FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2002
- --------------------------------------------------------------------------------
Common Stock, $0.01 per share par value 222,479,320 Shares
- --------------------------------------------------------------------------------
STILWELL FINANCIAL INC.
Form 10-Q
September 30, 2002
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
December 31, 2001 and September 30, 2002 2
Consolidated Condensed Statements of Income -
Three and Nine months ended September 30, 2001 and 2002 3
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 2001 and 2002 4
Consolidated Condensed Statements of Changes in Stockholders'
Equity - Year ended December 31, 2001 and Nine months ended
September 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 32
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
CERTIFICATIONS 35
STILWELL FINANCIAL INC.
FORM 10-Q
SEPTEMBER 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 Reports on Form 10-Q for the quarters ended
March 31, 2002 and June 30, 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 nine months ended September 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, September 30,
2001 2002
----------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 236.7 $ 90.3
Accounts receivable 128.5 103.8
Investments in advised funds 31.0 24.4
Other current assets 81.9 90.4
--------------- ---------------
Total current assets 478.1 308.9
Investments 508.7 495.4
Property and equipment (net of $93.5 and $122.4 accumulated
depreciation and amortization, respectively) 92.9 77.1
Intangibles and other assets, net 1,273.3 1,326.4
Goodwill, net 1,038.6 1,124.1
--------------- ---------------
Total assets $ 3,391.6 $ 3,331.9
=============== ===============
Liabilities and
stockholders' equity
Current liabilities:
Current portion of long-term debt $ 694.7 $ 35.0
Accounts and wages payable 42.5 16.8
Accrued compensation and benefits 56.3 52.4
Accrued liability to third party administrators 18.7 12.6
Other accrued liabilities 68.7 41.2
Accrued reorganization costs 46.1
Deferred acquisition liability 44.1
--------------- ---------------
Total current liabilities 880.9 248.2
Other liabilities:
Long-term debt 399.5 872.5
Deferred income taxes 679.9 736.4
Other liabilities 44.7 45.4
--------------- ---------------
Total liabilities 2,005.0 1,902.5
--------------- ---------------
Minority interest in consolidated subsidiaries 23.3 6.8
--------------- ---------------
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 222,423,458
shares outstanding, respectively) 2.2 2.2
Retained earnings 1,285.3 1,392.9
Accumulated other comprehensive income 75.8 27.5
--------------- ---------------
Total stockholders' equity 1,363.3 1,422.6
--------------- ---------------
Total liabilities and stockholders' equity $ 3,391.6 $ 3,331.9
=============== ===============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Income
(Dollars in Millions, except per share information)
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
----------------------------- -------------------------------
2001 2002 2001 2002
------------ ------------ ------------- ------------
Revenues:
Investment management fees $ 296.4 $ 211.9 $ 1,002.0 $ 739.1
Shareowner servicing fees 49.3 32.6 171.6 115.1
Other 15.9 13.3 48.0 42.3
------------ ------------ ------------- ------------
Total 361.6 257.8 1,221.6 896.5
------------ ------------ ------------- ------------
Operating expenses:
Compensation 78.0 107.2 257.8 258.5
Marketing and promotion 22.4 9.7 72.4 35.4
Third party concession fees 53.4 39.6 181.1 137.5
Depreciation and amortization 35.0 18.6 92.0 54.1
Professional services 9.9 9.0 34.7 29.1
Other 31.5 51.5 100.4 113.7
Severance, facility closing and other costs 46.1 40.3 46.1
------------ ------------ ------------- ------------
Total 230.2 281.7 778.7 674.4
------------ ------------ ------------- ------------
Operating income (loss) 131.4 (23.9) 442.9 222.1
Equity in earnings of unconsolidated affiliates 15.8 17.0 58.0 54.1
Interest expense (7.0) (14.3) (21.8) (41.1)
Other, net 5.0 1.8 18.1 7.4
------------ ------------ ------------- ------------
Income (loss) before taxes and minority interest 145.2 (19.4) 497.2 242.5
Income tax provision 47.2 111.5 170.7 201.4
Minority interest in consolidated earnings 71.2 0.3 97.9 1.4
------------ ------------ ------------- ------------
Net income (loss) $ 26.8 $(131.2) $ 228.6 $ 39.7
============ ============ ============= ============
Per Share Data (Note 4):
Weighted average Common shares
outstanding (in thousands) 220,462 222,415 219,685 222,339
Basic Earnings (Loss) per share $ 0.12 $ (0.59) $ 1.04 $ 0.18
Weighted average Diluted Common shares
outstanding (in thousands) 224,390 223,779 224,612 224,253
Diluted Earnings (Loss) per share $ 0.11 $ (0.60) $ 0.99 $ 0.12
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Cash Flows
(Dollars in millions)
(Unaudited)
Nine months ended
September 30,
-------------------------------------
2001 2002
-------------- --------------
Cash flows provided by (used for):
Operating activities:
Net income $ 228.6 $ 39.7
Adjustments to net income:
Depreciation and amortization 92.0 54.1
Deferred income taxes 25.8 80.9
Minority interest in consolidated earnings 97.9 1.4
Undistributed earnings of unconsolidated affiliates (58.0) (54.1)
Reorganization and impairment charges 30.0
Facility closing lease and equipment charges 20.5
Employee deferred compensation (2.9) 53.6
Deferred commissions (3.1) (22.7)
Changes in other assets (27.9) 11.6
Changes in working capital items:
Accounts receivable 71.1 29.3
Other current assets (6.0) (4.4)
Accounts payable and accrued compensation payable (42.2) (36.6)
Other accrued liabilities 59.4 22.3
Other, net 15.0 13.7
-------------- --------------
Net operating 470.2 218.8
-------------- --------------
Investing activities:
Property acquisitions (26.7) (12.5)
Investments in and loans with affiliates (979.0) (90.9)
Sale of investments in advised funds 0.4 12.8
Purchase of investments in advised funds (4.6) (7.0)
Other, net 6.3 (0.4)
-------------- --------------
Net investing (1,003.6) (98.0)
-------------- --------------
Financing activities:
Proceeds from issuance of long-term debt 915.0 625.7
Repayment of long-term debt (225.0) (849.5)
Debt issuance costs (16.4) (6.7)
Proceeds from stock plans 23.1 2.9
Distributions to minority interest (87.1) (25.2)
Dividends paid to shareholders (6.6) (11.2)
Other, net (3.5) (3.2)
-------------- --------------
Net financing 599.5 (267.2)
-------------- --------------
Cash and cash equivalents:
Net increase (decrease) 66.1 (146.4)
At beginning of year 364.3 236.7
-------------- --------------
At end of period $ 430.4 $ 90.3
============== ==============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
STILWELL FINANCIAL INC.
Consolidated Condensed Statements of Changes in Stockholders' Equity
(Dollars in millions)
(Unaudited)
Accumulated other Total
Common Retained comprehensive stockholders'
stock 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 loss:
Net income 39.7
Net unrealized loss on investments (52.4)
Reclassification for gains included
in net income (1.4)
Foreign currency
translation adjustment 5.5
Comprehensive loss (8.6)
Stock options and benefit plans 76.9 76.9
Common stock dividends (9.0) (9.0)
-------------- -------------- ---------------- ---------------
Balance at September 30, 2002 $ 2.2 $ 1,392.9 $ 27.5 $ 1,422.6
============== ============== ================ ===============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
STILWELL FINANCIAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the management of Stilwell Financial Inc. (the "Company" or
"Stilwell"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting of normal closing procedures)
necessary to present fairly the financial position of the Company and its
subsidiary companies as of December 31, 2001 and September 30, 2002, the results
of operations for the three and nine months ended September 30, 2001 and 2002
and the cash flows for the nine months ended September 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 September 30, 2002 were: Janus
Capital Corporation ("JCC"), a wholly-owned subsidiary; Janus Capital Management
LLC ("Janus"), of which JCC owns approximately 92% (see Note 15); 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 86% 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 September 30, 2002, and 91% of revenues and more than 100% of net income for
the nine months ended September 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. Except as discussed in Note 5 below, 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
nine months ended September 30, 2002 are not necessarily indicative of the
results to be expected for the full year 2002.
3. On September 3, 2002, Stilwell announced that it expects to merge its
operations into a unified platform that will market and distribute its
investment products globally under the Janus brand name (the "Reorganization").
The Reorganization - which is expected to be effective by January 1, 2003 - will
be accomplished by merging JCC into Stilwell, and the company is expected to be
named Janus Capital Management Inc. ("JCM"). JCM will be headquartered in
Denver, Colorado. The Reorganization is expected to streamline operations into a
more effective business model that provides opportunities to capitalize on
Janus' brand and global distribution network.
The Company also announced that Mark B. Whiston, Janus' President of
Retail-Institutional Services, will become JCM's Chief Executive Officer and
vice chairman of the Stilwell/JCM Board of Directors upon completion of the
Reorganization.
In connection with the Reorganization, on October 23, 2002, three new members in
addition to Mr. Whiston were added to the Stilwell/JCM Board of Directors,
including James P. Craig, formerly JCC's Chief Investment Officer, Helen Young
Hayes, Janus' managing director of investments, and Andrew Cox, an investment
management consultant. Two existing directors, Morton Sosland and Andrew Rudd,
resigned their seats.
6
In connection with the Reorganization, the Company recorded a current liability
during third quarter 2002 of approximately $46.1 million ($28.7 million, after
income taxes and minority interest) for severance, facility closing and other
costs. Of this total, approximately $39.3 million is for severance costs and
approximately $6.8 million for other costs. The Company expects to pay the
majority of this amount in cash during the first half of 2003. In addition, see
Note 15 regarding the acceleration of vesting of Janus equity interests.
4. 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.
Three months ended Nine months ended
September 30, September 30,
--------------------------------------- ---------------------------------------
2001 2002 2001 2002
----------------- ---------------- ---------------- -----------------
(dollars in millions, except per share data)
Net income (loss) $ 26.8 $ (131.2) $ 228.6 $ 39.7
Dilutive securities at
subsidiaries and affiliates (2.2) (3.2) (7.3) (12.8)
----------------- ---------------- ---------------- -----------------
Net income (loss) for dilutive
computation $ 24.6 $ (134.4) $ 221.3 $ 26.9
----------------- ---------------- ---------------- -----------------
Weighted average Common
shares outstanding 220,461,626 222,415,495 219,684,693 222,339,350
Incremental shares from assumed
conversion of stock options
and ESPP shares 3,928,383 1,363,866 4,926,921 1,913,937
----------------- ---------------- ---------------- -----------------
Weighted average Diluted Common
shares outstanding 224,390,009 223,779,361 224,611,614 224,253,287
----------------- ---------------- ---------------- -----------------
Basic Earnings (Loss) per share $ 0.12 $ (0.59) $ 1.04 $ 0.18
================= ================ ================ =================
Diluted Earnings
(Loss) per share $ 0.11 $ (0.60) $ 0.99 $ 0.12
================= ================ ================ =================
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 Nine months ended
September 30, September 30,
-------------------------------------- --------------------------------
2001 2002 2001 2002
----------------- ---------------- ------------ -------------
1,633,006 5,158,500 1,097,759 3,817,899
The diluted earnings per share computation for the three months and nine
months ended September 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 14).
7
5. Investments in unconsolidated affiliates accounted for under the equity
method generally include all entities in which the Company or its subsidiaries
have significant influence, but not more than 50% voting control. The Company's
equity interest in DST was its primary equity investment at September 30, 2002.
Condensed consolidated financial information for DST is shown below:
December 31, 2001 September 30, 2002
----------------------- -----------------------
(dollars in millions)
Percentage ownership 33.0% 33.2%
Carrying value (a) $ 486.1 $ 442.0
Equity in DST net assets 486.1 442.0
Fair market value (b) 1,980.0 1,170.7
Financial condition:
Current assets $ 604.8 $ 593.2
Non-current assets 2,099.2 2,015.1
---------------- ------------------
Total assets $ 2,704.0 $ 2,608.3
================ ==================
Current liabilities $ 471.4 $ 493.4
Non-current liabilities 760.2 782.6
Stockholders' equity 1,472.4 1,332.3
---------------- ------------------
Total liabilities and stockholders' equity $ 2,704.0 $ 2,608.3
================ ==================
Three months Nine months
ended September 30, ended September 30,
--------------------------------- --------------------------------
2001 2002 2001 (d) 2002
-------------- -------------- --------------- -------------
Operating results:
Revenues (c) $ 611.8 $ 578.0 $ 1,791.3 $ 1,779.2
Costs and expenses (c) 541.6 502.3 1,565.9 1,550.9
Net income 48.6 51.1 176.9 163.6
(a) Excludes goodwill related to Stilwell's investment in DST totaling $110.7
million at September 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")
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 $25.6 million from
the sale of DST's portfolio accounting business and sales of marketable
securities.
As disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, beginning with DST's public offering in October 1995, the
Company provided deferred income taxes on its proportionate share of DST
earnings using the dividends-received deduction, which excluded 80% of the total
from taxation. When the Reorganization was announced, management indicated that
it expects to evaluate strategic alternatives for its DST investment.
Alternatives now being considered include transactions that would be taxable at
the full federal and state income tax rates; accordingly, a non-cash charge of
$107.8 million was recorded to accrue additional deferred income taxes in third
quarter 2002, resulting in taxes being provided on Stilwell's share of DST
earnings since the 1995 public offering at full statutory rates.
8
6. 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 $57.3 million and
$59.0 million at September 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):
Nine months
ended September 30,
-----------------------------
2001 2002
------- --------
Interest paid (a) $ 9.6 $ 12.5
Income taxes paid $ 73.2 $ 142.9
(a) This total does not include the amortization associated with debt
issue costs paid by Stilwell in connection with its various debt
offerings.
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 Nine months ended
September 30, September 30,
------------------------------------ ----------------------------------
2001 2002 2001 2002
--------------- --------------- -------------- --------------
(dollars in millions)
Unrealized loss recorded
in investments $ (23.3) $ (61.9) $ (96.0) $ (85.5)
Deferred income taxes 9.3 24.3 37.6 33.1
--------------- --------------- -------------- --------------
Unrealized loss recorded in accumulated
other comprehensive income (14.0) (37.6) (58.4) (52.4)
Less: reclassification adjustment for
gains included in net income (0.9) (0.8) (1.7) (1.4)
Foreign currency
translation adjustment 5.2 1.9 1.8 5.5
Net income (loss) 26.8 (131.2) 228.6 39.7
--------------- --------------- -------------- --------------
Comprehensive income (loss) $ 17.1 $ (167.7) $ 170.3 $ (8.6)
=============== =============== ============== ==============
During the three and nine months ended September 30, 2001, Stilwell recorded
approximately $3.6 million and $10.2 million, respectively, directly to
stockholders' equity representing Stilwell gains resulting from issuances of
stock by Janus. During the three and nine months ended September 30, 2002,
Stilwell recorded approximately $39.1 million and $72.2 million, respectively,
directly to stockholders' equity representing Stilwell gains resulting from
issuances of stock by Janus.
9
7. 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.
Identified intangible assets and other assets are summarized as follows (in
millions):
December 31, September 30,
2001 2002
------------------ ------------------
Mutual fund advisory contracts (1) (4) $ 190.3 $ 266.8
Third party advisor and distribution
relationships (1) 712.1 712.1
Marketing-related, such as brand and
trademark (1) (4) 271.1 280.6
Separate account relationships (2) 17.5 40.0
Other identified intangible assets (3)(4) 86.0
Accumulated amortization (45.4) (49.5)
------------------ ------------------
Net 1,231.6 1,250.0
Other assets, net 41.7 76.4
------------------ ------------------
Total $ 1,273.3 $ 1,326.4
================== ==================
(1) Stilwell recorded approximately $13.1 million of amortization expense
during the nine months ended September 30, 2001. Pursuant to FAS 142, these
identified intangible assets are not amortized.
(2) Stilwell recorded approximately $0.1 million of amortization expense during
the nine months ended September 30, 2001. All amounts were subject to
amortization during the nine months ended September 30, 2002 over weighted
average periods of 6 to 9 years, resulting in approximately $3.8 million of
amortization expense. See Note 11 with respect to acquisition of INTECH in
2002.
(3) Amount represents identified intangible assets recorded prior to 2001 and
all were subject to amortization during 2001, resulting in amortization
expense of approximately $2.6 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 goodwill for the nine months ended September 30, 2002 were as
follows (in millions):
Balance at January 1, 2002 $ 1,038.6
Goodwill acquired during the year, net of
impairments (see Note 10) 85.5
-------------------
Balance at September 30, 2002 $ 1,124.1
===================
See Note 9 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 11.
Aggregate amortization expense is expected to total approximately $1.6 million
in fourth quarter 2002 and total approximately $7 million in each of the next
five years thereafter.
10
8. 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 Nine months ended
September 30, September 30,
-------------------------------------- ----------------------------------
2001 2002 2001 2002
----------------- ---------------- ----------------- --------------
Reported net income (loss) $ 26.8 $ (131.2) $ 228.6 $ 39.7
Identified intangible asset amortization 8.4 15.8
Goodwill amortization 7.8 16.9
----------------- ---------------- ----------------- --------------
Adjusted net income (loss) $ 43.0 $ (131.2) $ 261.3 $ 39.7
================= ================ ================= ==============
Basic Earnings (Loss) per share:
Reported net income (loss) $ 0.12 $ (0.59) $ 1.04 $ 0.18
Identified intangible asset amortization 0.04 0.07
Goodwill amortization 0.04 0.08
----------------- ---------------- ----------------- --------------
Adjusted net income (loss) $ 0.20 $ (0.59) $ 1.19 $ 0.18
================= ================ ================= ==============
Diluted Earnings (Loss) per share:
Reported net income (loss) $ 0.11 $ (0.60) $ 0.99 $ 0.12
Identified intangible asset amortization 0.04 0.07
Goodwill amortization 0.03 0.07
----------------- ---------------- ----------------- --------------
Adjusted net income (loss) $ 0.18 $ (0.60) $ 1.13 $ 0.12
================= ================ ================= ==============
9. The Company has three primary business units (Janus, Berger and Nelson) 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.
The following summary provides information concerning Stilwell's principal
geographic areas as of and for the nine months ended September 30 (in millions):
2001 2002
---- ----
Revenues (1):
United States $ 1,163.0 $ 842.0
International (2) 58.6 54.5
----------- -----------
Total $ 1,221.6 $ 896.5
=========== ===========
Long-lived assets:
United States $ 1,537.7 $ 2,481.8
International (2) 40.5 45.8
----------- -----------
Total $ 1,578.2 $ 2,527.6
=========== ===========
(1) Revenues are attributed to countries based on location at which
services are performed.
(2) Primarily the United Kingdom.
11
Summarized financial information concerning the segments for the three months
ended September 30, 2001 and 2002 is provided in the following tables (in
millions):
Three months ended
September 30, 2001
-------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- ------------
Revenues $ 357.1 $ 4.5 $ 361.6
Operating expenses 205.3 24.9 230.2
----------- --------- -----------
Operating income (loss) 151.8 (20.4) 131.4
Equity in earnings of
unconsolidated affiliates 15.8 15.8
Interest expense (7.0) (7.0)
Other, net 0.9 4.1 5.0
----------- --------- -----------
Pretax income (loss) 152.7 (7.5) 145.2
Income tax provision (benefit) 54.0 (6.8) 47.2
Minority interest 71.5 (0.3) 71.2
----------- --------- -----------
Net income (loss) $ 27.2 $ (0.4) $ 26.8
=========== ========== ===========
Three months ended
September 30, 2002
-------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- --------
Revenues $ 252.7 $ 5.1 $ 257.8
Operating expenses 244.9 36.8 281.7
----------- ---------- ------------
Operating income (loss) 7.8 (31.7) (23.9)
Equity in earnings of
unconsolidated affiliates 17.0 17.0
Interest expense (2.0) (12.3) (14.3)
Other, net 1.2 0.6 1.8
----------- ---------- ------------
Pretax income (loss) 7.0 (26.4) (19.4)
Income tax provision 15.3 96.2 111.5
Minority interest 0.3 0.3
----------- ---------- ------------
Net income (loss) $ (8.6) $ (122.6) $ (131.2)
=========== ========== ============
12
Summarized financial information concerning the segments for the nine months
ended September 30, 2001 and 2002 is provided in the following tables (in
millions):
Nine months ended
September 30, 2001
------------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- --------
Revenues $ 1,207.0 $ 14.6 $ 1,221.6
Operating expenses 719.0 59.7 778.7
----------- --------- -----------
Operating income (loss) 488.0 (45.1) 442.9
Equity in earnings of
unconsolidated affiliates 58.0 58.0
Interest expense (0.9) (20.9) (21.8)
Other, net 7.0 11.1 18.1
----------- --------- -----------
Pretax income 494.1 3.1 497.2
Income tax provision (benefit) 181.0 (10.3) 170.7
Minority interest 98.6 (0.7) 97.9
----------- --------- -----------
Net income $ 214.5 $ 14.1 $ 228.6
=========== ========= ===========
Total assets $ 442.9 $ 2,213.8 $ 2,656.7
Capital expenditures 19.2 7.5 26.7
Goodwill, net 603.3 603.3
Nine months ended
September 30, 2002
-----------------------------------------------
Nelson,
Janus and DST and Consolidated
Berger Other Stilwell
------ ----- --------
Revenues $ 880.1 $ 16.4 $ 896.5
Operating expenses 620.9 53.5 674.4
----------- --------- -----------
Operating income (loss) 259.2 (37.1) 222.1
Equity in earnings of
unconsolidated affiliates 54.1 54.1
Interest expense (6.0) (35.1) (41.1)
Other, net 2.3 5.1 7.4
----------- --------- -----------
Pretax income (loss) 255.5 (13.0) 242.5
Income tax provision 111.9 89.5 201.4
Minority interest 1.4 1.4
----------- -------- -----------
Net income (loss) $ 142.2 $ (102.5) $ 39.7
=========== ========== ==========
Total assets $ 517.5 $ 2,814.4 $ 3,331.9
Capital expenditures 12.2 0.3 12.5
Goodwill, net 95.0 1,029.1 1,124.1
13
10. During third quarter 2002, the Company recorded approximately $23.3 million
($18.4 million, after income taxes and minority interest) in impairments
associated with investments in Village Ventures, Inc. ("Village"), Nelson and
other costs. The impairments reflect management's determination that the amount
that could be realized for the investment in the current circumstances was lower
than the carrying amount as of September 30, 2002.
With respect to Janus' investment in Village, management determined that the
continued difficulties in the venture capital markets and value declines in
certain of Village's key investments were indicative of an other than temporary
diminution in underlying value.
In connection with the Reorganization, Janus management has indicated that it
expects to evaluate the Nelson investment for possible disposition in the coming
months. Pursuant to FAS 142, because circumstances have changed to indicate that
it is more likely than not that the carrying amount of the Nelson investment may
be greater than the fair value, management evaluated the investment for
impairment. Due to the timing of the announcement of the Reorganization and
strategic considerations with respect to Nelson, the Company is required to
record an impairment loss because a loss is probable and is reasonably estimable
(through a combination of analyses, including discounted cash flow models,
industry multiple comparisons and initial indicators of value from investment
banking institutions).
11. 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 had approximately $6 billion in assets under management
at acquisition, uses a proprietary mathematical investment process for
institutional and private clients.
Berger recorded a deferred acquisition liability for approximately $43.6 million
(which has since accreted to $44.1 million as of September 30, 2002)
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 September 30, 2002, the Consolidated Condensed Balance Sheet
reflects approximately $21 million as a separate account relationship identified
intangible asset and approximately $69 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 nine months ended September
30, 2002.
12. 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 nine months ended September 30, 2002
was to reduce interest expense by approximately $3.5 million and $8.5 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,
the recorded amount of long-term debt was increased by approximately $34.4
million as of September 30, 2002 and an
14
offsetting exchange contract asset was recorded to reflect the fair value of the
exchange agreement. On October 23, 2002, the Company terminated the exchange
agreement. The Company received $24.8 million and recorded a deferred gain,
which will be recognized over the term of the indebtedness.
13. 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 JCC common stock.
The following table summarizes the activity related to these various 2001
non-recurring items during the nine months ended September 30, 2002 (in
millions):
December 31, September 30,
2001 Reductions 2002
------------------- --------------- ---------------
Severance $ 1.6 $ (1.6) $ -
Lease and related costs 24.4 (5.7) 18.7
Fund shareowner proxy costs 11.9 (11.9) -
-------- ----------- ------------
Total $ 37.9 $ (19.2) $ 18.7
======== =========== ============
Of the remaining balance, approximately $7.4 million is included as current
other liabilities and approximately $11.3 million is included as non-current
other liabilities in the consolidated condensed balance sheet at September 30,
2002. The lease terms generally expire between 2007 and 2010.
14. 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.
15
15. 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 was originally scheduled to vest at the end of seven years, but
included the opportunity for accelerated vesting (either 20% or 33% annually)
when Janus met defined performance targets. The second grant represented the
customary long-term incentive component of the employees' annual compensation
package and was scheduled to vest at the end of five years, with opportunities
for acceleration similar to the shares for the one-time grant. In connection
with the planned Reorganization as discussed in Note 3, the Company changed
effective September 30, 2002 the vesting for all Janus ownership interests to a
pro rata five-year schedule. This change in vesting resulted in additional
compensation expense during third quarter 2002 of approximately $26 million. For
these two grants, the opportunity for accelerated vesting at 33% when Janus
meets defined performance targets was retained. All vesting is subject to
continued employment by Janus.
The combined grants, which were distributed to approximately 180 key employees,
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. Stilwell may pay for any such shares either with cash or
shares of Stilwell common stock. On October 21, 2002, Stilwell filed a Form S-8
Registration Statement to provide registered shares of Stilwell that may be
issued to satisfy these liquidity obligations.
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 plan 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
$50 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.
16. 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 14).
16
17. 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 18
regarding an issuance under the Shelf Registration. As of November 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.
18. 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.
19. 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. Janus' management committee will
continue to run Janus' day-to-day operations until the Reorganization. See Note
3 with respect to the Reorganization.
20. 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.
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.
21. On October 31, 2002, Janus purchased $85 million of investment grade
commercial paper from the Institutional Janus Money Market Fund. Janus made the
purchase because the credit rating of the commercial paper had been downgraded
to a level that Janus management believed was not prudent for the fund to own
the investment. Janus funded a portion of the purchase by borrowing $41 million
from the credit facility. The remaining $44 million was financed through a
short-term borrowing arrangement that bears interest at LIBOR plus a minimal
spread.
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 86% 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
SIGNIFICANT DEVELOPMENTS
Reorganization of Company. On September 3, 2002, Stilwell announced that
it expects to merge its operations into a unified platform that will market and
distribute its investment products globally under the Janus brand name (the
"Reorganization"). The Reorganization - which is expected to be effective by
January 1, 2003 - will be accomplished by merging Janus Capital Corporation into
Stilwell, and the company is expected to be named Janus Capital Management Inc.
("JCM"). JCM will be headquartered in Denver, Colorado. The Reorganization is
expected to streamline operations into a more effective business model that
provides opportunities to capitalize on Janus' brand and global distribution
network.
The Company also announced that Mark B. Whiston, Janus' President of
Retail-Institutional Services, will become JCM's Chief Executive Officer and
vice chairman of the Stilwell/JCM Board of Directors upon completion of the
Reorganization.
In connection with the Reorganization, on October 23, 2002, three new
members in addition to Mr. Whiston were added to the Stilwell/JCM Board of
Directors, including James P. Craig, formerly JCC's Chief Investment Officer,
Helen Young Hayes, Janus' managing director of investments, and Andrew Cox, an
investment management consultant. Two existing directors, Morton Sosland and
Andrew Rudd, resigned their seats.
In connection with the Reorganization, the Company recorded a current
liability during third quarter 2002 of approximately $46.1 million ($28.7
million, after taxes and minority interest) for severance, facility closing and
other costs. Of this total, approximately $39.3 million is for severance costs
and approximately $6.8 million for other costs. The Company expects to pay the
majority of this amount in cash during the first half of 2003.
When the Reorganization is fully implemented, the Company expects to
realize annual savings of approximately $40 million from the elimination of
redundant expenses, such as salaries, facilities and administration costs.
Significant Non-Recurring Third Quarter 2002 Charges. As disclosed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001,
beginning with DST's public offering in October 1995, the company provided
deferred income taxes on its proportionate share of DST earnings using the
dividends-received deduction, which excluded 80% of the total from taxation.
When the Reorganization was announced, management indicated that it expects to
evaluate strategic alternatives for its DST investment. Alternatives now being
considered include transactions that would be taxable at the full federal and
applicable state income tax rates; accordingly, a non-cash charge of $107.8
million was recorded to accrue additional deferred income taxes in third quarter
2002, resulting in taxes being provided on Stilwell's share of DST earnings
since the 1995 public offering at full statutory rates.
During third quarter 2002, the Company recorded approximately $23.3
million ($18.4 million, after taxes and minority interest) in impairments
associated with investments in Village Ventures, Inc. ("Village"), Nelson and
other costs. The impairments reflect management's determination that the amount
that could be realized for the investment in the current circumstances was lower
than the carrying amount as of September 30, 2002.
With respect to Janus' investment in Village, management determined that
the continued difficulties in the venture capital markets and value declines in
certain of Village's key investments were indicative of an other than temporary
diminution in underlying value.
In connection with the Reorganization, Janus management has indicated that
it expects to evaluate the Nelson investment for possible disposition in the
coming months. Pursuant to FAS 142, because circumstances have changed to
indicate that it is more likely than not that the carrying amount of the Nelson
investment may be
19
greater than the fair value, management evaluated the investment for impairment.
Due to the timing of the announcement of the Reorganization and strategic
considerations with respect to Nelson, the Company is required to record an
impairment loss because a loss is probable and is reasonably estimable (through
a combination of analyses, including discounted cash flow models, industry
multiple comparisons and initial indicators of value from investment banking
institutions).
$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. Janus' management
committee will continue to run Janus' day-to-day operations until the
Reorganization, as discussed above.
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.
20
The first grant was a special, one-time share grant equivalent to 5% of
Janus, all of which was originally scheduled to vest at the end of seven years
and included the opportunity for accelerated vesting (either 20% or 33%
annually) when Janus met defined performance targets. The second grant
represented the customary long-term incentive component of the employees' annual
compensation package and was scheduled to vest at the end of five years, with
opportunities for acceleration similar to the shares for the one-time grant. As
discussed above, in connection with the planned Reorganization, the Company
changed effective September 30, 2002 the vesting for all Janus ownership
interests to a pro rata five-year schedule. This change in vesting resulted in
additional compensation expense during third quarter 2002 of approximately $26
million. For these two grants, the opportunity for accelerated vesting at 33%
when Janus meets defined performance targets was retained. All vesting is
subject to continued employment by Janus.
The combined grants, which were distributed to approximately 180 key
employees, 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. Stilwell may pay for any such shares
either with cash or shares of Stilwell common stock. On October 21, 2002,
Stilwell filed a Form S-8 Registration Statement to provide registered shares of
Stilwell that may be issued to satisfy these liquidity obligations.
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 plan 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 $50 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 had approximately $6 billion in assets under
management at acquisition, uses a proprietary mathematical investment process
for institutional and private clients.
Berger recorded a deferred acquisition liability for approximately $43.6
million (which has since accreted to $44.1 million as of September 30, 2002)
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 September 30, 2002, the Consolidated Condensed Balance Sheet
reflects approximately $21 million as a separate account relationship identified
intangible asset and approximately $69 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 nine months ended September
30, 2002.
21
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 nine months ended September 30,
2002 was to reduce interest expense by approximately $3.5 million and $8.5
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, the recorded amount of long-term debt was increased by approximately
$34.4 million as of September 30, 2002 and an offsetting exchange contract asset
was recorded to reflect the fair value of the exchange agreement. On October 23,
2002, the Company terminated the exchange agreement. The Company received $24.8
million and recorded a deferred gain, which will be recognized over the term of
the indebtedness.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared with the Three Months Ended
September 30, 2001
The Company's revenues, operating income (loss) and net income (loss) were
as follows (dollars in millions):
Three months ended September 30,
-----------------------------------------------
2001 (i) 2002 (ii)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 341.0 $ 232.7
SMI and Berger 16.1 20.0
--------------------- --------------------
Sub-total 357.1 252.7
Other 4.5 5.1
--------------------- --------------------
Total $ 361.6 $ 257.8
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 149.5 $ 31.6
SMI and Berger 2.3 (23.8)
--------------------- --------------------
Sub-total 151.8 7.8
Other (20.4) (31.7)
--------------------- --------------------
Total $ 131.4 $ (23.9)
===================== ====================
Net income (loss):
Janus and Berger:
Janus (iii) $ 25.6 $ 7.8
SMI and Berger (iv) (v) 1.6 (16.4)
--------------------- --------------------
Sub-total 27.2 (8.6)
--------------------- --------------------
Other:
DST (v) 14.6 (93.4)
Other (15.0) (29.2)
--------------------- --------------------
Sub-total (0.4) (122.6)
--------------------- --------------------
Total $ 26.8 $ (131.2)
===================== ====================
22
(i) Includes certain non-recurring items as follows: a) a one-time non-cash
increase to minority interest of approximately $64 million in
connection with its commitment to purchase 609,950 shares of Janus
common stock pursuant to a contract under which the actual price paid
by Stilwell, which was computed using the results from Janus' record
year in 2000, exceeded the then current market value; and b) $0.3
million in equity earnings of DST representing Stilwell's proportionate
share of DST non-recurring gains in connection with sales of marketable
equity securities during third quarter 2001.
(ii) Includes certain non-recurring items as follows: a) approximately $46.1
million ($28.7 million after taxes and minority interest) in charges
associated with severance, facility closing and other costs in
connection with the Reorganization; b) a non-cash charge of
approximately $107.8 million to accrue additional deferred income taxes
related to Stilwell's investment in DST as discussed in "Significant
Developments" above; and c) approximately $23.3 million ($18.4 million,
after income taxes and minority interest) in impairments associated
with investments in Village, Nelson and other costs;
(iii) Janus net income is reported after minority interest of approximately
$71.5 for third quarter 2001 and minority loss of $0.3 million for
third quarter 2002.
(iv) SMI net income is reported after minority interest of approximately
$0.6 million for the three months ended September 30, 2002.
(v) Stilwell's investment in DST is held by SMI.
Assets under management at September 30, 2001, December 31, 2001 and
September 30, 2002 were as follows (in billions):
September 30, December 31, September 30,
2001 2001 2002
--------------- ----------------- ---------------
Janus:
Janus Advised Funds:
Janus Investment Fund $ 99.0 $ 107.9 $ 68.9
Janus Aspen Series 16.2 18.3 13.3
Janus Adviser Series 2.6 3.9 3.5
Janus Money Market Funds 17.0 18.8 17.6
Janus World Funds plc 2.6 3.3 3.2
--------------- ----------------- ---------------
Total Janus Advised Funds 137.4 152.2 106.5
Janus Sub-Advised Funds and Private
Accounts 27.1 30.0 18.4
--------------- ----------------- ---------------
Total Janus 164.5 182.2 124.9
--------------- ----------------- ---------------
Berger:
Berger Funds 4.7 6.0 4.8
INTECH LLC 5.8
Bay Isle 1.1 1.0
Berger Sub-Advised Funds and Private
Accounts 1.3 1.5 1.2
--------------- ----------------- ---------------
Total Berger 6.0 8.6 12.8
--------------- ----------------- ---------------
Nelson 1.3 1.4 1.3
--------------- ----------------- ---------------
Total Assets Under Management $ 171.8 $ 192.2 $ 139.0
=============== ================= ===============
23
The Company reported a net loss of $131.2 million in third quarter 2002
compared to net income of $26.8 million in third quarter 2001. Exclusive of the
one-time items in third quarter 2001 and 2002 as discussed in notes (i) and (ii)
in the earnings table above, earnings decreased approximately 74% (from $90.5
million to $23.7 million). This decrease reflects lower revenues due to lower
assets under management, a decrease in ongoing operating margin (partly as a
result of an additional $26 million in compensation resulting from the
acceleration of vesting for Janus LLC interests to a five-year pro rata
schedule) and an increase in interest expense associated with higher debt
levels.
Average assets under management decreased 25% compared to prior year's
third quarter (from $198.0 billion to $148.4 billion), leading to a decline in
revenues from $361.6 million to $257.8 million in third quarter 2002. The lower
revenues and significant non-recurring costs resulted in a $155.3 million
decrease in operating income quarter-to-quarter (an $85.9 million decrease,
exclusive of non-recurring costs). Stilwell reported a negative operating margin
in third quarter 2002; however, exclusive of non-recurring items, Stilwell's
operating margin was 17.6%, which is down from the 36.3% in third quarter 2001.
The decrease in operating margin exclusive of non-recurring costs reflects the
relative increase in compensation as a result of the grants of Janus LLC stock
interests in second quarter 2002, as well as the acceleration in the vesting of
such interests in third quarter 2002. Exclusive of one-time gains recorded by
DST, Stilwell's equity in net earnings of DST increased 10% during third 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 $137.7 billion, a
decrease of $22.5 billion since June 30, 2002. This decrease reflects net cash
outflows of $3.2 billion and market depreciation of $19.3 billion. Compared to
December 31, 2001 and September 30, 2001, assets under management have declined
by approximately $53.1 billion and $32.8 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 third
quarter 2002 totaled approximately $147.1 billion compared to $175.9 billion in
second quarter 2002 and $196.7 billion in third quarter 2001. See the brief
discussions of Janus and Berger separately below.
Investment management fees for Janus and Berger decreased 29% in third
quarter 2002 compared to third 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 third quarter 2002 totaled
approximately 68 basis points of average assets under management compared to
approximately 72 basis points in third 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 $19.3 million compared to
prior year's quarter, primarily due to declines in assets under management.
The operating margin for Janus and Berger (exclusive of the non-recurring
items) decreased to 19.7% from 42.5% in third quarter 2001. Operating expenses
totaled $244.9 million ($202.9 million, exclusive of non-recurring costs) for
the three months ended September 30, 2002 compared to $205.3 million in the
prior year quarter. The largest component of the operating expenses,
compensation expense, was 26% higher than third quarter 2001, reflecting the
non-cash compensation associated with the special, one-time grant of five
percent of Janus' equity to key Janus employees on April 1, 2002 and the
acceleration of such compensation expense associated with the change to a
five-year pro rata vesting in the third quarter of 2002 (from the $18 million
recorded in second quarter 2002 to $44 million in third quarter 2002). 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
24
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 $2.0 million as a result of higher average
debt balances, primarily associated with Berger's acquisition of INTECH.
Minority interest declined by $71.2 million quarter-to-quarter, primarily
due to the $64.0 million non-recurring charge recorded in third quarter 2001 in
connection with Stilwell's purchase commitment for 609,950 shares of Janus
common stock as discussed in the table above and other 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.
NELSON, DST AND OTHER
Nelson reported a net loss of $0.3 million for the third quarter 2002
versus a net loss of $1.3 million in prior year's third quarter. This
improvement reflects higher revenues and reduced costs quarter-to-quarter.
Nelson's assets under management were down slightly from June 30, 2002 and
December 31, 2001. Assets under management in British pounds decreased from
(pound)915 million at December 31, 2001 to (pound)836 million at September 30,
2002 due to market depreciation. As a result of increased marketing and
brand-awareness initiatives, the number of shareowner accounts has grown
approximately 5% since September 30, 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 be material to Stilwell's
results of operations or financial position.
As noted in "Significant Developments" above, during third quarter 2002,
the Company recorded an impairment charge in connection with its investment in
Nelson. The impairment reflects management's intention to evaluate strategic
alternatives for Nelson, which could include disposal of the investment at a
value below the carrying amount of the investment.
Third quarter 2002 equity earnings from DST were $17.0 million versus
$15.8 million in third quarter 2001. Exclusive of the one-time DST items in 2001
as discussed above, equity earnings from DST increased $1.5 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 6% due to lower
demutualization and corporate actions activity, 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 79.5 million at September 30, 2002 versus 75.6 million at
December 31, 2001 and 75.2 million at September 30, 2001).
Other Stilwell operating expenses increased over the comparable prior year
quarter, primarily as a result of the one-time charges associated with the
Reorganization and the impairment recorded on the Company's investment in
Nelson, partially offset by lower amortization expense resulting from Stilwell's
adoption of FAS 142.
Interest expense increased by $5.3 million in third quarter 2002 versus
2001 as a result of accrued interest on Stilwell's various senior debt and
convertible debt offerings, partially offset by interest costs that were
incurred in third quarter 2001 associated with Stilwell's obligations to
purchase shares of Janus common stock.
Other income for third quarter 2002 decreased by $3.5 million compared
to third quarter 2001 primarily due to reduced interest income from lower
average cash balances and interest rates.
25
Nine Months Ended September 30, 2002 Compared with the Nine Months Ended
September 30, 2001
The Company's revenues, operating income and net income were as follows (dollars
in millions):
Nine months ended September 30,
-----------------------------------------------
2001 (i) 2002 (ii)
--------------------- --------------------
Revenues:
Janus and Berger:
Janus $ 1,158.6 $ 815.9
SMI and Berger 48.4 64.2
--------------------- --------------------
Sub-total 1,207.0 880.1
Other 14.6 16.4
--------------------- --------------------
Total $ 1,221.6 $ 896.5
===================== ====================
Operating income (loss):
Janus and Berger:
Janus $ 480.7 $ 275.7
SMI and Berger 7.3 (16.5)
--------------------- --------------------
Sub-total 488.0 259.2
Other (45.1) (37.1)
--------------------- --------------------
Total $ 442.9 $ 222.1
===================== ====================
Net income (loss):
Janus and Berger:
Janus (iii) $ 209.4 $ 154.6
SMI and Berger (iv) (v) 5.1 (12.4)
--------------------- --------------------
Sub-total 214.5 142.2
--------------------- --------------------
Other:
DST (v) 53.6 (59.1)
Other (39.5) (43.4)
--------------------- --------------------
Sub-total 14.1 (102.5)
--------------------- --------------------
Total $ 228.6 $ 39.7
===================== ====================
(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; c) the Company recorded $8.4 million ($7.8
million after-tax) in equity earnings of DST representing Stilwell's
proportionate share of DST non-recurring gains in connection with the sale
of DST's portfolio accounting business and sales of marketable equity
securities during second quarter 2001; and d) the one-time $64.0 million
charge in connection with the purchase commitment for 609,950 shares of
Janus common stock.
(ii) Includes certain non-recurring items as follows: a) approximately $46.1
million ($28.7 million after taxes and minority interest) in charges
associated with severance, facility closing and other costs in connection
with the reorganization Stilwell announced on September 3, 2002; b) a
non-cash charge of approximately $107.8 million to accrue additional
deferred income taxes related to its investment in DST; c) approximately
$23.3 million ($18.4 million, after taxes and minority interest) in
impairments associated with investments in Village, Nelson and other costs;
and d) approximately $4.0 million ($2.6 million after-tax) in second
quarter 2002 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.
26
(iii)Janus net income is reported after minority interest of approximately
$98.6 and $0.1 million for the nine months ended September 30, 2001 and
2002, respectively.
(iv) SMI net income is reported after minority interest of approximately $1.3
million for the nine months ended September 30, 2002.
(v) Stilwell's investment in DST is held by SMI.
The Company earned $39.7 million for the nine months ended September 30,
2002 compared to $228.6 million for the nine months ended September 30, 2001.
Exclusive of non-recurring items as noted in (i) and (ii) in the table above,
earnings decreased approximately 35%. This decrease reflects lower revenues due
to lower asset under management levels, a lower operating margin partially due
to the acceleration of vesting of LLC interests and an increase in interest
expense associated with higher debt levels.
Average assets under management decreased 23% compared to prior year (from
$222.7 billion to $171.3 billion), leading to a $325.1 million (27%) decline in
revenues. Operating income decreased by $220.8 million ($187.7 million,
exclusive of one-time costs) period-to-period. Exclusive of one-time items,
Stilwell reported a lower operating margin in the first nine months of 2002
compared to 2001, attributable 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. Exclusive of one-time items, Stilwell's
equity in net earnings of DST increased 9% during the nine months ended
September 30, 2002 versus 2001.
JANUS AND BERGER
Average assets under management for Janus and Berger during the nine
months ended September 30, 2002 totaled $170.0 billion, approximately 23% lower
than comparable 2001. The lower level of average assets under management for
Janus and Berger was attributable 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 69 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 34.7% from 43.8% in comparable 2001. Operating expenses totaled
$620.9 million ($574.9 million, exclusive of one-time items) for the nine months
ended September 30, 2002 compared to $719.0 million ($678.7 million, exclusive
of one-time items) in the prior year period. Reduced operating expenses occurred
in the same key components identified in the third quarter discussion above.
Compensation and third party concession fees - the two largest components of
Stilwell's operating expenses - represented approximately 44% of revenues for
the nine months ended September 30, 2002, which is an increase over the
approximately 35% experienced during the same 2001 period. This increase is due
to the lower level of revenues in 2002 compared to 2001, the non-cash
compensation charges associated with the grants of equity to Janus employees in
2002 and the acceleration of vesting of the grants in the third quarter of 2002.
Interest expense increased by $5.1 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 $4.7 million as a
result of lower average cash balances and reduced interest rates.
Minority interest declined by $97.2 million period-to-period, primarily
due to the $64.0 million non-recurring charge recorded in third quarter 2001 in
connection with Stilwell's purchase commitment for 609,950 shares of
27
Janus common stock as discussed in table above and other 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.
NELSON, DST AND OTHER
Nelson reported earnings of $0.3 million for the nine months ended
September 30, 2002 versus a loss of $3.6 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 nine months ended September 30, 2002 were
$54.1 million versus $58.0 million in 2001. Exclusive of the one-time items
discussed above, equity earnings from DST increased $4.5 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 nine months ended September 30, 2002 declined slightly from 2001 as a result
of lower revenues from its Output Solutions and Customer Management segments,
substantially offset by improved revenues in the Financial Services segment due
to a higher number of shareowner accounts services and 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, partially offset by the third quarter 2002 costs
from the Reorganization and impairment charge in connection with Stilwell's
investment in Nelson (see above).
Interest expense increased by $14.2 million and Other, net declined $6.0
million during the nine months ended September 30, 2002 compared to 2001 for the
same reasons as identified in the third quarter discussion.
Subsidiary information for the Three and Nine months ended September 30, 2002
A brief discussion of significant Janus, Berger and Nelson items during
the nine months ended September 30, 2002 follows:
Janus
-----
During the three months ended September 30, 2002, assets under management
decreased by $20.5 billion due to market depreciation of $16.7 billion and
net cash outflows of $3.8 billion. The net outflows consisted of
approximately $4.1 billion in Janus' retail funds, $0.8 billion in Janus
Aspen Series and $1.6 billion in subadvised and private accounts, partially
offset by net sales of $2.7 billion in money market funds.
During the nine months ended September 30, 2002, assets under management
decreased by $57.3 billion due to market depreciation of $40.6 billion and
net cash outflows of $16.7 billion. The net outflows consisted of
approximately $11.7 billion in Janus' retail funds, $1.8 billion in money
market funds, $1.0 billion in Janus Aspen Series and $3.3 billion in
subadvised and private accounts, partially offset by net sales of $1.1
billion in the Janus Adviser Series and Janus World Funds. Total Janus
shareowner accounts decreased from 5.6 million at December 31, 2001 to 5.1
million at September 30, 2002.
Revenues were lower in the three months and nine months ending September
30, 2002 compared to 2001 due to the lower level of average assets under
management. Ongoing operating margins declined during the
28
first nine months of 2002 compared to the levels experienced throughout
2001 primarily due to increased compensation resulting from issuances of
LLC interests in second quarter 2002 and the acceleration of vesting for
these LLC interests in third quarter 2002.
Berger
------
Berger assets under management decreased by $2.0 billion during the three
months ended September 30, 2002 due to $2.6 billion of market depreciation,
partially offset by net cash inflows of $0.6 billion (primarily in the
INTECH LLC and value products).
Berger assets under management increased by $4.2 billion during the nine
months ended September 30, 2002, reflecting $6.0 billion from the purchase
of INTECH and net cash inflows of $2.1 billion, partially offset by market
depreciation of $3.9 billion. Berger's ability to maintain net cash inflows
during the year, as well as to increase its shareowner accounts to nearly
275,000, reflects the results of Berger's efforts to broaden its fund
platform to include value products and INTECH LLC products.
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 nearly doubled from the 25 Nelson employed in 1998 and the
number of clients during that same period has grown by approximately 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 equity markets and weak Janus investment
management performance relative to the markets 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 nine months ended September 30, 2002 were $171.3 billion and assets
under management at September 30, 2002 totaled $139.0 billion. Average assets
under management can fluctuate based on fund flows and changes in the market
value of funds and accounts managed by Janus, Berger or Nelson. Accordingly,
revenues during the remainder of 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 continuation of the lower revenue trends could result in lower
operating income and net income.
Exclusive of one-time items discussed above, the operating margin for the
nine months ended September 30, 2002 decreased to 33.0% from 39.6% 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 LLC equity grants at Janus that occurred on April 1, 2002.
29
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
Nine months ended September 30,
------------------------------------------
2001 2002
---------------- -----------------
Cash flows provided by (used for):
Operating activities $ 470.2 $ 218.8
Investing activities (1,003.6) (98.0)
Financing activities 599.5 (267.2)
---------------- -----------------
Net increase (decrease) 66.1 (146.4)
At beginning of year 364.3 236.7
---------------- -----------------
At end of period $ 430.4 $ 90.3
================ =================
During the nine months ended September 30, 2002, the Company's
consolidated cash position decreased $146.4 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 received from the issuance of the
Retail Notes and the 7.75% Senior Notes, borrowings under the credit facilities
and net income.
Net operating cash inflows for the nine months ended September 30, 2002
were $251.4 million lower than comparable 2001. This decrease was chiefly
attributable to lower net income and changes in working capital items. In
particular, the change in accounts receivable was lower in 2002 than in 2001 due
to declines in levels of assets under management period-to-period and the change
in other accrued liabilities was lower, partly due to lower income taxes. This
decline, however, was 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 $98.0 million during the nine months
ended September 30, 2002 compared to $1,003.6 million during the comparable 2001
period. This difference reflects the significant purchases of Janus common stock
in 2001, partially offset by the current year investment in INTECH. Capital
expenditures were approximately 53% lower than 2001 due to the extensive
infrastructure efforts at Janus in recent years.
Through September 30, 2002, financing cash outflows reflect the repayment
of long-term debt ($849.5 million) and minority interest distributions,
partially offset by the proceeds ($625.7 million) from the issuance of the
Retail Notes, the issuance of the 7.75% Senior Notes and borrowings under the
credit facilities. Activity during the nine months ended September 30, 2001
included proceeds from the issuance of the Convertible Notes and payment of
approximately $87.1 million in minority distributions.
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 and throughout 2003. 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
during 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.
As discussed in "Significant Developments" above, the Company expects to
pay approximately $39.3 million in severance costs in connection with the
Reorganization. Stilwell also expects to have other cash
30
requirements associated with the Reorganization, including repurchases of
minority interests at Berger. The Company expects to pay the majority of costs
associated with the Reorganization in the first half of 2003. 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.
On October 31, 2002, Janus purchased $85 million of investment grade
commercial paper from the Institutional Janus Money Market Fund. Janus made the
purchase because the credit rating of the commercial paper had been downgraded
to a level that Janus management believed was not prudent for the fund to own
the investment. Janus funded a portion of the purchase by borrowing $41 million
from the credit facility. The remaining $44 million was financed through a
short-term borrowing arrangement that bears interest at LIBOR plus a minimal
spread. Janus expects to repay these borrowings in the first quarter 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 actual amount outstanding under the Facilities as of
September 30, 2002 was $35 million. The Facilities contain a number of covenants
that could restrict maximum utilization of the Facilities, or the ability of the
Company to issue securities that are currently available for issuance under the
Company's Shelf Registration referred to below, including various financial
covenants such as a specified financing leverage, minimum net worth, minimum
unencumbered liquidity, a fixed charge coverage and minimum average assets under
management. Stilwell and Janus were in compliance with the various provisions of
the Facilities, including the financial covenants, as of September 30, 2002.
The Company did not renew the 364-Day Facility in October 2002.
Accordingly, as of November 13, 2002, the Company has $300 million under the
Five-Year Facility, of which currently only $150 million is available to the
Company. Pursuant to a provision included in the Five-Year Facility, 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 Five-Year Facility would be reduced to $250 million.
If the average assets under management were to fall below $170 billion, but
remain above $150 billion, the Five-Year Facility would be reduced to $200
million. If the average assets under management were to fall below $150 billion,
the maximum borrowing available would be reduced to $150 million. Further,
Stilwell would be required to repay portions of amounts borrowed under the
credit facilities to the extent such borrowing were in excess of the reduced
credit availability amount. As of September 30, 2002 the rolling three-month
average of assets under management was $148.4 billion and thus the amount
available under the Five-Year Facility was reduced to $150 million.
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 SEC declared
the Shelf Registration effective on April 25, 2002. As discussed in "Significant
Developments" above, the Company issued the 7.75% Senior Notes under the Shelf
Registration. As of November 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 facility.
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 through September 30, 2002. As of
September 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.
31
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 September 30, 2002, the six month LIBOR rate was 1.71%.
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 3.49%
and would have received a rate of 7%, resulting in a net gain to Stilwell of
3.51%, or approximately $3.5 million during the three months ended September 30,
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 third quarter 2002 would have been $3.5 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
On October 23, 2002, the Company terminated the exchange agreement. The
Company received $24.8 million and recorded a deferred gain, which will be
recognized over the term of the indebtedness.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing date of this Form 10-Q
Quarterly Report, Stilwell carried out under the supervision and with the
participation of management, including the principal executive officer and
principal financial officer, an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures.
Based on that evaluation, Stilwell's principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information that is
required to be included in the periodic reports that must be filed with the
Securities and Exchange Commission.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of that evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has had no significant changes in any legal proceedings from
that previously reported in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 - Consent, Waiver and Amendment dated October 23, 2002,
among Stilwell Financial Inc., Janus Capital
Corporation and Citibank, N.A., as administrative agent
for the lenders named therein, with respect to the
364-Day Credit Agreement and the Five-Year Credit
Agreement, is attached to this Form 10-Q as
Exhibit 10.1
Exhibit 10.2 - Third Amendment to the Stilwell Financial Inc. 401(k),
Profit Sharing and Employee Stock Ownership Plan,
dated October 2, 2002, is attached to this Form 10-Q
as Exhibit 10.2
Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by Landon H. Rowland, Chairman of
the Board, President and Chief Executive Officer of
Stilwell Financial Inc., is attached to this Form 10-Q
as Exhibit 99.1
Exhibit 99.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by Daniel P. Connealy, Vice
President and Chief Financial Officer of Stilwell
Financial Inc., is attached to this Form 10-Q as
Exhibit 99.2
b) Reports on Form 8-K
On August 14, 2002, the Company furnished a Current Report on Form 8-K,
dated August 12, 2002, under Item 9, that included the Statement Under Oath of
Principal Executive Officer and Principal Financial Officer Regarding Facts and
Circumstances Relating to Exchange Act Filings pursuant to Securities and
Exchange Commission Order No. 4-460 and the Officer's Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
On August 7, 2002, the Company furnished a Current Report on Form 8-K,
dated July 25, 2002, under Item 9, that attaches Stilwell's news releases
announcing financial results for the three months ended June 30, 2002 and
reporting assets under management information as of July 31, 2002.
On July 2, 2002, the Company filed a Current Report on Form 8-K, dated
July 1, 2002, under Item 5, to provide the Officers' Certificate, dated as of
July 2, 2002, pursuant to the Indenture dated as of November 6, 2001. The Form
8-K also included, as furnished under Item 9, a copy of the press release that
reported the Company's assets under management information as of June 30, 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
November 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
CERTIFICATION
I, Landon H. Rowland, President, Chief Executive Officer and Chairman of
Stilwell Financial Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stilwell
Financial Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Landon H. Rowland
----------------------------
Landon H. Rowland
President, Chief Executive Officer and
Chairman of the Board of Directors
35
CERTIFICATION
I, Daniel P. Connealy, Vice President and Chief Financial Officer of
Stilwell Financial Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stilwell
Financial Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Daniel P. Connealy
----------------------
Daniel P. Connealy
Vice President and Chief Financial Officer
36