which managed approximately $6 billion
in assets under management at acquisition, uses a proprietary mathematical
investment process for institutional and private clients.
Berger has recorded a deferred acquisition liability for approximately
$43.6 million representing Berger's discounted obligation to purchase an
additional 27.5% of INTECH LLC by the end of second quarter 2003 pursuant
to a put/call arrangement with the principal minority owners of INTECH LLC.
Berger may also be required to make contingent payments totaling
approximately $17.5 million over the next three years based on INTECH LLC
meeting certain financial goals.
The Company is in the process of completing a valuation for purposes of
determining the actual allocation of purchase price for INTECH LLC, which
may affect the levels of goodwill and identified intangible assets
currently recorded. As of June 30, 2002, Berger recorded approximately $32
million as a separate account relationship identified intangible asset,
approximately $5 million as a marketing-related identified intangible asset
and approximately $55 million as goodwill. The terms of the transaction
were not material to Stilwell's results of operation, financial position or
cash flows as of and for the three and six months ended June 30, 2002.
9. As previously disclosed, on February 12, 2002, Stilwell entered into a
receive-fixed, pay-floating interest rate exchange agreement with a major
investment bank with respect to Stilwell's $400 million 7% senior notes due
November 1, 2006 ("7% Senior Notes"). Stilwell will receive from the
counterparty a fixed 7% rate on $400 million, and Stilwell will pay the
counterparty based on the six month LIBOR rate (set in arrears) plus 178
basis points. Stilwell has designated the interest rate exchange as a hedge
that qualifies for the "shortcut" method for fair value hedges pursuant to
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), and the hedge
meets the prerequisites for the assumption of no ineffectiveness under FAS
133. The agreement increases the Company's exposure to changes in interest
rates.
The effect of the hedge for the three and six months ended June 30, 2002
was to reduce interest expense by approximately $3.5 million and $5.0
million, respectively, as a result of a lower floating rate cost compared
to the 7% fixed rate being received by the Company under the exchange
agreement. In addition, long-term debt increased by approximately $6.9
million as of June 30, 2002 and an offsetting exchange contract asset was
recorded to reflect the change in the fair value of the exchange agreement.
14
10. During 2001, Janus recorded several non-recurring items that were reflected
in the Consolidated Statement of Income as severance, facility closing and
other costs.
o In February 2001, Janus eliminated 468 jobs from its operations unit,
Janus Service Corporation, as a result of a lower level of shareowner
activity and its use of technology to moderate costs. Partially
offsetting these costs was a first quarter 2001 reduction in stock
bonus accruals at Janus that were no longer payable as a result of the
sale of shares of Janus common stock by various employees to Stilwell
during the quarter.
o On April 20, 2001, Janus announced a further work force reduction that
affected approximately 546 employees and resulted in the closing of
its Austin, Texas call center.
o In December 2001, Janus recorded additional facility closing and lease
costs related to Janus' Austin and Denver facilities and recorded
charges associated with shareowner proxy costs for the Janus group of
mutual funds to obtain shareowner approval of new advisory agreements
in connection with Stilwell's purchase of Thomas H. Bailey's remaining
shares of Janus common stock.
The following table summarizes the activity related to these various
non-recurring items during the six months ended June 30, 2002 (in
millions):
December 31, 2001 Reductions June 30, 2002
----------------- --------------- ----------------
Severance $ 1.6 $ (1.6) $ -
Lease and related costs 24.4 (3.8) 20.6
Fund shareowner proxy costs 11.9 (11.9) -
---------- ----------- ----------
Total $ 37.9 $ (17.3) $ 20.6
========== =========== ==========
Of the remaining balance, approximately $7.4 million is included as current
other liabilities and approximately $13.2 million is included as
non-current other liabilities in the consolidated condensed balance sheet
at June 30, 2002. The lease terms generally expire between 2007 and 2010.
11. As previously disclosed, on April 30, 2001, Stilwell completed an offering
of approximately $931 million principal amount at maturity of zero-coupon
convertible senior notes due April 30, 2031 ("Convertible Notes"). The
Convertible Notes resulted in gross proceeds to Stilwell of approximately
$690 million. Pursuant to the terms of the Convertible Notes, on April 30,
2002, holders required Stilwell to repurchase $820.7 million of the
Convertible Notes (approximately $614.5 million of accreted value). On May
1, 2002, Stilwell funded the purchase of the Convertible Notes with $344.5
million in cash and $270.0 million through borrowings under its credit
facilities.
Prior to receiving the repurchase notices from the holders of the
Convertible Notes, Stilwell announced its intention to add a 3% cash
interest payment on the face of the Convertible Notes over the next two
years (to be paid semi-annually beginning on October 30, 2002). For the
Convertible Notes that remained outstanding, Stilwell will pay this cash
interest to holders of record 15 days prior to the scheduled payment dates.
The other terms of the Convertible Notes remain materially the same.
12. As previously disclosed, on April 1, 2002, Stilwell completed the transfer
of the business and operations of Janus Capital Corporation to a limited
liability company named Janus Capital Management LLC. Concurrent with this
transfer of business and operations, approximately 6.2% of the shares of
the limited liability company were issued to key Janus employees. The
issuance of ownership to Janus employees was accomplished through two
grants. The first grant was a special, one-time share grant equivalent to
5% of Janus, all of which vests at the end of seven years and includes the
opportunity for accelerated vesting (either 20% or 33% annually) when Janus
meets
15
defined performance targets. The second grant represented the customary
long-term incentive component of the employees' annual compensation package
and will vest at the end of five years, with opportunities for acceleration
similar to the shares for the one-time grant. All vesting is subject to
continued employment by Janus.
The combined grants, which were distributed to approximately 180 key
employees (the majority of which were to the 65-member investment team),
are designed to encourage superior investment performance and long-term
stability at Janus through additional employee ownership in a tax-efficient
organizational structure. The equity program in the limited liability
company includes liquidity provisions that will provide Janus employees the
opportunity to sell up to 50% of their aggregate vested shares to Janus or
Stilwell, with certain restrictions, on scheduled liquidity dates at the
then-current fair value of the shares.
After issuance of the shares of the limited liability company, Stilwell
owns approximately 92% of Janus, with Janus employees owning the remaining
8% of the company. The Company is applying fixed accounting under generally
accepted accounting principles for the grants of shares and recognizing a
pro rata amount of compensation expense for each year during the vesting
period - approximately $35 million annually for the one-time grant and
approximately $14 million annually for the long-term incentive grant.
Because the grants of shares represent profits interests, that are
considered to have a value of zero for tax purposes, a tax deduction is not
available to the Company with respect to this compensation expense.
The exchange of the Janus Capital Corporation common stock for limited
liability shares terminated the change of control put rights held by
various Janus minority stockholders pursuant to various purchase and
restriction agreements.
13. As previously disclosed, on April 5, 2002, the Company issued $158.1
million of 7.875% senior notes due April 15, 2032 ("Retail Notes"). The
Retail Notes were offered in $25 increments to individual investors through
a network of financial professionals and are listed on the New York Stock
Exchange under the symbol "SVQ." The Retail Notes are not callable for five
years; thereafter, the Retail Notes are callable at any time, in whole or
in part, at par plus accrued and unpaid interest. The Retail Notes pay
interest quarterly beginning on July 31, 2002. The Company received
approximately $153.1 million after underwriter discount and certain
offering expenses. The proceeds were used to fund a portion of the
Convertible Notes that were retired on May 1, 2002 (see Note 11).
14. In April 2002, the Company filed with the Securities and Exchange
Commission ("SEC") a Shelf Registration Statement ("Shelf Registration"),
which supersedes Stilwell's previous shelf registration statement and
provides for the issuance from time to time of up to $800 million in
aggregate issue price of the Company's common stock, preferred stock and
debt securities. The Shelf Registration was declared effective by the SEC
on April 25, 2002. See Note 15 regarding an issuance under the Shelf
Registration. As of August 13, 2002, approximately $600 million of
securities are available for issuance under the Shelf Registration, subject
to the covenant limitations pursuant to the Company's credit facilities.
15. On July 1, 2002, the Company issued $200.0 million of 7.75% senior notes
due June 15, 2009 ("7.75% Senior Notes") under the Shelf Registration. The
7.75% Senior Notes are non-callable and pay interest semi-annually on June
15 and December 15, beginning December 15, 2002. The Company received
approximately $196.3 million after underwriter discount and certain
offering expenses. The Company used approximately $185.0 million from the
proceeds to retire indebtedness under the credit facilities.
16
16. On July 1, 2002, Thomas H. Bailey resigned as president and chief executive
officer of Janus. Mr. Bailey remains chairman of the board of trustees of
the Janus funds, a position he has held since launching Janus Fund in 1969.
In this capacity, he will continue working as a trustee of the funds,
focusing primarily on reviewing and monitoring fund performance. The
remaining five members of Janus' management committee will continue to run
Janus' day-to-day operations. A formal succession plan has not been
adopted, and Janus and Stilwell are working together to identify a new
president and chief executive officer of Janus.
17. In June of 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities" ("FAS 146"). FAS 146 requires that a liability, measured
initially at fair value, for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. A fundamental
concept of FAS 146 is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of
a liability. The provisions of this Statement shall be effective for exit
or disposal activities initiated after December 31, 2002. Early application
is encouraged and previously issued financial statements shall not be
restated. Stilwell expects to adopt FAS 146 for any such exit or disposal
activities effective January 1, 2003.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
The discussion set forth below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are typically identified by the use of words such as "may,"
"will," "expect," "believe," "anticipate," "intend," "could," "estimate," or
"continue" and similar expressions or variations, and are based on the beliefs
and assumptions of the management of Stilwell Financial Inc. (the "Company" or
"Stilwell") based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements. Important factors that
could cause actual results to differ materially from the forward-looking
statements include the risks identified in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, in Part I Item 1, Business, under
"Risk Factors". Stilwell cautions readers to carefully consider such factors.
Further, such forward-looking statements speak only as of the date on which such
statements are made; Stilwell undertakes no obligation to update any
forward-looking statements to reflect events or circumstances after the date of
such statements.
The discussion herein is intended to clarify and focus on the Company's
results of operations, certain changes in financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
condensed financial statements included under Item 1 of this Form 10-Q. This
discussion should be read in conjunction with these consolidated condensed
financial statements and the related notes thereto and is qualified by reference
thereto.
Stilwell, a Delaware corporation formed in 1998 by Kansas City Southern
Industries, Inc., is a holding company for a group of businesses and investments
in the financial services industry, including the following:
o Janus Capital Corporation ("JCC"), a wholly-owned subsidiary;
o Janus Capital Management LLC ("Janus"), of which JCC owns
approximately 92%;
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary;
o Berger Financial Group LLC ("Berger"), of which SMI owns 100% of the
preferred limited liability company interests and approximately 88% of
the regular limited liability company interests;
o Nelson Money Managers Plc ("Nelson"), an 81% owned subsidiary;
o DST Systems, Inc. ("DST"), an equity investment in which SMI owns an
approximate 33% interest; and
o various other subsidiaries and equity investments.
For purposes of segment reporting, Stilwell reports JCC (now Janus) and
Berger as one segment, representing businesses that derive the majority of their
revenues and income from the provision of investment management under investment
advisory agreements. Nelson, DST, the holding company and the various other
subsidiaries and affiliates of Stilwell, as well as any identified intangible
assets and goodwill resulting from the acquisition of subsidiaries and
affiliates by Stilwell, are aggregated as a separate segment.
18
RECENT DEVELOPMENTS
$200 Million Debt Offering. On July 1, 2002, the Company issued $200
million of 7.75% senior notes due June 15, 2009 ("7.75% Senior Notes") under the
Shelf Registration (see "Liquidity and Capital Resources" below). The 7.75%
Senior Notes are non-callable and pay interest semi-annually on June 15 and
December 15, beginning December 15, 2002. The Company received approximately
$196.3 million after underwriter discount and certain offering expenses. The
Company used approximately $185 million from the proceeds to retire indebtedness
under the credit facilities.
Thomas H. Bailey resigns as President and Chief Executive Officer of
Janus. On July 1, 2002, Thomas H. Bailey resigned as president and chief
executive officer of Janus. Mr. Bailey remains chairman of the board of trustees
of the Janus funds, a position he has held since launching Janus Fund in 1969.
In this capacity, he will continue working as a trustee of the funds, focusing
primarily on reviewing and monitoring fund performance. The remaining five
members of Janus' management committee will continue to run Janus' day-to-day
operations. A formal succession plan has not been adopted, and Janus and
Stilwell are working together to identify a new president and chief executive
officer of Janus.
SIGNIFICANT DEVELOPMENTS
Retirement of majority of Convertible Notes. As previously disclosed, on
April 30, 2001, Stilwell completed an offering of approximately $931 million
principal amount at maturity of zero-coupon convertible senior notes due April
30, 2031 ("Convertible Notes"). The Convertible Notes resulted in gross proceeds
to Stilwell of approximately $690 million. Pursuant to the terms of the
Convertible Notes, on April 30, 2002, holders required Stilwell to repurchase
$820.7 million of the Convertible Notes (approximately $614.5 million of
accreted value). On May 1, 2002, Stilwell funded the purchase of the Convertible
Notes with $344.5 million in cash and $270.0 million through borrowings under
its credit facilities.
Prior to receiving the repurchase notices from the holders of the
Convertible Notes, Stilwell announced its intention to add a 3% cash interest
payment on the face of the Convertible Notes over the next two years (to be paid
semi-annually beginning on October 30, 2002). For the Convertible Notes that
remained outstanding, Stilwell will pay this cash interest to holders of record
15 days prior to the scheduled payment dates. The other terms of the Convertible
Notes remain materially the same.
$158 Million Retail Debt Offering. On April 5, 2002, the Company issued
$158.1 million of 7.875% senior notes due April 15, 2032 ("Retail Notes"). The
Retail Notes were offered in $25 increments to individual investors through a
network of financial professionals and are listed on the New York Stock Exchange
under the symbol "SVQ." The Retail Notes are not callable for five years;
thereafter, the Retail Notes are callable at any time, in whole or in part, at
par plus accrued and unpaid interest. The Retail Notes pay interest quarterly
beginning on July 31, 2002. The Company received approximately $153.1 million
after underwriter discount and certain offering expenses. The proceeds were used
to fund a portion of the Convertible Notes that were retired on May 1, 2002.
Corporate Restructuring of Janus. On April 1, 2002, Stilwell completed the
transfer of the business and operations of JCC to a limited liability company
named Janus Capital Management LLC ("Janus"). Concurrent with this transfer of
business and operations, approximately 6.2% of the shares of the limited
liability company were issued to key Janus employees. The issuance of ownership
to Janus employees was accomplished through two grants. The first grant was a
special, one-time share grant equivalent to 5% of Janus, all of which vests at
the end of seven years and includes the opportunity for accelerated vesting
(either 20% or 33% annually) when Janus
19
meets defined performance targets. The second grant represented the customary
long-term incentive component of the employees' annual compensation package and
will vest at the end of five years, with opportunities for acceleration similar
to the shares for the one-time grant. All vesting is subject to continued
employment by Janus.
The combined grants, which were distributed to approximately 180 key
employees (the majority of which were to the 65-member investment team), are
designed to encourage superior investment performance and long-term stability at
Janus through additional employee ownership in a tax-efficient organizational
structure. The equity program in the limited liability company includes
liquidity provisions that will provide Janus employees the opportunity to sell
up to 50% of their aggregate vested shares to Janus or Stilwell, with certain
restrictions, on scheduled liquidity dates at the then-current fair value of the
shares.
After issuance of the shares of the limited liability company, Stilwell
owns approximately 92% of Janus, with Janus employees owning the remaining 8% of
the company. The Company is applying fixed accounting under generally accepted
accounting principles for the grants of shares and recognizing a pro
rata amount of compensation expense for each year during the vesting period -
approximately $35 million annually for the one-time grant and approximately $14
million annually for the long-term incentive grant. Because the grants of shares
represent profits interests, that are considered to have a value of zero for tax
purposes, a tax deduction is not available to the Company with respect to this
compensation expense.
The exchange of the Janus Capital Corporation common stock for limited
liability shares terminated the change of control put rights held by various
Janus minority stockholders pursuant to various purchase and restriction
agreements.
Berger Acquisition of INTECH. Berger acquired a majority ownership of
Enhanced Investment Technologies, Inc. ("INTECH") on February 28, 2002 and, as
part of the acquisition, INTECH was converted to a limited liability company
("INTECH LLC"). INTECH LLC, which managed approximately $6 billion in assets
under management at acquisition, uses a proprietary mathematical investment
process for institutional and private clients.
Berger has recorded a deferred acquisition liability for approximately
$43.6 million representing Berger's obligation to purchase an additional 27.5%
of INTECH LLC by the second quarter 2003 pursuant to a put/call arrangement with
the principal minority owners of INTECH LLC. Berger may also be required to make
contingent payments totaling approximately $17.5 million over the next three
years based on INTECH LLC meeting certain financial goals.
The Company is in the process of completing a valuation for purposes of
determining the actual allocation of the purchase price for INTECH LLC, which
may affect the levels of goodwill and identified intangible assets currently
recorded. As of June 30, 2002, Berger recorded approximately $32 million as a
separate account relationship identified intangible asset, approximately $5
million as a marketing-related identified intangible asset and approximately $55
million as goodwill. The terms of the transaction were not material to
Stilwell's results of operation, financial position or cash flows as of and for
the three and six months ended June 30, 2002.
20
Interest Rate Exchange Agreement. On February 12, 2002, Stilwell entered
into a receive-fixed, pay-floating interest rate exchange agreement with a major
investment bank with respect to Stilwell's $400 million 7% senior notes due
November 1, 2006 ("7% Senior Notes"). Stilwell will receive from the
counterparty a fixed 7% rate on $400 million and Stilwell will pay the
counterparty based on the six month LIBOR rate (set in arrears) plus 178 basis
points. Stilwell has designated the interest rate exchange as a hedge that
qualifies for the "shortcut" method for fair value hedges pursuant to Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133") and the hedge meets the prerequisites for
the assumption of no ineffectiveness under FAS 133. The agreement increases the
Company's exposure to fluctuations in interest rates.
The effect of the hedge for the three and six months ended June 30, 2002
was to reduce interest expense by approximately $3.5 million and $5.0 million,
respectively, as a result of a lower floating rate cost compared to the 7% fixed
rate being received by the Company under the exchange agreement. In addition,
long-term debt increased by approximately $6.9 million as of June 30, 2002 and
an offsetting exchange contract asset was recorded to reflect the change in the
fair value of the exchange agreement during the quarter.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared with the Three Months Ended
June 30, 2001
The Company's revenues, operating income and net income were as follows
(dollars in millions):
Three months ended June 30,
-----------------------------------------------
2001 (i) 2002 (ii)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 390.6 $ 280.7
SMI and Berger 16.1 24.1
--------------------- --------------------
Sub-total 406.7 304.8
Other 4.8 5.6
--------------------- --------------------
Total $ 411.5 $ 310.4
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 143.9 $ 107.1
SMI and Berger 2.5 3.6
--------------------- --------------------
Sub-total 146.4 110.7
Other (17.7) (2.7)
--------------------- --------------------
Total $ 128.7 $ 108.0
===================== ====================
Net income (loss):
Janus and Berger:
Janus (iii) $ 82.7 $ 62.6
SMI and Berger (iv)(v) 1.5 1.8
--------------------- --------------------
Sub-total 84.2 64.4
--------------------- --------------------
Other:
DST (v) 22.5 16.4
Other (16.3) (7.1)
--------------------- --------------------
Sub-total 6.2 9.3
--------------------- --------------------
Total $ 90.4 $ 73.7
===================== ====================
21
(i) Includes certain non-recurring items as follows: a) Janus recorded
approximately $39.4 million ($21.6 million after minority interest and
income taxes) in severance, facility closing and related costs associated
with work force reductions and the closing of its Austin location in April
2001; and b) the Company recorded $8.1 million ($7.5 million after-tax) in
equity earnings of DST representing Stilwell's proportionate share of DST
non-recurring gains in connection with the sale of DST's portfolio
accounting business and sales of marketable equity securities during second
quarter 2001.
(ii) Includes a non-recurring expense of approximately $4.0 million ($2.6
million after-tax) representing legal, accounting and other professional
expenses associated with the formation of Janus Capital Management LLC. In
addition, the reorganization from a corporation to a limited liability
company resulted in certain permanent tax effects netting to approximately
$1.8 million in additional tax expense to Stilwell.
(iii)Janus net income is reported after minority interest of approximately $8.1
and $0.2 million for the three months ended June 30, 2001 and 2002,
respectively.
(iv) SMI net income is reported after minority interest of approximately $0.3
million for the three months ended June 30, 2002.
(v) Stilwell's investment in DST is held by SMI.
Assets under management at June 30, 2001, December 31, 2001 and June 30,
2002 were as follows (in billions):
June 30, December 31, June 30,
2001 2001 2002
--------------- ----------------- ---------------
Janus:
Janus Advised Funds:
Janus Investment Fund $ 132.3 $ 107.9 $ 84.8
Janus Aspen Series (i) 20.3 18.3 16.0
Janus Adviser Series (i) 2.8 3.9 4.1
Janus Money Market Funds 14.8 18.8 14.8
Janus World Funds plc 3.0 3.3 3.4
--------------- ----------------- ---------------
Total Janus Advised Funds 173.2 152.2 123.1
Janus Sub-Advised Funds and Private
Accounts 37.9 30.0 22.3
--------------- ----------------- ---------------
Total Janus 211.1 182.2 145.4
--------------- ----------------- ---------------
Berger:
Berger Funds 6.1 6.0 6.1
INTECH LLC 5.8
Bay Isle 1.1 1.1
Berger Sub-Advised Funds and Private
Accounts 1.6 1.5 1.8
--------------- ----------------- ---------------
Total Berger 7.7 8.6 14.8
--------------- ----------------- ---------------
Nelson 1.3 1.4 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 220.1 $ 192.2 $ 161.5
=============== ================= ===============
The Company earned $73.7 million in second quarter 2002 compared to $90.4
million in second quarter 2001. Exclusive of the one-time items in second
quarter 2001 and 2002 as discussed in notes (i) and (ii) in the earnings table
above, earnings decreased approximately 25%. This decrease reflects lower
revenues due to lower assets under management, a decrease in ongoing operating
margin and an increase in interest expense associated with higher debt levels.
22
Average assets under management decreased 21% compared to prior year's
second quarter (from $223.9 billion to $177.2 billion), leading to a decline in
revenues from $411.5 million to $310.4 million in second quarter 2002. The lower
revenues resulted in a $20.7 million decrease in operating income
quarter-to-quarter ($56.1 million, exclusive of one-time costs). Stilwell
reported a higher operating margin in second quarter 2002 compared to the prior
year; however, exclusive of one-time items, the operating margin decreased from
40.9% in second quarter 2001 to 36.1% in second quarter 2002. Stilwell's ability
to maintain an operating margin above industry standards reflects the savings
generated by Janus in connection with its increased focus on electronic
shareowner servicing and reliance on technology. Exclusive of one-time gains
recorded by DST, Stilwell's equity in net earnings of DST increased 9% during
second quarter 2002 versus 2001, continuing the strong growth trends experienced
by DST over the last several quarters.
JANUS AND BERGER
Assets under management for Janus and Berger totaled $160.2 billion, a
decrease of $29.0 billion since March 31, 2002. This decrease reflects net cash
outflows of $7.3 billion and market depreciation of $21.7 billion. Compared to
December 31, 2001 and June 30, 2001, assets under management have declined by
approximately $30.6 billion and $58.6 billion, respectively, primarily due to
market depreciation associated with the general downturn in the various markets
and indices. Average assets under management for Janus and Berger during second
quarter 2002 totaled approximately $175.9 billion compared to $187.5 billion in
first quarter 2002 and $222.6 billion in second quarter 2001. See the brief
discussions of Janus and Berger separately below.
Investment management fees for Janus and Berger decreased 25% in second
quarter 2002 compared to second quarter 2001 as a result of the decrease in
average assets under management. Aggregate investment management fees,
shareowner servicing fees and other revenues for the second quarter 2002 totaled
approximately 70 basis points of average assets under management compared to
approximately 73 basis points in second quarter 2001. The decline in basis
points reflects a change in the composition of assets under management,
partially attributable to the addition of institutionally-based INTECH LLC
assets. Shareowner servicing fees and other revenues decreased $20.0 million
compared to prior year's second quarter, primarily due to declines in assets
under management.
Operating margins for Janus and Berger (exclusive of the one-time items)
decreased to 37.6% from 45.7% in second quarter 2001. Operating expenses totaled
$194.1 million ($190.1 million, exclusive of one-time costs) for the three
months ended June 30, 2002 compared to $260.3 million (220.9 million, exclusive
of one-time costs) in the prior year quarter. The largest component of the
operating expenses, compensation expense, was level with second quarter 2001,
reflecting the approximate $8.6 million increase in non-cash compensation
associated with the special, one-time grant of five percent of Janus' equity to
key Janus employees on April 1, 2002, offset by
reduced incentive compensation and a decrease in the average number of employees
quarter-to-quarter. Operating expenses with notable decreases quarter-to-quarter
included the following items: i) third party concession fees resulting from a
lower level of assets distributed through these arrangements; ii) depreciation
and amortization associated with goodwill and non-amortizable identified
intangible assets pursuant to the new accounting guidelines as set forth in
Statement of Financial Accounting Standards No. 142 "Goodwill and Intangible
Assets" ("FAS 142") as well as to reduced capital expenditures over the last two
years; iii) marketing costs resulting from promotion efforts that were scaled
back to reflect the current operating, market and performance environment; and
iv) other variable costs reflecting the decline in revenues.
Interest expense increased by $1.7 million as a result of higher average
debt balances, primarily associated with Berger's acquisition of INTECH.
Minority interest declined by $7.6 million quarter-to-quarter, reflecting
the various repurchases of vested JCC common stock by Stilwell during 2001. The
April 2002 grant of Janus profits interests (as discussed in "Significant
Developments" above) are not yet vested and therefore are not reflected as
minority interest.
23
NELSON, DST AND OTHER
Nelson reported earnings of $0.6 million for the second quarter 2002
versus a net loss of $1.3 million in prior year's second quarter.Nelson's assets
under management were essentially unchanged from March 31, 2002 and were down
slightly from December 31, 2001. Assets under management in British pounds
actually decreased from (pound)915 million at December 31, 2001 to (pound)897
million at June 30, 2002 due to market depreciation. As a result of increased
marketing and brand-awareness initiatives, the number of shareowner accounts has
grown approximately 6% since June 30, 2001. This improvement reflects higher
revenues and reduced costs quarter-to-quarter. Nelson continues its ongoing
efforts to expand its existing operations and develop products and services that
complement its core business. The Company expects that during this phase of
Nelson's development, Nelson will operate at a loss because the rate of growth
in expenses will exceed that of revenues (primarily due to increases in the
number of employees, technology infrastructure development and marketing
efforts). These losses, however, are not expected to be material to Stilwell's
results of operations or financial position.
Second quarter 2002 equity earnings from DST were $17.7 million versus
$24.4 million in second quarter 2001. Exclusive of the one-time DST items in
2001 as discussed above, equity earnings from DST increased $1.4 million
quarter-to-quarter. This improvement was largely attributable to higher earnings
in DST's financial services segment due to improved operating margins
quarter-to-quarter. Consolidated DST revenues decreased 9% due to lower
demutualization and corporate actions activity, the absence of revenues
associated with the Portfolio Accounting Systems unit, which was sold in June
2001, and reduced telecommunications, brokerage and trade confirmation volumes.
These declines were partially offset by increased revenues resulting from a
higher number of shareowner accounts serviced (totaling 80.3 million at June 30,
2002 versus 75.6 million at December 31, 2001 and 74.8 million at June 30,
2001).
Other Stilwell operating expenses decreased over the comparable prior year
quarter, primarily as a result of lower amortization expense resulting from
Stilwell's adoption of FAS 142.
Interest expense increased by $1.9 million in second quarter 2002 versus
2001 as a result of accrued interest on Stilwell's various senior debt and
convertible debt offerings and higher relative interest rates, partially offset
by interest costs that were incurred in second quarter 2001 associated with
Stilwell's obligations to purchase shares of Janus common stock.
Other income for second quarter 2002 decreased by $3.9 million compared to
second quarter 2001 primarily due to reduced interest income from lower average
cash balances and interest rates.
24
Six Months Ended June 30, 2002 Compared with the Six Months Ended June 30, 2001
The Company's revenues, operating income and net income were as follows (dollars
in millions):
Six months ended June 30,
-----------------------------------------------
2001 (i) 2002 (ii)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 817.6 $ 583.2
SMI and Berger 32.3 44.2
--------------------- --------------------
Sub-total 849.9 627.4
Other 10.1 11.3
--------------------- --------------------
Total $ 860.0 $ 638.7
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 331.2 $ 244.0
SMI and Berger 5.0 7.4
--------------------- --------------------
Sub-total 336.2 251.4
Other (24.7) (5.4)
--------------------- --------------------
Total $ 311.5 $ 246.0
===================== ====================
Net income (loss):
Janus and Berger:
Janus (iii) $ 183.8 $ 146.8
SMI and Berger (iv) (v) 3.5 4.0
--------------------- --------------------
Sub-total 187.3 150.8
--------------------- --------------------
Other:
DST (v) 39.0 34.3
Other (24.5) (14.2)
--------------------- --------------------
Sub-total 14.5 20.1
--------------------- --------------------
Total $ 201.8 $ 170.9
===================== ====================
(i) Includes certain non-recurring items as follows: a) Janus recorded
approximately $48.5 million ($26.5 million after minority interest and
income taxes) in severance, facility closing and related costs associated
with work force reductions and the closing of its Austin location in
February and April 2001; b) in first quarter 2001, Janus recorded a
reduction of approximately $8.2 million ($4.4 million after minority
interest and income taxes) in stock bonus accruals at Janus that were no
longer payable as a result of the sale of shares of Janus common stock by
various employees to Stilwell; and c) the Company recorded $8.1 million
($7.5 million after-tax) in equity earnings of DST representing Stilwell's
proportionate share of DST non-recurring gains in connection with the sale
of DST's portfolio accounting business and sales of marketable equity
securities during second quarter 2001.
(ii) Includes a non-recurring expense of approximately $4.0 million ($2.6
million after-tax) representing legal, accounting and other professional
expenses associated with the formation of Janus Capital Management LLC. In
addition, the reorganization from a corporation to a limited liability
company resulted in certain permanent tax effects netting to approximately
$1.8 million in additional tax expense to Stilwell.
(iii)Janus net income is reported after minority interest of approximately
$27.1 and $0.4 million for the six months ended June 30, 2001 and 2002,
respectively.
(iv) SMI net income is reported after minority interest of approximately $0.7
million for the six months ended June 30, 2002.
(v) Stilwell's investment in DST is held by SMI.
25
The Company earned $170.9 million for the six months ended June 30, 2002
compared to $201.8 million for the six months ended June 30, 2001. Exclusive of
one-time items as noted in (i) and (ii) in the table above, earnings decreased
approximately 19%. This decrease reflects lower revenues due to lower asset
under management levels and a lower operating margin (exclusive of one-time
items) and an increase in interest expense associated with higher debt levels.
Average assets under management decreased 22% compared to prior year (from
$235.2 billion to $183.0 billion), leading to a $221.3 million (26%) decline in
revenues. Operating income decreased by $65.5 million ($101.8 million, exclusive
of one-time costs) period-to-period. Exclusive of one-time items, Stilwell
reported a lower operating margin in the first half of 2002 compared to 2001,
indicative of the pressures expected due to the lower level of assets under
management and resulting lower revenue totals, higher relative compensation
costs and certain components of expenses that are fixed. The margin, however,
remained above industry standards due to the strong operational flexibility of
Stilwell, particularly Janus. Exclusive of one-time items, Stilwell's equity in
net earnings of DST increased 9% during the six months ended June 30, 2002
versus 2001.
JANUS AND BERGER
Average assets under management for Janus and Berger during the six months
ended June 30, 2002 totaled $181.7 billion, approximately 22% lower than
comparable 2001. The lower level of average assets under management for Janus
and Berger was due to both market depreciation and net redemptions. See the
brief discussions of Janus and Berger separately below.
Investment management fees, shareowner servicing fees and other revenues
declined period-to-period, reflecting the decrease in average assets under
management and a decline in basis points earned on average assets under
management from 73 basis points in 2001 to 70 basis points in 2002. The decline
in basis points reflects a change in the composition of assets under management,
primarily attributable to a larger proportion of money market products and the
addition of institutionally-based INTECH LLC assets.
The operating margin for Janus and Berger (exclusive of one-time costs)
decreased to 40.7% from 44.3% in comparable 2001. Operating expenses totaled
$376.0 million ($372.0 million, exclusive of one-time items) for the six months
ended June 30, 2002 compared to $513.7 million ($473.4 million, exclusive of
one-time items) in the prior year period. Reduced operating expenses occurred in
the same key components identified in the second quarter discussion above.
Compensation and third party concession fees - the two largest components of
Stilwell's operating expenses - represented approximately 39% of revenues for
the six months ended June 30, 2002, which is an increase over the approximately
36% experienced during the same 2001 period. This increase is due to the lower
level of revenues in 2002 compared to 2001 and the non-cash compensation charges
associated with the grants of equity to Janus employees in 2002.
Interest expense increased by $3.1 million as a result of higher average
debt balances resulting from Berger's acquisition of INTECH and borrowings by
Janus under the credit facilities. Other income declined by $5.0 million as a
result of reduced interest income from lower average cash balances and reduced
interest rates.
Minority interest declined by $26.0 million period-to-period, reflecting
the various repurchases of vested JCC common stock by Stilwell during 2001. The
April 2002 grant of Janus profits interests (as discussed in "Significant
Developments" above) are not yet vested and therefore are not reflected as
minority interest.
26
NELSON, DST AND OTHER
Nelson reported earnings of $0.6 million for the six months ended June 30,
2002 versus a loss of $2.3 million in 2001. This improvement reflects higher
revenues and reduced costs in 2002 compared to 2001. Nelson continues its
ongoing efforts to expand its existing operations and develop products and
services that complement its core business. The Company expects that during this
phase of Nelson's development, Nelson will operate at a loss because the rate of
growth in expenses will exceed that of revenues (primarily due to increases in
the number of employees, technology infrastructure development and marketing
efforts). These losses, however, are not expected to have a material impact on
Stilwell's results of operations or financial position.
Equity earnings from DST for the six months ended June 30, 2002 were $37.1
million versus $42.2 million in 2001. Exclusive of the one-time items discussed
above, equity earnings from DST increased $3.0 million. This improvement was
largely attributable to higher earnings in DST's financial services segment,
driven by increased revenues. DST's consolidated revenues for the six months
ended June 30, 2002 increased over 2001, primarily due to the inclusion of
revenue from EquiServe, Inc., in which DST acquired controlling ownership on
March 30, 2001.
Other Stilwell operating expenses decreased over the comparable prior
year, primarily as a result of lower amortization expense resulting from
Stilwell's adoption of FAS 142.
Interest expense increased by $8.9 million and Other, net declined $2.5
million during the six months ended June 30, 2002 compared to 2001 for the same
reasons as identified in the second quarter discussion.
Subsidiary information for the Three and Six months ended June 30, 2002
A brief discussion of significant Janus, Berger and Nelson items during
the six months ended June 30, 2002 follows:
Janus
-----
During the three months ended June 30, 2002, assets under management
decreased by $28.2 billion due to market depreciation of $20.1 billion
and net cash outflows of $8.1 billion. The net outflows consisted of
approximately $4.7 billion in Janus' retail funds, $1.9 billion in money
market funds, $0.3 billion in Janus Aspen Series and $1.6 billion in
subadvised and private accounts, partially offset by net sales of $0.4
billion in the Janus Adviser Series and Janus World Funds.
During the six months ended June 30, 2002, assets under management
decreased by $36.8 billion due to market depreciation of $24.0 billion
and net cash outflows of $12.8 billion. The net outflows consisted of
approximately $7.7 billion in Janus' retail funds, $4.4 billion in money
market funds, $0.3 billion in Janus Aspen Series and $1.7 billion in
subadvised and private accounts, partially offset by net sales of $1.3
billion in the Janus Adviser Series and Janus World Funds. Total Janus
shareowner accounts decreased from 5.6 million at December 31, 2001 to
5.3 million at June 30, 2002.
Revenues were lower in the three months and six months ending June 30,
2002 compared to 2001 due to the lower level of average assets under
management. While ongoing operating margins declined during the first
half of 2002 compared to the levels experienced throughout 2001, Janus'
well-planned cost structure and ongoing review of that structure has
produced margins that consistently surpass industry averages.
27
Berger
------
Berger assets under management decreased by $0.8 billion during the three
months ended June 30, 2002 due to $1.6 billion of market depreciation,
partially offset by net cash inflows of $0.8 billion (primarily in the
INTECH LLC and value products).
Berger assets under management increased by $6.2 billion during the six
months ended June 30, 2002, reflecting $6.0 billion from the purchase of
INTECH and net cash inflows of $1.5 billion, partially offset by market
depreciation of $1.3 billion. Berger's ability to maintain net cash
inflows during the year, as well as to increase its shareowner accounts
to more than 281,000, reflects the results of Berger's efforts to broaden
its fund platform to include value products and INTECH LLC products.
Berger's operating margin increased in 2002 compared to 2001 primarily
due to the addition of INTECH LLC, which has historically operated at
higher margins than Berger.
Nelson
------
Nelson continues to focus on building brand awareness through its
relationships with premier corporations and the ongoing presentations to
these corporations' employees. 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 43 as of June 30, 2002.
The number of clients during that same period has grown by nearly 50%.
TRENDS AND OUTLOOK
Stilwell's earnings and cash flows are heavily dependent on prevailing
financial market conditions. Significant increases or decreases in the various
securities markets, particularly the equity markets, can have a material impact
on Stilwell's results of operations, financial condition and cash flows.
Additionally, Stilwell results are affected by the relative performance of
Janus, Berger and Nelson products, introduction and market reception of new
products and the closing of existing funds to new investors, as well as other
factors, including, but not limited to, increases in the rate of return of
alternative investment products, increasing competition as new mutual funds
launch, and changes in marketing and distribution channels. The growth rates of
Stilwell's subsidiaries and equity investments have varied from year-to-year,
and management does not expect the high average growth rates sustained in the
late 1990's to be repeated in the foreseeable future.
Due to the downturn in the financial equity markets and weak Janus
investment performance from the second half of 2000 through the first half of
2002, Stilwell's assets under management declined from levels experienced during
recent prior years. Average assets under management for the six months ended
June 30, 2002 were $183.0 billion and assets under management at June 30, 2002
totaled $161.5 billion (and further declined to approximately $148 billion at
July 31, 2002). 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.
Exclusive of one-time items discussed above, the operating margin for the
six months ended June 30, 2002 decreased to 39.1% from 40.9% in prior year.
Management expects that Stilwell will continue to experience margin pressures as
the various subsidiaries strive to ensure that the operational and
administrative infrastructure continues to meet the high standards of quality
and service historically provided to investors. In addition, as discussed in
"Significant Developments" above, compensation costs increased as a result of
the equity grants at Janus that occurred on April 1, 2002.
Stilwell expects to continue to participate in the earnings or losses from
its DST investment.
28
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
Six months ended June 30,
------------------------------------------
2001 2002
---------------- -----------------
Cash flows provided by (used for):
Operating activities $ 292.0 $ 147.5
Investing activities (859.1) (95.0)
Financing activities 641.5 (219.7)
---------------- -----------------
Net increase (decrease) 74.4 (167.2)
At beginning of year 364.3 236.7
---------------- -----------------
At end of period $ 438.7 $ 69.5
================ =================
During the six months ended June 30, 2002, the Company's consolidated cash
position decreased $167.2 million from December 31, 2001. This decrease is
largely attributable to repayment of long-term debt and investment in INTECH
LLC, partially offset by proceeds from the issuance of the Retail Notes,
borrowings under the credit facilities and net income.
Net operating cash inflows for the six months ended June 30, 2002 were
$144.5 million lower than comparable 2001. This decrease was chiefly
attributable to lower net income and changes in working capital items (e.g.,
higher accrued liabilities in 2001 as a result of severance and facility charges
not yet paid, partially offset by reduced cash requirements for funding of
payments under ss.83(b) of the Internal Revenue Code for JCC employees as
described in Note 10 to the consolidated financial statements as presented in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001).
Net investing cash outflows were $95.0 million during the six months ended
June 30, 2002 compared to $859.1 million during the comparable 2001 period. This
difference results primarily from an $840.9 million increase in investments in
affiliates during the first half of 2001, largely attributable to the purchase
of 802,042 shares of Janus common stock from various minority stockholders. In
2002, the cash outflows related largely to the purchase of INTECH. Capital
expenditures were approximately 50% lower than 2001 due to the extensive
infrastructure efforts at Janus in recent years.
Through June 30, 2002, financing cash outflows reflect the repayment of
long-term debt ($614.5 million) and minority interest distributions, partially
offset by the proceeds ($428.1 million) from the issuance of the Retail Notes
and borrowings under the credit facilities.
The Company believes its operating cash flows and available financing
resources are sufficient to fund working capital and other requirements for the
remainder of 2002. Cash flows from operations are expected to continue during
the remainder of 2002 from positive operating income, which has historically
resulted in favorable operating cash flows. Based on activity in first half of
2002, the Company expects that deferred commission payments will be higher
than in 2001 as a result of the launch of various offshore funds that utilize
the B share commission structure. Capital expenditure levels are expected to be
lower than in 2001, largely due to the extensive infrastructure efforts at Janus
during 1998 through 2000. Additionally, as discussed in "Significant
Developments" above, the Company expects to make additional investments in
INTECH LLC of approximately $50 million during the first half of 2003.
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
29
Facilities contain a number of covenants that could restrict maximum utilization
of the Facilities, or the ability of the Company to issue securities that are
currently available for issuance under the Company's Shelf Registration referred
to below, including various financial covenants such as a specified financing
leverage, minimum net worth, minimum unencumbered liquidity, a fixed charge
coverage and minimum average assets under management. Stilwelland Janus were in
compliance with the various provisions of the Facilities,
including the financial covenants, as of June 30, 2002.
Pursuant to a provision included in the Facilities, if Stilwell's average
assets under management over a rolling three-month period were to fall below
$180 billion, but remain above $170 billion, the aggregate amount available
under the Facilities would be reduced to $500 million. If the average assets
under management were to fall below $170 billion, but remain above $150 billion,
the Facilities would be reduced to $400 million. If the average assets under
management were to fall below $150 billion, the Facilities would be reduced to
$300 million. Further, Stilwell would be required to repay portions of amounts
borrowed under the credit facilities in excess of the reduced credit
availability amount. As of June 30, 2002 the rolling three-month average of
assets under management was $177.2 billion and thus the amount available under
the Facilities was reduced to $500 million. As of July 31, 2002, the rolling
three-month average of assets under management was below $170 billion and thus
the amount available under the Facilities was further reduced to $400 million.
The actual amount outstanding under the Facilities as of June 30, 2002 was $270
million, of which approximately $235 million was repaid as of August 13, 2002
using proceeds from the 7.75% Senior Notes and operating cash flows.
The Company has a working capital deficit at June 30, 2002 of $42.9 million.
The deficit is partially due to the $150 million outstanding on the Company's
364 -Day Facility at June 30, 2002. The Company used proceeds from the 7.75%
Senior Notes (see "Recent Developments" above) to repay a portion of the
outstanding amount on the 364-Day Facility and expects to repay the remaining
amount outstanding by the end of the year.
In April 2002, the Company filed with the Securities and Exchange Commission
("SEC") a Shelf Registration Statement ("Shelf Registration"), which supersedes
Stilwell's previous shelf registration statement and provides for the issuance
from time to time of up to $800 million in aggregate issue price of the
Company's common stock, preferred stock and debt securities. The Shelf
Registration was declared effective by the SEC on April 25, 2002. See "Recent
Developments" above regarding issuance of the 7.75% Senior Notes under the Shelf
Registration. As of August 13, 2002, approximately $600 million of securities
are available for issuance under the Shelf Registration, subject to the covenant
limitations pursuant to the Company's credit facilities.
In July 2000, the Company announced a $1 billion stock repurchase
program to be completed over a period of two years. On May 9, 2002, the Company
extended the program an additional two years to expire on July 25, 2004. The
Company did not repurchase any shares during 2001 or first half of 2002. As of
June 30, 2002, the Company had repurchased approximately 7.2 million shares of
its common stock for a total cost of approximately $323.3 million. The Company
anticipates funding future repurchases with cash flow from operations and may
consider additional financing alternatives for these purposes.
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has had no significant changes in its Quantitative and
Qualitative Disclosures About Market Risk from that previously reported in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, other
than as described below
Interest Rate Sensitivity
In February 2002, Stilwell entered into a receive-fixed, pay-float
interest rate exchange agreement with a major investment bank with respect to
Stilwell's $400 million senior notes due November 1, 2006 ("7% Senior Notes").
Under the agreement, Stilwell will receive from the counterparty a fixed 7% rate
on $400 million and Stilwell will pay the counterparty based on the six month
LIBOR rate (set in arrears) plus 178 basis points. Stilwell has designated the
interest rate exchange as a hedge that qualifies for the "shortcut" method for
fair value hedges pursuant to Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133")
and the hedge meets the prerequisites for the assumption of no ineffectiveness
under FAS 133. The effect of the exchange agreement is to increase the Company's
exposure to fluctuations in interest rates, primarily to the six month LIBOR
rate.
For example, as of June 30, 2002, the six month LIBOR rate was 1.96%.
Assuming the agreement had been entered into on January 1, 2002, under the
exchange agreement, Stilwell would have paid to the counterparty a rate of 3.74%
and would have received a rate of 7%, resulting in a net gain to Stilwell of
3.26%, or approximately $6.5 million during the first half of 2002. Stilwell is
required to pay to the holders of the 7% Senior Notes an amount equal to $7.0
million per quarter. Accordingly, the net interest cost to Stilwell during the
first half of 2002 would have been $7.5 million under this hypothetical
scenario.
A one percentage point increase in the six month LIBOR rate would result
in a $1 million increase in the net interest cost to Stilwell per quarter, while
a one percentage point decrease in the six month LIBOR rate would result in a $1
million decrease in the net interest cost to Stilwell per quarter
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has had no significant changes in any legal proceedings from
that previously reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its 2002 Annual Meeting of Shareholders ("Annual
Meeting") on May 9, 2002. A total of 190,733,340 shares of the Common
Stock, or 85.8% of the outstanding voting stock on the record date
(222,300,415 shares), were represented at the Annual Meeting, thereby
constituting a quorum. These shares voted together as a single class.
b) Proxies for the meeting were solicited pursuant to Regulation 14A; there
was no solicitation in opposition to management's nominees for directors
as listed in the Company' definitive Proxy Statement for the Annual
Meeting ("Proxy Statement") and all such nominees were elected. The
voting was as follows:
Total
Shares
Election of Two Directors
Paul F. Balser
For 186,062,026
Withheld 4,671,314
----------------
Total 190,733,340
================
Robert Skidelsky
For 186,032,115
Withheld 4,701,225
----------------
Total 190,733,340
================
b) Listed below is the other matter voted on at the Annual Meeting. This
matter is fully described in the Proxy Statement. The voting was as
follows:
Total
Shares
Approval of a Performance-Based Incentive
Compensation Plan for the Chief Executive
Officer of Janus Capital Corporation
For 176,060,318
Against 12,790,863
Abstentions 1,882,159
Non-votes -
----------------
Total 190,733,340
================
Since this matter was approved by the majority of the shares present at the
Annual Meeting, this matter passed.
32
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 3.1 Amended and Restated Bylaws of Stilwell Financial Inc., as
amended and restated on May 8, 2002, is attached to this
Form 10-Q as Exhibit 3.1
b) Reports on Form 8-K
On June 25, 2002, the Company filed a Current Report on Form 8-K, dated
March 31, 2002, under Item 7, to provide a schedule reflecting the computation
of ratio of earnings to fixed charges prepared pursuant to Item 601(b)(12) of
Regulation S-K.
On June 7, 2002, the Company filed a Current Report on Form 8-K, dated May
31, 2002, under Item 5, to provide a schedule for comparison of the amortization
totals expected to occur during 2002 and beyond to the impact of the adoption of
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" on prior year amounts.
On May 6, 2002, the Company filed a Current Report on Form 8-K, dated
April 30, 2002, under Item 5, to provide the supplemental indenture, dated as of
April 30, 2002, to amend the Indenture and the Convertible Notes to add to the
Company's covenants for the benefit of the holders of the Convertible Notes.
On May 3, 2002, the Company furnished a Current Report on Form 8-K, dated
April 25, 2002, under Item 9, that attaches Stilwell's news releases announcing
financial results for the three months ended March 31, 2002 and reporting that
Stilwell retired approximately $615 million of the zero-coupon convertible notes
pursuant to put rights by the holders of the notes and also reporting ending
assets under management on April 30, 2002 and average assets under management
for the one month and four months ended April 30, 2002.
On April 25, 2002, the Company filed a Current Report on Form 8-K, dated
April 24, 2002, under Item 5, that attaches a Form of First Supplemental
Indenture to be entered into between Stilwell Financial Inc. and JPMorgan Chase
Bank with respect to the Convertible Notes. This Current Report on Form 8-K also
furnished under Item 9 a news release indicating Stilwell's intention to pay
cash interest to holders of the Convertible Notes.
On April 10, 2002, the Company furnished a Current Report on Form 8-K,
dated April 3, 2002, under Item 9, that reports that Stilwell issued
approximately 6.2% of Janus ownership to key Janus employees and completed the
formation of a Janus limited liability company.
On April 5, 2002, the Company filed a Current Report on Form 8-K, dated
April 5, 2002, under Item 5, that provides the Officer's Certificate for
Stilwell's series of debt securities, designated as Stilwell's 7.875% Public
Interest NotES due 2032 (the "PINES"), for issuance under an indenture, dated as
of November 6, 2001 (the "Indenture"), between Stilwell and JPMorgan Chase Bank
(formerly known as The Chase Manhattan Bank), a New York banking corporation.
On April 2, 2002, the Company furnished a Current Report on Form 8-K,
dated March 31, 2002, under Item 9, that reports ending assets under management
as of and for the quarter ended March 31, 2002 and information regarding the
quarterly earnings presentation expected to be held on April 25, 2002.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated on August
14, 2002.
Stilwell Financial Inc.
/s/ Daniel P. Connealy
-----------------------------
Daniel P. Connealy
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Douglas E. Nickerson
------------------------------
Douglas E. Nickerson
Vice President, Controller and Treasurer
(Principal Accounting Officer)
34