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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 5
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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STILWELL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1804048
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
920 MAIN STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices)
816-218-2400
Registrant's Telephone Number Including Area Code
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class to Name of Each Exchange on Which
be Registered each Class is to be Registered
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Common Stock, par value New York Stock Exchange
$.01 per share
Preferred Stock Purchase New York Stock Exchange
Rights
Securities to be registered pursuant to Section 12(g) of the Act: None
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EXPLANATORY NOTE
This Amendment No. 5 to Form 10 Registration Statement has been prepared on a
prospective basis on the assumption that, among other things, the Distribution
(as hereinafter described) and the related transactions contemplated to occur
prior to or contemporaneously with the Distribution will be consummated as
contemplated by the Information Statement which is a part of this Registration
Statement. There can be no assurance, however, that any or all of such
transactions will occur or will occur as so contemplated. Any significant
modifications or variations in the transactions contemplated will be reflected
in an amendment or supplement to this Registration Statement.
(Remainder of page intentionally left blank.)
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STILWELL FINANCIAL, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED HEREIN BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
1. BUSINESS
Summary; Introduction; Risk Factors; The Distribution; Management's
Discussion and Analysis of Financial Condition and Results of Operations;
Business; Index to Financial Statements
2. FINANCIAL INFORMATION
Summary -- Summary Financial and Operating Data; Risk Factors;
Selected Financial and Operating Data; Financing; Management's Discussion and
Analysis of Financial Condition and Results of Operations; Index to Financial
Statements; Exhibit 27 -- Financial Data Schedule
3. PROPERTIES
Business - Properties
4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Distribution; Management; Principal Stockholders and Stock Owned
Beneficially by Stilwell's Directors and Certain Executive Officers
5. DIRECTORS AND EXECUTIVE OFFICERS
Summary; Risk Factors; The Distribution; Relationship Between KCSI
and Stilwell After the Distribution; Management; Description of Capital Stock
6. EXECUTIVE COMPENSATION
Relationship Between KCSI and Stilwell After the Distribution;
Management; Principal Stockholders and Stock Owned Beneficially by Stilwell's
Directors and Certain Executive Officers
7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Summary; Introduction; Risk Factors; The Distribution; Relationship
Between KCSI and Stilwell After the Distribution; Management; Certain
Relationships and Related Transactions; Index to Financial Statements
8. LEGAL PROCEEDINGS
Business -- Legal Matters
9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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Summary; Introduction; Risk Factors; The Distribution; Management;
Principal Stockholders and Stock Owned Beneficially by Stilwell's Directors and
Certain Executive Officers; Description of Capital Stock
10. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable
11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Description of Capital Stock; Exhibit 3.1.1 - Form of Amended and
Restated Certificate of Incorporation of Stilwell Financial, Inc.; Exhibit
3.1.2 - Form of Certificate of Designation; Exhibit 3.2 - Form of Amended and
Restated Bylaws of Stilwell Financial, Inc.; Exhibit 4.2.1 - Form of
Stockholders' Rights Agreement
12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Management; Description of Capital Stock; Exhibit 3.1.1 - Form of
Amended and Restated Certificate of Incorporation of Stilwell Financial, Inc.;
Exhibit 3.2 - Form of Amended and Restated Bylaws of Stilwell Financial, Inc.;
Exhibit 10.1 - Representative Director Indemnification Agreement; Exhibit 10.2 -
Representative Officer Indemnification Agreement
13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Summary -- Summary Financial and Operating Data; Capitalization;
Selected Financial and Operating Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Index to Financial Statements
14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
15. FINANCIAL STATEMENTS AND EXHIBITS
(a) The Financial Statements filed as a part of this Registration
Statement on Form 10 are listed on the Index to Financial Statements
contained on page F-1 of the Information Statement (Exhibit 99.1)
forming a part hereof.
(b) Exhibits to Registration Statement on Form 10.
The exhibit list included in this Form 10 is incorporated by reference
in response to this Item 15(b).
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
STILWELL FINANCIAL, INC.
May 25, 2000 By: /s/ Danny R. Carpenter
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Name: Danny R. Carpenter
Title: Vice President and Secretary
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1.1 * Form of Delaware Certificate of Incorporation of Stilwell Financial,
Inc. as Amended and Restated on [ ], 2000 is attached as Exhibit
3.1.1.
3.1.2 * Form of Certificate of Designation dated [ ], 2000
establishing Series A Preferred Stock is attached as Exhibit 3.1.2.
3.2 * Form of Bylaws of Stilwell Financial, Inc. as Amended and Restated
on [ ], 2000 is attached as Exhibit 3.2.
4.1 @ Form of Certificate representing Stilwell Financial, Inc. Common
Stock is attached as Exhibit 4.1.
4.2.1 * Form of Stockholders' Rights Agreement, dated as of [ ], 1999
between Stilwell Financial, Inc. and UMB Bank, N.A., as Rights Agent
is attached as Exhibit 4.2.1.
4.2.2 * Form of Certificate of Designation establishing Series A Preferred
Stock attached hereto as Exhibit 3.1.2 is hereby incorporated by
reference as Exhibit 4.2.2.
4.3 * Article FOURTH, Article FIFTH, Article SIXTH, Article SEVENTH and
Article ELEVENTH of Exhibit 3.1.1 are hereby incorporated by reference
as Exhibit 4.3.
4.4 * Article II, Article III, Section 2 and Article V of Exhibit 3.2 are
hereby incorporated by reference as Exhibit 4.4.
8.1 * Internal Revenue Service Private Letter Ruling is attached as
Exhibit 8.1.
10.1 * Representative Director Indemnification Agreement is attached as
Exhibit 10.1 with schedule.
10.2 * Representative Officer Indemnification Agreement is attached as
Exhibit 10.2 with schedule.
10.3 * Intercompany Agreement, dated as of August 16, 1999 between Kansas
City Southern Industries, Inc. and Stilwell Financial, Inc. is
attached as Exhibit 10.3.
10.4 * Tax Disaffiliation Agreement, dated as of August 16, 1999, between
Kansas City Southern Industries, Inc. and Stilwell Financial, Inc. is
attached as Exhibit 10.4.
10.5.1 The Registration Rights Agreement, dated October 24, 1995, by and
between DST Systems, Inc. and Kansas City Southern Industries, Inc.,
which is attached as Exhibit 4.1 to the DST Systems, Inc. Registration
Statement on Form S-1 dated October 30, 1995, as
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amended (Commission file no. 33-96526), is hereby incorporated by
reference as Exhibit 10.5.1.
10.5.2 * Amendment to Registration Rights Agreement, dated June 30, 1999, by
and between DST Systems, Inc. and Kansas City Southern Industries,
Inc. is attached as Exhibit 10.5.2.
10.5.3 Assignment, Consent and Acceptance Agreement, dated as of August 11,
1999, by and among DST Systems, Inc. ("DST"), Kansas City Southern
Industries, Inc. and Stilwell Financial, Inc. which is attached as
Exhibit 4.15.2 to DST's Form 10-Q for the quarter ended June 30, 1999
(Commission File No. 1-14036) is hereby incorporated by reference as
Exhibit 10.5.3.
10.6.1 Amended Form of Employment Agreement dated [________] by and between
Stilwell Financial, Inc. and Landon H. Rowland is attached as Exhibit
10.6.1
10.6.2 Amended Form of Employment Agreement dated [________] by and between
Stilwell Financial, Inc. and Joseph D. Monello is attached as Exhibit
10.6.2
10.6.3 Amended Form of Employment Agreement dated [________] by and between
Stilwell Financial, Inc. and Danny R. Carpenter is attached as Exhibit
10.6.3
10.6.4 Amended Form of Employment Agreement dated [________] by and between
Stilwell Financial, Inc. and Anthony P. McCarthy is attached as
Exhibit 10.6.4
10.7.1 * Stock Purchase Agreement, dated April 13, 1984, by and among Kansas
City Southern Industries, Inc., Thomas H. Bailey, William C. Mangus,
Bernard E. Niedermeyer III, Michael Stolper, and Jack R. Thompson is
attached as Exhibit 10.7.1.
10.7.2 * Amendment to Stock Purchase Agreement, dated January 4, 1985, by and
among Kansas City Southern Industries, Inc., Thomas H. Bailey, Bernard
E. Niedermeyer III, Michael Stolper, and Jack R. Thompson is attached
as Exhibit 10.7.2.
10.7.3 * Second Amendment to Stock Purchase Agreement, dated March 18, 1988,
by and among Kansas City Southern Industries, Inc., Thomas H. Bailey,
Michael Stolper, and Jack R. Thompson is attached as Exhibit 10.7.3.
10.7.4 * Third Amendment to Stock Purchase Agreement, dated February 5, 1990,
by and among Kansas City Southern Industries, Inc., Thomas H. Bailey,
Michael Stolper, and Jack R. Thompson is attached as Exhibit 10.7.4.
10.7.5 * Fourth Amendment to Stock Purchase Agreement, dated January 1, 1991,
by and among Kansas City Southern Industries, Inc., Thomas H. Bailey,
Michael Stolper, and Jack R. Thompson is attached as Exhibit 10.7.5.
10.7.6 * Assignment and Assumption Agreement and Fifth Amendment to Stock
Purchase Agreement, dated November 19, 1999, by and among Kansas
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City Southern Industries, Inc., Stilwell Financial, Inc., Thomas H.
Bailey and Michael Stolper is attached as Exhibit 10.7.6.
10.8 * Stilwell Financial, Inc. 1998 Long Term Incentive Stock Plan as
Amended and Restated on August 11, 1999 is attached as Exhibit 10.8.
10.9 * Stilwell Executive Plan dated August 11, 1999 is attached as Exhibit
10.9.
10.10 * Stock Purchase Agreement, dated November 19, 1999, by and among
Kansas City Southern Industries, Inc., Stilwell Financial, Inc. and
Janus Capital Corporation, is attached as Exhibit 10.10.
10.11.1 * 364-day Competitive Advance and Revolving Credit Facility Agreement
dated as of January 11, 2000 among Kansas City Southern Industries,
Inc. and the lenders named therein, which is attached as Exhibit 10.20
to Kansas City Southern Industries, Inc.'s Form 10-K for the year
ended December 31, 1999 (Commission File No. 1-4717), is hereby
incorporated by reference as Exhibit 10.11.1.
10.11.2 * Assignment, Assumption and Amendment Agreement dated as of January
11, 2000, among Kansas City Southern Industries, Inc., Stilwell
Financial, Inc. and The Chase Manhattan Bank, as agent for the lenders
named in the 364-day Competitive Advance and Revolving Credit Facility
Agreement, which is attached as Exhibit 10.21 to Kansas City Southern
Industries, Inc.'s Form 10-K for the year ended December 31, 1999
(Commission File No. 1-4717), is hereby incorporated by reference as
Exhibit 10.11.2.
10.12 * Form of Stilwell Financial, Inc. Employee Stock Purchase Plan is
attached as Exhibit 10.12.
10.13 * Stilwell Financial, Inc. Employee Stock Ownership Plan is attached
as Exhibit 10.13.
10.14 * Stilwell Financial, Inc. 401(k) and Profit Sharing Plan is attached
as Exhibit 10.14.
27 Financial Data Schedule is attached as Exhibit 27.
99.1 Stilwell Financial, Inc. Information Statement, as amended, dated
May 26, 2000 is attached as Exhibit 99.1.
99.2 * Solvency and Surplus Opinion of Duff & Phelps, L.L.C. is attached as
Exhibit 99.2.
99.3 The consolidated financial statements and related notes, together
with the Report of Independent Accountants, of DST Systems, Inc. (an
approximate 32% owned affiliate of Stilwell accounted for under the
equity method) for the years ended December 31, 1997, 1998 and 1999,
which are included in the DST Systems, Inc. Annual Report on Form 10-K
for the year ended December 31, 1999 (Commission File No. 1-14036) are
incorporated by reference in this Information Statement.
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99.4 Opinion Letter of Rothgerber Johnson & Lyons LLP dated May 25, 2000,
is attached as Exhibit 99.4.
* Previously filed.
@ To be filed by amendment
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EXHIBIT 10.6.1
EMPLOYMENT AGREEMENT
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THIS AGREEMENT, made and entered into as of this ____ day of MayMay, 2000,
by and between Stilwell Financial, Inc., a Delaware corporation ("Stilwell") and
Landon H. RowlandLandon H. Rowland, an individual ("Executive") to be effective
on the date of the Spin-off Distribution (as defined below).
WHEREAS, the parties expect that all of the issued and outstanding stock of
Stilwell will be distributed (the "Spin-off Distribution") to the shareholders
of Kansas City Southern Industries, Inc. ("KCSI") which has been the parent of
Stilwell since its formation on January 23, 1998; and
WHEREAS, Executive previously was employed by KCSI, and Stilwell and
Executive desire for Stilwell to continue to employ Executive on the terms and
conditions set forth in this Agreement and to provide an incentive to Executive
to remain in the employ of Stilwell hereafter, particularly in the event of any
Change in Control (as herein defined) of Stilwell or any Significant Subsidiary
(as herein defined), thereby establishing and preserving continuity of
management of Stilwell.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between Stilwell and Executive as follows:
1. Employment. Stilwell hereby employs Executive as its Chairman of the
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Board, President and Chief Executive Officer to serve at the pleasure of the
Board of Directors of Stilwell (the "Stilwell Board") and to have such duties,
powers and responsibilities as may be prescribed or delegated from time to time
by the Stilwell Board, subject to the powers vested in the Stilwell Board and in
the stockholders of Stilwell. Executive shall faithfully perform his duties
under this Agreement to the best of his ability and shall devote substantially
all of his working time and efforts to the business and affairs of Stilwell and
its affiliates.
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2. Compensation.
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(a) Base Compensation. Stilwell shall pay Executive as compensation
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for his services hereunder an annual base salary at the rate of $825,000. Such
rate shall not be increased prior to January 1, 2003 and shall not be reduced
except as agreed by the parties or except as part of a general salary reduction
program imposed by Stilwell and applicable to all officers of Stilwell.
(b) Incentive Compensation. For the years 2000, 2001, and 2002,
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Executive shall not be entitled to participate in any Stilwell incentive
compensation plan.
3. Benefits and Stock Ownership.
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(a) Benefits. During the period of his employment hereunder, Stilwell
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shall provide Executive with coverage under such benefit plans and programs as
are made generally available to similarly situated employees of Stilwell,
provided (a) Stilwell shall have no obligation with respect to any plan or
program if Executive is not eligible for coverage thereunder, and (b) Executive
acknowledges that stock options and other stock and equity participation awards
are granted in the discretion of the Stilwell Board or the Compensation
Committee of the Stilwell Board and that Executive has no right to receive stock
options or other equity participation awards or any particular number or level
of stock options or other awards. In determining contributions, coverage and
benefits under any disability insurance policy and under any cash compensation-
based plan provided to Executive by Stilwell, it shall be assumed that the value
of Executive's annual compensation pursuant to this Agreement is the lower of
175% of Executive's annual base salary or $1,000,000. Executive acknowledges
that all rights and benefits under benefit plans and programs shall be governed
by the official text of each such plan or program and not by any summary or
description thereof or any provision of this Agreement (except to the extent
this Agreement expressly modifies such benefit plans or programs) and that
Stilwell is not under any
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obligation to continue in effect or to fund any such plan or program, except as
provided in Paragraph 7 hereof. Stilwell also shall reimburse Executive for
ordinary and necessary travel and other business expenses in accordance with
policies and procedures established by Stilwell.
(b) Stock Ownership. During the period of his employment hereunder,
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Executive shall retain ownership in himself or in members of his immediate
family of at least a majority of the number of shares of (i) Stilwell stock
received by Executive or members of his immediate family in the Distribution,
and (ii) Stilwell stock acquired upon the exercise of stock options, but
excluding from such number of shares any such shares transferred to Stilwell or
sold to pay the purchase price upon the exercise of stock options or to pay or
satisfy tax obligations resulting from such exercise.
4. Termination.
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(a) Termination by Executive. Executive may terminate this Agreement
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and his employment hereunder by at least thirty (30) days advance written notice
to Stilwell, except that in the event of any material breach of this Agreement
by Stilwell, Executive may terminate this Agreement and his employment hereunder
immediately upon notice to Stilwell.
(b) Death or Disability. This Agreement and Executive's employment
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hereunder shall terminate automatically on the death or disability of Executive,
except to the extent employment is continued under Stilwell's disability plan.
For purposes of this Agreement, Executive shall be deemed to be disabled if he
qualifies for disability benefits under Stilwell's long-term disability plan.
(c) Termination by Stilwell For Cause. Stilwell may terminate this
---------------------------------
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of
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this Agreement (except for Paragraph 7), termination "for cause" shall mean
termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Stilwell or any
subsidiary of Stilwell;
(iii) Gross negligence or willful misconduct in the performance
of Executive's duties as determined in good faith by the Stilwell Board;
(iv) Willful failure by Executive to follow reasonable
instructions of the President or other officer to whom Executive reports
concerning the operations or business of Stilwell or any subsidiary of
Stilwell;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Stilwell Other Than For Cause.
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(i) Stilwell may terminate this Agreement and Executive's
employment other than for cause immediately upon notice to Executive, and
in such event, Stilwell shall provide severance benefits to Executive in
accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this Agreement are
applicable, if Executive's employment is terminated under Paragraph
4(d)(i), Stilwell shall continue, for a period of two (2) years following
such termination, (a) to pay to Executive as severance pay a monthly amount
equal to one-twelfth (1/12th) of the annual base salary referenced in
Paragraph 2(a) above, at the rate in effect immediately prior to
termination, and, (b) to reimburse Executive for the cost (including state
and federal income taxes payable with respect to this reimbursement) of
continuing the health insurance coverage
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provided pursuant to this Agreement or obtaining health insurance coverage
comparable to the health insurance provided pursuant to this Agreement, and
obtaining coverage comparable to the life insurance provided pursuant to
this Agreement, unless Executive is provided comparable health or life
insurance coverage in connection with other employment. The foregoing
obligations of Stilwell shall continue until the end of such two (2) year
period notwithstanding the death or disability of Executive during said
period (except, in the event of death, the obligation to reimburse
Executive for the cost of life insurance shall not continue). In the year
in which termination of employment occurs, Executive shall be eligible to
receive benefits under the Stilwell Incentive Compensation Plan and the
Stilwell Executive Plan (if such Plans then are in existence and Executive
was entitled to participate immediately prior to termination) in accordance
with the provisions of such plans then applicable, and severance pay
received in such year shall be taken into account for the purpose of
determining benefits, if any, under the Stilwell Incentive Compensation
Plan but not under the Stilwell Executive Plan. After the year in which
termination occurs, Executive shall not be entitled to accrue or receive
benefits under the Stilwell Incentive Compensation Plan or the Stilwell
Executive Plan with respect to the severance pay provided herein,
notwithstanding that benefits under such plan then are still generally
available to executive employees of Stilwell. After termination of
employment, Executive shall not be entitled to accrue or receive benefits
under any other employee benefit plan or program, except that Executive
shall be entitled to participate in the Stilwell Employee Stock Ownership
Plan and the Stilwell Section 401(k) Plan with Profit Sharing Plan Portion
in the year of termination of employment only if Executive meets all
requirements of such plans for participation in such year.
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5. Non-Disclosure and Non-Compete.
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(a) Non-Disclosure. During the term of this Agreement and at all
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times after any termination of this Agreement, Executive shall not, either
directly or indirectly, use or disclose any Stilwell trade secret, except to the
extent necessary for Executive to perform his duties for Stilwell while an
employee. For purposes of this Agreement, the term "Stilwell trade secret"
shall mean any information regarding the business or activities of Stilwell or
any subsidiary or affiliate, including any formula, pattern, compilation,
program, device, method, technique, process, customer list, technical
information or other confidential or proprietary information, that (a) derives
independent economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use, and (b) is the subject of
efforts of Stilwell or its subsidiary or affiliate that are reasonable under the
circumstance to maintain its secrecy. In the event of any breach of this
Paragraph 5 by Executive, Stilwell shall be entitled to terminate any and all
remaining severance benefits under Paragraph 4(d)(ii) and shall be entitled to
pursue such other legal and equitable remedies as may be available.
(b) Non-Compete. Following termination of this Agreement, except
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termination pursuant to Paragraph 4(d) or any termination after a Change in
Control (as herein defined of Stilwell), for a period ending three (3) years
after the last payment of salary or severance pay to Executive, Executive shall
not, directly or indirectly, as an individual, consultant, employer, employee,
officer, director, advisory director, principal, agent, partner, member,
stockholder (except non-controlling holdings of stock of not more than 2% of a
publicly traded company) or otherwise, (i) engage in a business in competition
with any business conducted by Stilwell or any subsidiary of Stilwell at any
time within five (5) years preceding the commencement of the period
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of non-compete provided herein or any business which Stilwell or any of its
subsidiaries was actively considering for ownership or conduct during the
aforesaid five (5) year period, or (ii) participate in management of any holding
company owning, directly or indirectly, more than 5% of any such business.
Executive acknowledges that certain subsidiaries of Stilwell now conduct
business throughout the United States and in foreign countries, and agrees that
this non-compete shall apply in all countries and jurisdictions in which
Stilwell or any of its subsidiaries conduct business or was actively considering
for the conduct of business during the aforesaid five (5) year period.
6. Duties Upon Termination; Survival.
---------------------------------
(a) Duties. Upon termination of this Agreement by Stilwell or
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Executive for any reason, Executive shall immediately return to Stilwell all
Stilwell trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of Stilwell and all direct and indirect subsidiaries and
affiliates of Stilwell as may be requested by Stilwell and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as Stilwell may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this
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Agreement shall survive any termination of this Agreement by Stilwell or
Executive, and the provisions of Paragraph 4(d)(ii) shall survive any
termination of this Agreement by Stilwell under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of Stilwell.
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(a) Continuation of Employment. Subject to the terms and conditions
--------------------------
of this Paragraph 7, in the event of a Change in Control (as defined in
Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees
to remain in the employ of Stilwell for a
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period of three years (the "Three-Year Period") from the date of such Change in
Control (the "Control Change Date"). Stilwell agrees to continue to employ
Executive for the Three-Year Period. During the Three-Year Period, (i) the
Executive's position (including offices, titles, reporting requirements and
responsibilities), authority and duties shall be at least commensurate in all
material respects with the most significant of those held, exercised and
assigned at any time during the 12 month period immediately before the Control
Change Date and (ii) the Executive's services shall be performed at the location
where Executive was employed immediately before the Control Change Date or at
any other location less than 40 miles from such former location. During the
Three-Year Period, Stilwell shall continue to pay to Executive an annual base
salary on the same basis and at the same intervals as in effect prior to the
Control Change Date at a rate not less than 12 times the highest monthly base
salary paid or payable to the Executive by Stilwell in respect of the 12-month
period immediately before the Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be
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entitled to participate, on the basis of his executive position, in each of the
following Stilwell plans (together, the "Specified Benefits") in existence, and
in accordance with the terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated therewith,
related to (a) life, health, dental, disability, accidental death and
dismemberment insurance or accrued but unpaid vacation time, (b) profit
sharing, thrift or deferred savings (including deferred compensation, such
as under Section 401(k) plans), (c) retirement or pension benefits, (d)
ERISA excess benefits and similar plans and (e) tax favored employee stock
ownership (such as under ESOP, and Employee Stock Purchase programs); and
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(ii) any other benefit plans hereafter made generally available
to executives of Executive's level or to the employees of Stilwell
generally.
In addition, Stilwell shall use its best efforts to cause all outstanding
options held by Executive under any stock option plan of Stilwell or its
affiliates to become immediately exercisable on the Control Change Date and to
the extent that such options are not vested and are subsequently forfeited, the
Executive shall receive a lump-sum cash payment within 5 days after the options
are forfeited equal to the difference between the fair market value of the
shares of stock subject to the non-vested, forfeited options determined as of
the date such options are forfeited and the exercise price for such options.
During the Three-Year Period Executive shall be entitled to participate, on the
basis of his executive position, in any incentive compensation plan of Stilwell
in accordance with the terms thereof at the Control Change Date; provided that
if under Stilwell programs or Executive's Employment Agreement in existence
immediately prior to the Control Change Date, there are written limitations on
participation for a designated time period in any incentive compensation plan,
such limitations shall continue after the Control Change Date to the extent so
provided for prior to the Control Change Date.
If the amount of contributions or benefits with respect to the Specified
Benefits or any incentive compensation is determined on a discretionary basis
under the terms of the Specified Benefits or any incentive compensation plan
immediately prior to the Control Change Date, the amount of such contributions
or benefits during the Three-Year Period for each of the Specified Benefits
shall not be less than the average annual contributions or benefits for each
Specified Benefit for the three plan years ending prior to the Control Change
Date and, in the case of any incentive compensation plan, the amount of the
incentive compensation during the Three-Year
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Period shall not be less than 75% of the maximum that could have been paid to
the Executive under the terms of the incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which
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Executive would be entitled at the Control Change Date to receive Specified
Benefits or incentive compensation as a general obligation of Stilwell which has
not been separately funded (including specifically, but not limited to, those
referred to under Paragraph 7(b)(i) and (ii) above), Executive shall receive
within five (5) days after such date full payment in cash (discounted to the
then present value on the basis of a rate of seven percent (7%) per annum) of
all amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence of
-----------------
this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" means
any one or more of the following:
(i) the acquisition or holding by any person, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act"), other than by Stilwell or any
Subsidiary (as defined below), or any employee benefit plan of Stilwell or
a Subsidiary (and other than by KCSI prior to the Spin-off Distribution),
of beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of 20% or more of the then-outstanding common stock or the
combined voting power of the then-outstanding voting securities ("Voting
Power") of Stilwell; provided, however, that no Change in Control shall
occur solely by reason of any such acquisition by a corporation with
respect to which, after such acquisition, more than 60% of both the then-
outstanding common shares and the then-outstanding Voting Power of such
corporation are then beneficially owned, directly or indirectly, by the
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persons who were the beneficial owners of the then-outstanding common stock
and Voting Power of Stilwell immediately before such acquisition, in
substantially the same proportions as their respective ownership,
immediately before such acquisition, of the then-outstanding common stock
and Voting Power of Stilwell; or
(ii) individuals who, as of the date of the Spin-off
Distribution, constitute the Stilwell Board (the "Incumbent Board") cease
for any reason to constitute at least 75% of the Stilwell Board; provided
that any individual who becomes a director after the Spin-off Distribution
whose election or nomination for election by the stockholders of Stilwell
was approved by at least 75% of the Incumbent Board (other than an election
or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened "election contest" relating to the
election of the directors of Stilwell (as such terms are used in Rule 14a-
11 under the Exchange Act) or "tender offer" (as such term is used in
Section 14(d) of the Exchange Act) or a proposed Extraordinary Transaction
(as defined below)) shall be deemed to be a member of the Incumbent Board;
or
(iii) approval by the stockholders of Stilwell of any one or more
of the following:
(A) a merger, reorganization, consolidation or similar
transaction (any of the foregoing, an "Extraordinary Transaction") with
respect to which persons who were the respective beneficial owners of the
then-outstanding common stock and Voting Power of Stilwell immediately
before such Extraordinary Transaction would not, if such Extraordinary
Transaction were to be consummated immediately after such stockholder
approval (but otherwise in accordance with the terms presented in writing
to
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<PAGE>
the stockholders of Stilwell for their approval), beneficially own,
directly or indirectly, more than 60% of both the then-outstanding common
shares and the then-outstanding Voting Power of the corporation resulting
from such Extraordinary Transaction, in substantially the same proportions
as their respective ownership, immediately before such Extraordinary
Transaction, of the then-outstanding common stock and Voting Power of
Stilwell,
(B) a liquidation or dissolution of Stilwell, or
(C) the sale or other disposition of all or substantially
all of the assets of Stilwell in one transaction or a series of related
transactions; or
(iv) the sale or other disposition by Stilwell, directly or
indirectly, whether by merger, consolidation, combination, lease, exchange,
spin-off, split-off, or other means, of any Significant Subsidiary or any
reduction in Stilwell's direct or indirect beneficial ownership of any
Significant Subsidiary to less than 50% of the Voting Power of such entity.
For purposes of this Agreement, "Subsidiary" shall mean any entity of which at
least 50% of the Voting Power is beneficially owned, directly or indirectly, by
Stilwell and "Significant Subsidiary" shall mean (A) any Subsidiary which
contributed 30% or more of the total combined revenues of Stilwell and all
Subsidiaries for the prior calendar year, and (B) any one or more entities,
businesses or groups of assets directly or indirectly sold or disposed of by
Stilwell (within the meaning of paragraph 7(d)(iv)) within any two year period
that contributed 30% of more of such total combined revenues or would have
contributed such 30% based on revenues of such entities, businesses or groups of
assets for the calendar year prior to their sale or disposition.
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<PAGE>
Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary,
the Spin-off Distribution shall not constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any other
-------------------------------------
provision of this Paragraph 7, at any time after the Control Change Date,
Stilwell may terminate the employment of Executive (the "Termination"), but
unless such Termination is for Cause as defined in subparagraph (g) or for
disability, within five (5) days of the Termination Stilwell shall pay to
Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal
to the product (discounted to the then present value on the basis of a rate of
seven percent (7%) per annum) of (i) 175% of his annual base salary specified in
Paragraph 7(a) multiplied by (ii) three, and Specified Benefits (excluding any
incentive compensation) to which Executive was entitled immediately prior to
Termination shall continue until the end of the 3-year period ("Benefits
Period") beginning on the date of Termination. If any plan pursuant to which
Specified Benefits are provided immediately prior to Termination would not
permit continued participation by Executive after Termination, then Stilwell
shall pay to Executive within five (5) days after Termination a lump sum payment
equal to the amount of Specified Benefits Executive would have received under
such plan if Executive had been fully vested in the average annual contributions
or benefits in effect for the three plan years ending prior to the Control
Change Date (regardless of any limitations based on the earnings or performance
of Stilwell) and a continuing participant in such plan to the end of the
Benefits Period. Following the end of the Benefits Period, Stilwell shall
continue to provide to the Executive and the Executive's family the following
benefits ("Post-Period Benefits"): (1) prior to the Executive's attainment of
age sixty (60), health, prescription and dental benefits equivalent to those
then applicable to active
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<PAGE>
peer executives of Stilwell and their families, as the same may be modified from
time to time, and (2) following the Executive's attainment of age sixty (60)
(and without regard to the Executive's period of service with Stilwell), health
and prescription benefits equivalent to those then applicable to retired peer
executives of Stilwell and their families, as the same may be modified from time
to time. The cost to the Executive of such Post-Period Benefits shall not exceed
the cost of such benefits to active or retired (as applicable) peer executives,
as the same may be modified from time to time. Notwithstanding the preceding two
sentences of this Paragraph 7(e), if the Executive is covered under any health,
prescription or dental plan provided by a subsequent employer, then the
corresponding type of plan coverage (i.e., health, prescription or dental)
required to be provided as Post-Period Benefits under this Paragraph 7(e) shall
cease. The Executive's rights under this Paragraph 7(e) shall be in addition to,
and not in lieu of, any post-termination continuation coverage or conversion
rights the Executive may have pursuant to applicable law, including without
limitation continuation coverage required by Section 4980 of the Code. Nothing
in this Paragraph 7(e) shall be deemed to limit in any manner the reserved right
of Stilwell, in its sole and absolute discretion, to at any time amend, modify
or terminate health, prescription or dental benefits for active or retired
employees generally.
(f) Resignation After Control Change Date. In the event of a Change
-------------------------------------
in Control as defined in Paragraph 7(d), thereafter, upon good reason (as
defined below), Executive may, at any time during the 3-year period following
the Change in Control, in his sole discretion, on not less than thirty (30)
days' written notice (the "Notice of Resignation") to the Secretary of Stilwell
and effective at the end of such notice period, resign his employment with
Stilwell (the "Resignation"). Within five (5) days of such a Resignation,
Stilwell shall pay to Executive his full base salary through the effective date
of such Resignation, to the extent not theretofore paid,
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<PAGE>
plus a lump sum amount equal to the Special Severance Payment (computed as
provided in the first sentence of Paragraph 7(e), except that for purposes of
such computation all references to "Termination" shall be deemed to be
references to "Resignation"). Upon Resignation of Executive, Specified Benefits
to which Executive was entitled immediately prior to Resignation shall continue
on the same terms and conditions as provided in Paragraph 7(e) in the case of
Termination (including equivalent payments provided for therein), and Post-
Period Benefits shall be provided on the same terms and conditions as provided
in Paragraph 7(e) in the case of Termination. For purposes of this Agreement,
"good reason" means any one or more of the following:
(i) the assignment to the Executive of any duties which result
in a material adverse change in the Executive's position (including status,
offices, titles, and reporting requirements), authority, duties, or other
responsibilities with Stilwell, or any other action of Stilwell which
results in a material adverse change in such position, authority, duties,
or responsibilities, other than an insubstantial and inadvertent action
which is remedied by Stilwell promptly after receipt of notice thereof
given by the Executive,
(ii) any relocation of the Executive of more than 40 miles from
the place where the Executive was located at the time of the Change in
Control;
(iii) a material reduction or elimination of any component of the
Executive's rate of compensation, including (x) base salary, (y) any
incentive payment or (z) benefits or prerequisites which the Executive was
receiving immediately prior to a Change in Control, or;
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<PAGE>
(iv) any failure by Stilwell to comply with any of the
provisions of Paragraph 7;
A passage of time prior to delivery of the Notice of Resignation or a failure by
the Executive to include in the Notice of Resignation any fact or circumstance
which contributes to a showing of good reason shall not waive any right of the
Executive under this Agreement or preclude the Executive from asserting such
fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date. Notwithstanding
-----------------------------------------------
any other provision of this Paragraph 7, at any time after the Control Change
Date, Executive may be terminated by Stilwell "for Cause." Cause means
commission by the Executive of any felony or willful breach of duty by the
Executive in the course of the Executive's employment, except that Cause shall
not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in good faith
to have been in or not opposed to the interest of Stilwell (without intent
of the Executive to gain, directly or indirectly, a profit to which the
Executive was not legally entitled);
(iii) any act or omission with respect to which a determination
could properly have been made by the Stilwell Board that the Executive met
the applicable standard of conduct for indemnification or reimbursement
under Stilwell's by-laws, any applicable indemnification agreement, or
applicable law, in each case in effect at the time of such act or omission;
or
(iv) any act or omission with respect to which Notice of
Termination of the Executive is given more than 12 months after the
earliest date on which any member
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<PAGE>
of the Stilwell Board, not a party to the act or omission, knew or should
have known of such act or omission.
Any Termination of the Executive's employment by Stilwell for Cause shall be
communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the
--------------------------
reasonable computation of Stilwell's independent auditors, which determinations
shall be certified to by such auditors and set forth in a written certificate
("Certificate") delivered to the Executive) that any benefit received or deemed
received by the Executive from Stilwell pursuant to this Agreement or otherwise
(collectively, the "Payments") is or will become subject to any excise tax under
Section 4999 of the Code or any similar tax payable under any United States
federal, state, local or other law (such excise tax and all such similar taxes
collectively, "Excise Taxes"), then Stilwell shall, immediately after such
determination, pay the Executive an amount (the "Gross-up Payment") equal to the
product of:
(i) the amount of such Excise Taxes;
multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k).
The Gross-up Payment is intended to compensate the Executive for
the Excise Taxes and any federal, state, local or other income or excise
taxes or other taxes payable by the Executive with respect to the Gross-up
Payment.
Stilwell shall cause the preparation and delivery to the Executive
of a Certificate upon request at any time. Stilwell shall, in addition to
complying with this Paragraph 7(h), cause all determinations and
certifications under Paragraphs 7(h)-(o) to
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be made as soon as reasonably possible and in adequate time to permit the
Executive to prepare and file the Executive's individual tax returns on a
timely basis.
(i) Determination by the Executive.
-------------------------------
(i) If Stilwell shall fail (a) to deliver a Certificate to the
Executive or (b) to pay to the Executive the amount of the Gross-up
Payment, if any, within 14 days after receipt from the Executive of a
written request for a Certificate, or if at any time following receipt of a
Certificate the Executive disputes the amount of the Gross-up Payment set
forth therein, the Executive may elect to demand the payment of the amount
which the Executive, in accordance with an opinion of counsel to the
Executive ("Executive Counsel Opinion"), determines to be the Gross-up
Payment. Any such demand by the Executive shall be made by delivery to
Stilwell of a written notice which specifies the Gross-up Payment
determined by the Executive and an Executive Counsel Opinion regarding such
Gross-up Payment (such written notice and opinion collectively, the
"Executive's Determination"). Within 14 days after delivery of the
Executive's Determination to Stilwell, Stilwell shall either (a) pay the
Executive the Gross-up Payment set forth in the Executive's Determination
(less the portion of such amount, if any, previously paid to the Executive
by Stilwell) or (b) deliver to the Executive a Certificate specifying the
Gross-up Payment determined by Stilwell's independent auditors, together
with an opinion of Stilwell's counsel ("Stilwell Counsel Opinion"), and pay
the Executive the Gross-up Payment specified in such Certificate. If for
any reason Stilwell fails to comply with clause (b) of the preceding
sentence, the Gross-up Payment specified in the Executive's Determination
shall be controlling for all purposes.
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<PAGE>
(ii) If the Executive does not make a request for, and Stilwell
does not deliver to the Executive, a Certificate, Stilwell shall, for
purposes of Paragraph 7(j), be deemed to have determined that no Gross-up
Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial conclusion
---------------------------
of Stilwell and/or the Executive that certain Payments are neither subject to
Excise Taxes nor to be counted in determining whether other Payments are subject
to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined
(pursuant to subsequently-enacted provisions of the Code, final regulations or
published rulings of the IRS, final IRS determination or judgment of a court of
competent jurisdiction or Stilwell's independent auditors) that any of the Non-
Parachute Items are subject to Excise Taxes, or are to be counted in determining
whether any Payments are subject to Excise Taxes, with the result that the
amount of Excise Taxes payable by the Executive is greater than the amount
determined by Stilwell or the Executive pursuant to Paragraph 7(h) or Paragraph
7(i), as applicable, then Stilwell shall pay the Executive an amount (which
shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (a) such additional Excise Taxes and (b) any
interest, fines, penalties, expenses or other costs incurred by the
Executive as a result of having taken a position in accordance with a
determination made pursuant to Paragraph 7(h); multiplied by
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction,
-----------------
the numerator of which is one (1.0), and the denominator of which is one (1.0)
minus the sum, expressed as a decimal fraction, of the rates of all federal,
state, local and other income and other taxes and any Excise Taxes applicable to
the Gross-up Payment; provided that, if such sum
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exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation.
(If different rates of tax are applicable to various portions of a Gross-up
Payment, the weighted average of such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a legal
------------------
opinion of nationally recognized executive compensation counsel that there is a
reasonable basis to support a conclusion that the Gross-up Payment determined by
the Executive has been calculated in accord with this Paragraph 7 and applicable
law. "Company Counsel Opinion" means a legal opinion of nationally recognized
executive compensation counsel that (i) there is a reasonable basis to support a
conclusion that the Gross-up Payment set forth in the Certificate of Stilwell's
independent auditors has been calculated in accord with this Paragraph 7 and
applicable law, and (ii) there is no reasonable basis for the calculation of the
Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify
-----------------------------
Stilwell in writing of any claim by the IRS or other taxing authority that, if
successful, would require the payment by Stilwell of a Gross-up Payment. Such
notice shall include the nature of such claim and the date on which such claim
is due to be paid. The Executive shall give such notice as soon as practicable,
but no later than 10 business days, after the Executive first obtains actual
knowledge of such claim; provided, however, that any failure to give or delay in
giving such notice shall affect Stilwell's obligations under this Paragraph 7
only if and to the extent that such failure results in actual prejudice to
Stilwell. The Executive shall not pay such claim less than 30 days after the
Executive gives such notice to Stilwell (or, if sooner, the date on which
payment of such claim is due). If Stilwell notifies the Executive in writing
before the expiration of such period that it desires to contest such claim, the
Executive shall:
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(i) give Stilwell any information that it reasonably requests
relating to such claim;
(ii) take such action in connection with contesting such claim
as Stilwell reasonably requests in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by Stilwell;
(iii) cooperate with Stilwell in good faith to contest such
claim; and
(iv) permit Stilwell to participate in any proceedings relating
to such claim; provided, however, that Stilwell shall bear and pay directly
all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including related interest and penalties, imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing, Stilwell shall control all proceedings in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner. The Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as Stilwell shall determine; provided, however, that if Stilwell
directs the Executive to pay such claim and sue for a refund, Stilwell
shall advance the amount of such payment to the Executive, on an interest-
free basis and shall indemnify the Executive, on an after-tax basis, for
any Excise Tax or income tax,
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including related interest or penalties, imposed with respect to such
advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. The Stilwell's control of the
contest shall be limited to issues with respect to which a Gross-up Payment
would be payable. The Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the IRS or other taxing
authority.
(n) Refunds. If, after the receipt by the Executive of an amount
-------
advanced by Stilwell pursuant to Paragraph 7(m), the Executive receives any
refund with respect to such claim, the Executive shall (subject to Stilwell's
complying with the requirements of Paragraph 7(m)) promptly pay Stilwell the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by Stilwell pursuant to Paragraph 7(m), a determination is made that
the Executive shall not be entitled to a full refund with respect to such claim
and Stilwell does not notify the Executive in writing of its intent to contest
such determination before the expiration of 30 days after such determination,
then the applicable part of such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-up Payment required to be paid. Any contest of a
denial of refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement after
--------
the Control Change Date involving an effort by Executive to protect, enforce or
secure rights or benefits claimed by Executive hereunder, Stilwell shall pay
(promptly upon demand by Executive accompanied by reasonable evidence of
incurrence) all reasonable expenses (including
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attorneys' fees) incurred by Executive in connection with such dispute, without
regard to whether Executive prevails in such dispute except that Executive shall
repay Stilwell any amounts so received if a court having jurisdiction shall make
a final, nonappealable determination that Executive acted frivolously or in bad
faith by such dispute. To assure Executive that adequate funds will be made
available to discharge Stilwell's obligations set forth in the preceding
sentence, Stilwell has established a trust and upon the occurrence of a Change
in Control shall promptly deliver to the trustee of such trust to hold in
accordance with the terms and conditions thereof that sum which the Stilwell
Board shall have determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change Date, the
---------------------
provisions of this Paragraph 7 shall control and take precedence over any other
provisions of this Agreement which are in conflict with or address the same or a
similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of Executive's
-------------------------------
employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in
Paragraph 7(d), Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
and except as otherwise specifically provided in Paragraph 4(d)(ii) with respect
to health and life insurance and in Paragraph 7(e) with respect to health,
prescription and dental benefits, no such other employment, if obtained, or
compensation or benefits payable in connection therewith shall reduce any
amounts or benefits to which Executive is entitled hereunder. Such amounts or
benefits payable to Executive under this Agreement shall not be treated as
damages but as severance compensation to which Executive is entitled because
Executive's employment has been terminated.
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9. Notice. Notices and all other communications to either party pursuant
------
to this Agreement shall be in writing and shall be deemed to have been given
when personally delivered, delivered by facsimile or deposited in the United
States mail by certified or registered mail, postage prepaid, addressed, in the
case of Stilwell, to Stilwell at 114 West 11th Street, Kansas City, Missouri
64105, Attention: Secretary, or, in the case of the Executive, to him at
EverGlades Farm, 12717 Mt. Olivet, Kansas City, MO 64166, or to such other
address as a party shall designate by notice to the other party.
10. Amendment. No provision of this Agreement may be amended, modified,
---------
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in a writing signed by Executive and the President of Stilwell. No
waiver by any party hereto at any time of any breach by another party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the time or at any prior or subsequent time.
11. Successors in Interest. The rights and obligations of Stilwell under
----------------------
this Agreement shall inure to the benefit of and be binding in each and every
respect upon the direct and indirect successors and assigns of Stilwell,
regardless of the manner in which such successors or assigns shall succeed to
the interest of Stilwell hereunder, and this Agreement shall not be terminated
by the voluntary or involuntary dissolution of Stilwell or by any merger or
consolidation or acquisition involving Stilwell or upon any transfer of all or
substantially all of Stilwell's assets, or terminated otherwise than in
accordance with its terms. In the event of any such merger or consolidation or
transfer of assets, the provisions of this Agreement shall be binding upon and
shall inure to the benefit of the surviving corporation or the corporation or
other person to which such assets shall be transferred. Neither this Agreement
nor any of the payments or benefits hereunder may be pledged,
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assigned or transferred by Executive either in whole or in part in any manner,
without the prior written consent of Stilwell.
12. Severability. The invalidity or unenforceability of any particular
------------
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
13. Controlling Law and Jurisdiction. The validity, interpretation and
--------------------------------
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
14. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the terms of Executive's employment or
severance arrangements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above stated.
STILWELL FINANCIAL, INC.
By________________________________
Name: ___________________________
Title: ___________________________
EXECUTIVE
___________________________________
Landon H. Rowland
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EXHIBIT 10.6.2
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, made and entered into as of this ____ day of May, 2000, by
and between Stilwell Financial, Inc., a Delaware corporation ("Stilwell") and
Joseph D. Monello, an individual ("Executive") to be effective on the date of
the Spin-off Distribution (as defined below).
WHEREAS, the parties expect that all of the issued and outstanding stock of
Stilwell will be distributed (the "Spin-off Distribution") to the shareholders
of Kansas City Southern Industries, Inc. ("KCSI") which has been the parent of
Stilwell since its formation on January 23, 1998; and
WHEREAS, Executive previously was employed by KCSI with duties primarily
relating to Stilwell since its formation in 1998, and Stilwell and Executive
desire for Stilwell to continue to employ Executive on the terms and conditions
set forth in this Agreement and to provide an incentive to Executive to remain
in the employ of Stilwell hereafter, particularly in the event of any Change in
Control (as herein defined) of Stilwell or any Significant Subsidiary (as herein
defined), thereby establishing and preserving continuity of management of
Stilwell.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between Stilwell and Executive as follows:
1. Employment. Stilwell hereby employs Executive as its Vice President
----------
and Chief Operating Officer to serve at the pleasure of the Board of Directors
of Stilwell (the "Stilwell Board") and to have such duties, powers and
responsibilities as may be prescribed or delegated from time to time by the
President or other officer to whom Executive reports, subject to the powers
vested in the Stilwell Board and in the stockholders of Stilwell. Executive
shall faithfully perform his duties under this Agreement to the best of his
ability and shall devote substantially all of his working time and efforts to
the business and affairs of Stilwell and its affiliates.
<PAGE>
2. Compensation.
------------
(a) Base Compensation. Stilwell shall pay Executive as compensation
-----------------
for his services hereunder an annual base salary at the rate of $660,000. Such
rate shall not be increased prior to January 1, 2003 and shall not be reduced
except as agreed by the parties or except as part of a general salary reduction
program imposed by Stilwell and applicable to all officers of Stilwell.
(b) Incentive Compensation. For the years 2000, 2001 and 2002,
----------------------
Executive shall not be entitled to participate in any Stilwell incentive
compensation plan, except that Stilwell shall pay Executive a cash bonus of
$250,000 within ten days after the spin-off Distribution.
3. Benefits and Stock Ownership.
----------------------------
(a) Benefits. During the period of his employment hereunder, Stilwell
--------
shall provide Executive with coverage under such benefit plans and programs as
are made generally available to similarly situated employees of Stilwell,
provided (a) Stilwell shall have no obligation with respect to any plan or
program if Executive is not eligible for coverage thereunder, and (b) Executive
acknowledges that stock options and other stock and equity participation awards
are granted in the discretion of the Stilwell Board or the Compensation
Committee of the Stilwell Board and that Executive has no right to receive stock
options or other equity participation awards or any particular number or level
of stock options or other awards. In determining contributions, coverage and
benefits under any disability insurance policy and under any cash compensation-
based plan provided to Executive by Stilwell, it shall be assumed that the value
of Executive's annual compensation, pursuant to this Agreement, is the lower of
175% of Executive's annual base salary or $1,000,000. Executive acknowledges
that all rights and benefits under benefit plans and programs shall be governed
by the official text of each such plan or program and not by any
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summary or description thereof or any provision of this Agreement (except to the
extent this Agreement expressly modifies such benefit plans or programs) and
that Stilwell is not under any obligation to continue in effect or to fund any
such plan or program, except as provided in Paragraph 7 hereof. Stilwell also
shall reimburse Executive for ordinary and necessary travel and other business
expenses in accordance with policies and procedures established by Stilwell.
(b) Stock Ownership. During the period of his employment hereunder,
---------------
Executive shall retain ownership in himself or in members of his immediate
family of at least a majority of the number of shares of (i) Stilwell stock
received by Executive or members of his immediate family in the Distribution,
and (ii) Stilwell stock acquired upon the exercise of stock options, but
excluding from such number of shares any such shares transferred to Stilwell or
sold to pay the purchase price upon the exercise of stock options or to pay or
satisfy tax obligations resulting from such exercise.
4. Termination.
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(a) Termination by Executive. Executive may terminate this Agreement
------------------------
and his employment hereunder by at least thirty (30) days advance written notice
to Stilwell, except that in the event of any material breach of this Agreement
by Stilwell, Executive may terminate this Agreement and his employment hereunder
immediately upon notice to Stilwell.
(b) Death or Disability. This Agreement and Executive's employment
-------------------
hereunder shall terminate automatically on the death or disability of Executive,
except to the extent employment is continued under Stilwell's disability plan.
For purposes of this Agreement, Executive shall be deemed to be disabled if he
qualifies for disability benefits under Stilwell's long-term disability plan.
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(c) Termination by Stilwell For Cause. Stilwell may terminate this
---------------------------------
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7), termination
"for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Stilwell or any
subsidiary of Stilwell;
(iii) Gross negligence or willful misconduct in the performance
of Executive's duties as determined in good faith by the Stilwell Board;
(iv) Willful failure by Executive to follow reasonable
instructions of the President or other officer to whom Executive reports
concerning the operations or business of Stilwell or any subsidiary of
Stilwell;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Stilwell Other Than For Cause.
--------------------------------------------
(i) Stilwell may terminate this Agreement and Executive's
employment other than for cause immediately upon notice to Executive, and
in such event, Stilwell shall provide severance benefits to Executive in
accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this Agreement are
applicable, if Executive's employment is terminated under Paragraph
4(d)(i), Stilwell shall continue, for a period of two (2) years following
such termination, (a) to pay to Executive as severance pay a monthly amount
equal to one-twelfth (1/12th) of the annual base salary referenced in
Paragraph 2(a) above, at the rate in effect immediately prior to
termination,
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and, (b) to reimburse Executive for the cost (including state and federal
income taxes payable with respect to this reimbursement) of continuing the
health insurance coverage provided pursuant to this Agreement or obtaining
health insurance coverage comparable to the health insurance provided
pursuant to this Agreement, and obtaining coverage comparable to the life
insurance provided pursuant to this Agreement, unless Executive is provided
comparable health or life insurance coverage in connection with other
employment. The foregoing obligations of Stilwell shall continue until the
end of such two (2) year period notwithstanding the death or disability of
Executive during said period (except, in the event of death, the obligation
to reimburse Executive for the cost of life insurance shall not continue).
In the year in which termination of employment occurs, Executive shall be
eligible to receive benefits under the Stilwell Incentive Compensation Plan
and the Stilwell Executive Plan (if such Plans then are in existence and
Executive was entitled to participate immediately prior to termination) in
accordance with the provisions of such plans then applicable, and severance
pay received in such year shall be taken into account for the purpose of
determining benefits, if any, under the Stilwell Incentive Compensation
Plan but not under the Stilwell Executive Plan. After the year in which
termination occurs, Executive shall not be entitled to accrue or receive
benefits under the Stilwell Incentive Compensation Plan or the Stilwell
Executive Plan with respect to the severance pay provided herein,
notwithstanding that benefits under such plan then are still generally
available to executive employees of Stilwell. After termination of
employment, Executive shall not be entitled to accrue or receive benefits
under any other employee benefit plan or program, except that Executive
shall be entitled to participate in the Stilwell Employee Stock Ownership
Plan and the Stilwell Section 401(k) with Profit Sharing Plan
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Portion in the year of termination of employment only if Executive meets
all requirements of such plans for participation in such year.
5. Non-Disclosure. During the term of this Agreement and at all times
--------------
after any termination of this Agreement, Executive shall not, either directly or
indirectly, use or disclose any Stilwell trade secret, except to the extent
necessary for Executive to perform his duties for Stilwell while an employee.
For purposes of this Agreement, the term "Stilwell trade secret" shall mean any
information regarding the business or activities of Stilwell or any subsidiary
or affiliate, including any formula, pattern, compilation, program, device,
method, technique, process, customer list, technical information or other
confidential or proprietary information, that (a) derives independent economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use, and (b) is the subject of efforts of Stilwell
or its subsidiary or affiliate that are reasonable under the circumstance to
maintain its secrecy. In the event of any breach of this Paragraph 5 by
Executive, Stilwell shall be entitled to terminate any and all remaining
severance benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such
other legal and equitable remedies as may be available.
6. Duties Upon Termination; Survival.
---------------------------------
(a) Duties. Upon termination of this Agreement by Stilwell or
------
Executive for any reason, Executive shall immediately return to Stilwell all
Stilwell trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of Stilwell and all direct and indirect subsidiaries and
affiliates of Stilwell as may be requested by Stilwell and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as Stilwell may reasonably request.
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(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this
--------
Agreement shall survive any termination of this Agreement by Stilwell or
Executive, and the provisions of Paragraph 4(d)(ii) shall survive any
termination of this Agreement by Stilwell under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of Stilwell.
-------------------------------------------------------------
(a) Continuation of Employment. Subject to the terms and conditions
--------------------------
of this Paragraph 7, in the event of a Change in Control (as defined in
Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees
to remain in the employ of Stilwell for a period of three years (the "Three-Year
Period") from the date of such Change in Control (the "Control Change Date").
Stilwell agrees to continue to employ Executive for the Three-Year Period.
During the Three-Year Period, (i) the Executive's position (including offices,
titles, reporting requirements and responsibilities), authority and duties shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 12 month period
immediately before the Control Change Date and (ii) the Executive's services
shall be performed at the location where Executive was employed immediately
before the Control Change Date or at any other location less than 40 miles from
such former location. During the Three-Year Period, Stilwell shall continue to
pay to Executive an annual base salary on the same basis and at the same
intervals as in effect prior to the Control Change Date at a rate not less than
12 times the highest monthly base salary paid or payable to the Executive by
Stilwell in respect of the 12-month period immediately before the Control Change
Date.
(b) Benefits. During the Three-Year Period, Executive shall be
--------
entitled to participate, on the basis of his executive position, in each of the
following Stilwell plans
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(together, the "Specified Benefits") in existence, and in accordance with the
terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated therewith,
related to (a) life, health, dental, disability, accidental death and
dismemberment insurance or accrued but unpaid vacation time, (b) profit
sharing, thrift or deferred savings (including deferred compensation, such
as under Section 401(k) plans), (c) retirement or pension benefits, (d)
ERISA excess benefits and similar plans and (e) tax favored employee stock
ownership (such as under ESOP, and Employee Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally available
to executives of Executive's level or to the employees of Stilwell
generally.
In addition, Stilwell shall use its best efforts to cause all outstanding
options held by Executive under any stock option plan of Stilwell or its
affiliates to become immediately exercisable on the Control Change Date and to
the extent that such options are not vested and are subsequently forfeited, the
Executive shall receive a lump-sum cash payment within 5 days after the options
are forfeited equal to the difference between the fair market value of the
shares of stock subject to the non-vested, forfeited options determined as of
the date such options are forfeited and the exercise price for such options.
During the Three-Year Period Executive shall be entitled to participate, on the
basis of his executive position, in any incentive compensation plan of Stilwell
in accordance with the terms thereof at the Control Change Date; provided that
if under Stilwell programs or Executive's Employment Agreement in existence
immediately prior to the Control Change Date, there are written limitations on
participation for a designated time period in any incentive compensation plan,
such limitations shall continue after the Control Change Date to the extent so
provided for prior to the Control Change Date.
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If the amount of contributions or benefits with respect to the Specified
Benefits or any incentive compensation is determined on a discretionary basis
under the terms of the Specified Benefits or any incentive compensation plan
immediately prior to the Control Change Date, the amount of such contributions
or benefits during the Three-Year Period for each of the Specified Benefits
shall not be less than the average annual contributions or benefits for each
Specified Benefit for the three plan years ending prior to the Control Change
Date and, in the case of any incentive compensation plan, the amount of the
incentive compensation during the Three-Year Period shall not be less than 75%
of the maximum that could have been paid to the Executive under the terms of the
incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which
-------
Executive would be entitled at the Control Change Date to receive Specified
Benefits or incentive compensation as a general obligation of Stilwell which has
not been separately funded (including specifically, but not limited to, those
referred to under Paragraph 7(b)(i) and (ii) above), Executive shall receive
within five (5) days after such date full payment in cash (discounted to the
then present value on the basis of a rate of seven percent (7%) per annum) of
all amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence of
-----------------
this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" means
any one or more of the following:
(i) the acquisition or holding by any person, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act"), other than by Stilwell or any
Subsidiary (as defined below), or any employee benefit plan of Stilwell or
a Subsidiary (and other than by KCSI prior to the
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Spin-off Distribution), of beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) of 20% or more of the then-outstanding common
stock or the combined voting power of the then-outstanding voting
securities ("Voting Power") of Stilwell; provided, however, that no Change
in Control shall occur solely by reason of any such acquisition by a
corporation with respect to which, after such acquisition, more than 60% of
both the then-outstanding common shares and the then-outstanding Voting
Power of such corporation are then beneficially owned, directly or
indirectly, by the persons who were the beneficial owners of the then-
outstanding common stock and Voting Power of Stilwell immediately before
such acquisition, in substantially the same proportions as their respective
ownership, immediately before such acquisition, of the then-outstanding
common stock and Voting Power of Stilwell; or
(ii) individuals who, as of the date of the Spin-off
Distribution, constitute the Stilwell Board (the "Incumbent Board") cease
for any reason to constitute at least 75% of the Stilwell Board; provided
that any individual who becomes a director after the Spin-off Distribution
whose election or nomination for election by the stockholders of Stilwell
was approved by at least 75% of the Incumbent Board (other than an election
or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened "election contest" relating to the
election of the directors of Stilwell (as such terms are used in Rule 14a-
11 under the Exchange Act) or "tender offer" (as such term is used in
Section 14(d) of the Exchange Act) or a proposed Extraordinary Transaction
(as defined below)) shall be deemed to be a member of the Incumbent Board;
or
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(iii) approval by the stockholders of Stilwell of any one or
more of the following:
(A) a merger, reorganization, consolidation or similar
transaction (any of the foregoing, an "Extraordinary Transaction") with
respect to which persons who were the respective beneficial owners of the
then-outstanding common stock and Voting Power of Stilwell immediately
before such Extraordinary Transaction would not, if such Extraordinary
Transaction were to be consummated immediately after such stockholder
approval (but otherwise in accordance with the terms presented in writing
to the stockholders of Stilwell for their approval), beneficially own,
directly or indirectly, more than 60% of both the then-outstanding common
shares and the then-outstanding Voting Power of the corporation resulting
from such Extraordinary Transaction, in substantially the same proportions
as their respective ownership, immediately before such Extraordinary
Transaction, of the then-outstanding common stock and Voting Power of
Stilwell,
(B) a liquidation or dissolution of Stilwell, or
(C) the sale or other disposition of all or
substantially all of the assets of Stilwell in one transaction or a series
of related transactions; or
(iv) the sale or other disposition by Stilwell, directly or
indirectly, whether by merger, consolidation, combination, lease, exchange,
spin-off, split-off, or other means, of any Significant Subsidiary or any
reduction in Stilwell's direct or indirect beneficial ownership of any
Significant Subsidiary to less than 50% of the Voting Power of such entity.
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For purposes of this Agreement, "Subsidiary" shall mean any entity of which at
least 50% of the Voting Power is beneficially owned, directly or indirectly, by
Stilwell and "Significant Subsidiary" shall mean (A) any Subsidiary which
contributed 30% or more of the total combined revenues of Stilwell and all
Subsidiaries for the prior calendar year, and (B) any one or more entities,
businesses or groups of assets directly or indirectly sold or disposed of by
Stilwell (within the meaning of paragraph 7(d)(iv)) within any two year period
that contributed 30% of more of such total combined revenues or would have
contributed such 30% based on revenues of such entities, businesses or groups of
assets for the calendar year prior to their sale or disposition.
Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary,
the Spin-off Distribution shall not constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any other
-------------------------------------
provision of this Paragraph 7, at any time after the Control Change Date,
Stilwell may terminate the employment of Executive (the "Termination"), but
unless such Termination is for Cause as defined in subparagraph (g) or for
disability, within five (5) days of the Termination Stilwell shall pay to
Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal
to the product (discounted to the then present value on the basis of a rate of
seven percent (7%) per annum) of (i) 175% of his annual base salary specified in
Paragraph 7(a) multiplied by (ii) three, and Specified Benefits (excluding any
incentive compensation) to which Executive was entitled immediately prior to
Termination shall continue until the end of the 3-year period ("Benefits
Period") beginning on the date of Termination. If any plan pursuant to which
Specified Benefits are provided immediately prior to Termination would not
permit continued participation by
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Executive after Termination, then Stilwell shall pay to Executive within five
(5) days after Termination a lump sum payment equal to the amount of Specified
Benefits Executive would have received under such plan if Executive had been
fully vested in the average annual contributions or benefits in effect for the
three plan years ending prior to the Control Change Date (regardless of any
limitations based on the earnings or performance of Stilwell) and a continuing
participant in such plan to the end of the Benefits Period. Following the end of
the Benefits Period, Stilwell shall continue to provide to the Executive and the
Executive's family the following benefits ("Post-Period Benefits"): (1) prior to
the Executive's attainment of age sixty (60), health, prescription and dental
benefits equivalent to those then applicable to active peer executives of
Stilwell and their families, as the same may be modified from time to time, and
(2) following the Executive's attainment of age sixty (60) (and without regard
to the Executive's period of service with Stilwell), health and prescription
benefits equivalent to those then applicable to retired peer executives of
Stilwell and their families, as the same may be modified from time to time. The
cost to the Executive of such Post-Period Benefits shall not exceed the cost of
such benefits to active or retired (as applicable) peer executives, as the same
may be modified from time to time. Notwithstanding the preceding two sentences
of this Paragraph 7(e), if the Executive is covered under any health,
prescription or dental plan provided by a subsequent employer, then the
corresponding type of plan coverage (i.e., health, prescription or dental)
required to be provided as Post-Period Benefits under this Paragraph 7(e) shall
cease. The Executive's rights under this Paragraph 7(e) shall be in addition to,
and not in lieu of, any post-termination continuation coverage or conversion
rights the Executive may have pursuant to applicable law, including without
limitation continuation coverage required by Section 4980 of the Code. Nothing
in this Paragraph 7(e) shall be deemed to limit in any manner the reserved
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right of Stilwell, in its sole and absolute discretion, to at any time amend,
modify or terminate health, prescription or dental benefits for active or
retired employees generally.
(f) Resignation After Control Change Date. In the event of a Change
-------------------------------------
in Control as defined in Paragraph 7(d), thereafter, upon good reason (as
defined below), Executive may, at any time during the 3-year period following
the Change in Control, in his sole discretion, on not less than thirty (30)
days' written notice (the "Notice of Resignation") to the Secretary of Stilwell
and effective at the end of such notice period, resign his employment with
Stilwell (the "Resignation"). Within five (5) days of such a Resignation,
Stilwell shall pay to Executive his full base salary through the effective date
of such Resignation, to the extent not theretofore paid, plus a lump sum amount
equal to the Special Severance Payment (computed as provided in the first
sentence of Paragraph 7(e), except that for purposes of such computation all
references to "Termination" shall be deemed to be references to "Resignation").
Upon Resignation of Executive, Specified Benefits to which Executive was
entitled immediately prior to Resignation shall continue on the same terms and
conditions as provided in Paragraph 7(e) in the case of Termination (including
equivalent payments provided for therein), and Post-Period Benefits shall be
provided on the same terms and conditions as provided in Paragraph 7(e) in the
case of Termination. For purposes of this Agreement, "good reason" means any one
or more of the following:
(i) the assignment to the Executive of any duties which result
in a material adverse change in the Executive's position (including status,
offices, titles, and reporting requirements), authority, duties, or other
responsibilities with Stilwell, or any other action of Stilwell which
results in a material adverse change in such position, authority, duties,
or responsibilities, other than an insubstantial and inadvertent action
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which is remedied by Stilwell promptly after receipt of notice thereof
given by the Executive,
(ii) any relocation of the Executive of more than 40 miles from
the place where the Executive was located at the time of the Change in
Control;
(iii) a material reduction or elimination of any component of the
Executive's rate of compensation, including (x) base salary, (y) any
incentive payment or (z) benefits or prerequisites which the Executive was
receiving immediately prior to a Change in Control, or;
(iv) any failure by Stilwell to comply with any of the
provisions of Paragraph 7;
A passage of time prior to delivery of the Notice of Resignation or a failure by
the Executive to include in the Notice of Resignation any fact or circumstance
which contributes to a showing of good reason shall not waive any right of the
Executive under this Agreement or preclude the Executive from asserting such
fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date. Notwithstanding
-----------------------------------------------
any other provision of this Paragraph 7, at any time after the Control Change
Date, Executive may be terminated by Stilwell "for Cause." Cause means
commission by the Executive of any felony or willful breach of duty by the
Executive in the course of the Executive's employment, except that Cause shall
not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in good faith
to have been in or not opposed to the interest of Stilwell (without intent
of the Executive to gain, directly or indirectly, a profit to which the
Executive was not legally entitled);
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(iii) any act or omission with respect to which a determination
could properly have been made by the Stilwell Board that the Executive met
the applicable standard of conduct for indemnification or reimbursement
under Stilwell's by-laws, any applicable indemnification agreement, or
applicable law, in each case in effect at the time of such act or omission;
or
(iv) any act or omission with respect to which Notice of
Termination of the Executive is given more than 12 months after the
earliest date on which any member of the Stilwell Board, not a party to the
act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by Stilwell for Cause shall be
communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the
--------------------------
reasonable computation of Stilwell's independent auditors, which determinations
shall be certified to by such auditors and set forth in a written certificate
("Certificate") delivered to the Executive) that any benefit received or deemed
received by the Executive from Stilwell pursuant to this Agreement or otherwise
(collectively, the "Payments") is or will become subject to any excise tax under
Section 4999 of the Code or any similar tax payable under any United States
federal, state, local or other law (such excise tax and all such similar taxes
collectively, "Excise Taxes"), then Stilwell shall, immediately after such
determination, pay the Executive an amount (the "Gross-up Payment") equal to the
product of:
(i) the amount of such Excise Taxes;
multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k).
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The Gross-up Payment is intended to compensate the Executive for
the Excise Taxes and any federal, state, local or other income or excise
taxes or other taxes payable by the Executive with respect to the Gross-up
Payment.
Stilwell shall cause the preparation and delivery to the
Executive of a Certificate upon request at any time. Stilwell shall, in
addition to complying with this Paragraph 7(h), cause all determinations
and certifications under Paragraphs 7(h)-(o) to be made as soon as
reasonably possible and in adequate time to permit the Executive to prepare
and file the Executive's individual tax returns on a timely basis.
(i) Determination by the Executive.
-------------------------------
(i) If Stilwell shall fail (a) to deliver a Certificate to the
Executive or (b) to pay to the Executive the amount of the Gross-up
Payment, if any, within 14 days after receipt from the Executive of a
written request for a Certificate, or if at any time following receipt of a
Certificate the Executive disputes the amount of the Gross-up Payment set
forth therein, the Executive may elect to demand the payment of the amount
which the Executive, in accordance with an opinion of counsel to the
Executive ("Executive Counsel Opinion"), determines to be the Gross-up
Payment. Any such demand by the Executive shall be made by delivery to
Stilwell of a written notice which specifies the Gross-up Payment
determined by the Executive and an Executive Counsel Opinion regarding such
Gross-up Payment (such written notice and opinion collectively, the
"Executive's Determination"). Within 14 days after delivery of the
Executive's Determination to Stilwell, Stilwell shall either (a) pay the
Executive the Gross-up Payment set forth in the Executive's Determination
(less the portion of such amount, if any, previously paid to the Executive
by Stilwell) or (b) deliver to the Executive a
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Certificate specifying the Gross-up Payment determined by Stilwell's
independent auditors, together with an opinion of Stilwell's counsel
("Stilwell Counsel Opinion"), and pay the Executive the Gross-up Payment
specified in such Certificate. If for any reason Stilwell fails to comply
with clause (b) of the preceding sentence, the Gross-up Payment specified
in the Executive's Determination shall be controlling for all purposes.
(ii) If the Executive does not make a request for, and Stilwell
does not deliver to the Executive, a Certificate, Stilwell shall, for
purposes of Paragraph 7(j), be deemed to have determined that no Gross-up
Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial conclusion
---------------------------
of Stilwell and/or the Executive that certain Payments are neither subject to
Excise Taxes nor to be counted in determining whether other Payments are subject
to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined
(pursuant to subsequently-enacted provisions of the Code, final regulations or
published rulings of the IRS, final IRS determination or judgment of a court of
competent jurisdiction or Stilwell's independent auditors) that any of the Non-
Parachute Items are subject to Excise Taxes, or are to be counted in determining
whether any Payments are subject to Excise Taxes, with the result that the
amount of Excise Taxes payable by the Executive is greater than the amount
determined by Stilwell or the Executive pursuant to Paragraph 7(h) or Paragraph
7(i), as applicable, then Stilwell shall pay the Executive an amount (which
shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (a) such additional Excise Taxes and (b) any
interest, fines, penalties, expenses or other costs incurred by the
Executive as a result of having taken a position in accordance with a
determination made pursuant to Paragraph 7(h); multiplied by
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(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction,
-----------------
the numerator of which is one (1.0), and the denominator of which is one (1.0)
minus the sum, expressed as a decimal fraction, of the rates of all federal,
state, local and other income and other taxes and any Excise Taxes applicable to
the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed
equal to 0.8 for purposes of this computation. (If different rates of tax are
applicable to various portions of a Gross-up Payment, the weighted average of
such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a legal
------------------
opinion of nationally recognized executive compensation counsel that there is a
reasonable basis to support a conclusion that the Gross-up Payment determined by
the Executive has been calculated in accord with this Paragraph 7 and applicable
law. "Company Counsel Opinion" means a legal opinion of nationally recognized
executive compensation counsel that (i) there is a reasonable basis to support a
conclusion that the Gross-up Payment set forth in the Certificate of Stilwell's
independent auditors has been calculated in accord with this Paragraph 7 and
applicable law, and (ii) there is no reasonable basis for the calculation of the
Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify
-----------------------------
Stilwell in writing of any claim by the IRS or other taxing authority that, if
successful, would require the payment by Stilwell of a Gross-up Payment. Such
notice shall include the nature of such claim and the date on which such claim
is due to be paid. The Executive shall give such notice as soon as practicable,
but no later than 10 business days, after the Executive first obtains actual
knowledge of such claim; provided, however, that any failure to give or delay in
giving such
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notice shall affect Stilwell's obligations under this Paragraph 7 only if and to
the extent that such failure results in actual prejudice to Stilwell. The
Executive shall not pay such claim less than 30 days after the Executive gives
such notice to Stilwell (or, if sooner, the date on which payment of such claim
is due). If Stilwell notifies the Executive in writing before the expiration of
such period that it desires to contest such claim, the Executive shall:
(i) give Stilwell any information that it reasonably requests
relating to such claim;
(ii) take such action in connection with contesting such claim
as Stilwell reasonably requests in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by Stilwell;
(iii) cooperate with Stilwell in good faith to contest such
claim; and
(iv) permit Stilwell to participate in any proceedings relating
to such claim; provided, however, that Stilwell shall bear and pay directly
all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including related interest and penalties, imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing, Stilwell shall control all proceedings in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner. The Executive agrees to
prosecute such contest to a
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determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Stilwell shall
determine; provided, however, that if Stilwell directs the Executive to pay
such claim and sue for a refund, Stilwell shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify the
Executive, on an after-tax basis, for any Excise Tax or income tax,
including related interest or penalties, imposed with respect to such
advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. The Stilwell's control of the
contest shall be limited to issues with respect to which a Gross-up Payment
would be payable. The Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the IRS or other taxing
authority.
(n) Refunds. If, after the receipt by the Executive of an amount
-------
advanced by Stilwell pursuant to Paragraph 7(m), the Executive receives any
refund with respect to such claim, the Executive shall (subject to Stilwell's
complying with the requirements of Paragraph 7(m)) promptly pay Stilwell the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by Stilwell pursuant to Paragraph 7(m), a determination is made that
the Executive shall not be entitled to a full refund with respect to such claim
and Stilwell does not notify the Executive in writing of its intent to contest
such determination before the expiration of 30 days after such determination,
then the applicable part of such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
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thereof, the amount of Gross-up Payment required to be paid. Any contest of a
denial of refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement after
--------
the Control Change Date involving an effort by Executive to protect, enforce or
secure rights or benefits claimed by Executive hereunder, Stilwell shall pay
(promptly upon demand by Executive accompanied by reasonable evidence of
incurrence) all reasonable expenses (including attorneys' fees) incurred by
Executive in connection with such dispute, without regard to whether Executive
prevails in such dispute except that Executive shall repay Stilwell any amounts
so received if a court having jurisdiction shall make a final, nonappealable
determination that Executive acted frivolously or in bad faith by such dispute.
To assure Executive that adequate funds will be made available to discharge
Stilwell's obligations set forth in the preceding sentence, Stilwell has
established a trust and upon the occurrence of a Change in Control shall
promptly deliver to the trustee of such trust to hold in accordance with the
terms and conditions thereof that sum which the Stilwell Board shall have
determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change Date, the
---------------------
provisions of this Paragraph 7 shall control and take precedence over any other
provisions of this Agreement which are in conflict with or address the same or a
similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of Executive's
-------------------------------
employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in
Paragraph 7(d), Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
and except as otherwise specifically
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provided in Paragraph 4(d)(ii) with respect to health and life insurance and in
Paragraph 7(e) with respect to health, prescription and dental benefits, no such
other employment, if obtained, or compensation or benefits payable in connection
therewith shall reduce any amounts or benefits to which Executive is entitled
hereunder. Such amounts or benefits payable to Executive under this Agreement
shall not be treated as damages but as severance compensation to which Executive
is entitled because Executive's employment has been terminated.
9. Notice. Notices and all other communications to either party pursuant
------
to this Agreement shall be in writing and shall be deemed to have been given
when personally delivered, delivered by facsimile or deposited in the United
States mail by certified or registered mail, postage prepaid, addressed, in the
case of Stilwell, to Stilwell at 114 West 11th Street, Kansas City, Missouri
64105, Attention: Secretary, or, in the case of the Executive, to him at 10051
Hardy Drive, Overland Park, KS 66212, or to such other address as a party shall
designate by notice to the other party.
10. Amendment. No provision of this Agreement may be amended, modified,
---------
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in a writing signed by Executive and the President of Stilwell. No
waiver by any party hereto at any time of any breach by another party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the time or at any prior or subsequent time.
11. Successors in Interest. The rights and obligations of Stilwell under
----------------------
this Agreement shall inure to the benefit of and be binding in each and every
respect upon the direct and indirect successors and assigns of Stilwell,
regardless of the manner in which such successors or assigns shall succeed to
the interest of Stilwell hereunder, and this Agreement shall not be terminated
by
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the voluntary or involuntary dissolution of Stilwell or by any merger or
consolidation or acquisition involving Stilwell or upon any transfer of all or
substantially all of Stilwell's assets, or terminated otherwise than in
accordance with its terms. In the event of any such merger or consolidation or
transfer of assets, the provisions of this Agreement shall be binding upon and
shall inure to the benefit of the surviving corporation or the corporation or
other person to which such assets shall be transferred. Neither this Agreement
nor any of the payments or benefits hereunder may be pledged, assigned or
transferred by Executive either in whole or in part in any manner, without the
prior written consent of Stilwell.
12. Severability. The invalidity or unenforceability of any particular
------------
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
13. Controlling Law and Jurisdiction. The validity, interpretation and
--------------------------------
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
14. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the terms of Executive's employment or
severance arrangements.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above stated.
STILWELL FINANCIAL, INC.
By________________________________
Name: ____________________________
Title:____________________________
EXECUTIVE
___________________________________
Joseph D. Monello
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EXHIBIT 10.6.3
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, made and entered into as of this ____ day of May, 2000, by
and between Stilwell Financial, Inc., a Delaware corporation ("Stilwell") and
Danny R. Carpenter, an individual ("Executive") to be effective on the date of
the Spin-off Distribution (as defined below).
WHEREAS, the parties expect that all of the issued and outstanding stock of
Stilwell will be distributed (the "Spin-off Distribution") to the shareholders
of Kansas City Southern Industries, Inc. ("KCSI") which has been the parent of
Stilwell since its formation on January 23, 1998; and
WHEREAS, Executive previously was employed by KCSI with duties primarily
relating to Stilwell since its formation in 1998, and Stilwell and Executive
desire for Stilwell to continue to employ Executive on the terms and conditions
set forth in this Agreement and to provide an incentive to Executive to remain
in the employ of Stilwell hereafter, particularly in the event of any Change in
Control (as herein defined) of Stilwell or any Significant Subsidiary (as herein
defined), thereby establishing and preserving continuity of management of
Stilwell.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between Stilwell and Executive as follows:
1. Employment. Stilwell hereby employs Executive as its Vice President
----------
and Secretary to serve at the pleasure of the Board of Directors of Stilwell
(the "Stilwell Board") and to have such duties, powers and responsibilities as
may be prescribed or delegated from time to time by the President or other
officer to whom Executive reports, subject to the powers vested in the Stilwell
Board and in the stockholders of Stilwell. Executive shall faithfully perform
his duties under this Agreement to the best of his ability and shall devote
substantially all of his working time and efforts to the business and affairs of
Stilwell and its affiliates.
<PAGE>
2. Compensation.
------------
(a) Base Compensation. Stilwell shall pay Executive as compensation
-----------------
for his services hereunder an annual base salary at the rate of $400,000. Such
rate shall not be increased prior to January 1, 2003 and shall not be reduced
except as agreed by the parties or except as part of a general salary reduction
program imposed by Stilwell and applicable to all officers of Stilwell.
(b) Incentive Compensation. For the years 2000, 2001 and 2002,
----------------------
Executive shall not be entitled to participate in any Stilwell incentive
compensation plan, except that Stilwell shall pay Executive a cash bonus of
$400,000 within ten days after the spin-off Distribution.
3. Benefits and Stock Ownership.
----------------------------
(a) Benefits. During the period of his employment hereunder, Stilwell
--------
shall provide Executive with coverage under such benefit plans and programs as
are made generally available to similarly situated employees of Stilwell,
provided (a) Stilwell shall have no obligation with respect to any plan or
program if Executive is not eligible for coverage thereunder, and (b) Executive
acknowledges that stock options and other stock and equity participation awards
are granted in the discretion of the Stilwell Board or the Compensation
Committee of the Stilwell Board and that Executive has no right to receive stock
options or other equity participation awards or any particular number or level
of stock options or other awards. In determining contributions, coverage and
benefits under any disability insurance policy and under any cash compensation-
based plan provided to Executive by Stilwell, it shall be assumed that the value
of Executive's annual compensation, pursuant to this Agreement, is the lower of
175% of Executive's annual base salary or $1,000,000. Executive acknowledges
that all rights and benefits under benefit plans and programs shall be governed
by the official text of each such plan or program and not by any
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summary or description thereof or any provision of this Agreement (except to the
extent this Agreement expressly modifies such benefit plans or programs) and
that Stilwell is not under any obligation to continue in effect or to fund any
such plan or program, except as provided in Paragraph 7 hereof. Stilwell also
shall reimburse Executive for ordinary and necessary travel and other business
expenses in accordance with policies and procedures established by Stilwell.
(b) Stock Ownership. During the period of his employment hereunder,
---------------
Executive shall retain ownership in himself or in members of his immediate
family of at least a majority of the number of shares of (i) Stilwell stock
received by Executive or members of his immediate family in the Distribution,
and (ii) Stilwell stock acquired upon the exercise of stock options, but
excluding from such number of shares any such shares transferred to Stilwell or
sold to pay the purchase price upon the exercise of stock options or to pay or
satisfy tax obligations resulting from such exercise.
4. Termination.
-----------
(a) Termination by Executive. Executive may terminate this Agreement
------------------------
and his employment hereunder by at least thirty (30) days advance written notice
to Stilwell, except that in the event of any material breach of this Agreement
by Stilwell, Executive may terminate this Agreement and his employment hereunder
immediately upon notice to Stilwell.
(b) Death or Disability. This Agreement and Executive's employment
-------------------
hereunder shall terminate automatically on the death or disability of Executive,
except to the extent employment is continued under Stilwell's disability plan.
For purposes of this Agreement, Executive shall be deemed to be disabled if he
qualifies for disability benefits under Stilwell's long-term disability plan.
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<PAGE>
(c) Termination by Stilwell For Cause. Stilwell may terminate this
---------------------------------
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7), termination
"for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Stilwell or any subsidiary
of Stilwell;
(iii) Gross negligence or willful misconduct in the performance
of Executive's duties as determined in good faith by the Stilwell Board;
(iv) Willful failure by Executive to follow reasonable
instructions of the President or other officer to whom Executive reports
concerning the operations or business of Stilwell or any subsidiary of
Stilwell;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Stilwell Other Than For Cause.
--------------------------------------------
(i) Stilwell may terminate this Agreement and Executive's
employment other than for cause immediately upon notice to Executive, and
in such event, Stilwell shall provide severance benefits to Executive in
accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this Agreement are
applicable, if Executive's employment is terminated under Paragraph
4(d)(i), Stilwell shall continue, for a period of two (2) years following
such termination, (a) to pay to Executive as severance pay a monthly amount
equal to one-twelfth (1/12th) of the annual base salary referenced in
Paragraph 2(a) above, at the rate in effect immediately prior to
termination,
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<PAGE>
and, (b) to reimburse Executive for the cost (including state and federal
income taxes payable with respect to this reimbursement) of continuing the
health insurance coverage provided pursuant to this Agreement or obtaining
health insurance coverage comparable to the health insurance provided
pursuant to this Agreement, and obtaining coverage comparable to the life
insurance provided pursuant to this Agreement, unless Executive is provided
comparable health or life insurance coverage in connection with other
employment. The foregoing obligations of Stilwell shall continue until the
end of such two (2) year period notwithstanding the death or disability of
Executive during said period (except, in the event of death, the obligation
to reimburse Executive for the cost of life insurance shall not continue).
In the year in which termination of employment occurs, Executive shall be
eligible to receive benefits under the Stilwell Incentive Compensation Plan
and the Stilwell Executive Plan (if such Plans then are in existence and
Executive was entitled to participate immediately prior to termination) in
accordance with the provisions of such plans then applicable, and severance
pay received in such year shall be taken into account for the purpose of
determining benefits, if any, under the Stilwell Incentive Compensation
Plan but not under the Stilwell Executive Plan. After the year in which
termination occurs, Executive shall not be entitled to accrue or receive
benefits under the Stilwell Incentive Compensation Plan or the Stilwell
Executive Plan with respect to the severance pay provided herein,
notwithstanding that benefits under such plan then are still generally
available to executive employees of Stilwell. After termination of
employment, Executive shall not be entitled to accrue or receive benefits
under any other employee benefit plan or program, except that Executive
shall be entitled to participate in the Stilwell Employee Stock Ownership
Plan and the Stilwell Section 401(k) with Profit Sharing Plan
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<PAGE>
Portion in the year of termination of employment only if Executive meets
all requirements of such plans for participation in such year.
5. Non-Disclosure. During the term of this Agreement and at all times
--------------
after any termination of this Agreement, Executive shall not, either directly or
indirectly, use or disclose any Stilwell trade secret, except to the extent
necessary for Executive to perform his duties for Stilwell while an employee.
For purposes of this Agreement, the term "Stilwell trade secret" shall mean any
information regarding the business or activities of Stilwell or any subsidiary
or affiliate, including any formula, pattern, compilation, program, device,
method, technique, process, customer list, technical information or other
confidential or proprietary information, that (a) derives independent economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use, and (b) is the subject of efforts of Stilwell
or its subsidiary or affiliate that are reasonable under the circumstance to
maintain its secrecy. In the event of any breach of this Paragraph 5 by
Executive, Stilwell shall be entitled to terminate any and all remaining
severance benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such
other legal and equitable remedies as may be available.
6. Duties Upon Termination; Survival.
---------------------------------
(a) Duties. Upon termination of this Agreement by Stilwell or
------
Executive for any reason, Executive shall immediately return to Stilwell all
Stilwell trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of Stilwell and all direct and indirect subsidiaries and
affiliates of Stilwell as may be requested by Stilwell and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as Stilwell may reasonably request.
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<PAGE>
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this
--------
Agreement shall survive any termination of this Agreement by Stilwell or
Executive, and the provisions of Paragraph 4(d)(ii) shall survive any
termination of this Agreement by Stilwell under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of Stilwell.
-------------------------------------------------------------
(a) Continuation of Employment. Subject to the terms and conditions
--------------------------
of this Paragraph 7, in the event of a Change in Control (as defined in
Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees
to remain in the employ of Stilwell for a period of three years (the "Three-Year
Period") from the date of such Change in Control (the "Control Change Date").
Stilwell agrees to continue to employ Executive for the Three-Year Period.
During the Three-Year Period, (i) the Executive's position (including offices,
titles, reporting requirements and responsibilities), authority and duties shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 12 month period
immediately before the Control Change Date and (ii) the Executive's services
shall be performed at the location where Executive was employed immediately
before the Control Change Date or at any other location less than 40 miles from
such former location. During the Three-Year Period, Stilwell shall continue to
pay to Executive an annual base salary on the same basis and at the same
intervals as in effect prior to the Control Change Date at a rate not less than
12 times the highest monthly base salary paid or payable to the Executive by
Stilwell in respect of the 12-month period immediately before the Control Change
Date.
(b) Benefits. During the Three-Year Period, Executive shall be
--------
entitled to participate, on the basis of his executive position, in each of the
following Stilwell plans
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<PAGE>
(together, the "Specified Benefits") in existence, and in accordance with the
terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated therewith,
related to (a) life, health, dental, disability, accidental death and
dismemberment insurance or accrued but unpaid vacation time, (b) profit
sharing, thrift or deferred savings (including deferred compensation, such
as under Section 401(k) plans), (c) retirement or pension benefits, (d)
ERISA excess benefits and similar plans and (e) tax favored employee stock
ownership (such as under ESOP, and Employee Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally available
to executives of Executive's level or to the employees of Stilwell
generally.
In addition, Stilwell shall use its best efforts to cause all outstanding
options held by Executive under any stock option plan of Stilwell or its
affiliates to become immediately exercisable on the Control Change Date and to
the extent that such options are not vested and are subsequently forfeited, the
Executive shall receive a lump-sum cash payment within 5 days after the options
are forfeited equal to the difference between the fair market value of the
shares of stock subject to the non-vested, forfeited options determined as of
the date such options are forfeited and the exercise price for such options.
During the Three-Year Period Executive shall be entitled to participate, on the
basis of his executive position, in any incentive compensation plan of Stilwell
in accordance with the terms thereof at the Control Change Date; provided that
if under Stilwell programs or Executive's Employment Agreement in existence
immediately prior to the Control Change Date, there are written limitations on
participation for a designated time period in any incentive compensation plan,
such limitations shall continue after the Control Change Date to the extent so
provided for prior to the Control Change Date.
-8-
<PAGE>
If the amount of contributions or benefits with respect to the Specified
Benefits or any incentive compensation is determined on a discretionary basis
under the terms of the Specified Benefits or any incentive compensation plan
immediately prior to the Control Change Date, the amount of such contributions
or benefits during the Three-Year Period for each of the Specified Benefits
shall not be less than the average annual contributions or benefits for each
Specified Benefit for the three plan years ending prior to the Control Change
Date and, in the case of any incentive compensation plan, the amount of the
incentive compensation during the Three-Year Period shall not be less than 75%
of the maximum that could have been paid to the Executive under the terms of the
incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which
-------
Executive would be entitled at the Control Change Date to receive Specified
Benefits or incentive compensation as a general obligation of Stilwell which has
not been separately funded (including specifically, but not limited to, those
referred to under Paragraph 7(b)(i) and (ii) above), Executive shall receive
within five (5) days after such date full payment in cash (discounted to the
then present value on the basis of a rate of seven percent (7%) per annum) of
all amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence of
-----------------
this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" means
any one or more of the following:
(i) the acquisition or holding by any person, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act"), other than by Stilwell or any
Subsidiary (as defined below), or any employee benefit plan of Stilwell or
a Subsidiary (and other than by KCSI prior to the
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Spin-off Distribution), of beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) of 20% or more of the then-outstanding common
stock or the combined voting power of the then-outstanding voting
securities ("Voting Power") of Stilwell; provided, however, that no Change
in Control shall occur solely by reason of any such acquisition by a
corporation with respect to which, after such acquisition, more than 60% of
both the then-outstanding common shares and the then-outstanding Voting
Power of such corporation are then beneficially owned, directly or
indirectly, by the persons who were the beneficial owners of the then-
outstanding common stock and Voting Power of Stilwell immediately before
such acquisition, in substantially the same proportions as their respective
ownership, immediately before such acquisition, of the then-outstanding
common stock and Voting Power of Stilwell; or
(ii) individuals who, as of the date of the Spin-off
Distribution, constitute the Stilwell Board (the "Incumbent Board") cease
for any reason to constitute at least 75% of the Stilwell Board; provided
that any individual who becomes a director after the Spin-off Distribution
whose election or nomination for election by the stockholders of Stilwell
was approved by at least 75% of the Incumbent Board (other than an election
or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened "election contest" relating to the
election of the directors of Stilwell (as such terms are used in Rule 14a-
11 under the Exchange Act) or "tender offer" (as such term is used in
Section 14(d) of the Exchange Act) or a proposed Extraordinary Transaction
(as defined below)) shall be deemed to be a member of the Incumbent Board;
or
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(iii) approval by the stockholders of Stilwell of any one or more
of the following:
(A) a merger, reorganization, consolidation or similar
transaction (any of the foregoing, an "Extraordinary Transaction") with
respect to which persons who were the respective beneficial owners of the
then-outstanding common stock and Voting Power of Stilwell immediately
before such Extraordinary Transaction would not, if such Extraordinary
Transaction were to be consummated immediately after such stockholder
approval (but otherwise in accordance with the terms presented in writing
to the stockholders of Stilwell for their approval), beneficially own,
directly or indirectly, more than 60% of both the then-outstanding common
shares and the then-outstanding Voting Power of the corporation resulting
from such Extraordinary Transaction, in substantially the same proportions
as their respective ownership, immediately before such Extraordinary
Transaction, of the then-outstanding common stock and Voting Power of
Stilwell,
(B) a liquidation or dissolution of Stilwell, or
(C) the sale or other disposition of all or substantially
all of the assets of Stilwell in one transaction or a series of related
transactions; or
(iv) the sale or other disposition by Stilwell, directly or
indirectly, whether by merger, consolidation, combination, lease, exchange,
spin-off, split-off, or other means, of any Significant Subsidiary or any
reduction in Stilwell's direct or indirect beneficial ownership of any
Significant Subsidiary to less than 50% of the Voting Power of such entity.
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<PAGE>
For purposes of this Agreement, "Subsidiary" shall mean any entity of which at
least 50% of the Voting Power is beneficially owned, directly or indirectly, by
Stilwell and "Significant Subsidiary" shall mean (A) any Subsidiary which
contributed 30% or more of the total combined revenues of Stilwell and all
Subsidiaries for the prior calendar year, and (B) any one or more entities,
businesses or groups of assets directly or indirectly sold or disposed of by
Stilwell (within the meaning of paragraph 7(d)(iv)) within any two year period
that contributed 30% of more of such total combined revenues or would have
contributed such 30% based on revenues of such entities, businesses or groups of
assets for the calendar year prior to their sale or disposition.
Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary,
the Spin-off Distribution shall not constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any other
-------------------------------------
provision of this Paragraph 7, at any time after the Control Change Date,
Stilwell may terminate the employment of Executive (the "Termination"), but
unless such Termination is for Cause as defined in subparagraph (g) or for
disability, within five (5) days of the Termination Stilwell shall pay to
Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal
to the product (discounted to the then present value on the basis of a rate of
seven percent (7%) per annum) of (i) 175% of his annual base salary specified in
Paragraph 7(a) multiplied by (ii) three, and Specified Benefits (excluding any
incentive compensation) to which Executive was entitled immediately prior to
Termination shall continue until the end of the 3-year period ("Benefits
Period") beginning on the date of Termination. If any plan pursuant to which
Specified Benefits are provided immediately prior to Termination would not
permit continued participation by
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<PAGE>
Executive after Termination, then Stilwell shall pay to Executive within five
(5) days after Termination a lump sum payment equal to the amount of Specified
Benefits Executive would have received under such plan if Executive had been
fully vested in the average annual contributions or benefits in effect for the
three plan years ending prior to the Control Change Date (regardless of any
limitations based on the earnings or performance of Stilwell) and a continuing
participant in such plan to the end of the Benefits Period. Following the end of
the Benefits Period, Stilwell shall continue to provide to the Executive and the
Executive's family the following benefits ("Post-Period Benefits"): (1) prior to
the Executive's attainment of age sixty (60), health, prescription and dental
benefits equivalent to those then applicable to active peer executives of
Stilwell and their families, as the same may be modified from time to time, and
(2) following the Executive's attainment of age sixty (60) (and without regard
to the Executive's period of service with Stilwell), health and prescription
benefits equivalent to those then applicable to retired peer executives of
Stilwell and their families, as the same may be modified from time to time. The
cost to the Executive of such Post-Period Benefits shall not exceed the cost of
such benefits to active or retired (as applicable) peer executives, as the same
may be modified from time to time. Notwithstanding the preceding two sentences
of this Paragraph 7(e), if the Executive is covered under any health,
prescription or dental plan provided by a subsequent employer, then the
corresponding type of plan coverage (i.e., health, prescription or dental)
required to be provided as Post-Period Benefits under this Paragraph 7(e) shall
cease. The Executive's rights under this Paragraph 7(e) shall be in addition to,
and not in lieu of, any post-termination continuation coverage or conversion
rights the Executive may have pursuant to applicable law, including without
limitation continuation coverage required by Section 4980 of the Code. Nothing
in this Paragraph 7(e) shall be deemed to limit in any manner the reserved
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<PAGE>
right of Stilwell, in its sole and absolute discretion, to at any time amend,
modify or terminate health, prescription or dental benefits for active or
retired employees generally.
(f) Resignation After Control Change Date. In the event of a Change
-------------------------------------
in Control as defined in Paragraph 7(d), thereafter, upon good reason (as
defined below), Executive may, at any time during the 3-year period following
the Change in Control, in his sole discretion, on not less than thirty (30)
days' written notice (the "Notice of Resignation") to the Secretary of Stilwell
and effective at the end of such notice period, resign his employment with
Stilwell (the "Resignation"). Within five (5) days of such a Resignation,
Stilwell shall pay to Executive his full base salary through the effective date
of such Resignation, to the extent not theretofore paid, plus a lump sum amount
equal to the Special Severance Payment (computed as provided in the first
sentence of Paragraph 7(e), except that for purposes of such computation all
references to "Termination" shall be deemed to be references to "Resignation").
Upon Resignation of Executive, Specified Benefits to which Executive was
entitled immediately prior to Resignation shall continue on the same terms and
conditions as provided in Paragraph 7(e) in the case of Termination (including
equivalent payments provided for therein), and Post-Period Benefits shall be
provided on the same terms and conditions as provided in Paragraph 7(e) in the
case of Termination. For purposes of this Agreement, "good reason" means any one
or more of the following:
(i) the assignment to the Executive of any duties which result
in a material adverse change in the Executive's position (including status,
offices, titles, and reporting requirements), authority, duties, or other
responsibilities with Stilwell, or any other action of Stilwell which
results in a material adverse change in such position, authority, duties,
or responsibilities, other than an insubstantial and inadvertent action
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<PAGE>
which is remedied by Stilwell promptly after receipt of notice thereof
given by the Executive,
(ii) any relocation of the Executive of more than 40 miles from
the place where the Executive was located at the time of the Change in
Control;
(iii) a material reduction or elimination of any component of the
Executive's rate of compensation, including (x) base salary, (y) any
incentive payment or (z) benefits or prerequisites which the Executive was
receiving immediately prior to a Change in Control, or;
(iv) any failure by Stilwell to comply with any of the
provisions of Paragraph 7;
A passage of time prior to delivery of the Notice of Resignation or a failure by
the Executive to include in the Notice of Resignation any fact or circumstance
which contributes to a showing of good reason shall not waive any right of the
Executive under this Agreement or preclude the Executive from asserting such
fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date. Notwithstanding
-----------------------------------------------
any other provision of this Paragraph 7, at any time after the Control Change
Date, Executive may be terminated by Stilwell "for Cause." Cause means
commission by the Executive of any felony or willful breach of duty by the
Executive in the course of the Executive's employment, except that Cause shall
not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in good faith
to have been in or not opposed to the interest of Stilwell (without intent
of the Executive to gain, directly or indirectly, a profit to which the
Executive was not legally entitled);
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<PAGE>
(iii) any act or omission with respect to which a determination
could properly have been made by the Stilwell Board that the Executive met
the applicable standard of conduct for indemnification or reimbursement
under Stilwell's by-laws, any applicable indemnification agreement, or
applicable law, in each case in effect at the time of such act or omission;
or
(iv) any act or omission with respect to which Notice of
Termination of the Executive is given more than 12 months after the
earliest date on which any member of the Stilwell Board, not a party to the
act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by Stilwell for Cause shall be
communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the
--------------------------
reasonable computation of Stilwell's independent auditors, which determinations
shall be certified to by such auditors and set forth in a written certificate
("Certificate") delivered to the Executive) that any benefit received or deemed
received by the Executive from Stilwell pursuant to this Agreement or otherwise
(collectively, the "Payments") is or will become subject to any excise tax under
Section 4999 of the Code or any similar tax payable under any United States
federal, state, local or other law (such excise tax and all such similar taxes
collectively, "Excise Taxes"), then Stilwell shall, immediately after such
determination, pay the Executive an amount (the "Gross-up Payment") equal to the
product of:
(i) the amount of such Excise Taxes;
multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k).
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<PAGE>
The Gross-up Payment is intended to compensate the Executive for
the Excise Taxes and any federal, state, local or other income or excise
taxes or other taxes payable by the Executive with respect to the Gross-up
Payment.
Stilwell shall cause the preparation and delivery to the
Executive of a Certificate upon request at any time. Stilwell shall, in
addition to complying with this Paragraph 7(h), cause all determinations
and certifications under Paragraphs 7(h)-(o) to be made as soon as
reasonably possible and in adequate time to permit the Executive to prepare
and file the Executive's individual tax returns on a timely basis.
(i) Determination by the Executive.
-------------------------------
(i) If Stilwell shall fail (a) to deliver a Certificate to the
Executive or (b) to pay to the Executive the amount of the Gross-up
Payment, if any, within 14 days after receipt from the Executive of a
written request for a Certificate, or if at any time following receipt of a
Certificate the Executive disputes the amount of the Gross-up Payment set
forth therein, the Executive may elect to demand the payment of the amount
which the Executive, in accordance with an opinion of counsel to the
Executive ("Executive Counsel Opinion"), determines to be the Gross-up
Payment. Any such demand by the Executive shall be made by delivery to
Stilwell of a written notice which specifies the Gross-up Payment
determined by the Executive and an Executive Counsel Opinion regarding such
Gross-up Payment (such written notice and opinion collectively, the
"Executive's Determination"). Within 14 days after delivery of the
Executive's Determination to Stilwell, Stilwell shall either (a) pay the
Executive the Gross-up Payment set forth in the Executive's Determination
(less the portion of such amount, if any, previously paid to the Executive
by Stilwell) or (b) deliver to the Executive a
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<PAGE>
Certificate specifying the Gross-up Payment determined by Stilwell's
independent auditors, together with an opinion of Stilwell's counsel
("Stilwell Counsel Opinion"), and pay the Executive the Gross-up Payment
specified in such Certificate. If for any reason Stilwell fails to comply
with clause (b) of the preceding sentence, the Gross-up Payment specified
in the Executive's Determination shall be controlling for all purposes.
(ii) If the Executive does not make a request for, and Stilwell
does not deliver to the Executive, a Certificate, Stilwell shall, for
purposes of Paragraph 7(j), be deemed to have determined that no Gross-up
Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial conclusion
---------------------------
of Stilwell and/or the Executive that certain Payments are neither subject to
Excise Taxes nor to be counted in determining whether other Payments are subject
to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined
(pursuant to subsequently-enacted provisions of the Code, final regulations or
published rulings of the IRS, final IRS determination or judgment of a court of
competent jurisdiction or Stilwell's independent auditors) that any of the Non-
Parachute Items are subject to Excise Taxes, or are to be counted in determining
whether any Payments are subject to Excise Taxes, with the result that the
amount of Excise Taxes payable by the Executive is greater than the amount
determined by Stilwell or the Executive pursuant to Paragraph 7(h) or Paragraph
7(i), as applicable, then Stilwell shall pay the Executive an amount (which
shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (a) such additional Excise Taxes and (b) any
interest, fines, penalties, expenses or other costs incurred by the
Executive as a result of having taken a position in accordance with a
determination made pursuant to Paragraph 7(h); multiplied by
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<PAGE>
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction,
-----------------
the numerator of which is one (1.0), and the denominator of which is one (1.0)
minus the sum, expressed as a decimal fraction, of the rates of all federal,
state, local and other income and other taxes and any Excise Taxes applicable to
the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed
equal to 0.8 for purposes of this computation. (If different rates of tax are
applicable to various portions of a Gross-up Payment, the weighted average of
such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a legal
------------------
opinion of nationally recognized executive compensation counsel that there is a
reasonable basis to support a conclusion that the Gross-up Payment determined by
the Executive has been calculated in accord with this Paragraph 7 and applicable
law. "Company Counsel Opinion" means a legal opinion of nationally recognized
executive compensation counsel that (i) there is a reasonable basis to support a
conclusion that the Gross-up Payment set forth in the Certificate of Stilwell's
independent auditors has been calculated in accord with this Paragraph 7 and
applicable law, and (ii) there is no reasonable basis for the calculation of the
Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify
-----------------------------
Stilwell in writing of any claim by the IRS or other taxing authority that, if
successful, would require the payment by Stilwell of a Gross-up Payment. Such
notice shall include the nature of such claim and the date on which such claim
is due to be paid. The Executive shall give such notice as soon as practicable,
but no later than 10 business days, after the Executive first obtains actual
knowledge of such claim; provided, however, that any failure to give or delay in
giving such
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notice shall affect Stilwell's obligations under this Paragraph 7 only if and to
the extent that such failure results in actual prejudice to Stilwell. The
Executive shall not pay such claim less than 30 days after the Executive gives
such notice to Stilwell (or, if sooner, the date on which payment of such claim
is due). If Stilwell notifies the Executive in writing before the expiration of
such period that it desires to contest such claim, the Executive shall:
(i) give Stilwell any information that it reasonably requests
relating to such claim;
(ii) take such action in connection with contesting such claim
as Stilwell reasonably requests in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by Stilwell;
(iii) cooperate with Stilwell in good faith to contest such
claim; and
(iv) permit Stilwell to participate in any proceedings relating
to such claim; provided, however, that Stilwell shall bear and pay directly
all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including related interest and penalties, imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing, Stilwell shall control all proceedings in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner. The Executive agrees to
prosecute such contest to a
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<PAGE>
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Stilwell shall
determine; provided, however, that if Stilwell directs the Executive to pay
such claim and sue for a refund, Stilwell shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify the
Executive, on an after-tax basis, for any Excise Tax or income tax,
including related interest or penalties, imposed with respect to such
advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. The Stilwell's control of the
contest shall be limited to issues with respect to which a Gross-up Payment
would be payable. The Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the IRS or other taxing
authority.
(n) Refunds. If, after the receipt by the Executive of an amount
-------
advanced by Stilwell pursuant to Paragraph 7(m), the Executive receives any
refund with respect to such claim, the Executive shall (subject to Stilwell's
complying with the requirements of Paragraph 7(m)) promptly pay Stilwell the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by Stilwell pursuant to Paragraph 7(m), a determination is made that
the Executive shall not be entitled to a full refund with respect to such claim
and Stilwell does not notify the Executive in writing of its intent to contest
such determination before the expiration of 30 days after such determination,
then the applicable part of such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
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thereof, the amount of Gross-up Payment required to be paid. Any contest of a
denial of refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement after
--------
the Control Change Date involving an effort by Executive to protect, enforce or
secure rights or benefits claimed by Executive hereunder, Stilwell shall pay
(promptly upon demand by Executive accompanied by reasonable evidence of
incurrence) all reasonable expenses (including attorneys' fees) incurred by
Executive in connection with such dispute, without regard to whether Executive
prevails in such dispute except that Executive shall repay Stilwell any amounts
so received if a court having jurisdiction shall make a final, nonappealable
determination that Executive acted frivolously or in bad faith by such dispute.
To assure Executive that adequate funds will be made available to discharge
Stilwell's obligations set forth in the preceding sentence, Stilwell has
established a trust and upon the occurrence of a Change in Control shall
promptly deliver to the trustee of such trust to hold in accordance with the
terms and conditions thereof that sum which the Stilwell Board shall have
determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change Date, the
---------------------
provisions of this Paragraph 7 shall control and take precedence over any other
provisions of this Agreement which are in conflict with or address the same or a
similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of Executive's
-------------------------------
employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in
Paragraph 7(d), Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
and except as otherwise specifically
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<PAGE>
provided in Paragraph 4(d)(ii) with respect to health and life insurance and in
Paragraph 7(e) with respect to health, prescription and dental benefits, no such
other employment, if obtained, or compensation or benefits payable in connection
therewith shall reduce any amounts or benefits to which Executive is entitled
hereunder. Such amounts or benefits payable to Executive under this Agreement
shall not be treated as damages but as severance compensation to which Executive
is entitled because Executive's employment has been terminated.
9. Notice. Notices and all other communications to either party pursuant
------
to this Agreement shall be in writing and shall be deemed to have been given
when personally delivered, delivered by facsimile or deposited in the United
States mail by certified or registered mail, postage prepaid, addressed, in the
case of Stilwell, to Stilwell at 114 West 11th Street, Kansas City, Missouri
64105, Attention: Secretary, or, in the case of the Executive, to him at 5639
High Drive, Shawnee Mission, Kansas 66208, or to such other address as a party
shall designate by notice to the other party.
10. Amendment. No provision of this Agreement may be amended, modified,
---------
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in a writing signed by Executive and the President of Stilwell. No
waiver by any party hereto at any time of any breach by another party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the time or at any prior or subsequent time.
11. Successors in Interest. The rights and obligations of Stilwell under
----------------------
this Agreement shall inure to the benefit of and be binding in each and every
respect upon the direct and indirect successors and assigns of Stilwell,
regardless of the manner in which such successors or assigns shall succeed to
the interest of Stilwell hereunder, and this Agreement shall not be terminated
by
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<PAGE>
the voluntary or involuntary dissolution of Stilwell or by any merger or
consolidation or acquisition involving Stilwell or upon any transfer of all or
substantially all of Stilwell's assets, or terminated otherwise than in
accordance with its terms. In the event of any such merger or consolidation or
transfer of assets, the provisions of this Agreement shall be binding upon and
shall inure to the benefit of the surviving corporation or the corporation or
other person to which such assets shall be transferred. Neither this Agreement
nor any of the payments or benefits hereunder may be pledged, assigned or
transferred by Executive either in whole or in part in any manner, without the
prior written consent of Stilwell.
12. Severability. The invalidity or unenforceability of any particular
------------
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
13. Controlling Law and Jurisdiction. The validity, interpretation and
--------------------------------
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
14. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the terms of Executive's employment or
severance arrangements.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above stated.
STILWELL FINANCIAL, INC.
By_________________________________
Name: _____________________________
Title:_____________________________
EXECUTIVE
___________________________________
Danny R. Carpenter
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<PAGE>
EXHIBIT 10.6.4
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, made and entered into as of this ____ day of May, 2000, by
and between Stilwell Financial, Inc., a Delaware corporation ("Stilwell") and
Anthony P. McCarthy, an individual ("Executive") to be effective on the date of
the Spin-off Distribution (as defined below).
WHEREAS, the parties expect that all of the issued and outstanding stock of
Stilwell will be distributed (the "Spin-off Distribution") to the shareholders
of Kansas City Southern Industries, Inc. ("KCSI") which has been the parent of
Stilwell since its formation on January 23, 1998; and
WHEREAS, Executive previously was employed by KCSI with duties primarily
relating to Stilwell since its formation in 1998, and Stilwell and Executive
desire for Stilwell to continue to employ Executive on the terms and conditions
set forth in this Agreement and to provide an incentive to Executive to remain
in the employ of Stilwell hereafter, particularly in the event of any Change in
Control (as herein defined) of Stilwell or any Significant Subsidiary (as herein
defined), thereby establishing and preserving continuity of management of
Stilwell.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between Stilwell and Executive as follows:
1. Employment. Stilwell hereby employs Executive as its Vice President -
----------
Finance to serve at the pleasure of the Board of Directors of Stilwell (the
"Stilwell Board") and to have such duties, powers and responsibilities as may be
prescribed or delegated from time to time by the President or other officer to
whom Executive reports, subject to the powers vested in the Stilwell Board and
in the stockholders of Stilwell. Executive shall faithfully perform his duties
under this Agreement to the best of his ability and shall devote substantially
all of his working time and efforts to the business and affairs of Stilwell and
its affiliates.
<PAGE>
2. Compensation.
------------
(a) Base Compensation. Stilwell shall pay Executive as compensation
-----------------
for his services hereunder an annual base salary at the rate of $200,000. Such
rate shall not be increased prior to January 1, 2003 and shall not be reduced
except as agreed by the parties or except as part of a general salary reduction
program imposed by Stilwell and applicable to all officers of Stilwell.
(b) Incentive Compensation. For the years 2000, 2001 and 2002,
----------------------
Executive shall not be entitled to participate in any Stilwell incentive
compensation plan, except that Stilwell shall pay Executive a cash bonus of
$150,000 within ten days after the spin-off Distribution.
3. Benefits and Stock Ownership.
----------------------------
(a) Benefits. During the period of his employment hereunder, Stilwell
--------
shall provide Executive with coverage under such benefit plans and programs as
are made generally available to similarly situated employees of Stilwell,
provided (a) Stilwell shall have no obligation with respect to any plan or
program if Executive is not eligible for coverage thereunder, and (b) Executive
acknowledges that stock options and other stock and equity participation awards
are granted in the discretion of the Stilwell Board or the Compensation
Committee of the Stilwell Board and that Executive has no right to receive stock
options or other equity participation awards or any particular number or level
of stock options or other awards. In determining contributions, coverage and
benefits under any disability insurance policy and under any cash compensation-
based plan provided to Executive by Stilwell, it shall be assumed that the value
of Executive's annual compensation, pursuant to this Agreement, is the lower of
175% of Executive's annual base salary or $1,000,000. Executive acknowledges
that all rights and benefits under benefit plans and programs shall be governed
by the official text of each such plan or program and not by any
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<PAGE>
summary or description thereof or any provision of this Agreement (except to the
extent this Agreement expressly modifies such benefit plans or programs) and
that Stilwell is not under any obligation to continue in effect or to fund any
such plan or program, except as provided in Paragraph 7 hereof. Stilwell also
shall reimburse Executive for ordinary and necessary travel and other business
expenses in accordance with policies and procedures established by Stilwell.
(b) Stock Ownership. During the period of his employment hereunder,
---------------
Executive shall retain ownership in himself or in members of his immediate
family of at least a majority of the number of shares of (i) Stilwell stock
received by Executive or members of his immediate family in the Distribution,
and (ii) Stilwell stock acquired upon the exercise of stock options, but
excluding from such number of shares any such shares transferred to Stilwell or
sold to pay the purchase price upon the exercise of stock options or to pay or
satisfy tax obligations resulting from such exercise.
4. Termination.
-----------
(a) Termination by Executive. Executive may terminate this Agreement
------------------------
and his employment hereunder by at least thirty (30) days advance written notice
to Stilwell, except that in the event of any material breach of this Agreement
by Stilwell, Executive may terminate this Agreement and his employment hereunder
immediately upon notice to Stilwell.
(b) Death or Disability. This Agreement and Executive's employment
-------------------
hereunder shall terminate automatically on the death or disability of Executive,
except to the extent employment is continued under Stilwell's disability plan.
For purposes of this Agreement, Executive shall be deemed to be disabled if he
qualifies for disability benefits under Stilwell's long-term disability plan.
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<PAGE>
(c) Termination by Stilwell For Cause. Stilwell may terminate this
---------------------------------
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7), termination
"for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Stilwell or any subsidiary
of Stilwell;
(iii) Gross negligence or willful misconduct in the performance
of Executive's duties as determined in good faith by the Stilwell Board;
(iv) Willful failure by Executive to follow reasonable
instructions of the President or other officer to whom Executive reports
concerning the operations or business of Stilwell or any subsidiary of
Stilwell;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Stilwell Other Than For Cause.
--------------------------------------------
(i) Stilwell may terminate this Agreement and Executive's
employment other than for cause immediately upon notice to Executive, and
in such event, Stilwell shall provide severance benefits to Executive in
accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this Agreement are
applicable, if Executive's employment is terminated under Paragraph
4(d)(i), Stilwell shall continue, for a period of one (1) year following
such termination, (a) to pay to Executive as severance pay a monthly amount
equal to one-twelfth (1/12th) of the annual base salary referenced in
Paragraph 2(a) above, at the rate in effect immediately prior to
termination,
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<PAGE>
and, (b) to reimburse Executive for the cost (including state and federal
income taxes payable with respect to this reimbursement) of continuing the
health insurance coverage provided pursuant to this Agreement or obtaining
health insurance coverage comparable to the health insurance provided
pursuant to this Agreement, and obtaining coverage comparable to the life
insurance provided pursuant to this Agreement, unless Executive is provided
comparable health or life insurance coverage in connection with other
employment. The foregoing obligations of Stilwell shall continue until the
end of such one (1) year period notwithstanding the death or disability of
Executive during said period (except, in the event of death, the obligation
to reimburse Executive for the cost of life insurance shall not continue).
In the year in which termination of employment occurs, Executive shall be
eligible to receive benefits under the Stilwell Incentive Compensation Plan
and the Stilwell Executive Plan (if such Plans then are in existence and
Executive was entitled to participate immediately prior to termination) in
accordance with the provisions of such plans then applicable, and severance
pay received in such year shall be taken into account for the purpose of
determining benefits, if any, under the Stilwell Incentive Compensation
Plan but not under the Stilwell Executive Plan. After the year in which
termination occurs, Executive shall not be entitled to accrue or receive
benefits under the Stilwell Incentive Compensation Plan or the Stilwell
Executive Plan with respect to the severance pay provided herein,
notwithstanding that benefits under such plan then are still generally
available to executive employees of Stilwell. After termination of
employment, Executive shall not be entitled to accrue or receive benefits
under any other employee benefit plan or program, except that Executive
shall be entitled to participate in the Stilwell Employee Stock Ownership
Plan and the Stilwell Section 401(k) with Profit Sharing Plan
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<PAGE>
Portion in the year of termination of employment only if Executive meets
all requirements of such plans for participation in such year.
5. Non-Disclosure. During the term of this Agreement and at all times
--------------
after any termination of this Agreement, Executive shall not, either directly or
indirectly, use or disclose any Stilwell trade secret, except to the extent
necessary for Executive to perform his duties for Stilwell while an employee.
For purposes of this Agreement, the term "Stilwell trade secret" shall mean any
information regarding the business or activities of Stilwell or any subsidiary
or affiliate, including any formula, pattern, compilation, program, device,
method, technique, process, customer list, technical information or other
confidential or proprietary information, that (a) derives independent economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use, and (b) is the subject of efforts of Stilwell
or its subsidiary or affiliate that are reasonable under the circumstance to
maintain its secrecy. In the event of any breach of this Paragraph 5 by
Executive, Stilwell shall be entitled to terminate any and all remaining
severance benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such
other legal and equitable remedies as may be available.
6. Duties Upon Termination; Survival.
---------------------------------
(a) Duties. Upon termination of this Agreement by Stilwell or
------
Executive for any reason, Executive shall immediately return to Stilwell all
Stilwell trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of Stilwell and all direct and indirect subsidiaries and
affiliates of Stilwell as may be requested by Stilwell and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as Stilwell may reasonably request.
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<PAGE>
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this
--------
Agreement shall survive any termination of this Agreement by Stilwell or
Executive, and the provisions of Paragraph 4(d)(ii) shall survive any
termination of this Agreement by Stilwell under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of Stilwell.
-------------------------------------------------------------
(a) Continuation of Employment. Subject to the terms and conditions
--------------------------
of this Paragraph 7, in the event of a Change in Control (as defined in
Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees
to remain in the employ of Stilwell for a period of three years (the "Three-Year
Period") from the date of such Change in Control (the "Control Change Date").
Stilwell agrees to continue to employ Executive for the Three-Year Period.
During the Three-Year Period, (i) the Executive's position (including offices,
titles, reporting requirements and responsibilities), authority and duties shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 12 month period
immediately before the Control Change Date and (ii) the Executive's services
shall be performed at the location where Executive was employed immediately
before the Control Change Date or at any other location less than 40 miles from
such former location. During the Three-Year Period, Stilwell shall continue to
pay to Executive an annual base salary on the same basis and at the same
intervals as in effect prior to the Control Change Date at a rate not less than
12 times the highest monthly base salary paid or payable to the Executive by
Stilwell in respect of the 12-month period immediately before the Control Change
Date.
(b) Benefits. During the Three-Year Period, Executive shall be
--------
entitled to participate, on the basis of his executive position, in each of the
following Stilwell plans
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<PAGE>
(together, the "Specified Benefits") in existence, and in accordance with the
terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated therewith, related to
(a) life, health, dental, disability, accidental death and dismemberment
insurance or accrued but unpaid vacation time, (b) profit sharing, thrift
or deferred savings (including deferred compensation, such as under Section
401(k) plans), (c) retirement or pension benefits, (d) ERISA excess
benefits and similar plans and (e) tax favored employee stock ownership
(such as under ESOP, and Employee Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally available to
executives of Executive's level or to the employees of Stilwell generally.
In addition, Stilwell shall use its best efforts to cause all outstanding
options held by Executive under any stock option plan of Stilwell or its
affiliates to become immediately exercisable on the Control Change Date and to
the extent that such options are not vested and are subsequently forfeited, the
Executive shall receive a lump-sum cash payment within 5 days after the options
are forfeited equal to the difference between the fair market value of the
shares of stock subject to the non-vested, forfeited options determined as of
the date such options are forfeited and the exercise price for such options.
During the Three-Year Period Executive shall be entitled to participate, on the
basis of his executive position, in any incentive compensation plan of Stilwell
in accordance with the terms thereof at the Control Change Date; provided that
if under Stilwell programs or Executive's Employment Agreement in existence
immediately prior to the Control Change Date, there are written limitations on
participation for a designated time period in any incentive compensation plan,
such limitations shall continue after the Control Change Date to the extent so
provided for prior to the Control Change Date.
-8-
<PAGE>
If the amount of contributions or benefits with respect to the Specified
Benefits or any incentive compensation is determined on a discretionary basis
under the terms of the Specified Benefits or any incentive compensation plan
immediately prior to the Control Change Date, the amount of such contributions
or benefits during the Three-Year Period for each of the Specified Benefits
shall not be less than the average annual contributions or benefits for each
Specified Benefit for the three plan years ending prior to the Control Change
Date and, in the case of any incentive compensation plan, the amount of the
incentive compensation during the Three-Year Period shall not be less than 75%
of the maximum that could have been paid to the Executive under the terms of the
incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which
-------
Executive would be entitled at the Control Change Date to receive Specified
Benefits or incentive compensation as a general obligation of Stilwell which has
not been separately funded (including specifically, but not limited to, those
referred to under Paragraph 7(b)(i) and (ii) above), Executive shall receive
within five (5) days after such date full payment in cash (discounted to the
then present value on the basis of a rate of seven percent (7%) per annum) of
all amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence of
-----------------
this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" means
any one or more of the following:
(i) the acquisition or holding by any person, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act"), other than by Stilwell or any
Subsidiary (as defined below), or any employee benefit plan of Stilwell or
a Subsidiary (and other than by KCSI prior to the
-9-
<PAGE>
Spin-off Distribution), of beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) of 20% or more of the then-outstanding common
stock or the combined voting power of the then-outstanding voting
securities ("Voting Power") of Stilwell; provided, however, that no Change
in Control shall occur solely by reason of any such acquisition by a
corporation with respect to which, after such acquisition, more than 60% of
both the then-outstanding common shares and the then-outstanding Voting
Power of such corporation are then beneficially owned, directly or
indirectly, by the persons who were the beneficial owners of the then-
outstanding common stock and Voting Power of Stilwell immediately before
such acquisition, in substantially the same proportions as their respective
ownership, immediately before such acquisition, of the then-outstanding
common stock and Voting Power of Stilwell; or
(ii) individuals who, as of the date of the Spin-off
Distribution, constitute the Stilwell Board (the "Incumbent Board") cease
for any reason to constitute at least 75% of the Stilwell Board; provided
that any individual who becomes a director after the Spin-off Distribution
whose election or nomination for election by the stockholders of Stilwell
was approved by at least 75% of the Incumbent Board (other than an election
or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened "election contest" relating to the
election of the directors of Stilwell (as such terms are used in Rule 14a-
11 under the Exchange Act) or "tender offer" (as such term is used in
Section 14(d) of the Exchange Act) or a proposed Extraordinary Transaction
(as defined below)) shall be deemed to be a member of the Incumbent Board;
or
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<PAGE>
(iii) approval by the stockholders of Stilwell of any one or more
of the following:
(A) a merger, reorganization, consolidation or similar
transaction (any of the foregoing, an "Extraordinary Transaction") with
respect to which persons who were the respective beneficial owners of the
then-outstanding common stock and Voting Power of Stilwell immediately
before such Extraordinary Transaction would not, if such Extraordinary
Transaction were to be consummated immediately after such stockholder
approval (but otherwise in accordance with the terms presented in writing
to the stockholders of Stilwell for their approval), beneficially own,
directly or indirectly, more than 60% of both the then-outstanding common
shares and the then-outstanding Voting Power of the corporation resulting
from such Extraordinary Transaction, in substantially the same proportions
as their respective ownership, immediately before such Extraordinary
Transaction, of the then-outstanding common stock and Voting Power of
Stilwell,
(B) a liquidation or dissolution of Stilwell, or
(C) the sale or other disposition of all or substantially
all of the assets of Stilwell in one transaction or a series of related
transactions; or
(iv) the sale or other disposition by Stilwell, directly or
indirectly, whether by merger, consolidation, combination, lease, exchange,
spin-off, split-off, or other means, of any Significant Subsidiary or any
reduction in Stilwell's direct or indirect beneficial ownership of any
Significant Subsidiary to less than 50% of the Voting Power of such entity.
-11-
<PAGE>
For purposes of this Agreement, "Subsidiary" shall mean any entity of which at
least 50% of the Voting Power is beneficially owned, directly or indirectly, by
Stilwell and "Significant Subsidiary" shall mean (A) any Subsidiary which
contributed 30% or more of the total combined revenues of Stilwell and all
Subsidiaries for the prior calendar year, and (B) any one or more entities,
businesses or groups of assets directly or indirectly sold or disposed of by
Stilwell (within the meaning of paragraph 7(d)(iv)) within any two year period
that contributed 30% of more of such total combined revenues or would have
contributed such 30% based on revenues of such entities, businesses or groups of
assets for the calendar year prior to their sale or disposition.
Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary,
the Spin-off Distribution shall not constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any other
-------------------------------------
provision of this Paragraph 7, at any time after the Control Change Date,
Stilwell may terminate the employment of Executive (the "Termination"), but
unless such Termination is for Cause as defined in subparagraph (g) or for
disability, within five (5) days of the Termination Stilwell shall pay to
Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal
to the product (discounted to the then present value on the basis of a rate of
seven percent (7%) per annum) of (i) 175% of his annual base salary specified in
Paragraph 7(a) multiplied by (ii) two, and Specified Benefits (excluding any
incentive compensation) to which Executive was entitled immediately prior to
Termination shall continue until the end of the 3-year period ("Benefits
Period") beginning on the date of Termination. If any plan pursuant to which
Specified Benefits are provided immediately prior to Termination would not
permit continued participation by
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<PAGE>
Executive after Termination, then Stilwell shall pay to Executive within five
(5) days after Termination a lump sum payment equal to the amount of Specified
Benefits Executive would have received under such plan if Executive had been
fully vested in the average annual contributions or benefits in effect for the
three plan years ending prior to the Control Change Date (regardless of any
limitations based on the earnings or performance of Stilwell) and a continuing
participant in such plan to the end of the Benefits Period. Following the end of
the Benefits Period, Stilwell shall continue to provide to the Executive and the
Executive's family the following benefits ("Post-Period Benefits"): (1) prior to
the Executive's attainment of age sixty (60), health, prescription and dental
benefits equivalent to those then applicable to active peer executives of
Stilwell and their families, as the same may be modified from time to time, and
(2) following the Executive's attainment of age sixty (60) (and without regard
to the Executive's period of service with Stilwell), health and prescription
benefits equivalent to those then applicable to retired peer executives of
Stilwell and their families, as the same may be modified from time to time. The
cost to the Executive of such Post-Period Benefits shall not exceed the cost of
such benefits to active or retired (as applicable) peer executives, as the same
may be modified from time to time. Notwithstanding the preceding two sentences
of this Paragraph 7(e), if the Executive is covered under any health,
prescription or dental plan provided by a subsequent employer, then the
corresponding type of plan coverage (i.e., health, prescription or dental)
required to be provided as Post-Period Benefits under this Paragraph 7(e) shall
cease. The Executive's rights under this Paragraph 7(e) shall be in addition to,
and not in lieu of, any post-termination continuation coverage or conversion
rights the Executive may have pursuant to applicable law, including without
limitation continuation coverage required by Section 4980 of the Code. Nothing
in this Paragraph 7(e) shall be deemed to limit in any manner the reserved
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<PAGE>
right of Stilwell, in its sole and absolute discretion, to at any time amend,
modify or terminate health, prescription or dental benefits for active or
retired employees generally.
(f) Resignation After Control Change Date. In the event of a Change
-------------------------------------
in Control as defined in Paragraph 7(d), thereafter, upon good reason (as
defined below), Executive may, at any time during the 3-year period following
the Change in Control, in his sole discretion, on not less than thirty (30)
days' written notice (the "Notice of Resignation") to the Secretary of Stilwell
and effective at the end of such notice period, resign his employment with
Stilwell (the "Resignation"). Within five (5) days of such a Resignation,
Stilwell shall pay to Executive his full base salary through the effective date
of such Resignation, to the extent not theretofore paid, plus a lump sum amount
equal to the Special Severance Payment (computed as provided in the first
sentence of Paragraph 7(e), except that for purposes of such computation all
references to "Termination" shall be deemed to be references to "Resignation").
Upon Resignation of Executive, Specified Benefits to which Executive was
entitled immediately prior to Resignation shall continue on the same terms and
conditions as provided in Paragraph 7(e) in the case of Termination (including
equivalent payments provided for therein), and Post-Period Benefits shall be
provided on the same terms and conditions as provided in Paragraph 7(e) in the
case of Termination. For purposes of this Agreement, "good reason" means any one
or more of the following:
(i) the assignment to the Executive of any duties which result
in a material adverse change in the Executive's position (including status,
offices, titles, and reporting requirements), authority, duties, or other
responsibilities with Stilwell, or any other action of Stilwell which
results in a material adverse change in such position, authority, duties,
or responsibilities, other than an insubstantial and inadvertent action
-14-
<PAGE>
which is remedied by Stilwell promptly after receipt of notice thereof
given by the Executive,
(ii) any relocation of the Executive of more than 40 miles from
the place where the Executive was located at the time of the Change in
Control;
(iii) a material reduction or elimination of any component of the
Executive's rate of compensation, including (x) base salary, (y) any
incentive payment or (z) benefits or prerequisites which the Executive was
receiving immediately prior to a Change in Control, or;
(iv) any failure by Stilwell to comply with any of the
provisions of Paragraph 7;
A passage of time prior to delivery of the Notice of Resignation or a failure by
the Executive to include in the Notice of Resignation any fact or circumstance
which contributes to a showing of good reason shall not waive any right of the
Executive under this Agreement or preclude the Executive from asserting such
fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date. Notwithstanding
-----------------------------------------------
any other provision of this Paragraph 7, at any time after the Control Change
Date, Executive may be terminated by Stilwell "for Cause." Cause means
commission by the Executive of any felony or willful breach of duty by the
Executive in the course of the Executive's employment, except that Cause shall
not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in good faith
to have been in or not opposed to the interest of Stilwell (without intent
of the Executive to gain, directly or indirectly, a profit to which the
Executive was not legally entitled);
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<PAGE>
(iii) any act or omission with respect to which a determination
could properly have been made by the Stilwell Board that the Executive met
the applicable standard of conduct for indemnification or reimbursement
under Stilwell's by-laws, any applicable indemnification agreement, or
applicable law, in each case in effect at the time of such act or omission;
or
(iv) any act or omission with respect to which Notice of
Termination of the Executive is given more than 12 months after the
earliest date on which any member of the Stilwell Board, not a party to the
act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by Stilwell for Cause shall be
communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the
--------------------------
reasonable computation of Stilwell's independent auditors, which determinations
shall be certified to by such auditors and set forth in a written certificate
("Certificate") delivered to the Executive) that any benefit received or deemed
received by the Executive from Stilwell pursuant to this Agreement or otherwise
(collectively, the "Payments") is or will become subject to any excise tax under
Section 4999 of the Code or any similar tax payable under any United States
federal, state, local or other law (such excise tax and all such similar taxes
collectively, "Excise Taxes"), then Stilwell shall, immediately after such
determination, pay the Executive an amount (the "Gross-up Payment") equal to the
product of:
(i) the amount of such Excise Taxes; multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k).
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<PAGE>
The Gross-up Payment is intended to compensate the Executive for
the Excise Taxes and any federal, state, local or other income or excise
taxes or other taxes payable by the Executive with respect to the Gross-up
Payment.
Stilwell shall cause the preparation and delivery to the
Executive of a Certificate upon request at any time. Stilwell shall, in
addition to complying with this Paragraph 7(h), cause all determinations
and certifications under Paragraphs 7(h)-(o) to be made as soon as
reasonably possible and in adequate time to permit the Executive to prepare
and file the Executive's individual tax returns on a timely basis.
(i) Determination by the Executive.
-------------------------------
(i) If Stilwell shall fail (a) to deliver a Certificate to the
Executive or (b) to pay to the Executive the amount of the Gross-up
Payment, if any, within 14 days after receipt from the Executive of a
written request for a Certificate, or if at any time following receipt of a
Certificate the Executive disputes the amount of the Gross-up Payment set
forth therein, the Executive may elect to demand the payment of the amount
which the Executive, in accordance with an opinion of counsel to the
Executive ("Executive Counsel Opinion"), determines to be the Gross-up
Payment. Any such demand by the Executive shall be made by delivery to
Stilwell of a written notice which specifies the Gross-up Payment
determined by the Executive and an Executive Counsel Opinion regarding such
Gross-up Payment (such written notice and opinion collectively, the
"Executive's Determination"). Within 14 days after delivery of the
Executive's Determination to Stilwell, Stilwell shall either (a) pay the
Executive the Gross-up Payment set forth in the Executive's Determination
(less the portion of such amount, if any, previously paid to the Executive
by Stilwell) or (b) deliver to the Executive a
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<PAGE>
Certificate specifying the Gross-up Payment determined by Stilwell's
independent auditors, together with an opinion of Stilwell's counsel
("Stilwell Counsel Opinion"), and pay the Executive the Gross-up Payment
specified in such Certificate. If for any reason Stilwell fails to comply
with clause (b) of the preceding sentence, the Gross-up Payment specified
in the Executive's Determination shall be controlling for all purposes.
(ii) If the Executive does not make a request for, and Stilwell
does not deliver to the Executive, a Certificate, Stilwell shall, for
purposes of Paragraph 7(j), be deemed to have determined that no Gross-up
Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial conclusion
---------------------------
of Stilwell and/or the Executive that certain Payments are neither subject to
Excise Taxes nor to be counted in determining whether other Payments are subject
to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined
(pursuant to subsequently-enacted provisions of the Code, final regulations or
published rulings of the IRS, final IRS determination or judgment of a court of
competent jurisdiction or Stilwell's independent auditors) that any of the Non-
Parachute Items are subject to Excise Taxes, or are to be counted in determining
whether any Payments are subject to Excise Taxes, with the result that the
amount of Excise Taxes payable by the Executive is greater than the amount
determined by Stilwell or the Executive pursuant to Paragraph 7(h) or Paragraph
7(i), as applicable, then Stilwell shall pay the Executive an amount (which
shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (a) such additional Excise Taxes and (b) any
interest, fines, penalties, expenses or other costs incurred by the
Executive as a result of having taken a position in accordance with a
determination made pursuant to Paragraph 7(h); multiplied by
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<PAGE>
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction,
-----------------
the numerator of which is one (1.0), and the denominator of which is one (1.0)
minus the sum, expressed as a decimal fraction, of the rates of all federal,
state, local and other income and other taxes and any Excise Taxes applicable to
the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed
equal to 0.8 for purposes of this computation. (If different rates of tax are
applicable to various portions of a Gross-up Payment, the weighted average of
such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a legal
------------------
opinion of nationally recognized executive compensation counsel that there is a
reasonable basis to support a conclusion that the Gross-up Payment determined by
the Executive has been calculated in accord with this Paragraph 7 and applicable
law. "Company Counsel Opinion" means a legal opinion of nationally recognized
executive compensation counsel that (i) there is a reasonable basis to support a
conclusion that the Gross-up Payment set forth in the Certificate of Stilwell's
independent auditors has been calculated in accord with this Paragraph 7 and
applicable law, and (ii) there is no reasonable basis for the calculation of the
Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify
-----------------------------
Stilwell in writing of any claim by the IRS or other taxing authority that, if
successful, would require the payment by Stilwell of a Gross-up Payment. Such
notice shall include the nature of such claim and the date on which such claim
is due to be paid. The Executive shall give such notice as soon as practicable,
but no later than 10 business days, after the Executive first obtains actual
knowledge of such claim; provided, however, that any failure to give or delay in
giving such
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<PAGE>
notice shall affect Stilwell's obligations under this Paragraph 7 only if and to
the extent that such failure results in actual prejudice to Stilwell. The
Executive shall not pay such claim less than 30 days after the Executive gives
such notice to Stilwell (or, if sooner, the date on which payment of such claim
is due). If Stilwell notifies the Executive in writing before the expiration of
such period that it desires to contest such claim, the Executive shall:
(i) give Stilwell any information that it reasonably requests
relating to such claim;
(ii) take such action in connection with contesting such claim
as Stilwell reasonably requests in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by Stilwell;
(iii) cooperate with Stilwell in good faith to contest such
claim; and
(iv) permit Stilwell to participate in any proceedings relating
to such claim; provided, however, that Stilwell shall bear and pay directly
all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including related interest and penalties, imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing, Stilwell shall control all proceedings in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner. The Executive agrees to
prosecute such contest to a
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<PAGE>
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Stilwell shall
determine; provided, however, that if Stilwell directs the Executive to pay
such claim and sue for a refund, Stilwell shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify the
Executive, on an after-tax basis, for any Excise Tax or income tax,
including related interest or penalties, imposed with respect to such
advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. The Stilwell's control of the
contest shall be limited to issues with respect to which a Gross-up Payment
would be payable. The Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the IRS or other taxing
authority.
(n) Refunds. If, after the receipt by the Executive of an amount
-------
advanced by Stilwell pursuant to Paragraph 7(m), the Executive receives any
refund with respect to such claim, the Executive shall (subject to Stilwell's
complying with the requirements of Paragraph 7(m)) promptly pay Stilwell the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by Stilwell pursuant to Paragraph 7(m), a determination is made that
the Executive shall not be entitled to a full refund with respect to such claim
and Stilwell does not notify the Executive in writing of its intent to contest
such determination before the expiration of 30 days after such determination,
then the applicable part of such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
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<PAGE>
thereof, the amount of Gross-up Payment required to be paid. Any contest of a
denial of refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement after
--------
the Control Change Date involving an effort by Executive to protect, enforce or
secure rights or benefits claimed by Executive hereunder, Stilwell shall pay
(promptly upon demand by Executive accompanied by reasonable evidence of
incurrence) all reasonable expenses (including attorneys' fees) incurred by
Executive in connection with such dispute, without regard to whether Executive
prevails in such dispute except that Executive shall repay Stilwell any amounts
so received if a court having jurisdiction shall make a final, nonappealable
determination that Executive acted frivolously or in bad faith by such dispute.
To assure Executive that adequate funds will be made available to discharge
Stilwell's obligations set forth in the preceding sentence, Stilwell has
established a trust and upon the occurrence of a Change in Control shall
promptly deliver to the trustee of such trust to hold in accordance with the
terms and conditions thereof that sum which the Stilwell Board shall have
determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change Date, the
---------------------
provisions of this Paragraph 7 shall control and take precedence over any other
provisions of this Agreement which are in conflict with or address the same or a
similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of Executive's
-------------------------------
employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in
Paragraph 7(d), Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
and except as otherwise specifically
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<PAGE>
provided in Paragraph 4(d)(ii) with respect to health and life insurance and in
Paragraph 7(e) with respect to health, prescription and dental benefits, no such
other employment, if obtained, or compensation or benefits payable in connection
therewith shall reduce any amounts or benefits to which Executive is entitled
hereunder. Such amounts or benefits payable to Executive under this Agreement
shall not be treated as damages but as severance compensation to which Executive
is entitled because Executive's employment has been terminated.
9. Notice. Notices and all other communications to either party pursuant
------
to this Agreement shall be in writing and shall be deemed to have been given
when personally delivered, delivered by facsimile or deposited in the United
States mail by certified or registered mail, postage prepaid, addressed, in the
case of Stilwell, to Stilwell at 114 West 11th Street, Kansas City, Missouri
64105, Attention: Secretary, or, in the case of the Executive, to him at 79
Beach Drive, Lake Tapawingo, Missouri 64015, or to such other address as a party
shall designate by notice to the other party.
10. Amendment. No provision of this Agreement may be amended, modified,
---------
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in a writing signed by Executive and the President of Stilwell. No
waiver by any party hereto at any time of any breach by another party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the time or at any prior or subsequent time.
11. Successors in Interest. The rights and obligations of Stilwell under
----------------------
this Agreement shall inure to the benefit of and be binding in each and every
respect upon the direct and indirect successors and assigns of Stilwell,
regardless of the manner in which such successors or assigns shall succeed to
the interest of Stilwell hereunder, and this Agreement shall not be terminated
by
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<PAGE>
the voluntary or involuntary dissolution of Stilwell or by any merger or
consolidation or acquisition involving Stilwell or upon any transfer of all or
substantially all of Stilwell's assets, or terminated otherwise than in
accordance with its terms. In the event of any such merger or consolidation or
transfer of assets, the provisions of this Agreement shall be binding upon and
shall inure to the benefit of the surviving corporation or the corporation or
other person to which such assets shall be transferred. Neither this Agreement
nor any of the payments or benefits hereunder may be pledged, assigned or
transferred by Executive either in whole or in part in any manner, without the
prior written consent of Stilwell.
12. Severability. The invalidity or unenforceability of any particular
------------
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
13. Controlling Law and Jurisdiction. The validity, interpretation and
--------------------------------
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
14. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the terms of Executive's employment or
severance arrangements.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above stated.
STILWELL FINANCIAL, INC.
By_________________________________
Name: ____________________________
Title: ____________________________
EXECUTIVE
___________________________________
Anthony P. McCarthy
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 350,700,000
<SECURITIES> 0
<RECEIVABLES> 223,500,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 649,300,000
<PP&E> 145,000,000
<DEPRECIATION> 50,700,000
<TOTAL-ASSETS> 1,432,700,000
<CURRENT-LIABILITIES> 266,300,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 889,000,000
<TOTAL-LIABILITY-AND-EQUITY> 1,432,700,000
<SALES> 0
<TOTAL-REVENUES> 545,100,000
<CGS> 0
<TOTAL-COSTS> 300,200,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,600,000
<INCOME-PRETAX> 330,300,000
<INCOME-TAX> 114,300,000
<INCOME-CONTINUING> 188,700,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 188,700,000
<EPS-BASIC> 188,700
<EPS-DILUTED> 186,400
</TABLE>
<PAGE>
PRELIMINARY COPY
SUBJECT TO COMPLETION OR AMENDMENT, DATED MAY 26, 2000
INFORMATION STATEMENT
STILWELL FINANCIAL, INC.
Common Stock, par value $.01 per share
This information statement is being furnished by Kansas City Southern
Industries, Inc., a Delaware corporation ("KCSI"), in connection with the
distribution to holders of record of common stock of KCSI, on [________], 2000
of TWO SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, INCLUDING CERTAIN
ATTACHED PREFERRED STOCK PURCHASE RIGHTS OF STILWELL FINANCIAL, INC., A DELAWARE
CORPORATION ("STILWELL"), FOR EVERY ONE SHARE OF KCSI COMMON STOCK OUTSTANDING
ON THE RECORD DATE. The Distribution will result in all of the outstanding
shares of Stilwell common stock being distributed to holders of KCSI common
stock on a pro-rata basis. KCSI HAS RECEIVED A TAX RULING FROM THE INTERNAL
REVENUE SERVICE WHICH STATES THAT NO GAIN OR LOSS, FOR UNITED STATES FEDERAL
INCOME TAX PURPOSES, WILL BE RECOGNIZED BY HOLDERS OF KCSI COMMON STOCK UPON
RECEIPT OF THE STILWELL COMMON STOCK IN THIS DISTRIBUTION.
Stilwell was formed by KCSI as a holding company for the group of
businesses and investments that comprise the financial services segment of KCSI.
Stilwell's principal subsidiary is Janus Capital Corporation, an investment
advisory company, which represented approximately 96% of the revenues and
approximately 91% of the ongoing net income of KCSI's financial services segment
for the three months ended March 31, 2000. The following table presents summary
financial information for KCSI (excluding Stilwell) and Stilwell as of, and for
the three months ended March 31, 2000.
STOCKHOLDERS' OPERATING NET
EQUITY ASSETS REVENUES INCOME INCOME
------ -------- ------ ------
(In Millions)
KCSI $ 624.9 $ 1,884.7 $ 148.9 $ 18.0 $ 4.5
Stilwell 889.0 1,432.7 545.1 244.9 188.7
-----------------------------------------------------------
Total $ 1,513.9 $ 3,317.4 $ 694.0 $ 262.9 $ 193.2
===========================================================
Recently, there have been STRAINED RELATIONS BETWEEN STILWELL AND JANUS as
a result of a disagreement over whether there should be a separate spin-off of
Janus. See "Summary-Overview of Stilwell's Business and Strategy." Stillwell
does not believe that this disagreement will cause any key employees of Janus to
resign, but these employees are not subject to any noncompete agreements that
would preclude them from participating in a competing financial services
business. See "Risk Factors-Continuation of Strained Relations Between Stilwell
and Janus Management Could Have a Material Adverse Effect on Stilwell." Stilwell
may be required under certain agreements containing mandatory put rights to
purchase the interests in Janus owned by certain
<PAGE>
minority stockholders at any time at the option of those holders at a fair
market value purchase price equal to fifteen times the net after-tax earnings
per share of Janus over the period indicated in the relevant agreement, or in
some circumstances as determined by an independent appraisal. IF STILWELL HAD
BEEN REQUIRED TO MAKE SUCH PURCHASE BASED ON THE VALUE OF THE STOCK AT A FIFTEEN
TIMES MULTIPLE AS OF MARCH 31, 2000, IT WOULD HAVE BEEN REQUIRED TO PAY
APPROXIMATELY $833 MILLION. Stilwell is also required under such agreements and
certain other agreements to purchase the interests in Janus owned by such
minority stockholders and other minority stockholders at the option of those
holders upon the occurrence of certain changes in ownership of KCSI or Stilwell
at a fair market value purchase price equal to fifteen times the net after-tax
earnings per share of Janus over the period indicated in the relevant agreement
or as otherwise negotiated between the parties or determined by Janus' Stock
Option Committee. IF STILWELL WERE REQUIRED TO MAKE SUCH PURCHASE BASED ON THE
VALUE OF THE STOCK AT A FIFTEEN TIMES MULTIPLE AS OF MARCH 31, 2000, IT WOULD
HAVE BEEN REQUIRED TO PAY APPROXIMATELY $1.14 BILLION (reduced by the amount
paid upon exercise of any mandatory put rights). As of March 31, 2000, Stilwell
had $200 million in credit facilities available, owned securities which, if
liquidated, would provide estimated net proceeds of $826 million after taxes and
associated transaction costs and had cash balances at the Stilwell holding
company level in excess of $147.5 million. To the extent that these resources
were insufficient to fund its purchase obligations, Stilwell had access to the
capital markets and, with respect to most of the shares to be purchased, had 120
days to raise additional sums. See "Risk Factors-Stilwell May Be Required to
Purchase or Sell Janus Common Stock" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Minority Purchase Agreements."
The distribution of Stilwell common stock will be effective on [________,
2000], and it is expected that certificates representing Stilwell common stock
will be mailed within [____] days following the such date.
No consideration will be paid by KCSI's stockholders for the shares of
Stilwell Common Stock to be received by them in the distribution nor will they
be required to surrender or exchange shares of KCSI common stock or take any
other action in order to receive Stilwell common stock.
There has been no established trading market for the shares of Stilwell
Common Stock, although it is expected that a "when-issued" trading market will
develop near the Record Date. [Stilwell has received approval, subject to
official notice of issuance, to have the Stilwell Common Stock listed on the New
York Stock Exchange under the symbol "SV."]
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" WHICH BEGINS ON PAGE 18.
____________________
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
____________________
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE
MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
THE DATE OF THIS INFORMATION STATEMENT IS [___________], 2000.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY................................................................................. 6
Overview of the Distribution......................................................... 6
Overview of Stilwell's Business and Strategy......................................... 11
Summary Financial and Operating Data................................................. 16
INTRODUCTION............................................................................ 19
RISK FACTORS............................................................................ 19
THE DISTRIBUTION........................................................................ 32
Background and Reasons for the Distribution.......................................... 32
Manner of Effecting the Distribution................................................. 36
Results of the Distribution.......................................................... 37
Differences in Rights of Stockholders Arising from Differences
Between the Certificates and Bylaws of Stilwell and KCSI........................ 37
Material Federal Income Tax Consequences............................................. 38
Trading of Stilwell Common Stock..................................................... 40
Modification or Abandonment of the Distribution...................................... 41
Solvency and Surplus Opinion of Financial Advisor.................................... 41
RELATIONSHIP BETWEEN KCSI AND STILWELL AFTER THE DISTRIBUTION........................... 46
Intercompany Agreement............................................................... 46
Tax Disaffiliation Agreement......................................................... 46
Employee Benefits.................................................................... 47
FINANCING............................................................................... 50
Description of the Credit Facilities................................................. 50
Need for Additional Financing........................................................ 51
CAPITALIZATION.......................................................................... 52
DIVIDEND POLICY......................................................................... 53
SELECTED FINANCIAL AND OPERATING DATA................................................... 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................... 57
BUSINESS................................................................................ 85
Background........................................................................... 85
Stilwell Financial, Inc.............................................................. 85
Stilwell's Principal Subsidiaries and Equity Investments............................. 86
Janus Capital Corporation....................................................... 86
Berger LLC...................................................................... 91
Nelson Money Managers Plc....................................................... 101
DST Systems, Inc................................................................ 102
Properties........................................................................... 103
Stilwell Holding Company............................................................. 104
Employees............................................................................ 104
Stilwell Business Strategy........................................................... 104
Competition.......................................................................... 105
Regulation........................................................................... 107
Legal Matters........................................................................ 107
MANAGEMENT.............................................................................. 108
Directors and Executive Officers..................................................... 108
Composition of Stilwell's Board of Directors......................................... 110
Committees of Stilwell's Board of Directors.......................................... 110
Compensation of Stilwell's Directors................................................. 111
Executive Compensation............................................................... 111
Summary Compensation Table........................................................... 112
1999 Option/SAR Grants In Last Fiscal Year........................................... 115
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
1999 Aggregate Option Exercises and Year-End Option
Values............................................................................. 116
Employment Agreements with the Named Executive Officers.............................. 117
Indemnification Agreements........................................................... 120
Other Compensatory Plans and Arrangements............................................ 121
PRINCIPAL STOCKHOLDERS AND STOCK OWNED BENEFICIALLY
BY STILWELL'S DIRECTORS AND CERTAIN EXECUTIVE OFFICERS................................ 125
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 127
DESCRIPTION OF CAPITAL STOCK............................................................ 128
Common Stock......................................................................... 128
Preferred Stock...................................................................... 128
Certain Antitakeover Effects......................................................... 129
Transfer Agent....................................................................... 134
ADDITIONAL INFORMATION.................................................................. 134
INDEX TO FINANCIAL STATEMENTS........................................................... F-1
</TABLE>
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<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS INFORMATION STATEMENT (THE "INFORMATION STATEMENT"). REFERENCE IS MADE TO,
AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION
SET FORTH IN THIS INFORMATION STATEMENT, WHICH SHOULD BE READ IN ITS ENTIRETY.
UNLESS OTHERWISE STATED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS
INFORMATION STATEMENT TO (i) KCSI AND STILWELL INCLUDE KCSI'S AND STILWELL'S
RESPECTIVE DIRECT AND INDIRECT SUBSIDIARIES AND EQUITY INVESTMENTS, (ii)
STILWELL PRIOR TO THE DISTRIBUTION DATE REFER TO KCSI'S FINANCIAL SERVICES
SEGMENT (AS DESCRIBED BELOW) AND (iii) BERGER (AS DEFINED HEREIN) PRIOR TO
SEPTEMBER 30, 1999 REFER TO BERGER ASSOCIATES, INC.
OVERVIEW OF THE DISTRIBUTION
Corporation Making the Kansas City Southern Industries, Inc., a
Distribution Delaware corporation.
Corporation and Business
Being Distributed Stilwell Financial, Inc., a Delaware corporation
and wholly-owned subsidiary of KCSI. Stilwell is
a holding company for the group of businesses and
investments that comprise the KCSI financial
services segment. These businesses, the most
significant of which is Janus Capital Corporation
("Janus"), offer a variety of asset management
and related financial services to registered
investment companies, retail investors,
institutions and individuals. See "Business."
Business to be Retained
By KCSI Rail transportation. Through its principal
subsidiaries and joint ventures, KCSI owns and
operates a rail network of approximately 6,000
miles of main and branch lines that link the key
commercial and industrial markets of the United
States and Mexico and, through a joint venture,is
participating in the rebuilding and operation of
the trans-isthmus railroad in Panama.
Primary Purpose of the
Distribution Separation of the financial services business, to
be owned solely by Stilwell, from the rail
transportation business, to be owned solely by
KCSI. The Distribution will allow each company to
(i) focus on adopting strategies and pursuing
objectives appropriate to its specific business;
(ii) focus attention and financial resources on
the development and management of growth in each
of their respective core businesses; (iii)
eliminate time and resources spent resolving
differences between the businesses relating to
utilization of KCSI resources, available capital,
capitalization, management style,
-6-
<PAGE>
organizational structure and long-term and short-
term strategies and goals; (iv) minimize the
exposure of each business to the liabilities
arising from the operations of the other; (v)
issue its own securities to implement more
focused stock-based compensation programs keyed
more directly to its earnings and performance;
and (vi) issue its own securities to pursue
acquisitions or strategic relationships. See "The
Distribution-Background and Reasons for the
Distribution."
Number of Shares of Two shares of common stock, par value $.01 per
Stilwell Common Stock share, including certain attached preferred
To Be Received by Each stock purchase rights (collectively, the
KCSI Stockholder "Stilwell Common Stock"), for every one share of
KCSI common stock ("KCSI Common Stock") held on
the Record Date. No consideration will need to be
paid by KCSI's stockholders for the shares of
Stilwell Common Stock to be received by them in
the Distribution nor will they be required to
surrender or exchange shares of KCSI Common Stock
or take any other action to receive Stilwell
Common Stock. See "The Distribution-Manner of
Effecting the Distribution" and "Description of
Capital Stock-Stockholders' Rights Plan."
Total Number of Shares to Will depend on the number of shares of KCSI
be Distributed Common Stock outstanding on the Record Date.
Based on the number of shares of KCSI Common
Stock outstanding as of March 31, 2000,
approximately 222,800,000 shares of Stilwell
Common Stock will be distributed. The shares of
Stilwell Common Stock to be distributed will
constitute all of the outstanding shares of
Stilwell Common Stock on the Distribution Date.
See "The Distribution-Manner of Effecting the
Distribution" and "The Distribution-Results of
the Distribution."
Distribution Agent UMB Bank, N.A. (the "Distribution Agent"), 1010
Grand Avenue, Kansas City, Missouri 64106.
KCSI's Board's Power The Distribution may be amended, modified or
to Modify or Abandon abandoned at any time prior to the Record Date
by, and in the sole discretion of, KCSI's Board
of Directors. See "The Distribution-Modification
or Abandonment of the Distribution."
No Fractional Shares No fractional shares of Stilwell Common Stock
will be distributed in the Distribution. See "The
Distribution-Manner of Effecting the
Distribution."
No Established Trading There has been no established trading market for
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<PAGE>
Market for Stilwell Stilwell Common Stock, although a "when-issued"
Common Stock trading market is expected to develop near the
Record Date. [Stilwell has received approval,
subject to official notice of issuance, to have
the Stilwell Common Stock listed on the New York
Stock Exchange under the symbol "SV."] See "The
Distribution-Trading of Stilwell Common Stock."
Interests of Stilwell Stilwell officers and directors who own shares of
Officers and Directors KCSI Common Stock on the Record Date will receive
in the Distribution shares of Stilwell common stock in the same
proportion as other KCSI stockholders in the
Distribution. Stilwell officers and directors
will also receive New Stilwell Options (defined
herein) for each KCSI non-qualified stock option
held on the record date, in the same 2 to 1
proportion. See "Relationship Between KCSI and
Stilwell After the Distribution - Employee
Benefits." In addition, Stilwell has entered into
employment agreements with certain of its
officers dated May ___,2000. Under the employment
agreements, which are consistent with past
compensation practices of KCSI, these officers
are not entitled to participate in any Stilwell
incentive compensation plan during 2000, 2001 and
2002, but will receive cash bonuses aggregating
$1,200,000 within ten days after the Distribution
Date and will be eligible to participate in other
benefit plans. In conjunction with entering into
the employment agreements and in lieu of
participation in Stilwell's incentive
compensation plans, these officers received a
grant of options to purchase an aggregate of
550,600 shares of KCSI Common Stock, 527,000 of
which will become exercisable based on the
performance of the market price of KCSI's Common
Stock. At the time of the Distribution, Stilwell
options will be substituted for all such KCSI
options in their entirety and the target stock
price levels for the performance options will be
adjusted to Stilwell stock prices. The employment
agreements also include severance and change of
control benefits. See "Management - Employment
Agreements with the Named Executive Officers."
Record Date Close of business on [______] (the "Record
Date").
Distribution Date Certificates representing the shares of Stilwell
Common Stock will be delivered to the
Distribution Agent on [__________] (the
"Distribution Date") and the Distribution will be
effective on that date.
-8-
<PAGE>
Date Certificates are to Certificates representing the shares of Stilwell
Be Mailed Common Stock are expected to be mailed by the
Distribution Agent to KCSI stockholders within
[____] days following the Distribution Date (the
"Mailing Date"). See "The Distribution-Manner of
Effecting the Distribution."
Tax Ruling Indicates KCSI has received a tax ruling (the "Tax Ruling")
Distribution Will Be from the Internal Revenue Service (the "IRS")
Tax-Free that states that for United States federal income
tax purposes, no gain or loss will be recognized
by KCSI from the Distribution or by the holders
of KCSI Common Stock upon receipt of the Stilwell
Common Stock in the Distribution. See "The
Distribution-Material Federal Income Tax
Consequences."
KCSI and Stilwell Following the Distribution, KCSI and Stilwell
to be Operated as will be operated separately as independent
Separate Companies companies. They will continue to have a limited
relationship, including a common director, during
a transitional period. See "The Distribution-
Results of the Distribution," "Relationship
Between KCSI and Stilwell After the
Distribution," and "Certain Relationships and
Related Transactions."
Stilwell Anticipates To date, Stilwell has not declared or paid any
Paying Cash Dividends dividends on the Stilwell Common Stock, but
anticipates paying cash dividends following the
Distribution. The payment of dividends by
Stilwell is subject to the discretion of its
Board of Directors, and various factors may
prevent it from paying dividends. These factors
include Stilwell's financial position, its
capital requirements and liquidity, the existence
of a stock repurchase program, contractual and
legal requirements, results of operations and
such other factors as Stilwell's Board of
Directors may consider relevant. As a holding
company, Stilwell's ability to pay dividends is
dependent on the dividends and income it receives
from its subsidiaries. At the present time
Stilwell's primary source of cash is dividends
received from Janus. Janus represented
approximately 95% of Stilwell's revenues and
approximately 91% of Stilwell's net income for
the year ended December 31, 1999 and for that
year Stilwell received $173.2 million in
dividends from Janus. The payment of dividends by
Janus is subject to the discretion of its Board
of Directors. Although Stilwell has a contractual
obligation to cause such payment, Thomas H.
Bailey, the Chief Executive Officer of Janus, has
certain
-9-
<PAGE>
rights to select a majority of that Board
(the Janus Board Selection Rights, as defined in
"Summary-Overview of Stilwell's Business and
Strategy-Background"), and such majority of
directors could determine in their discretion
that Janus will not pay dividends for any given
year. See "Risk Factors-Various Factors May
Hinder the Declaration and Payment of Dividends
by Stilwell Following the Distribution,"
"Dividend Policy," "Management's Discussion and
Analysis of Financial Condition and Results of
Operations" and Note 15 to the Stilwell
consolidated financial statements.
Risk Factors To Be Stockholders should carefully review the matters
Considered discussed in the section entitled "Risk Factors"
for a discussion of matters that should be
considered in owning Stilwell Common Stock.
Provisions Which May Have Provisions of Stilwell's certificate of
Antitakeover Effects incorporation and bylaws, certain agreements,
Stilwell's Stockholders' Rights Plan and
provisions of the Delaware General Corporation
Law and the Internal Revenue Code of 1986, as
amended (the "Code"), may have the effect of
delaying, deterring or preventing a change in
control of Stilwell. See "Risk Factors," "The
Distribution-Material Federal Income Tax
Consequences" and "Description of Capital Stock."
* * *
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<PAGE>
OVERVIEW OF STILWELL'S BUSINESS AND STRATEGY
BACKGROUND
KCSI is a holding company that has owned and managed, through its
direct and indirect subsidiaries, two principal business segments: rail
transportation and financial services. ONLY THE FINANCIAL SERVICES SEGMENT
IS INCLUDED IN THE DISTRIBUTION. The primary entities comprising the
financial services segment are Janus, an approximately 81.5% owned
subsidiary; Stilwell Management, Inc. ("SMI," formerly Berger Associates,
Inc.), a wholly-owned subsidiary; Berger LLC ("Berger"), of which SMI owns
100% of Berger preferred limited liability company interests and
approximately 86% of the Berger regular limited liability company
interests; Nelson Money Managers Plc ("Nelson"), an 80% owned subsidiary;
DST Systems, Inc. ("DST"), an equity investment in which SMI holds an
approximately 32% interest, and miscellaneous other subsidiaries and equity
investments (the "Miscellaneous Corporations"). Janus is the principal
business of the financial services segment of KCSI, representing 97% of
assets under management at March 31, 2000 and 96% of revenues and 91% of
ongoing net income for the three months ended March 31, 2000. The
businesses which comprise the financial services segment offer a variety of
asset management and related financial services to registered investment
companies, retail investors, institutions and individuals.
After extensive review and discussion, the Board of Directors of KCSI
concluded that it is in the best interests of KCSI and its stockholders for
KCSI to focus on the rail transportation business and for a separate
company to focus on the financial services business and determined that the
Distribution was the best way to accomplish a separation of the two
businesses. KCSI formed Stilwell as a holding company for the group of
businesses and investments that comprise KCSI's financial services segment.
In connection with the Distribution, KCSI transferred to Stilwell KCSI's
ownership interests in Janus, Berger, Nelson, DST, the Miscellaneous
Corporations and certain other financial services-related assets, and
Stilwell assumed all of KCSI's liabilities associated with the assets
transferred, effective July 1, 1999. Consistent with the prior philosophy
of KCSI, Stilwell expects to encourage autonomy by its subsidiaries in the
operation of their businesses. Stilwell has agreed that the management of
Janus will continue to operate the business of Janus of providing
investment advice and management services on the basis provided in a stock
purchase agreement with Thomas H. Bailey ("Mr. Bailey"), the Chief
Executive Officer of Janus, and another Janus stockholder (the "Janus Stock
Purchase Agreement"). The Janus Stock Purchase Agreement with Mr. Bailey,
the holder of 12% of Janus common stock, provides that so long as Mr.
Bailey is a holder of at least 5% of the shares of Janus and continues to
be employed as President or Chairman of the Board of Janus (or, if he does
not serve as President, James P. Craig, III serves as President and Chief
Executive Officer or Co-Chief Executive Officer with Mr. Bailey), he shall
continue to establish and implement policy with respect to the investment
advisory and portfolio management activity of Janus. Such agreement
provides that in furtherance of such objective, so long as both the
ownership threshold and officer status conditions described above are
satisfied, in those circumstances Stilwell will vote its shares of Janus
stock to elect directors of
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<PAGE>
Janus, at least the majority of whom are selected by Mr. Bailey, subject to
Stilwell's approval, which approval may not be unreasonably withheld (the
"Janus Board Selection Rights"). See Stilwell Financial, Inc., "Stilwell
Business Strategy" and "Business - Stilwell Business Strategy."
On March 26, 1999, a number of minority stockholders and employees of
Janus, including members of Janus' management, its chief executive officer,
its chief investment officer, portfolio managers and assistant portfolio
managers who own a material number of Janus shares, five of the six Janus
directors and others (the "Janus Minority Group")<1>, proposed that KCSI
consider in addition to the Distribution, a separate spin-off of Janus.
Members of the Janus Minority Group met with the KCSI Board of Directors on
June 23, 1999 and urged the Board to consider their separate spin-off
proposal.
After considering the information presented by the Janus Minority
Group, KCSI's Board of Directors decided it was in the best interests of
KCSI and its stockholders to proceed with the Distribution in the manner
previously contemplated and as described herein. In arriving at this
decision, KCSI's Board of Directors took into consideration a number of
factors, including that: (i) a favorable tax ruling on the Distribution had
been received from the Internal Revenue Service, (ii) the presentation by
the Janus Minority Group was not persuasive, in the Board's view, as to the
advantages of the alternative proposal as compared to the Distribution,
(iii) an estimated minimum of six to nine months would be required to
obtain a favorable tax ruling, and there was a lack of certainty that a
favorable ruling could be obtained at all, with respect to the alternative
proposal, and (iv) the Distribution was more consistent with the strategic
direction of Stilwell. See "The Distribution-Background and Reasons for the
Distribution."
Recently, press reports have appeared in which certain Janus employees
have expressed objections to the Distribution and other disagreements with
Stilwell's structure and direction. Representatives of Stilwell and of the
Janus Minority Group have met and held discussions regarding resolution of
these disagreements and while not all disagreements have been resolved,
agreements have been made under which Stilwell sold to Janus 192,408 shares
of Janus common stock to be used to provide long-term incentives to Janus
personnel. In return, Janus agreed not to grant phantom stock, stock
appreciation rights, or similar rights, for so long as Janus common stock
is available for use under its Long-Term Incentive Plan. The availability
of Janus common stock for this purpose will depend upon the number of such
shares granted or sold from time to time by Janus and upon the number
acquired from holders by voluntary sale or upon the death, retirement or
termination of employment of employees of Janus. In first quarter 2000,
Janus made an annual grant to Janus employees of 35,670 shares of Janus
common stock, but the number of shares awarded in future years may be more
or less than that amount. KCSI and Stilwell have also agreed to waive
certain rights of first refusal and options to purchase other outstanding
shares of Janus common stock so that such shares may be available for
awards under the Long-Term Incentive Plan. Finally, KCSI, Stilwell and
Janus have agreed to increase an intercompany credit line available to
Janus and to the assignment to Stilwell of the Janus Stock Purchase
Agreement. See "The Distribution--Background and Reasons for the
Distribution."
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<PAGE>
[FN]<1>
The Janus Minority Group is comprised of:
Thomas H. Bailey President, Chairman, Chief Executive Officer
and Director
William H. Bales Vice President and Portfolio Manager
Laurence J. Chang Vice President and Portfolio Manager
Jonathan D. Coleman Vice President and Portfolio Manager
David J. Corkins Vice President and Portfolio Manager
James P. Craig, III Vice Chairman, Chief Investment Officer
and Director
David C. Decker Vice President and Portfolio Manager
Michael J. Dugas Assistant Portfolio Manager
Thomas A. Early Vice President, General Counsel and Secretary
James P. Goff Vice President and Portfolio Manager
Steven R. Goodbarn Vice President of Finance, Treasurer and Chief
Financial Officer
Helen Young Hayes Vice President and Portfolio Manager
Michael E. Herman Director
Marjorie G. Hurd Vice President and Chief Operations Officer
Warren B. Lammert Vice President and Portfolio Manager
Chih-Lin Mike Lu Vice President and Portfolio Manager
Brent A. Lynn Assistant Portfolio Manager
Thomas R. Malley Vice President and Portfolio Manager
Thomas A. McDonnell Director
Elias Marc Pinto Vice President and Portfolio Manager
Karen L. Reidy Vice President and Assistant Portfolio Manager
Blaine P. Rollins Vice President and Portfolio Manager
Sandy R. Rufenacht Vice President and Portfolio Manager
Ron Sachs Assistant Portfolio Manager
Scott W. Schoelzel Vice President and Portfolio Manager
John H. Schreiber Assistant Portfolio Manager
Ronald V. Speaker Vice President and Portfolio Manager
Michael Stolper Director
Mark B. Whiston Vice President and Chief Marketing Officer
Claire Young Vice President and Portfolio Manager
</FN>
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<PAGE>
STILWELL FINANCIAL, INC.
Stilwell is a holding company that manages its investments in the
principal subsidiaries and equity investments more particularly described
below and elsewhere in this Information Statement. The functions performed
by Stilwell include consolidated accounting; consolidated tax return
preparation and filing; corporate secretarial functions; banking and
financing; administration of retirement and stock option plans; internal
auditing; investor relations; analysis and evaluation of acquisition and
strategic business opportunities; insurance assessment and coverage and
holding company legal services. Stilwell management does not have direct
experience in mutual fund investment advisory or portfolio management
services and will rely on its subsidiaries' managements to perform such
functions. At Janus, Mr. Bailey will continue to establish and implement
policy with respect to the investment advisory and portfolio management
activity of that subsidiary, and has the right to select a majority of the
directors of Janus, pursuant to the Janus Board Selection Rights.
STILWELL'S PRINCIPAL SUBSIDIARIES AND EQUITY INVESTMENTS
JANUS CAPITAL CORPORATION
-------------------------
Janus and its adviser subsidiaries are investment advisers registered
with the U.S. Securities and Exchange Commission (the "SEC") or other
regulatory bodies, and are the investment advisers of the Janus Investment
Fund, Janus Aspen Series, Janus World Funds Plc and Janus Universal Funds
(collectively, the "Janus Advised Funds"). Additionally, Janus is the
adviser or sub-adviser to other investment companies and institutional and
individual private accounts, including pension, profit-sharing and other
employee-benefit plans, trusts, charitable organizations, endowments,
foundations and others (collectively, "Janus Sub-Advised Funds and Private
Accounts"). As of March 31, 2000, Janus had total assets under management
of $315.3 billion, of which $255.0 billion are in the Janus Advised Funds
and the remainder are in Janus Sub-Advised Funds and Private Accounts.
Janus primarily offers equity portfolios to its investors, which comprised
approximately 95% of total assets under management for Janus and its
affiliates at March 31, 2000. At that date, funds advised by Janus had
approximately 5.4 million shareowner accounts. For the five-year period
ended March 31, 2000, Janus' total assets under management increased 1,198
percent. See "Business-Stilwell's Principal Subsidiaries and Equity
Investments-Janus Capital Corporation."
BERGER LLC
----------
Berger is the entity to which Berger Associates, Inc. contributed its
operating assets and business as part of a restructuring consummated as of
September 30, 1999. Berger is an investment adviser registered with the
SEC and serves as an investment adviser to a group of registered investment
companies known as the Berger Advised Funds (as defined in "Business--
Stilwell's Principal Subsidiaries and Equity Investments-
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<PAGE>
Berger LLC"). Berger also serves as investment sub-adviser to a group of
registered investment companies and separate accounts known as the Berger
Sub-Advised Funds and Private Accounts (as defined in "Business--Stilwell's
Principal Subsidiaries and Equity Investments-Berger LLC"). Berger owns 80%
of Berger/Bay Isle LLC, a Delaware limited liability company ("B/B Isle"),
which is a joint venture with Bay Isle Financial Corporation. B/B Isle acts
as investment adviser to privately managed separate accounts (the "B/B Isle
Separate Accounts"). As of March 31, 2000, the Berger Complex (as defined
in "Business--Stilwell's Principal Subsidiaries and Equity Investments-
Berger LLC") had total assets under management of $8.2 billion. Of this
amount, Berger managed $7.1 billion in the Berger Advised Funds and $1.0
billion in the Berger Sub-Advised Funds and Private Accounts; and B/B Isle
managed $0.1 billion in the B/B Isle Separate Accounts. As of March 31,
2000, funds included in the Berger Complex had more than 258,000 shareowner
accounts. For the five-year period ended March 31, 2000, assets under
management in the Berger Complex increased by 173 percent. See "Business-
Stilwell's Principal Subsidiaries and Equity Investments-Berger LLC."
NELSON MONEY MANAGERS PLC
-------------------------
Nelson provides investment advice and investment management services
in the United Kingdom, primarily to individuals who are retired or
contemplating retirement. In order to reach these clients, Nelson has
traditionally performed financial planning seminars for employees of
companies in the United Kingdom. More recently, Nelson has also been
offering services directly to the public via advertisements in the media.
For individuals interested in Nelson's services, Nelson assigns a specific
investment adviser to have a one-on-one consultation. The investment
adviser works with each client to conduct an analysis of the client's
investment objectives and then recommends in writing the construction of a
portfolio to meet those objectives. Recommendations for the design and
ongoing maintenance of the portfolio structure are the responsibility of
the investment adviser. The selection and management of the instruments
which constitute the portfolio are the responsibility of Nelson's
investment management team. At March 31, 2000, Nelson employed more than
40 investment advisers and managed approximately $1.4 billion ((Pound)866
million) in assets. At March 31, 2000, Nelson managed assets for more than
15,000 individuals. For the five-year period ended March 31, 2000,
Nelson's total assets under management increased by approximately 130
percent. See "Business-Stilwell's Principal Subsidiaries and Equity
Investments-Nelson Money Managers Plc."
DST SYSTEMS, INC.
----------------
DST, together with its subsidiaries and joint ventures, provides
information processing, printing and mailing and computer software services
and products to mutual funds, investment managers, communications
industries and other service industries through business units organized
into three operating segments: Financial Services, Customer Management and
Output Solutions. DST's Financial Services segment serves primarily mutual
funds, insurance companies, banks, brokers and financial planners. DST's
Customer Management segment provides services and products to the
video/broadband, direct broadcast
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<PAGE>
satellite, wireless and Internet-protocol telephony, Internet and utility
markets worldwide. DST's Output Solutions segment provides statement
processing and solutions to customers of DST's other segments and to other
customers. See "Business-Stilwell's Principal Subsidiaries and Equity
Investments-DST Systems, Inc."
STILWELL BUSINESS STRATEGY
Stilwell believes that it has established a strong platform to support
future growth in revenues, deriving its strength in large part from the
experience and capabilities of Stilwell's subsidiaries and equity
investments as full service providers of asset management and related
financial services. The strength of Stilwell's subsidiaries and equity
investments is based on core investment professionals, solid investment
performance results, sophisticated distribution systems, quality customer
service, talented support and service staff and product expertise and
systems. In addition, Stilwell believes that it will benefit from the
brand name equity associated with the names JANUS, BERGER, NELSON and DST.
Opportunities for growth for Stilwell are expected to come, principally
through its subsidiaries and equity investments, from new and existing
clients, strategic acquisitions and alliances and strengthening the brand
name and brand image of Stilwell's subsidiaries and equity investments.
MAINTAIN AND ENHANCE EXISTING CLIENT RELATIONSHIPS. As one of its
primary business objectives, Stilwell intends to maintain and enhance
existing client relationships by continuing to provide a high level of
quality service to existing clients through strong support and service
staff, excellent customer service and product expertise and systems.
GENERATE GROWTH FROM NEW AND EXISTING CLIENTS. Stilwell will pursue
growth from new clients through on-going sales and marketing efforts.
Additionally, Stilwell will seek to increase its share of existing clients'
managed assets.
To encourage growth, Stilwell intends to continue compensation
programs with equity incentives for key management employees of its
principal subsidiaries to provide incentives through ownership of stock in
the enterprises in which they are employed. Stilwell seeks to facilitate
the acquisition of such ownership through such compensation programs and by
making such programs competitive with, if not superior to, compensation
programs of other financial services companies.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. Stilwell plans to
regularly evaluate strategic acquisitions, joint ventures and alliances and
pursue those that appear appropriate as a means of expanding the range of
its product offerings and distribution, as well as for increasing its sales
and marketing capabilities.
STRENGTHEN BRAND NAME AND BRAND IMAGE. Stilwell intends to continue
developing several independent financial services businesses with
autonomous management and separate brand names. Stilwell believes it has a
strong starting position for this strategy, based on its existing ownership
of Janus, Berger and Nelson, as well as its equity investment in DST.
Management of each of Stilwell's affiliates has general autonomy over its
respective day-to-day operations, allowing each business to develop a
separate public identity, satisfy legal
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<PAGE>
requirements regarding separation of investment decisions and maintain
compliance with certain minority stockholder agreements. At Janus, Mr.
Bailey will continue to establish and implement policy with respect to the
investment advisory and portfolio management activity of that subsidiary,
and to select a majority of the directors of Janus, pursuant to the Janus
Board Selection Rights.
ORGANIZATIONAL STRUCTURE
The following chart shows the organizational structure of Stilwell's
principal subsidiaries and equity investments.
[Organizational Chart Inserted Here]
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<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table presents summary financial data of Stilwell. The
information set forth below should be read in conjunction with, and is qualified
in its entirety by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this Information Statement. The summary
financial data for the five years ended December 31, 1999 was derived from the
audited consolidated financial statements of Stilwell. The summary financial
data as of and for the three months ended March 31, 1999 and 2000 was derived
from the unaudited consolidated financial statements of Stilwell, which were
prepared on the same basis as the historical audited financial statements.
The summary financial data set forth below may not be indicative of
Stilwell's future performance and does not necessarily reflect the financial
position and results of operations of Stilwell had Stilwell operated as a
separate, stand-alone entity during each of the periods presented. In addition
to historical earnings per share data based on the Stilwell capital structure as
of March 31, 2000 (1,000 shares outstanding), pro forma earnings per share
information is presented for the year ended December 31, 1999 and for the three
months ended March 31, 1999 and 2000. This pro forma information is presented
for purposes of comparison to future years and was derived assuming an issuance
of two shares of Stilwell Common Stock for every one outstanding share of KCSI
Common Stock as of March 31, 2000. In addition, dilutive options were included
based on the number of dilutive KCSI stock options assumed to be exercised as of
March 31, 2000 in connection with the determination of KCSI's diluted earnings
per share computations. Pro forma basic and diluted earnings per share for the
year ended December 31, 1999 and for the three months ended March 31, 1999
reflect adjustments for interest expense (at an assumed rate of 6.5%), net of
income taxes assumed to be incurred, as if the assumption of $125 million of
indebtedness from KCSI had occurred as of January 1, 1999. See "Financing--
Description of the Credit Facilities."
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31
----------------------------------------------------- ------------------------------
1995(i) 1996(ii) 1997 1998(iii) 1999 1999 2000(iv)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Millions, except per share data) (Unaudited)
FINANCIAL DATA:
- --------------
INCOME STATEMENT
DATA:
Revenues $236.7 $329.6 $485.1 $670.8 $1,212.3 $233.3 $545.1
Operating expenses 156.5 197.8 285.9 390.2 694.0 136.1 300.2
------ ------ ------ ------ -------- ------ ------
Operating Income 80.2 131.8 199.2 280.6 518.3 97.2 244.9
Equity in earnings
of unconsolidated
affiliates 29.6 68.6 24.9 25.8 46.7 11.2 18.8
Gain on litigation
settlement 44.2
Gain on sale of Janus
common stock 15.1
Reduction in
ownership of DST -- -- -- (29.7) -- -- --
Gain on sale
of DST 296.3 -- -- -- -- -- --
Other, net 3.7 8.2 5.8 12.6 21.5 3.9 7.3
------ ------ ------ ------ -------- ------ ------
Pretax Income 409.8 208.6 229.9 289.3 586.5 112.3 330.3
Income tax
provision 181.3 58.2 87.0 103.7 216.1 40.1 114.3
Minority interest 10.5 15.8 24.9 33.4 57.3 11.2 27.3
------ ------ ------ ------ -------- ------ ------
Net Income $218.0 $134.6 $118.0 $152.2 $ 313.1 $ 61.0 $188.7
====== ====== ====== ====== ======== ====== ======
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data:
Weighted Average
Common shares
outstanding 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Basic Earnings
per share $218,000 $134,600 $118,000 $152,200 $313,100 $ 61,000 $188,700
Diluted Earnings
per share 218,000 134,000 117,400 149,900 308,300 60,200 186,400
Pro Forma
Per Share Data:
Common shares
outstanding (in
thousands) 222,799 222,799 222,799
Basic Earnings per share $ 1.38 $ 0.27 $ 0.85
Diluted Common
shares outstanding
(in thousands) 230,760 230,760 230,760
Diluted Earnings per share $ 1.31 $ 0.26 $ 0.81
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31, March 31,
---------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000(iv)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $475.2 $548.2 $672.6 $822.9 $1,231.5 $868.1 $1,432.7
Long term obligations:
Third Parties 0.4 0.1 -- -- -- -- --
KCSI -- 117.3 84.1 16.6 -- -- --
Cash dividends per
Common share n/a n/a n/a n/a n/a n/a n/a
OPERATING DATA:
- --------------
Total Assets Under
Management
(in billions) $ 34.5 $ 50.3 $ 71.6 $113.1 $ 257.4 $141.7 $ 324.9
Total Shareowner
Accounts
(in millions) 2.5 2.5 2.7 3.0 4.3 3.4 5.5
</TABLE>
(i) Reflects DST as an unconsolidated affiliate as of January 1, 1995 due
to the DST public offering and associated transactions completed in
November 1995, which reduced Stilwell's ownership of DST to
approximately 41% and resulted in deconsolidation of DST from
Stilwell's consolidated financial statements. The public offering and
associated transactions resulted in a $144.6 million after-tax gain to
Stilwell.
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<PAGE>
(ii) Includes a one-time after-tax gain of $47.7 million, representing
Stilwell's proportionate share of the one-time gain recognized by DST
in connection with the merger of The Continuum Company, Inc.
("Continuum"), formerly a DST equity affiliate, with Computer Sciences
Corporation ("CSC")in a tax-free share exchange.
(iii) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax) resulting from the merger of a wholly-owned subsidiary of
DST with USCS International, Inc. ("USCS"). The merger was accounted
for by DST under the pooling of interests method. The charge reflects
Stilwell's reduced ownership of DST (from 41% to approximately 32%),
together with Stilwell's proportionate share of DST and USCS fourth
quarter merger-related costs.
(iv) Includes two one-time gains: a) a $27.3 million (after-tax) gain on
the settlement of litigation with a former equity affiliate; and b) a
$15.1 million (after-tax) gain resulting from the sale by Stilwell of
192,408 shares of Janus common stock to Janus, which reduced
Stilwell's ownership in Janus to approximately 81.5%.
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<PAGE>
INTRODUCTION
KCSI formed Stilwell on January 23, 1998 as a holding company for the group
of businesses and investments that comprise the financial services business of
KCSI and to effect the Distribution. Such businesses include Janus, Berger,
Nelson, DST and the Miscellaneous Corporations. In connection with the
Distribution, KCSI transferred to Stilwell KCSI's ownership interests in these
businesses and certain other financial services-related assets and Stilwell
assumed all of KCSI's liabilities associated with the assets transferred,
effective July 1, 1999.
On [May ___, 2000], the Board of Directors of KCSI gave final approval to
the Distribution, payable to holders of record of KCSI Common Stock on the
Record Date, of two shares of Stilwell Common Stock for every one share of KCSI
Common Stock outstanding on the Record Date. As a result of the Distribution,
all of the outstanding shares of Stilwell Common Stock will be distributed to
holders of KCSI Common Stock on a pro-rata basis (including the holders of KCSI
Common Stock through accounts in the KCSI ESOP, the Stilwell ESOP, the DST ESOP
and the KCSI Profit Sharing Plan (as each is defined herein)). No fractional
shares of Stilwell Common Stock will be distributed in the Distribution.
Certificates representing shares of Stilwell Common Stock are expected to be
mailed by the Distribution Agent to KCSI stockholders on the Mailing Date.
Stockholders of KCSI with inquiries relating to the Distribution should
contact: The Office of the Corporate Secretary; 114 West 11th Street, Kansas
City, MO 64105, telephone (816) 983-1237.
RISK FACTORS
Stockholders of KCSI should carefully consider and evaluate all of the
information set forth in this Information Statement, including the risk factors
listed below. In addition to the historical information included herein, the
discussion set forth below, as well as other portions of this Information
Statement, contains comments not based upon historical fact. Such forward-
looking comments are based upon information currently available to management
and management's perception thereof as of the date of this Information
Statement. Readers can identify these forward-looking comments by their use of
such verbs as "expects," "anticipates," "believes" or similar verbs or
conjugations of such verbs. The actual results of operations of Stilwell could
materially differ from those indicated in forward-looking comments. The
differences could be caused by a number of factors or combination of factors.
Readers are strongly encouraged to consider the following risk factors when
evaluating any such forward-looking comments. Stilwell will not update any
forward-looking comments set forth in this Information Statement.
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<PAGE>
RISKS RELATED TO THE BUSINESS OF STILWELL FINANCIAL, INC.
A DECLINE IN THE PERFORMANCE OF THE SECURITIES MARKETS COULD ADVERSELY AFFECT
STILWELL'S REVENUES
The results of operations of Stilwell are affected by many economic
factors, including the performance of the U.S. securities markets. A decline in
the securities markets or certain segments of those markets, failure of the
securities markets or segments thereof to sustain their recent levels of growth,
or short-term volatility in the securities markets or segments thereof could
result in investors withdrawing assets from the markets or decreasing their rate
of investment, either of which could adversely affect Janus, Berger and Nelson.
Because most of Stilwell's revenues are based on the value of assets under
management, a decline in the value of those assets would adversely affect
revenues of Stilwell. Favorable performance by the U.S. securities markets over
the last several years has attracted a substantial increase in the investments
in these markets. Partly as a result of this financial environment, the assets
under management of Janus and Berger have increased significantly and levels of
profitability have grown. The growth rate of Stilwell's subsidiaries and equity
investments has varied from year to year, and the high average growth rates
sustained in the recent past may not continue. In addition, in periods of
slowing growth or declining revenues, profits and profit margins are adversely
affected because certain expenses remain relatively fixed.
POOR INVESTMENT PERFORMANCE OF FUNDS MANAGED BY STILWELL'S SUBSIDIARIES COULD
ADVERSELY AFFECT STILWELL'S REVENUES
Success for Stilwell is dependent to a significant extent on the investment
performance of the mutual funds and other accounts (the "Funds") managed by its
subsidiaries, especially Janus. Failure of the Funds to perform well could have
an adverse effect on the revenues of Stilwell. Good performance stimulates
sales of the Funds' shares and tends to keep redemptions low. Increased sales
of the Funds' shares generate higher revenues for Stilwell (which are directly
related to assets under management). Conversely, poor performance tends to
result in decreased sales and increased redemptions of the Funds' shares, with
corresponding decreases in revenues to Stilwell. Similarly, success for Nelson
is partly dependent on attaining consistently reasonable investment returns for
the assets managed by Nelson.
STILWELL'S BUSINESS IS DEPENDENT ON INVESTMENT ADVISORY AGREEMENTS WHICH ARE
SUBJECT TO TERMINATION OR NON-RENEWAL
Most of the revenues of Janus and Berger are derived pursuant to investment
advisory agreements with their respectively managed Funds. Any termination of
or failure to renew a significant number of these agreements could have a
material adverse impact on Janus or Berger. These investment advisory
agreements may be terminated by either party with notice, are terminated in the
event of an "assignment" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")), and must be approved and renewed annually by the
disinterested members of each fund's board of directors or trustees, or its
shareowners, as required by law.
Generally, any change in control of Janus or Berger would constitute an
"assignment" under the 1940 Act. The Distribution is not expected to result in
a change of control of Janus or Berger and therefore under the applicable rules
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<PAGE>
of the Securities and Exchange Commission would not constitute such an
assignment. Under certain circumstances a material reduction in the ownership of
Janus common stock by Mr. Bailey or his departure from Janus by removal, death,
or resignation could be a change of control, resulting in an assignment, because
he has contractual rights to select a majority of the directors of Janus,
pursuant to the Janus Board Selection Rights. Under the 1940 Act, "control" is
defined as "the power to exercise a controlling influence over the management or
policies of a company, unless such power is solely the result of an official
position with the company." The 1940 Act establishes a presumption that any
person who owns less than 25% of the voting securities of a company does not
control that company. Since Mr. Bailey owns less than 25% of Janus, he is
presumed to not control Janus. That presumption can be rebutted by evidence but,
under the 1940 Act, it continues until the SEC issues an order determining that
the presumption has been rebutted. The SEC has issued such an order in the past
with regard to a holder of less than 25% of the voting securities of a company,
but on facts much different from Mr. Bailey's circumstances. The SEC has not
issued such an order with respect to Mr. Bailey and it is unclear whether it
would do so. If the SEC were to issue such an order, Mr. Bailey's departure from
Janus, or a material reduction in his ownership of Janus common stock, which
eliminated his Janus Board Selection Rights could be deemed a change in control
of Janus. Such a change in control would result, under the 1940 Act and under
the Investment Advisers Act of 1940 (the "Advisers Act"), in an assignment and
termination of Janus' investment advisory contracts, requiring approval of fund
shareowners and other advisory clients to obtain new agreements. See "Risk
Factors-Stilwell May Be Required to Purchase or Sell Janus Common Stock." The
Boards of Trustees or Directors of the Janus Advised Funds and of the funds in
the Berger Complex ("Trustees") generally may terminate the investment advisory
agreements upon written notice for any reason, including if they believe the
Distribution may adversely affect the funds. See "Summary-Overview of Stilwell's
Business and Strategy-Stilwell Financial, Inc." and "Business."
ANY EVENT THAT NEGATIVELY AFFECTS THE U.S. MUTUAL FUND INDUSTRY COULD HAVE A
MATERIAL ADVERSE EFFECT ON STILWELL
Any event affecting the U.S. mutual fund industry which results in a
general decrease in assets under management or a significant general decline in
the number of U.S. mutual fund industry clients or accounts could have a
material adverse effect on Janus, Berger and DST. The future growth and success
of Janus, Berger and DST depend in part upon the continued growth of the mutual
fund industry in the United States, which has experienced significant growth
over the last several years. Janus and Berger derive a substantial portion of
their revenues from assets under management in U.S. mutual funds. DST derives a
substantial portion of its revenues from the delivery of services and products
to U.S. mutual fund industry clients.
STILWELL'S INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL
ADVERSE EFFECT ON ITS FUTURE SUCCESS
The loss of the services of one or more of Stilwell's key employees or its
failure to attract, retain and motivate qualified personnel could have a
material adverse impact on Stilwell's business, financial condition, results of
operations and future prospects. As with other investment management
businesses, Stilwell's future performance depends to a significant degree upon
the continued contributions of certain officers, portfolio managers and other
key management personnel. Stilwell's business is also similar to other
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<PAGE>
investment management businesses in that it is dependent on its ability to
attract, retain and motivate highly skilled, and often highly specialized,
technical and management personnel. There is substantial competition for
qualified technical and management personnel. Further, relations between
Stilwell and the management of its key subsidiary, Janus, have been strained
recently, primarily as the result of disagreements over the structure of the
Distribution. See "Risk Factors--Continuation of Strained Relations Between
Stilwell and Janus Management Could Have a Material Adverse Effect on Stilwell,"
"Management," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 15 to the Stilwell consolidated financial
statements.
INCREASED COMPETITION COULD REDUCE THE DEMAND FOR STILWELL'S PRODUCTS AND
SERVICES WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON STILWELL'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS PROSPECTS
Stilwell is subject to substantial and growing competition in all aspects
of its business. Such competition could reduce the demand for Stilwell's
products and services and could have a material adverse effect on Stilwell's
business, financial condition, results of operations and business prospects.
Janus and Berger compete with hundreds of other mutual fund management
distribution and service companies that distribute their fund shares through a
variety of methods, including affiliated and unaffiliated sales forces, broker-
dealers, and direct sales to the public. Nelson competes with other money
managers in obtaining new client business. DST competes with third party
providers, in-house systems and broker-dealers for the provision of processing
services. Although no one company or group of companies dominates the financial
services industry, many are larger, better known and have greater resources than
Stilwell. Stilwell believes that competition in the mutual fund industry will
increase as a result of increased flexibility afforded to banks and other
financial institutions to sponsor mutual funds and distribute mutual fund
shares, and as a result of consolidation and acquisition activity within the
industry. In addition, the mutual fund industry, in general, faces significant
competition as the number of mutual funds continues to increase, marketing and
distribution channels become more creative and complex, and investors place
greater emphasis on published fund recommendations and investment category
rankings. Barriers to entry to the investment management business are relatively
few, and Stilwell anticipates that Janus, Berger and Nelson will face a growing
number of competitors. See "Business-Competition."
STILWELL'S CREDIT FACILITIES IMPOSE RESTRICTIONS ON ITS ABILITY TO CONDUCT
BUSINESS AND MAY NOT BE SUFFICIENT TO SATISFY STILWELL'S CAPITAL AND OPERATING
REQUIREMENTS
Stilwell's credit facilities impose restrictions on its ability to conduct
business and may not be sufficient to satisfy Stilwell's capital and operating
requirements. These credit facilities contain covenants that, among other
things, restrict the ability of Stilwell to transfer assets, merge, incur debt
and create liens. In addition, the credit facilities require Stilwell to
maintain specified financial ratios, including maximum leverage, minimum net
worth and minimum interest coverage. The ability of Stilwell to comply with
such provisions may be affected by events beyond Stilwell's control. The breach
of any of these covenants would result in a default under the credit facilities.
In the event of any such default, lenders party to the credit facilities could
elect to declare all amounts borrowed under the credit facilities, together with
accrued interest and other fees, to be due and
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<PAGE>
payable. If any indebtedness under the credit facilities is accelerated,
Stilwell may not have sufficient assets to repay such indebtedness in full.
The timing of Stilwell's future capital requirements will depend on a
number of factors, including the ability of Stilwell to successfully implement
its business strategy. In addition, Stilwell, as a continuation of its practice
of providing credit facilities to its subsidiaries, has provided an intercompany
credit facility to Janus for use by Janus for general corporate purposes,
effectively reducing the amount of the credit facilities available for
Stilwell's other purposes. Stilwell may require additional capital sooner than
anticipated to the extent that Stilwell's operations do not progress as
anticipated or if certain put rights are exercised by Janus stockholders. Based
on financial information as of March 31, 2000, Stilwell would have the ability
to fund the purchase of stock required if all such put rights had been exercised
without, in management's judgment, causing a breach of any of Stilwell's current
credit facility restrictions. Stilwell has not obtained the concurrence of its
lenders with this judgment. There may not be any additional capital available on
acceptable terms, or at all, and the failure to obtain any such required capital
could have a material adverse effect on Stilwell's operations. See "Financing"
and "Management's Discussion and Analysis of Financial Conditions and Results of
Operations-Minority Purchase Agreements."
STILWELL'S BUSINESS IS SUBJECT TO PERVASIVE REGULATION WITH ATTENDANT COSTS OF
COMPLIANCE AND SERIOUS CONSEQUENCES FOR VIOLATIONS
Virtually all aspects of Stilwell's business are subject to various laws
and regulations. Violations of such laws or regulations could subject Stilwell
and/or its employees to disciplinary proceedings or civil or criminal liability,
including revocation of licenses, censures, fines or temporary suspension or
permanent bar from the conduct of their business. Any such proceeding or
liability could have a material adverse effect upon Stilwell's business,
financial condition, results of operations and business prospects. These laws
and regulations generally grant regulatory agencies and bodies broad
administrative powers, including, in some cases, the power to limit or restrict
Stilwell from operating its businesses in the event it fails to comply with such
laws and regulations. Due to the extensive regulations and laws to which
Stilwell is subject, management of Stilwell is required to devote substantial
time and effort to legal and regulatory compliance issues.
In addition, the regulatory environment in which Stilwell operates is
subject to change. Stilwell may be adversely affected as a result of new or
revised legislation or regulations or by changes in the interpretation or
enforcement of existing laws and regulations. See "Business-Regulation."
STILWELL'S BUSINESS IS VULNERABLE TO SYSTEMS FAILURES WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON STILWELL'S BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Any delays or inaccuracies in securities pricing information or information
processing could give rise to claims against Janus, Berger, Nelson or DST, which
could have a material adverse effect on Stilwell's business, financial condition
and results of operations. Janus, Berger, Nelson and DST are highly dependent
on communications and information systems and on third party vendors for
securities pricing information and updates from certain software. In addition,
DST's processing services are dependent on the Winchester and Poindexter Data
Centers, DST's facilities for computer
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<PAGE>
operations, information processing and image processing. Stilwell's subsidiaries
and equity investments may suffer a systems failure or interruption, whether
caused by an earthquake, fire, other natural disaster, power or
telecommunications failure, unauthorized access, act of God, act of war or
otherwise and Stilwell's back-up procedures and capabilities may not be adequate
or sufficient to eliminate the risk of extended interruptions in operations.
CERTAIN AGREEMENTS PROVIDE THE CHIEF EXECUTIVE OFFICER OF JANUS SUBSTANTIAL
INFLUENCE OVER THE INVESTMENT POLICIES OF JANUS
The Janus Stock Purchase Agreement with Mr. Bailey, the holder of 12% of
Janus common stock, provides that so long as Mr. Bailey is a holder of at least
5% of the shares of Janus and continues to be employed as President or Chairman
of the Board of Janus (or, if he does not serve as President, James P. Craig,
III serves as President and Chief Executive Officer or Co-Chief Executive
Officer with Mr. Bailey), he shall continue to establish and implement policy
with respect to the investment advisory and portfolio management activity of
Janus. In furtherance of such objective, such agreement provides that, so long
as both the ownership threshold and officer status conditions described above
are satisfied, in those circumstances Stilwell will vote its shares of Janus
stock to elect directors of Janus, at least the majority of whom are selected by
Mr. Bailey, subject to Stilwell's approval, which approval may not be
unreasonably withheld. The agreement also provides that any change in
management philosophy, style or approach with respect to investment advisory and
portfolio management policies of Janus shall be mutually agreed upon by Stilwell
and Mr. Bailey. In addition, Janus is party to employment and other agreements
with certain key employees of Janus that provide that in the event that (i) Mr.
Bailey, James P. Craig, Vice Chairman and Chief Investment Officer of Janus, or
an individual mutually agreed to by Mr. Bailey and the Board of Directors of
Janus, no longer serves as the Chief Executive Officer of Janus, or (ii) Mr.
Bailey ceases to have the foregoing rights with respect to selection of a
majority of the Board of Directors of Janus, these employees would be entitled
to additional benefits following certain terminations of their employment and
additional vesting of certain shares of Janus stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 15 to the Stilwell consolidated financial statements.
STILWELL'S BUSINESS IS SUBJECT TO INTERNATIONAL MARKET RISKS OF EVENTS WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON STILWELL'S BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain portions of the managed portfolios of Janus and Berger as well as
assets managed by Nelson are invested from time to time in various securities of
corporations located or doing business in foreign trading markets and developing
regions of the world commonly known as emerging markets. These portfolios and
assets, and revenues derived from the management of such portfolios and assets,
are subject to various risks of events which could have a material adverse
effect on Stilwell's business, financial condition and results of operations.
Such risks include unfavorable political and diplomatic developments, currency
fluctuations, social instability, changes in governmental policies,
expropriation, nationalization, confiscation of assets and changes in
legislation relating to foreign ownership. In addition, foreign trading
markets, particularly in some emerging market countries, are often smaller, less
liquid, less regulated and significantly more volatile.
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RISKS RELATED TO THE DISTRIBUTION
STILWELL'S LACK OF OPERATING HISTORY AS A STAND-ALONE COMPANY MAKES IT DIFFICULT
TO PREDICT ITS FUTURE RESULTS
Stilwell was formed in 1998 as a holding company for the group of
businesses and investments that comprise the financial services business of
KCSI, and has never operated as a stand-alone company. Following the
Distribution, KCSI will have no obligation to provide financial or other
assistance to Stilwell except as described in an intercompany agreement (the
"Intercompany Agreement") and a tax disaffiliation agreement (the "Tax
Disaffiliation Agreement") between KCSI and Stilwell. See "Relationship Between
KCSI and Stilwell After the Distribution," "Financing" and "Business." The
historical financial information included in this Information Statement may not
be indicative of Stilwell's future performance, and does not necessarily reflect
the financial position, results of operations and cash flows of Stilwell had
Stilwell operated as a separate stand-alone entity during each of the periods
presented. In addition, the financial information included herein does not
reflect any changes that may occur in the financial condition and operations of
Stilwell as a result of the Distribution. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and Stilwell's
consolidated financial statements.
THERE HAS BEEN NO PRIOR MARKET FOR STILWELL COMMON STOCK AND IT IS IMPOSSIBLE TO
PREDICT THE PRICES AT WHICH THOSE SECURITIES MIGHT TRADE
There has been no established trading market for Stilwell Common Stock, and
there can be no reliable prediction as to the prices at which it will trade
after completion of the Distribution. While it is expected that a "when-issued"
trading market will develop near the Record Date, until the Stilwell Common
Stock is fully distributed and an orderly trading market develops, the prices at
which trading in Stilwell Common Stock occurs may fluctuate significantly.
Trading in Stilwell Common Stock on a "when-issued" basis exposes traders to a
risk of loss if the Distribution does not occur. See "The Distribution-Trading
of Stilwell Common Stock." Based on Stilwell's contribution to the net income
of KCSI, Stilwell expects that the two shares of its common stock to be
distributed for each one share of KCSI common stock may together trade initially
in a range reflecting 90% to 95% of the market price of KCSI common stock at the
time of the Distribution. The closing price on the New York Stock Exchange of
KCSI common stock on May __, 2000, was $___________. If the Distribution had
occurred on that date, on this basis Stilwell common stock could have been
expected to trade in a range of $________ to $_________ per share. However,
this estimate does not take into account other factors which influence the
market price of securities, including disaggregation values and other factors
that may not be related to Stilwell's net income. The prices at which shares of
Stilwell Common Stock trade will be determined by the marketplace and may be
influenced by many factors, including, among others, Stilwell's performance and
prospects, the depth and liquidity of the market for Stilwell Common Stock,
investor perception of Stilwell and its businesses and the industry in which
Stilwell operates, Stilwell's dividend policy, general financial and other
market conditions, domestic and international economic conditions and the impact
of factors described in this "Risk Factors" section. See "The Distribution-
Trading of Stilwell Common Stock."
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THE COMBINED POST-DISTRIBUTION MARKET VALUE OF KCSI COMMON STOCK AND STILWELL
COMMON STOCK MAY NOT EQUAL OR EXCEED THE PRE-DISTRIBUTION MARKET VALUE OF KCSI
COMMON STOCK
The combined market value of KCSI Common Stock and Stilwell Common Stock
immediately after the Distribution may not be equal to or greater than the
market value of KCSI Common Stock immediately prior to the Distribution. After
the Distribution, KCSI expects that the KCSI Common Stock will continue to be
listed for trading on the New York Stock Exchange. As a result of the
Distribution, absent other action, the trading prices of KCSI Common Stock are
expected to be significantly lower than the trading prices of KCSI Common Stock
immediately prior to the Distribution. In an attempt to address this issue,
KCSI's Board of Directors intends to effect, after the Record Date, a reverse
stock split whereby every two shares of KCSI Common Stock then outstanding will
be combined into one share of KCSI Common Stock. See "The Distribution-Trading
of Stilwell Common Stock." The primary objective of the reverse stock split is
to attempt to move the trading price of KCSI common stock back into a higher
trading range since lower-priced stocks may be unattractive to some investors.
SUBSTANTIAL SALES OF STILWELL COMMON STOCK FOLLOWING THE DISTRIBUTION OR THE
PERCEPTION THAT SUCH SALES MIGHT OCCUR COULD DEPRESS THE MARKET PRICE OF
STILWELL COMMON STOCK
Substantially all of the shares of Stilwell Common Stock issued in the
Distribution will be eligible for immediate resale in the public market. Any
sales of substantial amounts of Stilwell Common Stock in the public market, or
the perception that such sales might occur, whether as a result of the
Distribution or otherwise, could depress the market price of Stilwell Common
Stock. Stilwell is unable to predict whether substantial amounts of Stilwell
Common Stock will be sold in the open market following the Distribution. See
"The Distribution-Trading of Stilwell Common Stock."
THE INTERCOMPANY AGREEMENT AND THE TAX DISAFFILIATION AGREEMENT CONTAIN
INDEMNIFICATION OBLIGATIONS OF KCSI AND STILWELL THAT KCSI OR STILWELL MAY NOT
BE ABLE TO SATISFY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON KCSI OR
STILWELL
The Intercompany Agreement and the Tax Disaffiliation Agreement allocate
responsibility between KCSI and Stilwell for various liabilities and
obligations. However, the availability of such indemnities will depend upon the
future financial strength of KCSI and Stilwell. KCSI or Stilwell may not be in a
financial position to fund such indemnities if they should arise, which could
have a material adverse effect on KCSI or Stilwell. The Intercompany Agreement
provides that each party will indemnify the other against claims relating to or
arising out of their respective businesses before and after the Distribution.
The Tax Disaffiliation Agreement provides that each party will indemnify the
other with respect to taxes attributable to their respective businesses arising
before or after the Distribution, taxes or losses caused by their respective
breach of the Tax Disaffiliation Agreement and taxes and claims relating to
their respective businesses caused by KCSI's or Stilwell's actions, failure to
act, any party's actions with respect to KCSI or Stilwell, inaccurate or
incomplete information provided by KCSI or Stilwell in the Tax Ruling request or
any actions taken by KCSI or Stilwell that negatively impact the Tax Ruling. See
"Relationship Between KCSI and Stilwell after the Distribution."
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ACQUISITIONS, WHICH ARE PART OF STILWELL'S BUSINESS STRATEGY, INVOLVE INHERENT
RISKS WHICH COULD RESULT IN ADVERSE EFFECTS ON STILWELL'S OPERATING RESULTS AND
FINANCIAL CONDITION AND DILUTE THE HOLDINGS OF CURRENT STOCKHOLDERS
As part of its business strategy, Stilwell intends to consider acquisitions
of similar or complementary businesses. See "Business-Stilwell Business
Strategy." If Stilwell is not correct when it assesses the value, strengths,
weaknesses, liabilities and potential profitability of acquisition candidates or
if it is not successful in integrating the operations of the acquired
businesses, that could have a material adverse effect on Stilwell's operating
results and financial condition. Any future acquisitions will be accompanied by
the risks commonly associated with acquisitions. These risks include, among
others, potential exposure to unknown liabilities of acquired companies and to
acquisition costs and expenses, the difficulty and expense of integrating the
operations and personnel of the acquired companies, the potential disruption to
the business of the combined company and potential diversion of management's
time and attention, the impairment of relationships with and the possible loss
of key employees and clients as a result of the changes in management, the
occurrence of amortization expenses if an acquisition is accounted for as a
purchase, and dilution to the stockholders of the combined company if the
acquisition is made for stock of the combined company. In addition, products,
technologies or businesses of acquired companies may not be effectively
assimilated into Stilwell's business and product offerings of the combined
company may not have a positive effect on the combined company's revenues or
earnings. The combined company may also incur significant expense to complete
acquisitions and to support the acquired products and businesses. Further, any
such acquisitions may be funded with cash, debt or equity, which could have the
effect of diluting or otherwise adversely affecting the holdings or the rights
of stockholders acquiring Stilwell Common Stock in the Distribution. Finally,
Stilwell may not be successful in identifying attractive acquisition candidates
or completing acquisitions on favorable terms.
ANTITAKEOVER PROVISIONS: PROVISIONS OF STILWELL'S GOVERNING DOCUMENTS, ITS
RIGHTS PLAN AND RESTRICTIONS RELATING TO THE TAX RULING COULD DELAY OR PREVENT A
CHANGE IN CONTROL OF STILWELL, THEREBY ENTRENCHING CURRENT MANAGEMENT AND
POSSIBLY DEPRESSING THE MARKET PRICE OF STILWELL COMMON STOCK
Provisions of Stilwell's Certificate and Bylaws, the Rights Plan and
restrictions relating to the Tax Ruling are antitakeover in nature and may delay
or make more difficult acquisitions or changes in control of Stilwell, thereby
entrenching current management and possibly depressing the market price of
Stilwell Common Stock. For example, Stilwell's Certificate and Bylaws authorize
blank series preferred stock, require a supermajority stockholder vote for
approval of certain types of business combinations, establish a staggered Board
of Directors and impose certain procedural and other requirements for some
corporate actions. Stilwell's Rights Plan could significantly dilute the
interest in Stilwell of persons seeking to acquire control of Stilwell without
prior approval of Stilwell's Board of Directors. Further, income taxes that
could be imposed by the Code as a result of ownership changes of Stilwell made
in conjunction with the Distribution may have the effect of delaying or making
more difficult changes in control of Stilwell. See "Description of Capital
Stock" and "The Distribution-Material Federal Income Tax Consequences."
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STILWELL HAS A SIGNIFICANT NUMBER OF AUTHORIZED BUT UNISSUED SHARES WHICH IF
ISSUED COULD DILUTE THE EQUITY INTERESTS OF EXISTING STILWELL STOCKHOLDERS AND
ADVERSELY AFFECT EARNINGS PER SHARE
If more shares of Stilwell Common Stock are issued following the
Distribution, the equity interests of existing Stilwell stockholders could be
diluted and the earnings per share of Stilwell Common Stock could be adversely
affected. Stilwell is authorized to issue one billion shares of Stilwell Common
Stock. Approximately 222,800,000 shares of Stilwell Common Stock will be
distributed and outstanding after the Distribution. See "Capitalization" and
"Description of Capital Stock." The Board of Directors of Stilwell has full
discretion to issue shares of Stilwell Common Stock at any time in the future,
subject to applicable legal, stock exchange and other regulatory requirements.
VARIOUS FACTORS MAY HINDER THE DECLARATION AND PAYMENT OF DIVIDENDS BY STILWELL
FOLLOWING THE DISTRIBUTION
The payment of dividends by Stilwell is subject to the discretion of its
Board of Directors, and various factors may prevent it from paying dividends.
Such factors include Stilwell's financial position, its capital requirements and
liquidity, the existence of a stock repurchase program, any loan agreement
restrictions, state corporate law requirements, results of operations and such
other factors as Stilwell's Board of Directors may consider relevant. In
addition, as a holding company, Stilwell's ability to pay dividends is dependent
on the dividends and income it receives from its subsidiaries. At the present
time Stilwell's primary source of cash is dividends received from Janus. In
1999, Stilwell received $173.2 million in dividends from Janus. Additionally,
for the year ended December 31, 1999, Janus represented 95% of Stilwell revenues
and 91% of Stilwell net income. The payment of dividends by Janus is subject to
the discretion of its Board of Directors. Although Stilwell has a contractual
obligation to cause such payment, Mr. Bailey has the right to select a majority
of that Board, pursuant to the Janus Board Selection Rights. Such majority of
directors may determine in their discretion that Janus will not pay dividends
for any given year. See "Dividend Policy," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 15 to the
Stilwell consolidated financial statements.
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CONTINUATION OF STRAINED RELATIONS BETWEEN STILWELL AND JANUS MANAGEMENT COULD
HAVE A MATERIAL ADVERSE EFFECT ON STILWELL
Relations between Stilwell and the management of its key subsidiary, Janus,
have been strained recently, primarily as the result of disagreements over the
structure of the Distribution. See "The Distribution-Background and Reasons for
the Distribution." Although not expected, continuation of these strained
relations could result in the loss of key Janus employees and Janus management
which could have a material adverse effect on Stilwell. The portfolio managers
and other key employees of Janus are not subject to any noncompete agreements
that would preclude them from participating in a competing financial services
business, although they are subject to agreements that prohibit them for a
specific period of time following the end of their employment from soliciting
any investment advisory or investment management clients of Janus or hiring or
soliciting employees to leave the employ of Janus. It is also possible that the
publicity surrounding the disagreements between Stilwell and members of the
Janus Minority Group could have an adverse effect on Janus' business and on
Stilwell's ability to attract or retain qualified personnel. See "Risk Factors
- - Stilwell's Inability to Attract and Retain Key Personnel Could Have a Material
Adverse Effect on Its Future Success," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 15 to the Stilwell
consolidated financial statements.
STILWELL MAY BE REQUIRED TO PURCHASE OR SELL JANUS COMMON STOCK
Under mandatory put rights contained in certain agreements, Stilwell may be
required to purchase the interests in Janus owned by certain minority
stockholders. Under the mandatory put rights, KCSI or Stilwell would be required
to purchase the interests of such stockholders at a fair market value purchase
price equal to fifteen times the net after-tax earnings over a specified period,
or in some circumstances as determined by an independent appraisal. The
purchase price will be determined by independent appraisal if the appraisal
process is elected by either the selling stockholder or Stilwell, except that no
appraisal process is applicable to shares held by Mr. Bailey and by one other
stockholder. The period used to calculate net after-tax earnings per share is
the fiscal year ended immediately prior to the date that the put rights are
exercised or the last four complete calendar quarters ended immediately prior to
the date that the put rights are exercised. If Stilwell had been required to
make such purchases based on the value of the stock at a fifteen times multiple
as of March 31, 2000, Stilwell would have been required to pay approximately
$833 million. Under these and other agreements, Stilwell may be required to
purchase the interests in Janus owned by certain minority stockholders upon
certain changes in ownership of KCSI or Stilwell. If Stilwell had been required
to make such purchases based on the value of the stock at a fifteen times
multiple as of March 31, 2000, Stilwell would have been required to pay
approximately $1.14 billion (reduced by the amount paid upon exercise of any
mandatory put rights). As of March 31, 2000, Stilwell had $200 million in
credit facilities available and had cash balances at the Stilwell holding
company level in excess of $147.5 million. The market value of Stilwell's 32%
investment in DST was approximately $1.38 billion using DST's closing price on
the New York Stock Exchange on May 22, 2000. Although Stilwell has no intention
of converting this investment into cash, management believes that, if cash were
needed to fund the purchase of Janus common stock from minority stockholders, it
could liquidate its investment in DST within 120 days and receive approximately
$826 million after taking into account payment of approximately $512 million
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in federal and state income taxes under current statutory rates, underwriting
discounts and commissions estimated at $41 million and payment of associated
transaction costs, estimated at $900,000. To the extent that available credit
facilities, existing cash balances and proceeds from the liquidation of
Stilwell's investment in DST were insufficient to fund its purchase obligations,
Stilwell had access to the capital markets and, with respect to the Janus Stock
Purchase Agreement, had 120 days to raise additional sums. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Minority Purchase Agreements." If such purchases were to include a reduction in
ownership of Janus common stock held by Mr. Bailey, to below 5%, because this
would terminate his Janus Board Selection Rights under the Janus Stock Purchase
Agreement, this might be deemed to constitute a change of control which would
result in an assignment and termination of Janus' investment advisory
agreements. See "Risk Factors-Stilwell's Business is Dependent on Investment
Advisory Agreements Which Are Subject to Termination or Non-Renewal."
Under the Janus Stock Purchase Agreement, upon the occurrence of a Change
in Ownership (as defined below) of Stilwell, Stilwell may be required, at such
holders' option, to sell its stock of Janus to such minority stockholders, or to
purchase such holders' Janus stock. The purchase price in either instance is
equal to fifteen times the net after-tax earnings per share of Janus for the
fiscal year ending immediately after the Change in Ownership, or as otherwise
negotiated between the parties. Under other stock purchase agreements and
restriction agreements with other minority stockholders, upon the occurrence of
a Change in Ownership of KCSI or Stilwell, Stilwell may be required, at such
stockholders' option, to purchase such minority stockholders' Janus stock at a
fair market value purchase price equal to fifteen times the net after-tax
earnings over the period indicated in the relevant agreement, or in some
circumstances as determined by Janus' Stock Option Committee. The period used to
calculate net after-tax earnings per share is the fiscal year ended immediately
prior to the date that the put rights are exercised or the last four complete
calendar quarters ended immediately prior to the date that notice of the Change
in Ownership is given by KCSI or Stilwell. A Change in Ownership of KCSI or
Stilwell is deemed to occur if (i) a person or entity without the prior approval
of KCSI or Stilwell acquires a significant percentage of stock with the intent
to acquire control of KCSI or Stilwell or (ii) upon certain changes in the
composition of KCSI's or Stilwell's Board of Directors. The Janus Stock Purchase
Agreement and its amendments are filed as exhibits to the Registration Statement
on Form 10 to which this Information Statement is an exhibit. The Janus Stock
Purchase Agreement and certain, but not all, of these other agreements have been
assigned to Stilwell, and none of the other agreements have been amended to
change the reference to Change in Ownership from KCSI to Stilwell. However,
pursuant to the Intercompany Agreement, Stilwell is obligated to KCSI in the
same manner that KCSI is obligated under these agreements, and Stilwell has the
right to any benefits and assets received by KCSI under such agreements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Minority Purchase Agreements" and "Financing."
* * *
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THIS INFORMATION STATEMENT IS BEING FURNISHED SOLELY TO PROVIDE INFORMATION
TO KCSI STOCKHOLDERS WHO WILL RECEIVE SHARES OF STILWELL COMMON STOCK IN THE
DISTRIBUTION. IT IS NOT AN INDUCEMENT OR ENCOURAGEMENT TO BUY OR SELL ANY
SECURITIES OF KCSI OR STILWELL. THE INFORMATION CONTAINED IN THIS INFORMATION
STATEMENT IS ACCURATE AS OF THE DATE SET FORTH ON ITS COVER. CHANGES MAY OCCUR
AFTER THAT DATE, AND NEITHER KCSI NOR STILWELL WILL UPDATE THE INFORMATION
EXCEPT IN THE NORMAL COURSE OF THEIR RESPECTIVE REQUIRED PUBLIC DISCLOSURES.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS INFORMATION
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED.
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THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
KCSI was incorporated in 1962 as a holding company for its rail
transportation business. Following its formation, KCSI engaged in a series of
transactions aimed at diversifying beyond the railroad business. KCSI entered
the mutual fund industry in 1963 when it acquired a Chicago-based mutual fund
manager, later named Supervised Investor Services, Inc. ("SIS").
During the late 1960s, mutual funds began to experience difficulty in
securing accurate and timely recordkeeping for their shareowners as the volume
of mutual fund transactions increased. Using computer and data processing
capabilities developed for its railroad business, KCSI in cooperation with SIS
management developed specialized data processing systems and computer software
services and products designed specifically for mutual funds. In 1968, DST
(originally called "DATA-SYS-TANCE") was incorporated by KCSI to own, enhance
and market these systems to the financial services industry. DST's financial
services business eventually expanded to provide information processing and
computer software services and products to mutual funds, investment managers and
other financial services organizations.
KCSI sold SIS in 1970 and subsequently reduced its ownership in DST to 32%.
Through a series of transactions starting in 1984, KCSI acquired what is now an
approximately 81.5% ownership interest in Janus. KCSI further expanded its
mutual fund business when it acquired a minority interest in Berger in 1992, and
later increased that interest to over 80%. In 1998, KCSI acquired an 80%
interest in Nelson.
For the last few years, KCSI management has considered a number of
proposals for separating the financial services and transportation segments.
These proposals included a combination or a public offering of its rail
transportation segment and a spin-off separating the rail transportation and
financial services segments. KCSI management retained investment bankers and
other advisors to examine KCSI's structure and to advise on various aspects of
separating the two businesses. After extensive review and discussion, KCSI's
Board of Directors determined that the Distribution was the best way to
accomplish a separation of the rail transportation and financial services
businesses. On February 3, 1998, KCSI announced that its Board of Directors
intended to pursue a strategic restructuring plan to effect the Distribution
after receipt of a favorable tax ruling from the IRS.
On February 27, 1998, KCSI filed a ruling request with the IRS requesting
that the IRS rule that the Distribution would qualify as a tax-free distribution
under Code Section 355. On April 29, 1998, KCSI's Board of Directors approved
the Distribution, which it indicated it would effect after declaration of the
dividend of Stilwell Common Stock at a later date, receipt of a favorable tax
ruling from the IRS and satisfaction of other conditions.
On July 15, 1998, the stockholders of KCSI approved a reverse stock split
of KCSI Common Stock to be effective after the Record Date and a benefit plan
for Stilwell Financial, Inc. in contemplation of KCSI's completing the
Distribution. No further stockholder vote is required in connection with the
Distribution.
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When KCSI determined that the IRS might not rule favorably on the
Distribution without changes in the planned structure for Stilwell's
subsidiaries and equity investments, the ruling request was withdrawn. A
revised ruling request was submitted to the IRS by letter dated January 26,
1999.
On March 26, 1999, without any prior consultation with KCSI management, the
Janus Minority Group delivered a proposal to the Chief Executive Officer of KCSI
suggesting that KCSI's Board of Directors consider an alternative to the
Distribution. The Janus Minority Group's proposal indicated, that while they
strongly supported the separation of KCSI's financial services operations from
its rail operations, they preferred that an additional, separate spin-off of
Janus be considered. The Janus Minority Group argued that their alternative to
the Distribution would enhance shareholder value, better achieve the business
purposes of the separation and be more advantageous from a tax and accounting
point of view. In response to their suggestion that a meeting be held to
discuss their proposal, a special meeting of KCSI's Board of Directors was held
on June 23, 1999. At that meeting, KCSI's Board of Directors received a
presentation from the Janus Minority Group and their representatives regarding
the details of the alternative proposal.
KCSI's Board of Directors considered and discussed the information
presented by the Janus Minority Group and information provided by Stilwell
management regarding the advantages and disadvantages of the two methods of
achieving the separation. The principal advantages for an additional spin-off of
Janus cited by some members of the Janus Minority Group were that Stilwell's
stock, unlike that of Janus, would trade in the market at a holding company
discount and that a separate Janus spin-off would provide a structure for better
equity incentives to Janus employees. The Board considered the presentation to
them as contradictory on the question of a holding company discount, as some
information suggested Stilwell would not be perceived as a holding company
because of the large proportion of its revenues being derived from Janus. In
addition, the Board determined that there was sufficient Janus stock available
from Stilwell and from Mr. Bailey to meet Janus' reasonable needs for equity
incentives for several years. Moreover, the Board believed that going forward
with the spin-off of Stilwell would not preclude later consideration of a spin-
off or other restructuring of Janus if that were to be found to be appropriate.
Therefore, in the absence of any compelling reason to change direction and
experience further delay in the long planned separation of KCSI's principal
business segments, KCSI's Board of Directors decided that the Distribution
should go forward on the basis originally contemplated and as set forth herein.
In arriving at this decision, KCSI's Board of Directors took into consideration
a number of factors, including that: (i) a favorable tax ruling on the
Distribution had been received from the Internal Revenue Service, (ii) the
presentation by the Janus Minority Group was not persuasive, in the Board's
view, as to the advantages of the alternative proposal as compared to the
Distribution, (iii) an estimated minimum of six to nine months would be required
to obtain a favorable tax ruling, and there was a lack of certainty that a
favorable ruling could be obtained at all, with respect to the alternative
proposal, and (iv) the Distribution was more consistent with the strategic
direction of Stilwell.
The determination by KCSI's Board that there was sufficient Janus stock
available from Stilwell and Mr. Bailey to meet Janus' reasonable needs for
equity incentives for several years was based on an understanding reached
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between KCSI and Mr. Bailey on December 14, 1998 for KCSI to sell approximately
100,000 shares of Janus stock and for Mr. Bailey to sell approximately 50,000
shares of Janus stock to Janus. Prior to that date, Mr. Bailey and Mr. James P.
Craig, III stated that 300,000 shares would meet the needs of Janus for equity
incentives for a period of five to ten years and Mr. Bailey proposed that KCSI
sell 200,000 and that he sell 100,000, of the shares needed. The understanding
between KCSI and Mr. Bailey for a sale of approximately 150,000 shares was never
consummated; however, as part of an effort to assure that additional shares of
Janus stock would be available for equity incentives for Janus employees and to
resolve differences with the Janus Minority Group, on November 19, 1999 Stilwell
agreed to sell to Janus 192,408 shares of Janus common stock to be used to
provide equity incentives.
The Janus Fund Trustees (William D. Stewart, Gary O. Loo, Dennis B. Mullen,
Martin H. Waldinger and James T. Rothe) expressed support on March 26, 1999 for
the proposal of the Janus Minority Group, indicating that, based on their
discussions with members of that group, the Trustees believed the proposal would
provide superior equity ownership opportunities for key Janus employees and
could help assure continuity of management for the Janus Funds. Stilwell
management assured the Trustees of their support for equity incentive
arrangements for key Janus personnel, but believed these incentives could be
achieved without a separate spin-off of Janus. The Trustees have continued to
express their support for equity incentive arrangements for the key Janus
personnel, but have indicated that they intend to remain neutral with respect to
the particular proposals of Janus and Stilwell and other disagreements between
Stilwell and the Janus Minority Group. The Trustees have strongly encouraged
the parties to resolve their disagreements as soon as possible so that they
would not be a distraction to the management of the Janus Funds.
KCSI's support for employee equity incentives at Janus started in 1984 when
KCSI demonstrated its willingness to acquire a majority interest in Janus and
leave key employees, specifically Mr. Bailey and Mr. Jack R. Thompson, as
shareholders. KCSI fully supported share ownership by a broader group of Janus
employees in January, 1995, when KCSI waived the right to purchase 526,819
shares sold by Mr. Bailey to 14 other employees of Janus and to Janus. Since
January, 1995, KCSI has given waivers or otherwise completed transactions on
eight occasions for the sale of a total of 256,700 additional shares either to
other employees of Janus or to Janus for use as equity incentives. As a
director of Janus, Mr. Landon H. Rowland (KCSI's Chairman, President and Chief
Executive Officer) has consistently voted in favor of equity incentive programs
for Janus employees involving the sale or grant of Janus shares, or the grant of
options to purchase Janus shares. In addition, as described above, Stilwell
sold to Janus 192,408 shares of Janus common stock to be used for equity
incentives for employees. At the same time, Stilwell and KCSI agreed to waive
all rights of first refusal, options to purchase and other rights to purchase
shares of Janus common stock contained in various agreements with minority
stockholders, subject to certain conditions set forth in the waiver, in order
that such shares could be purchased by Janus and available for equity
incentives.
Press reports have appeared in which certain Janus employees have expressed
objections to the Distribution and other disagreements with Stilwell's structure
and direction. Representatives of Stilwell and of the Janus Minority Group have
met and held discussions regarding resolution of these disagreements and while
not all disagreements have been resolved, agreements have been made under which
Stilwell sold to Janus 192,408 shares of
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Janus common stock to be used to provide long-term incentives to Janus
personnel. In return, Janus agreed not to grant phantom stock, stock
appreciation rights, or similar rights, for so long as Janus common stock is
available for use under its Long-Term Incentive Plan. The availability of Janus
common stock for this purpose will depend upon the number of such shares granted
or sold from time to time by Janus and upon the number acquired from holders by
voluntary sale or upon the death, retirement or termination of employment of
employees of Janus. In first quarter 2000, Janus made an annual grant to Janus
employees of 35,670 shares of Janus common stock, but the number of shares
awarded in future years may be more or less than that amount. KCSI and Stilwell
have also agreed to waive certain rights of first refusal and options to
purchase other outstanding shares of Janus common stock so that such shares may
be available for awards under Janus' Long-Term Incentive Plan. Finally, KCSI,
Stilwell and Janus have agreed to increase an intercompany credit line available
to Janus and to the assignment to Stilwell of the Janus Stock Purchase
Agreement.
The Distribution is intended to accomplish several purposes. First, it is
intended to separate the financial services business of Stilwell from the rail
transportation business of KCSI, each such business having its own distinct
financial, investment and operating characteristics, so that each can focus on
adopting strategies and pursuing objectives more appropriate to its specific
business than is possible with Stilwell's businesses consolidated with those of
KCSI.
In addition, KCSI's Board of Directors believes that the Distribution will
better enable management of each business segment to focus attention and
financial resources on the development and management of growth in each of their
respective core businesses, without regard to the corporate objectives,
policies, challenges and investment criteria of the other.
KCSI's two segments have different dynamics and business cycles, serve
different marketplaces and customer bases, are subject to different competitive
forces and regulations, have different organizational structures and management
styles and must be managed with different long-term and short-term strategies
and goals. KCSI management believes that separating the two businesses into
independent companies, each with its own management team and board of directors,
is necessary to address management and competitive issues and considerations
that result from operating these diverse businesses under a single holding
company structure. Separating the two segments also will help resolve
differences between them over utilization of KCSI's resources, available capital
and capitalization.
Further, KCSI's rail transportation business is subject to risks of
environmental liabilities and catastrophe, collision or property loss and
currency fluctuations and other risks of conducting business outside the United
States while its financial services business is subject to risks arising from
market volatility, exposure to derivatives and hedges and other regulatory and
operating conditions specific to the financial services industry. Separating
the two businesses is intended to eliminate the exposure of each to liabilities
arising from operations of the other.
Finally, as separate companies, KCSI and Stilwell will be able to issue
their own respective securities to develop more focused stock-based compensation
programs keyed more directly to their respective earnings and performance. The
Board of Directors of KCSI believes that such programs should
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enhance KCSI's and Stilwell's ability to attract, motivate and retain key
employees for the further development and growth of the rail transportation
business and financial services business, respectively. Stilwell and KCSI will
each also have greater ability to effect acquisitions or strategic relationships
by issuing their own respective securities.
MANNER OF EFFECTING THE DISTRIBUTION
Prior to the Distribution, Stilwell will issue additional shares of
Stilwell Common Stock to KCSI pursuant to a stock split effected in the form of
a dividend to provide a sufficient number of shares for the Distribution. KCSI
will effect the Distribution on the Distribution Date by delivering all of the
outstanding shares of Stilwell Common Stock to the Distribution Agent for
distribution to the stockholders of record of KCSI Common Stock on the Record
Date. The Distribution will be made on the basis of two shares of Stilwell
Common Stock for every one share of KCSI Common Stock held on the Record Date.
This ratio was established because of the large contribution of Stilwell to the
earnings of KCSI. Given this factor, it was believed that the distribution ratio
should be more than 1 to 1 and that fractional shares should be avoided. Using
more shares than 2 for 1 might have had the effect of causing Stilwell Common
Stock to have a market price that would be too low on a per share basis in the
Board's view. The 2 for 1 distribution ratio was established in an attempt to
have Stilwell Common Stock trade at an initial trading range that was slightly
less than half of the trading price of KCSI Common Stock immediately prior to
the Distribution. Based on Stilwell's contribution to the net income of KCSI,
Stilwell expects that the two shares of its common stock to be distributed for
each one share of KCSI common stock may together trade initially in a range
reflecting 90% to 95% of the market price of KCSI common stock at the time of
the Distribution. The closing price on the New York Stock Exchange of KCSI
common stock on May __, 2000, was $___________. If the Distribution had occurred
on that date, on this basis Stilwell common stock could have been expected to
trade in a range of $________ to $_________ per share. However, this estimate
does not take into account other factors which influence the market price of
securities, including disaggregation values and other factors that may not be
related to Stilwell's net income. Neither KCSI nor Stilwell can predict the
prices at which their securities may trade as a result of the Distribution. See
"Risk Factors--There Has Been No Prior Market for Stilwell Common Stock and it
is Impossible to Predict the Prices at Which Those Securities Might Trade." The
shares of Stilwell Common Stock to be distributed will constitute all of the
outstanding shares of Stilwell Common Stock on the Distribution Date. The shares
of Stilwell Common Stock will be fully paid and non-assessable and the holders
thereof will not be entitled to preemptive rights. See "Description of Capital
Stock-Common Stock." The shares of Stilwell Common Stock will also be
distributed with certain attached preferred stock purchase rights. See
"Description of Capital Stock-Stockholders' Rights Plan." Certificates
representing shares of Stilwell Common Stock are expected to be mailed by the
Distribution Agent to KCSI stockholders on the Mailing Date.
No holder of KCSI Common Stock will be required to pay any consideration
for the shares of Stilwell Common Stock to be received by them in the
Distribution, to surrender or exchange any shares of KCSI Common Stock, or to
take any other action in order to receive the shares of Stilwell Common Stock to
which they are entitled in the Distribution. No fractional shares of Stilwell
Common Stock will be distributed in the Distribution.
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RESULTS OF THE DISTRIBUTION
Stilwell will be a separate, independent company after the Distribution.
Based on the number of shares of KCSI Common Stock outstanding as of March 31,
2000 and the number of stockholders as of March 31, 2000, approximately
222,800,000 shares of Stilwell Common Stock will be distributed to approximately
6,000 KCSI stockholders in the Distribution on a pro-rata basis (including the
holders of KCSI Common Stock through accounts in the KCSI ESOP, the Stilwell
ESOP, the DST ESOP and the KCSI Profit Sharing Plan). The total number of
shares of Stilwell Common Stock that will be distributed will be determined as
of the Record Date. The Distribution will not affect the number of outstanding
shares of KCSI Common Stock.
DIFFERENCES IN RIGHTS OF STOCKHOLDERS ARISING FROM DIFFERENCES BETWEEN THE
CERTIFICATES AND BYLAWS OF STILWELL AND KCSI
Following the Distribution, the rights of Stilwell's stockholders will be
governed by Stilwell's Certificate and Bylaws, which contain differences from
the certificate of incorporation and bylaws of KCSI, including the following:
Stilwell's Certificate provides that the holders of Stilwell voting stock
are not able to cumulate votes for the election of directors, whereas, pursuant
to the KCSI Certificate, holders of KCSI voting stock are entitled, in general,
to cumulate votes for the election of directors.
Stilwell's Certificate requires a supermajority vote of at least 70% of the
then-outstanding shares of capital stock of Stilwell entitled to vote generally
in the election of directors (the "Voting Stock") to approve certain
transactions with a person or entity (or affiliate thereof) holding more than
20% of the Voting Stock, including, but not limited to, a merger, consolidation,
disposition of Stilwell's assets, or adoption of a plan of liquidation ("Certain
Transactions"). Stilwell's Certificate also requires a supermajority vote of at
least 70% of the Voting Stock to approve an amendment to the Stilwell
Certificate provisions relating to, (a) the directors' ability to set the number
of directors within a prescribed range and to fill vacancies on Stilwell's Board
of Directors, (b) the existence of a staggered board, (c) the removal of
directors, (d) calling meetings of Stilwell's stockholders, (e) prohibiting
stockholder action by written consent in lieu of a meeting and (f) the amendment
of Stilwell's Certificate. Additionally, on and after the date on which a
person or entity (or affiliate thereof) becomes the holder of more than 20% of
Stilwell's Voting Stock, Stilwell's Certificate requires a supermajority vote of
at least 70% of Stilwell's Voting Stock to approve (i) an amendment to the
Stilwell Bylaws by stockholder action, (ii) the removal of a director for cause,
(iii) an amendment to certain definitions contained in Stilwell's Certificate,
or (iv) an amendment to provisions of the Stilwell Certificate relating to (a)
the number, powers and preferences of Stilwell Common Stock and Stilwell
Preferred Stock, (b) stockholder nominations of directors and business to be
brought by stockholders, (c) amending the Stilwell Bylaws, (d) approving Certain
Transactions with a person or entity (or affiliate thereof) holding more than
20% of the Voting Stock, (e) factors to be considered in evaluating offers
relating to tender offers, mergers, or the purchase or acquisition of all or
substantially all of the properties and assets of Stilwell, (f) indemnification
of officers, directors and others and (g) liability of directors. KCSI's
certificate of incorporation requires a supermajority vote of at least 70% of
the KCSI voting stock to approve (i) a merger or
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consolidation with, or disposition of KCSI's assets to, a person or entity (or
affiliate thereof) holding more than 5% of KCSI's outstanding voting stock, and
(ii) an amendment to the KCSI certificate of incorporation increasing the number
of directors above 18, abolishing cumulative voting for directors, abolishing
the division of the board into three classes, or (iii) to amend the super
majority voting requirement for approval of a merger, consolidation or
disposition of assets of KCSI.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In July, 1999, KCSI received the Tax Ruling which states that for United
States federal income tax purposes, no gain or loss will be recognized by KCSI
from the Distribution or by the holders of KCSI Common Stock upon receipt of the
Stilwell Common Stock in the Distribution. The Tax Ruling is based upon the
accuracy of factual representations and assumptions provided by KCSI.
Additionally, KCSI received a supplementary tax ruling from the IRS which states
that the assumption of $125 million of KCSI debt by Stilwell would have no
effect on the Tax Ruling. Assuming the accuracy of the factual representations
and assumptions provided by KCSI in connection with the Tax Ruling request,
neither KCSI nor the holders of KCSI Common Stock will have to recognize taxable
gain or loss as a result of the Distribution. The following discussion
describes the material United States federal income tax consequences if the
transaction qualifies as a tax-free transaction. It further discusses the
material United States federal income tax consequences if the Distribution were
not to qualify as a tax-free transaction. See "Risk Factors-The Intercompany
Agreement and the Tax Disaffiliation Agreement Contain Indemnification
Obligations of KCSI and Stilwell that KCSI or Stilwell May Not be Able to
Satisfy, Which Could Have a Material Adverse Effect on KCSI or Stilwell."
Finally, the discussion describes the material United States federal tax
consequences of certain ownership changes of KCSI or Stilwell after the
Distribution. The discussion is based on the Code, United States Treasury
regulations promulgated thereunder, and judicial and administrative
interpretations thereof, all as in effect on the date hereof, and is subject to
any changes in these or other laws occurring after such date. The discussion
generally does not address the effects of any state, local or foreign tax laws.
In addition, the discussion set forth below may not be applicable to certain
KCSI stockholders who, among other limitations, received their shares of KCSI
Common Stock as compensation, who are not citizens or residents of the United
States or who are otherwise subject to special treatment under the Code.
CONSEQUENCES OF QUALIFICATION AS A TAX-FREE DISTRIBUTION. Subject to
certain special circumstances that may apply to certain KCSI stockholders, the
Distribution will have the following federal income tax consequences if treated
as non-taxable under Code Section 355:
(1) A KCSI stockholder will not recognize gain or loss, and no
amount will be included in the income of a KCSI stockholder upon the receipt
of Stilwell Common Stock by such stockholder as a result of the Distribution.
(2) A KCSI stockholder's tax basis in the KCSI Common Stock with
respect to which Stilwell Common Stock is received will be apportioned between
such stockholder's KCSI Common Stock and the shares of Stilwell Common Stock
received by such stockholder in proportion to the relative fair market values
of such stockholder's KCSI Common Stock and Stilwell Common Stock.
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<PAGE>
(3) A KCSI stockholder's holding period for Stilwell Common Stock
received in the Distribution will include the period during which such
stockholder held the KCSI Common Stock with respect to which the Stilwell
Common Stock is distributed, provided that such KCSI Common Stock is held as a
capital asset by such holder on the Distribution Date.
Current United States Treasury regulations require that each KCSI
stockholder who receives shares of Stilwell Common Stock pursuant to the
Distribution attach a statement to such stockholder's federal income tax return
for the taxable year in which the Distribution occurs, providing certain
information with respect to the applicability of Code Section 355 to the
Distribution. KCSI has agreed that it will provide each KCSI stockholder as of
the Record Date information necessary to comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. If the
Distribution ultimately were determined not to qualify as a tax-free transaction
pursuant to Code Section 355, the following federal income tax consequences
would result:
(1) Each KCSI stockholder would be considered to have received a
distribution in an amount equal to the fair market value, when distributed, of
the shares of Stilwell Common Stock received by such stockholder. Such a
distribution would be taxed as a dividend to such stockholder to the extent of
KCSI's current and accumulated earnings and profits for federal income tax
purposes (which current earnings and profits, if any, would be increased by
any gain recognized by KCSI as a result of the Distribution (as discussed
below)). To the extent that the aggregate fair market value of the shares of
Stilwell Common Stock distributed exceeded such earnings and profits, such
excess would be treated first as a non-taxable reduction in the tax basis of a
stockholder's KCSI Common Stock to the extent of such tax basis, and
thereafter as short-term or long-term capital gain, provided the KCSI Common
Stock were held by the stockholder as a capital asset.
(2) A KCSI stockholder's tax basis in the shares of Stilwell Common
Stock received in the Distribution would equal the fair market value of the
Stilwell Common Stock on the Distribution Date, and the stockholder's holding
period for the shares of Stilwell Common Stock would begin on such date. In
such event, a KCSI stockholder's tax basis in such stockholder's KCSI Common
Stock would not be affected by the Distribution, unless, as described above,
the amount of the Distribution were to exceed the current and accumulated
earnings and profits of KCSI and were treated as a non-taxable reduction in
tax basis. Upon a subsequent sale of the shares of Stilwell Common Stock, a
stockholder would recognize gain or loss measured by the difference between
the amount realized on such sale and the stockholder's tax basis in the shares
of Stilwell Common Stock sold.
(3) KCSI would recognize gain in an amount equal to the difference
between the fair market value of the shares of Stilwell Common Stock
distributed and KCSI's basis in the shares of Stilwell Common Stock.
CONSEQUENCES OF CERTAIN OWNERSHIP CHANGES AFTER THE DISTRIBUTION. Code
Section 355 would require KCSI to recognize gain for federal income tax purposes
as of the Distribution Date equal to the difference between the fair market
value and adjusted basis of the Stilwell Common Stock if 50 percent or more of
the total combined interests (by vote or value) of KCSI or Stilwell were
acquired, directly or indirectly, subsequent to the Distribution (or up to
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two years before the Distribution) in an acquisition which is part of a plan
that included the Distribution (which would be presumed if such an acquisition
were within two years of the Distribution). Under the Tax Disaffiliation
Agreement, Stilwell is required to indemnify KCSI for any taxes resulting from
any changes in ownership of Stilwell. See "Relationship Between KCSI and
Stilwell After the Distribution-Tax Disaffiliation Agreement."
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE MAY NOT BE
APPLICABLE TO STOCKHOLDERS WHO RECEIVED THEIR SHARES OF KCSI COMMON STOCK
THROUGH THE EXERCISE OF AN OPTION OR OTHERWISE AS COMPENSATION, WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO
SPECIAL TREATMENT UNDER THE CODE. ALL STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
TRADING OF STILWELL COMMON STOCK
There has been no established trading market for the Stilwell Common Stock.
A "when-issued" trading market in the Stilwell Common Stock is expected to
develop near the Record Date. The term "when-issued" means trading in shares
prior to the time certificates are actually available or issued. None of these
trades, however, can be finally settled until after the Distribution Date, when
regular trading in the Stilwell Common Stock has begun. If the Distribution
does not occur, all when-issued trading will be null and void. Prices at which
shares of the Stilwell Common Stock may trade, on a when-issued basis or after
the Distribution, cannot be predicted. Until the Stilwell Common Stock is fully
distributed and an orderly trading market develops, the prices at which trading
in such stock occurs may fluctuate significantly. In addition, an active
trading market in Stilwell Common Stock may not develop or be sustained in the
future. [Stilwell has received approval, subject to official notice of
issuance, to have the Stilwell Common Stock listed on the New York Stock
Exchange under the symbol "SV."] In the event trading does occur, the prices at
which shares of Stilwell Common Stock trade will be determined by the
marketplace and may be influenced by many factors, including, among others,
Stilwell's performance and prospects, the depth and liquidity of the market for
Stilwell Common Stock, investor perception of Stilwell and its businesses and
the industry in which Stilwell operates, Stilwell's dividend policy, general
financial and other market conditions, domestic and international economic
conditions and the impact of factors referred to in "Risk Factors." In
addition, the stock market has experienced price and volume fluctuations that
have affected the market price of many stocks and that, at times, could be
viewed as unrelated or disproportionate to the operating performance of such
companies. Such volatility and other factors may have a material adverse effect
on the market price for shares of Stilwell Common Stock. See "Risk Factors-
There Has Been No Prior Market for Stilwell Common Stock and it is Impossible to
Predict the Prices at Which Those Securities Might Trade."
As a result of the Distribution, absent other action, the trading prices of
KCSI Common Stock are expected to be significantly lower than the trading prices
of KCSI Common Stock immediately prior to the Distribution. In an attempt to
address the effect of the Distribution on KCSI Common Stock's trading price on
the New York Stock Exchange and in contemplation of the Distribution, KCSI's
Board of Directors received stockholder approval to effect, after the Record
Date, a reverse stock split, whereby every two shares of KCSI Common Stock then
outstanding will be combined into one share of KCSI
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<PAGE>
Common Stock. The primary objective of the reverse stock split is to attempt to
move the trading price of KCSI common stock back into a higher trading range
since lower-priced stocks may be unattractive to some investors. No further
stockholder approval is required for the Distribution. Nevertheless, even after
such reverse stock split, the combined trading prices of KCSI Common Stock and
Stilwell Common Stock after the Distribution may be less than, equal to, or
greater than, the trading price of KCSI Common Stock immediately prior to the
Distribution. Such prices may also be affected by certain provisions of
Stilwell's Certificate and Bylaws, certain agreements, the Rights Plan, the Code
and the DGCL, all of which may have an antitakeover effect. See "Risk Factors-
The Combined Post-Distribution Market Value of KCSI Common Stock and Stilwell
Common Stock May Not Equal or Exceed the Pre-Distribution Market Value of KCSI
Common Stock," "Risk Factors-Antitakeover Provisions: Provisions of Stilwell's
Governing Documents, its Rights Plan and Restrictions Relating to the Tax Ruling
Could Delay or Prevent a Change in Control of Stilwell, Thereby Entrenching
Current Management and Possibly Depressing the Market Price of Stilwell Common
Stock," and "Description of Capital Stock."
Shares of Stilwell Common Stock distributed to KCSI stockholders will be
freely transferable, except for shares received by persons who may be deemed to
be "affiliates" of Stilwell under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of Stilwell after
the Distribution will generally include individuals or entities that control,
are controlled by, or are under common control with Stilwell and may include
certain officers and directors of Stilwell as well as principal stockholders of
Stilwell. Persons who are affiliates of Stilwell will be permitted to sell
their shares of Stilwell Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions afforded by Section
4(2) of the Securities Act and Rule 144 thereunder.
MODIFICATION OR ABANDONMENT OF THE DISTRIBUTION
The Distribution may be amended, modified or abandoned at any time prior to
the Record Date by, and in the sole discretion of, KCSI's Board of Directors.
SOLVENCY AND SURPLUS OPINION OF FINANCIAL ADVISOR
KCSI has engaged Duff & Phelps, LLC ("Duff & Phelps") as its financial
advisor in connection with the Distribution. Duff & Phelps is a nationally
recognized financial advisory firm active in the valuation of businesses and
securities and in rendering advisory services in connection with a variety of
corporate and securities matters. Duff and Phelps was retained, based on its
qualifications, expertise and reputation in providing such financial advice to
companies, by KCSI to provide certain opinions to KCSI's Board of Directors as
to the solvency and capitalization of KCSI following the Distribution.
Specifically, KCSI has requested Duff & Phelps to render opinions to KCSI's
Board of Directors that after effecting the Distribution (i) the fair salable
value of KCSI's assets exceeds the stated value of KCSI's liabilities (including
contingent liabilities); (ii) KCSI will not have an unreasonably small amount of
capital for the operation of the businesses in which it is engaged; (iii) KCSI
will be able to pay its stated liabilities (including contingent liabilities) as
they mature; and (iv) the fair salable value of KCSI's assets exceeds the stated
value of KCSI's liabilities (including all contingent liabilities) by an amount
greater than the sum of the aggregate par
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value of its issued capital stock and all amounts allocated to capital by KCSI's
Board of Directors. Duff & Phelps and its affiliates have not provided any
financial advisory services to KCSI during the past two years, but Duff & Phelps
has been engaged to provide valuation services to Stilwell in connection with
Stilwell's stockholders' rights plan. Duff & Phelps has reported that it does
not own beneficially and has never owned beneficially any interest in KCSI.
There were no limitations placed by KCSI on Duff & Phelps in conducting its
analysis or in issuing its opinion. Duff & Phelps' qualitative analysis was
based on discussions with senior management concerning the history, current
operations and future outlook of the remaining business of KCSI after the
Distribution - the rail transportation segment of KCSI - which primarily
includes The Kansas City Southern Railway Company ("KCSR"). Duff & Phelps also
toured representative operating facilities. The financial analysis was based on
historical financial statements for the rail transportation segment to the
extent available, as well as internal operating documents, including financial
projections. Duff & Phelps also reviewed documents relating to the
Distribution. Industry information and data on comparable companies used as
background for the analysis was obtained from regularly published sources.
The financial projections used by Duff & Phelps in their analysis were
prepared by and are the responsibility of the management of KCSI and KCSR, and
not the management of Stilwell. Those projections and the prospective financial
information set forth in the following tables are based upon estimates and
assumptions that, while presented with numerical specificity and considered
reasonable by KCSI and KCSR, are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond the control of KCSI and KCSR. Actual results will vary from those used
and set forth in the tables, and those variations may be material.
PricewaterhouseCoopers has neither examined nor compiled the accompanying
prospective financial information nor the financial projections from which it
was derived and, accordingly, does not express an opinion or any other form of
assurance with respect thereto. The PricewaterhouseCoopers report included in
this Information Statement relates only to Stilwell's historical financial
information and does not extend to any prospective financial information.
The following is a summary of the various analyses performed by Duff &
Phelps in arriving at the conclusions set forth in the opinion.
DISCOUNTED CASH FLOW ANALYSIS. Duff & Phelps reviewed KCSI's financial
performance data and other information to conduct a discounted cash flow
analysis. In performing this analysis, Duff & Phelps examined the projected cash
available to invest in the business and to service debt. In addition, discount
rates were determined using a combination of theoretical models. Following is
the financial ratio analysis produced by the discounted cash flow analysis.
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- -----------------------------------------------------------------------------
YEAR
Ratio 2000 2001 2002 2003 2004
- -----------------------------------------------------------------------------
EBITDA/Interest Expense 2.55x 2.64x 2.79x 3.12x 3.53x
Funded Debt/EBITDA 4.38x 3.92x 3.51x 3.11x 2.71x
EBITDA/Interest Expense 2.2x 0.6x 1.7x 1.8x 2.1x
+ Current Maturities
Funded Debt/Total Capital 53.7% 51.2% 47.9% 43.9% 39.3%
- -----------------------------------------------------------------------------
EBITDA = Earnings before interest, taxes, depreciation and amortization
ANALYSIS OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. Duff & Phelps
compared certain financial and operating information and projected financial
performance data of KCSI with similar information and data of six publicly
traded railroad companies that Duff & Phelps deemed comparable to KCSI in terms
of qualitative and quantitative factors. No single company utilized in the
analysis of the railroad companies is identical to KCSI. Following is the list
of the comparable companies used in the analysis of KCSI.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Market Cap.(1) LTM Revenues LTM Revenue LTM EBITDA
Company (millions) (millions) Growth Margin,
Adj.(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Burlington Northern
Santa Fe Corp. $15,823 $ 8,983 1.7% 40.0%
Canadian National
Railway (3) 7,925 3,499 29.8 NA
CSX Corporation 13,143 10,574 4.6 27.0
Norfolk Southern
Corp. 15,686 4,752 11.7 36.4
Union Pacific Corp. 20,667 11,090 -0.4 35.0
Wisconsin Central
Transportation Corp. 980 358 5.0 41.0
KCSI NA $ 601 -2.9% 31.9%
(Transportation Segment)
- --------------------------------------------------------------------------------------------
</TABLE>
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LTM = latest twelve months as of September 30, 1999
EBITDA = earnings before interest, taxes, depreciation and amortization
(1) Market capitalization as of January 4, 2000
(2) Adds back rent expense related to operating leases
(3) Canadian National's LTM revenue is proforma to account for June 1999
acquisition of Illinois Central
Duff & Phelps compared each company's enterprise value (equity value plus
the value of debt and preferred stock, less cash) to EBITDA and revenues.
Following are the key valuation multiples of the comparable railroad companies.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Enterprise Value as a Multiple of Adj. Ent. Val./
Company LTM Projected LTM Adj. LTM
EBITDA EBITDA Revenues EBITDA(1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Burlington Northern
Santa Fe Corp. 5.1x 4.8x 1.8x 6.0x
Canadian National
Railway (2) 6.1 5.3 2.3 NA
CSX Corporation 7.3 6.2 1.2 8.8
Norfolk Southern
Corp. 9.7 9.7 3.3 9.8
Union Pacific Corp. 6.5 5.5 1.9 7.3
Wisconsin Central 8.4 6.8 2.7 9.0
Transportation Corp.
Median 6.9x 5.8x 2.1x 8.8x
- ------------------------------------------------------------------------------------
</TABLE>
LTM = latest twelve months as of September 30, 1999
EBITDA = earnings before interest, taxes, depreciation and amortization
(1) Operating lease rent expense added back to EBITDA; debt grossed up
by capitalizing operating lease expense
(2) Financial performance for Canadian National is proforma to account
for June 1999 acquisition of Illinois Central
ANALYSIS OF INDUSTRY TRANSACTIONS. Duff & Phelps compared transactions
involving railroad companies that Duff & Phelps deemed comparable in terms of
qualitative and quantitative factors. Duff & Phelps noted that the most recent
announced transaction in the railroad industry, involving the proposed merger of
Burlington Northern Santa Fe Corp. and Canadian National Railway, did not
include a control premium.
Duff & Phelps used and relied on the information provided by and on behalf
of KCSI without independent verification thereof by Duff & Phelps. Duff &
Phelps assumed no responsibility for the accuracy or completeness of any
information provided by or on behalf of KCSI or any other information regarding
KCSI or the Distribution provided or otherwise made available to Duff & Phelps.
Duff & Phelps used generally accepted valuation and analytical techniques as the
basis for its opinions.
-48-
<PAGE>
Duff & Phelps delivered such opinion on January 10, 2000, a copy of which
is included as an exhibit to the Registration Statement on Form 10 of which this
Information Statement is a part. Duff & Phelps received customary fees,
including reimbursement of certain out-of-pocket expenses, for its services as a
financial advisor related to the Distribution. KCSI has agreed to indemnify Duff
& Phelps against certain liabilities and expenses in connection with its
services as a financial advisor.
-49-
<PAGE>
RELATIONSHIP BETWEEN KCSI AND STILWELL
AFTER THE DISTRIBUTION
For the purpose of governing certain of the limited ongoing relationships
between KCSI and Stilwell during a transitional period after the Distribution
and providing for an orderly transition of Stilwell to a separate company, KCSI
and Stilwell have entered into various agreements and relationships, including
those described in this section regarding certain transition services,
indemnification, tax matters and other matters relating to the Distribution.
INTERCOMPANY AGREEMENT
KCSI and Stilwell have entered into an Intercompany Agreement which
generally provides for a number of matters relating to the Distribution and
certain other matters involving a limited ongoing relationship between KCSI and
Stilwell during a transitional period, including certain indemnification rights,
insurance matters, access to records and information and certain transitional
support services.
Under the Intercompany Agreement, each of the parties has agreed to
indemnify the other against certain claims relating to or arising out of their
respective businesses before and after the Distribution and to have joint
responsibility for obligations, if any, of KCSI which relate neither to Stilwell
nor KCSI's respective businesses (unless KCSI and Stilwell otherwise agree).
The Intercompany Agreement provides that Stilwell is obligated to KCSI with
respect to all of KCSI's agreements relating to the financial services segment
that were not assigned to Stilwell in the same manner that KCSI is obligated
under such agreements, and Stilwell has the right to any benefits and assets
received by KCSI under such agreements. The Intercompany Agreement also
provides for the continuation of KCSI's medical, dental, vision, life insurance
and long-term disability insurance coverage for Stilwell-related individuals who
retire through December 31, 1999. The Intercompany Agreement also grants
Stilwell access to historical financial and accounting information regarding
Stilwell. In addition, KCSI and Stilwell will provide each other with access to
business records, materials and personnel for appropriate purposes and agreed to
certain document retention arrangements. Pursuant to the Intercompany
Agreement, after December 31, 1999, Stilwell may request from KCSI data tapes of
historical financial and accounting records and information applicable to
Stilwell. The cost associated with the services to be provided by KCSI will be
a fixed dollar amount or percentage based on the estimated cost to KCSI of
providing such services. All such transitional and ongoing relationships will
be on an arm's-length basis. Stilwell believes that the amounts to be paid to
KCSI for services will not exceed the amounts that would have to be paid if such
services were provided by third parties. Finally, the Intercompany Agreement
outlines mediation and arbitration procedures to resolve any disputes between
the parties relating to the subjects included in the agreements between KCSI and
Stilwell.
TAX DISAFFILIATION AGREEMENT
KCSI and Stilwell have entered into a Tax Disaffiliation Agreement which
provides for their respective obligations concerning various tax liabilities and
the procedures for preparing and filing consolidated and combined tax returns
for the periods prior to and including the Distribution Date. The Tax
Disaffiliation Agreement further provides that KCSI will indemnify and hold
-50-
<PAGE>
harmless Stilwell with respect to all federal, state, local and foreign income,
franchise and similar taxes ("Taxes") attributable to the income, operations or
assets of the transportation division of KCSI for any taxable period, whether
arising before or after the Distribution Date. It also provides that Stilwell
will indemnify and hold harmless KCSI with respect to all Taxes attributable to
the income, operations or assets of Stilwell for any taxable period, whether
arising before or after the Distribution Date. The Tax Disaffiliation Agreement
also provides for payments between the two companies for tax adjustments,
carrybacks and refunds. Further, the Tax Disaffiliation Agreement provides for
cooperation with respect to certain tax matters, including the preparation of
income tax returns, the exchange of information, the handling of tax audits and
other proceedings and the retention of records which may affect the income tax
liability of either party.
Additionally, KCSI and Stilwell each agree not to take any action which
would cause the Distribution to fail to qualify as a tax-free distribution under
Code Section 355 unless required to do so by law. KCSI and Stilwell have agreed
to indemnify each other with respect to any tax liability resulting from their
respective failures to comply with such provisions. KCSI and Stilwell have also
agreed to indemnify each other if either should cause the Distribution to fail
to qualify as a tax-free spin-off under Code Section 355 because of a change of
ownership of their respective companies. See "Risk Factors--The Intercompany
Agreement and the Tax Disaffiliation Agreement Contain Indemnification
Obligations of KCSI and Stilwell that KCSI and Stilwell May Not be Able to
Satisfy, Which Could Have a Material Adverse Effect on KCSI or Stilwell."
EMPLOYEE BENEFITS
Pursuant to the Intercompany Agreement, Stilwell will retain or assume, as
the case may be, sole responsibility as employer for all employees of KCSI
designated to become Stilwell employees, and will use reasonable efforts to
cause any employee of Stilwell who is then a party to any employment, change in
control or other employment-related agreement (other than any stock option
agreements) with KCSI to terminate such agreement or agreements not later than
the Distribution Date.
KCSI provides benefits to its employees under the KCSI Profit Sharing Plan
and Trust Agreement (the "KCSI Profit Sharing Plan"), The Employee Stock
Ownership Plan and Trust Agreement of KCSI (the "KCSI ESOP"), The KCSI 401(k)
Plan and Trust Agreement (the "KCSI 401(k) Plan") and The Employee Stock
Purchase Plan of KCSI (the "KCSI Purchase Plan"). Options to purchase KCSI
Common Stock are also currently outstanding pursuant to the KCSI 1991 Amended
and Restated Stock Option and Performance Award Plan (the "KCSI Stock Option
Plan"). KCSI and Stilwell have agreed to adjust each existing KCSI employee
benefit or award in the following manner:
- - PROFIT SHARING PLAN. The Stilwell Financial, Inc. 401(k) Plan (the "Stilwell
401(k) Plan") has a profit sharing portion for accounts of participants and
for future contributions (the "Profit Sharing Portion"). The trustee for the
KCSI Profit Sharing Plan, the KCSI 401(k) Plan and the KCSI ESOP (the
"Trustee") will divide the KCSI Profit Sharing Plan as of the Distribution and
will transfer the accounts of participants of Stilwell Financial, Inc. to the
Profit Sharing Portion in a plan-to-plan transfer of assets. An investment
manager will manage the participant accounts in the Profit Sharing Portion.
The Profit Sharing Portion
-51-
<PAGE>
provides generally the same eligibility and vesting requirements and
distribution provisions as the KCSI Profit Sharing Plan.
- - STILWELL 401(K) PLAN. As of the Distribution, the Trustee will transfer the
accounts of the Stilwell participants who will participate in the 401(k)
portion of the Stilwell 401(k) Plan (the "401(k) Portion") to the 401(k)
Portion. The 401(k) Portion provides generally the same investment options
and the same eligibility and vesting requirements and distribution provisions
as the KCSI 401(k) Plan. The trustee for the Stilwell 401(k) Plan will accept
the transferred accounts from the KCSI 401(k) Plan and participants' elections
under the KCSI 401(k) Plan will remain in effect under the 401(k) Portion
until changed by the Stilwell participants.
- - STILWELL STOCK OPTION PLAN. As part of the Distribution, KCSI and Stilwell
plan to substitute options for KCSI non-qualified stock options held by KCSI
and Stilwell employees, former KCSI employees and KCSI directors (including
former directors) to provide for the equitable adjustment of the stock options
as allowed by the KCSI Stock Option Plan. Specifically, as part of the
Distribution, all KCSI non-qualified stock options outstanding as of the
Record Date ("Options") will remain outstanding with an adjusted exercise
price ("New KCSI Options"), and holders of the Options will receive separately
exercisable options to buy Stilwell Common Stock ("New Stilwell Options")
(collectively, the New KCSI Options and the New Stilwell Options are referred
to as "Substituted Options"). New Stilwell Options for approximately
16,000,000 shares will be issued to current and former employees and directors
of KCSI and Stilwell and will result in the dilution of ownership of Stilwell
stockholders.
The exercise prices of the Substituted Options will be a prorated amount of
the exercise price for the related Options based on the ratio of the trading
price of Stilwell Common Stock to the total of the trading prices of both KCSI
Common Stock (excluding Stilwell) and Stilwell Common Stock. For this
purpose, the trading prices will be the closing prices of the stocks on the
New York Stock Exchange on the Distribution Date. The other terms of the
Substituted Options will be the same as for the Options.
The New Stilwell Options will be granted in the same proportion as the
distribution of Stilwell Common Stock in the Distribution; i.e., two New
Stilwell Options for each Option held. New KCSI Options and New Stilwell
Options which will be substituted for Options which were subject to time
vesting (under the KCSI Stock Option Plan, vesting means the Options become
exercisable; therefore, Options which time vest are Options which become
exercisable after the passage of a specified period of time) will vest at the
time the Options for which they were substituted would have vested. The
Stilwell 1998 Long Term Incentive Stock Plan (as amended and restated
effective August 11, 1999) ("Stilwell Stock Option Plan") will govern the New
Stilwell Options.
The substitution of New KCSI Options and New Stilwell Options for Options is
provided for in the Intercompany Agreement under which (1) the New KCSI
Options and New Stilwell Options will be established with the exercise prices
determined as described above based on an allocation of the exercise price of
the Options; and (2) KCSI and Stilwell assume the obligation to issue shares
of their Common Stock upon the exercise of the New KCSI Options and the New
Stilwell Options, respectively.
-52-
<PAGE>
- - STILWELL ESOP. Stilwell has adopted the Employee Stock Ownership Plan of
Stilwell (the "Stilwell ESOP") and, the Trustee has transferred the Stilwell
participant accounts to the Stilwell ESOP. The KCSI ESOP and the Stilwell
ESOP will participate in the Distribution. Immediately after the
Distribution, participants in the Stilwell ESOP will have two shares of
Stilwell Common Stock for each one share of KCSI Common Stock in their
accounts. To allow Stilwell participants to retain the KCSI Common Stock in
their respective Stilwell ESOP accounts, Stilwell participants will have an
election with respect to the portion of each Stilwell participant's account
allocated to KCSI Common Stock to keep the KCSI Common Stock in their accounts
or to have the trustee for the Stilwell ESOP sell the KCSI Common Stock in
their accounts and reinvest the proceeds in either Stilwell Common Stock or in
a guaranteed investment contract fund. The election may be a partial
election; however, once a participant elects to have the KCSI Common Stock
held in his or her ESOP account sold, the participant may not reinvest in KCSI
Common Stock, nor may a participant elect to sell any of the Stilwell Common
Stock in his or her account to invest in the guaranteed investment contract
fund. For any participant who does not affirmatively elect to retain the KCSI
Common Stock in his or her account, the trustee for the Stilwell ESOP will
sell the KCSI Common Stock from his or her account and will reinvest the
proceeds in Stilwell Common Stock.
- - STILWELL STOCK PURCHASE PLAN. The main provisions of the Stilwell Stock
Purchase Plan are substantially similar to the KCSI Purchase Plan: eligible
employees may purchase during certain periods Stilwell Common Stock at 85% of
the average market price on either the exercise date or the grant date,
whichever is lower, but in no event at less than the par value of the shares.
Eligible Stilwell employees may elect to have up to a board-determined maximum
percentage of annualized base pay applied to purchase Stilwell Common Stock,
and the purchase price will be collected via employee payroll deductions.
With certain exceptions, all employees of Stilwell or any eligible Stilwell
affiliates who work at least 20 hours per week for five months of the year
will be eligible to participate in the Stilwell Stock Purchase Plan. The
Stilwell Stock Purchase Plan will be administered by Stilwell's Board of
Directors or Stilwell's Compensation Committee.
-53-
<PAGE>
FINANCING
DESCRIPTION OF THE CREDIT FACILITIES
On May 14, 1999, KCSI renewed a $100 million, 364-day senior unsecured
competitive advance/revolving credit facility (the "Credit Facility") with
several banks and institutional lenders (the "Lenders"). The Credit Facility
has been transferred to Stilwell. The Credit Facility contains interest rates
below prime and terms which can be fixed up to the expiration date. Management
elected not to renew the Credit Facility upon expiration on May 13, 2000.
On January 11, 2000, KCSI arranged a new $200 million 364-day senior
unsecured competitive Advance/Revolving Credit Facility ("New Credit Facility").
KCSI borrowed $125 million under this facility and used the proceeds to retire
other debt obligations. Stilwell has assumed the New Credit Facility, including
the $125 million borrowed thereunder, thereby reducing its stockholders' equity.
Upon such assumption, KCSI was released from all obligations, and Stilwell
became the sole obligor, under the New Credit Facility. Stilwell may assign and
delegate all or a portion of its rights and obligations under the New Credit
Facility to one or more of its domestic subsidiaries. In March 2000, Stilwell
repaid the $125 million borrowed under the New Credit Facility.
Two borrowing options are available under the New Credit Facility: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive advance option is based on rates
obtained from bids as selected by Stilwell in accordance with the lenders'
standard competitive auction procedures. Interest on the revolving credit
option accrues based on the type of loan (e.g., Eurodollar, Swingline, etc.),
with rates computed using LIBOR plus 0.35% per annum or, alternatively, the
highest of the prime rate, the Federal Funds Effective Rate plus 0.005% or the
Base Certificate of Deposit Rate plus 1%.
The New Credit Facility includes a facility fee of 0.15% per annum and a
utilization fee of 0.125% on the amount of outstanding loans under the New
Credit Facility for each day on which the aggregate utilization of the New
Credit Facility exceeds 33% of the aggregate commitments of the various lenders.
The credit facilities include customary covenants that, among other things,
restrict the ability of Stilwell to create liens, incur debt, enter into certain
sale and lease-back transactions and transactions with affiliates, transfer
assets, merge, maintain specified financial assets and otherwise restrict
corporate activities. The credit facilities also contain various financial
covenants, including the requirement for Stilwell to maintain specified
financial ratios such as maximum leverage, minimum net worth and minimum
interest coverage. Because of such financial covenants, maximum utilization of
Stilwell's available lines of credit may be restricted. Based on financial
information as of March 31, 2000, Stilwell would have the ability to fund the
purchase of stock required if all such put rights had been exercised without, in
management's judgment, causing a breach of any of Stilwell's current credit
facility restrictions. See "Risk Factors-Stilwell May be Required to Purchase
or Sell Janus Common Stock." Stilwell has not obtained the concurrence of its
lenders with this judgment but the existence of the Janus put rights was
disclosed to those lenders at the time they provided
-54-
<PAGE>
the existing credit facilities. In any event, if additional capital is needed
for operations or the honoring of the Janus put rights, management would not
necessarily rely on existing credit facilities but would likely seek to obtain
additional financing on substantially the same terms and conditions as existing
credit facilities.
The credit facilities contain customary events of default, including, but
not limited to, failure by Stilwell to satisfy its obligations under the credit
facilities, a change of control of Stilwell, events of bankruptcy, insolvency
and reorganization and other material indebtedness defaults by Stilwell. See
"Risk Factors-Stilwell's Credit Facilities Impose Restrictions on Stilwell's
Ability to Conduct Business and may not be Sufficient to Satisfy Stilwell's
Capital and Operating Requirements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEED FOR ADDITIONAL FINANCING
The timing of Stilwell's future capital requirements will depend on a number
of factors, including the ability of Stilwell to successfully implement its
business strategy. In addition, Stilwell, as a continuation of its practice of
providing credit facilities to its subsidiaries, has provided an intercompany
credit facility to Janus for use by Janus for general corporate purposes,
effectively reducing the amount of the credit facilities available for
Stilwell's other purposes. Stilwell may also require additional capital sooner
than anticipated to the extent that Stilwell's operations do not progress as
anticipated or if certain put rights are exercised by Janus stockholders. If
all such Janus puts would have been exercised on April 1, 2000, the required
payment would have been approximately $833 million. As of March 31, 2000,
Stilwell had $200 million in credit facilities available and had cash balances
at the Stilwell holding company level in excess of $147.5 million. The market
value of Stilwell's 32% investment in DST was approximately $1.38 billion using
DST's closing price on the New York Stock Exchange on May 22, 2000. Although
Stilwell has no intention of converting this investment into cash, management
believes that, if cash were needed to fund the purchase of Janus common stock
from minority stockholders, it could liquidate its investment in DST within 120
days and receive approximately $826 million after taking into account payment of
approximately $512 million in federal and state income taxes under current
statutory rates, underwriting discounts and commissions estimated at $41 million
and payment of associated transaction costs, estimated at $900,000. To the
extent that available credit facilities, existing cash balances and proceeds
from the liquidation of Stilwell's investment in DST were insufficient to fund
its purchase obligations, Stilwell had access to the capital markets and, with
respect to the Janus Stock Purchase Agreement, had 120 days to raise additional
sums. Stilwell intends to obtain any additional financing for general corporate
purposes on terms and conditions substantially similar to the Credit Facility
and New Credit Facility. There may not be any required additional capital
available on acceptable terms, or at all, and the failure to obtain any such
required capital could have a material adverse effect on Stilwell's operations.
See "Risk Factors-Stilwell's Credit Facilities Impose Restrictions on Stilwell's
Ability to Conduct Business and may not be Sufficient to Satisfy Stilwell's
Capital and Operating Requirements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Minority Purchase Agreements."
-55-
<PAGE>
CAPITALIZATION
Set forth below is the capitalization of Stilwell as of March 31, 2000 and
on a pro forma basis to give effect to the Distribution as if the Distribution
and related transactions had occurred on that date. The table set forth below
should be read in conjunction with the financial statements set forth elsewhere
in this Information Statement. The pro forma information may not reflect the
capitalization of Stilwell in the future or as it would have been had Stilwell
been a separate, independent company.
March 31, 2000
Actual Pro Forma
------ ---------
(in millions)
Debt obligations $ -- $ --
------ ------
Equity:
Preferred Stock, $1.00 par value;
10,000,000 shares authorized; no shares issued or
outstanding (no shares, as adjusted) -- --
Common Stock, $.01 par value; 1,000,000,000
shares authorized; 1,000 issued and outstanding;
(222,798,708 issued and outstanding,
as adjusted) (1) -- 2.2
Net investment by KCSI 106.8 --
Retained Earnings 670.2 670.2
Accumulated other comprehensive income 112.0 112.0
Additional paid-in capital -- 104.6
------ ------
Total Equity 889.0 889.0
------ ------
Total Capitalization $889.0 $889.0
====== ======
(1) Based on an assumed two shares of Stilwell Common Stock for every one share
of KCSI Common Stock. There were 111,399,354 shares of KCSI Common Stock
issued and outstanding at March 31, 2000. Excludes an estimated 15,765,342
shares of Stilwell Common Stock reserved for issuance upon the exercise of
New Stilwell Options granted in connection with the Distribution (assuming
that two Stilwell options are granted for every one KCSI stock option).
-56-
<PAGE>
DIVIDEND POLICY
To date, Stilwell has not declared or paid any dividends on the Stilwell
Common Stock, but it anticipates paying cash dividends following the
Distribution. The payment of dividends by Stilwell is subject to the discretion
of its Board of Directors, and various factors may prevent it from paying
dividends. These factors include Stilwell's financial position, its capital
requirements and liquidity, the existence of a stock repurchase program,
contractual and legal requirements, results of operations and such other factors
as Stilwell's Board of Directors may consider relevant. As a holding company,
Stilwell's ability to pay dividends is dependent on the dividends and income it
receives from its subsidiaries. At the present time Stilwell's primary source of
cash is dividends received from Janus. In 1999, Stilwell received $173.2 million
in dividends from Janus. Additionally, for the year ended December 31, 1999,
Janus represented 95% of Stilwell's revenues and 91% of Stilwell's net income.
The payment of dividends by Janus is subject to the discretion of its Board of
Directors. Although Stilwell has a contractual obligation to cause such payment,
Mr. Bailey has the right to select a majority of that Board, pursuant to the
Janus Board Selection Rights. Such majority of directors may determine in their
discretion that Janus will not pay dividends for any given year. See "Risk
Factors-Various Factors May Hinder the Declaration and Payment of Dividends by
Stilwell Following the Distribution," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 15 to the Stilwell
consolidated financial statements.
-57-
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table presents selected financial data of Stilwell. The
information set forth below should be read in conjunction with, and is qualified
in its entirety by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this Information Statement. The selected
financial data for the five years ended December 31, 1999 was derived from the
audited consolidated financial statements of Stilwell. The selected financial
data as of and for the three months ended March 31, 1999 and 2000 was derived
from the unaudited consolidated financial statements of Stilwell, which were
prepared on the same basis as the historical audited financial statements.
The selected financial data set forth below may not be indicative of
Stilwell's future performance, and does not necessarily reflect the financial
position and results of operations of Stilwell had Stilwell operated as a
separate, stand-alone entity during each of the periods presented. In addition
to historical earnings per share data based on the Stilwell capital structure as
of March 31, 2000 (1,000 shares outstanding), pro forma earnings per share
information is presented for the year ended December 31, 1999 and for the three
months ended March 31, 1999 and 2000. This pro forma information is presented
for comparison purposes to future years and was derived assuming an issuance of
two shares of Stilwell Common Stock for every one outstanding share of KCSI
Common Stock as of March 31, 2000. In addition, dilutive options were included
based on the number of dilutive KCSI stock options assumed to be exercised as of
March 31, 2000 in connection with the determination of KCSI's diluted earnings
per share computations. Pro forma basic and diluted earnings per share for the
year ended December 31, 1999 and for the three months ended March 31, 1999
reflect adjustments for interest expense (at an assumed rate of 6.5%), net of
income taxes assumed to be incurred as if the assumption of $125 million of
indebtedness from KCSI had occurred as of January 1, 1999. See "Financing--
Description of the Credit Facilities."
-58-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------------------------- --------------------
1995(i) 1996(ii) 1997 1998(iii) 1999 1999 2000(iv)
------ ------ ------ ------ -------- ------ ------
(Dollars in Millions, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
- --------------
INCOME STATEMENT
DATA:
Revenues $236.7 $329.6 $485.1 $670.8 $1,212.3 $233.3 $545.1
Operating expenses 156.5 197.8 285.9 390.2 694.0 136.1 300.2
------ ------ ------ ------ -------- ------ ------
Operating Income 80.2 131.8 199.2 280.6 518.3 97.2 244.9
Equity in earnings
of unconsolidated
affiliates 29.6 68.6 24.9 25.8 46.7 11.2 18.8
Gain on litigation
settlement 44.2
Gain on sale of Janus
common stock 15.1
Reduction in
ownership of DST -- -- -- (29.7) -- -- --
Gain on sale
of DST 296.3 -- -- -- -- -- --
Other, net 3.7 8.2 5.8 12.6 21.5 3.9 7.3
------ ------ ------ ------ -------- ------ ------
Pretax Income 409.8 208.6 229.9 289.3 586.5 112.3 330.3
Income tax
provision 181.3 58.2 87.0 103.7 216.1 40.1 114.3
Minority interest 10.5 15.8 24.9 33.4 57.3 11.2 27.3
------ ------ ------ ------ -------- ------ ------
Net Income $218.0 $134.6 $118.0 $152.2 $ 313.1 $ 61.0 $188.7
====== ====== ====== ====== ======== ====== ======
</TABLE>
-59-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data:
Weighted Average
Common shares
outstanding 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Basic Earnings
per share $218,000 $134,600 $118,000 $152,200 $313,100 $ 61,000 $188,700
Diluted Earnings
per share 218,000 134,000 117,400 149,900 308,300 60,200 186,400
Pro Forma
Per Share Data:
Common shares
outstanding (in
thousands) 222,799 222,799 222,799
Basic Earnings per share $ 1.38 $ 0.27 $ 0.85
Diluted Common
shares outstanding
(in thousands) 230,760 230,760 230,760
Diluted Earnings per share $ 1.31 $ 0.26 $ 0.81
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31, March 31,
-------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000(iv)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $475.2 $548.2 $672.6 $822.9 $1,231.5 $868.1 $1,432.7
Long term obligations:
Third Parties 0.4 0.1 -- -- -- -- --
KCSI -- 117.3 84.1 16.6 -- -- --
Cash dividends per
Common share n/a n/a n/a n/a n/a n/a n/a
OPERATING DATA:
- --------------
Total Assets Under
Management
(in billions) $ 34.5 $ 50.3 $ 71.6 $113.1 $257.4 $141.7 $ 324.0
Total Shareowner
Accounts
(in millions) 2.5 2.5 2.7 3.0 4.3 3.4 5.5
</TABLE>
(i) Reflects DST as an unconsolidated affiliate as of January 1, 1995 due
to the DST public offering and associated transactions completed in
November 1995, which reduced Stilwell's ownership of DST to approximately
41% and resulted in deconsolidation of DST from Stilwell's consolidated
financial statements. The public offering and associated transactions
resulted in a $144.6 million after-tax gain to Stilwell.
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<PAGE>
(ii) Includes a one-time after-tax gain of $47.7 million, representing
Stilwell's proportionate share of the one-time gain recognized by DST in
connection with the merger of The Continuum Company, Inc. ("Continuum"),
formerly a DST equity affiliate, with Computer Sciences Corporation
("CSC")in a tax-free share exchange.
(iii) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax) resulting from the merger of a wholly-owned subsidiary of DST
with USCS International, Inc. ("USCS"). The merger was accounted for by
DST under the pooling of interests method. The charge reflects Stilwell's
reduced ownership of DST (from 41% to approximately 32%), together with
Stilwell's proportionate share of DST and USCS fourth quarter merger-
related costs.
(iv) Includes two one-time gains: a) a $27.3 million (after-tax) gain on the
settlement of litigation with a former equity affiliate; and b) a $15.1
million (after-tax) gain resulting from the sale by Stilwell of 192,408
shares of Janus common stock to Janus, which reduced Stilwell's ownership
in Janus to approximately 81.5%.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The discussion set forth below, as well as other portions of this
Information Statement, contains comments not based upon historical fact. Such
forward-looking comments are based upon information currently available to
management and management's perception thereof as of the date of this
Information Statement. Readers can identify these forward-looking comments by
the use of such verbs as "expects," "anticipates," "believes" or similar verbs
or conjugations of such verbs. The actual results of operations of Stilwell
could materially differ from those indicated in forward-looking comments. The
differences could be caused by those factors identified in the section of this
Information Statement which identifies risk factors, which are hereby
incorporated by reference herein or by other factors which Stilwell has not yet
identified. Readers are strongly encouraged to consider these factors when
evaluating any forward-looking comments. Stilwell will not update any forward-
looking comments set forth in this Information Statement.
This discussion and the financial statements included in this Information
Statement were prepared by attributing the historical data for the financial
services segment of KCSI to Stilwell utilizing accounting policies consistent
with those applied to the preparation of KCSI's historical financial statements.
Since the financial services business was operated as part of KCSI during the
period presented, such financial information and statements may not necessarily
reflect the results of operations or financial position of Stilwell or what the
results of operations would have been if Stilwell had been a separate,
independent company during those periods.
As a result, within this Management's Discussion and Analysis of Financial
Condition and Results of Operations, historical transactions and events
involving KCSI's financial services segment are discussed as if Stilwell were
the entity involved in the transaction or event, unless otherwise indicated.
Unless otherwise stated or the context otherwise requires, references herein to
Stilwell include Stilwell's direct and indirect subsidiaries and equity
investments. Also, intercompany transactions between Stilwell and KCSI during
the periods covered herein are reflected as transfers from or dividends to KCSI.
The discussion herein is intended to clarify and focus on Stilwell's results
of operations, certain changes in its financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
financial statements included in this Information Statement. As discussed
below, the Company is in discussions with the Staff of the Securities and
Exchange Commission as to whether or not Janus Capital Corporation should
continue to be classified as a consolidated subsidiary for financial reporting
purposes. The outcome of these discussions could result in the Company
restating certain of its consolidated financial statements to reflect Janus as a
majority-owned unconsolidated subsidiary accounted for under the equity method
for financial reporting purposes. This discussion should be read in conjunction
with these consolidated financial statements, the related notes and the Report
of Independent Accountants thereon, and is qualified in its entirety by
reference thereto.
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RESULTS OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
Consolidated operating results from 1997 to 1999 were affected by the
following significant developments.
SALE OF JANUS STOCK. In the first quarter of 2000, Stilwell sold to Janus,
for treasury, 192,408 shares of Janus common stock and such shares will be
available for awards under Janus' recently adopted Long Term Incentive Plan.
Janus has agreed that for so long as it has available shares of Janus common
stock for grant under that plan, it will not award phantom stock, stock
appreciation rights or similar rights. In first quarter 2000, Janus issued
35,670 shares of its stock to Janus employees as restricted stock. The sale of
shares by Stilwell and the reissuance of shares to Janus employees as restricted
stock resulted in an after-tax gain to Stilwell of approximately $15.1 million
and reduced Stilwell's ownership of Janus to approximately 81.5%. After this
first quarter 2000 issuance, more than 168,000 shares of Janus common stock
remain in treasury for use in connection with Janus' Long Term Incentive Plan.
Upon the issuance of all of these shares in future years, Stilwell's ownership
interest in Janus will be 80.1%. See Note 16 to the Stilwell consolidated
financial statements.
LITIGATION SETTLEMENT. In January 2000, Stilwell received approximately
$44.2 million in connection with the settlement of a legal dispute related to a
former equity investment. The settlement agreement resolves all outstanding
issues related to this former equity investment. In the first quarter of 2000,
Stilwell recognized an after-tax gain of approximately $27.3 million as a result
of this settlement.
DST MERGER. On December 21, 1998, DST and USCS announced the completion of
the merger of USCS with a wholly-owned DST subsidiary. Under the terms of the
merger, USCS became a wholly-owned subsidiary of DST. The merger, accounted for
as a pooling of interests by DST, expands DST's presence in the output solutions
and customer management software and services industries. DST issued
approximately 13.8 million shares of its common stock in the transaction,
reducing Stilwell's ownership interest from 41% to approximately 32%. Stilwell
recorded a one-time pretax non-cash charge of approximately $36.0 million ($23.2
million after-tax), reflecting Stilwell's reduced ownership of DST and
Stilwell's proportionate share of DST and USCS costs incurred in the fourth
quarter related to the merger. Stilwell accounts for its investment in DST
under the equity method.
ASSET IMPAIRMENT CHARGES. In connection with Stilwell's review of its
accounts for the year ended December 31, 1997 in accordance with its established
accounting policies, $15.7 million of asset impairment charges were recorded
during fourth quarter 1997. After consideration of related tax effects, these
charges reduced consolidated earnings by $14.6 million. The asset impairment
charges included a $12.7 million impairment of goodwill associated with
Stilwell's investment in Berger. This charge was recorded because management
determined that a portion of the carrying value of the investment in Berger,
including identifiable intangible assets and goodwill, was not recoverable,
primarily due to below-peer performance and growth of the core Berger funds. In
addition, the charges included a $3.0 million allowance for a non-core cost
investment reflecting recoverability issues.
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OVERVIEW
On January 23, 1998, KCSI formed Stilwell as a holding company for the group
of businesses and investments that comprised the financial services segment of
KCSI. The primary entities comprising the financial services segment are Janus,
an 81.5% owned subsidiary; Berger, of which SMI owns 100% of the Berger
preferred limited liability company interests and approximately 86% of the
Berger regular limited liability company interests; Nelson, an 80% owned
subsidiary; DST, an equity investment in which SMI holds an approximate 32%
interest; and the Miscellaneous Corporations. KCSI transferred to Stilwell
KCSI's ownership interests in Janus, Berger, Nelson, DST, the Miscellaneous
Corporations and certain other financial services-related assets, and Stilwell
assumed all of KCSI's liabilities associated with the assets transferred,
effective July 1, 1999.
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THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
1999
Stilwell's revenues, operating income and net income (with subsidiary
information exclusive of holding company amortization and interest costs
attributed to the respective subsidiary) were as follows (in millions):
Three Months
Ended March 31,
-------------------
1999 2000(i)
-------- ---------
REVENUES:
Janus $220.7 $523.1
SMI and Berger 8.5 16.7
Other 4.1 5.3
------ ------
Total $233.3 $545.1
====== ======
OPERATING INCOME (LOSS):
Janus $103.1 $250.6
SMI and Berger 0.5 4.7
Other (6.4) (10.4)
------ ------
Total $ 97.2 $244.9
====== ======
NET INCOME:
Janus $ 53.9 $130.2
SMI and Berger 1.2 3.9
Other 5.9 54.6
------ ------
Total $ 61.0 $188.7
====== ======
(i) Stilwell recorded two one-time gains during first quarter 2000: a) a
$27.3 million (after-tax) gain resulting from the settlement of litigation
with a former equity affiliate; and b) a $15.1 million (after-tax) gain
resulting from the sale by Stilwell of 192,408 shares of Janus common stock
to Janus. See "Significant Developments" above for additional information.
Assets under management as of March 31, 1999 and 2000 were as follows (in
billions):
March 31,
-----------------
1999 2000
------ ------
JANUS
Janus Advised Funds:
Janus Investment Funds (i) $ 96.1 $218.2
Janus Aspen Series (ii) 7.6 24.0
Janus Money Market Funds 6.3 9.4
Janus World Funds Plc (iii) 0.3 3.4
------ ------
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Total Janus Advised Funds 110.3 255.0
Janus Sub-Advised Funds
and Private Accounts 26.5 60.3
------ ------
Total Janus 136.8 315.3
------ ------
BERGER
Berger Advised Funds 3.3 7.1
Berger Sub-Advised Funds and
Private Accounts 0.4 1.1
------ ------
Total Berger 3.7 8.2
------ ------
NELSON 1.2 1.4
------ ------
Total Assets Under Management $141.7 $324.9
====== ======
(i) Excludes money market funds.
(ii) The Janus Aspen Series consists of eleven portfolios offered through
variable annuity and variable life insurance contracts, and certain
qualified pension plans.
(iii) The Janus World Funds Plc are a group of Ireland-domiciled funds
introduced in December 1998.
For the three months ended March 31, 2000, Stilwell reported consolidated
earnings of $188.7 million, a $127.7 million increase over first quarter 1999.
Exclusive of the one-time items discussed in "Significant Developments" above,
ongoing net income was $85.3 million, or 140%, higher than comparable 1999. Due
to a 126% increase in average assets under management quarter to quarter,
Stilwell consolidated revenues reached $545.1 million, an increase of 134% over
prior year, and consolidated operating margins improved to 44.9% versus 41.7% in
first quarter 1999. These improved revenues and operating margins resulted in a
152% increase in operating income (to $244.9 million).
Assets under management increased more than $67.5 billion during the three
months ended March 31, 2000, reaching $324.9 billion. Net sales and market
appreciation for the quarter totaled $42.8 and $24.7 billion, respectively, with
Janus contributing $42.1 and $23.6 billion of the respective totals. Average
assets under management for the three months ended March 31, 2000 were 126%
higher than the same period in 1999. In addition, shareowner accounts grew more
than 28% during first quarter 2000, surpassing 5.5 million as of March 31, 2000.
Consolidated operating expenses increased 121% (to $300.2 million) in first
quarter 2000 compared to 1999, largely reflecting the significant growth in
revenues. Higher expenses were evident in the following components: i) salaries
and wages, primarily due to investment performance-based incentive compensation
and an increased number of employees; ii) alliance and third party administrator
fees resulting from increased assets under management through this distribution
channel; and iii) marketing and promotion, reflecting efforts to capitalize on
strong investment performance by both Janus and Berger in the last two years.
Additionally, depreciation
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and amortization increased by 129% as a result of the significant infrastructure
developments by Janus, as well as amortization associated with the deferred
commissions paid on the Janus World Funds B shares.
Equity in net earnings of DST for the three months ended March 31, 2000
improved to $18.0 million from $10.7 million in 1999. This $7.3 million
improvement includes approximately $3.6 million from two non-recurring DST items
- - a gain on the settlement of a legal dispute with a former equity affiliate and
gains related to sales of marketable securities. Exclusive of these DST gain
items, Stilwell's proportionate share of DST earnings improved $3.7 million due
to the following: i) a 14.1% increase in revenues, reflecting growth in the
financial services segment (shareowner accounts serviced reached 61.0 million as
of March 31, 2000 compared to 56.4 million at December 31, 1999 and 51.6 million
at March 31, 1999) and output solutions segment; and ii) improved consolidated
operating margins.
The 102% increase in the Other, net component of the Consolidated Statement
of Income quarter to quarter is attributable to realized gains by Janus on the
sale of short-term investments, higher interest income resulting from an
increase in cash and gains resulting from the issuance of Janus shares to
certain of its employees, which reduced Stilwell's ownership of Janus.
A brief discussion of significant Janus, Berger and Nelson items during the
three months ended March 31, 2000 follows:
JANUS
-----
Janus assets under management increased $65.8 billion during first quarter
2000 and $178.5 billion from March 31, 1999. Janus' net sales growth for the
three months ended March 31, 2000 was more than 40% of the total growth
experienced during all of 1999. This growth generally reflects ongoing
favorable investment performance by the various funds/portfolios within the
Janus group of mutual funds (as demonstrated by market appreciation of
approximately $23.6 billion in first quarter 2000), marketing and
promotional efforts and competitive levels of expenses and fees compared to
industry standards.
BERGER
------
Berger assets under management increased 24% (to $8.2 billion) during the
three months ended March 31, 2000 and 122% compared to the $3.7 billion in
assets under management at March 31, 1999. For the first time in over two
years, Berger's shareowner accounts increased during a quarter - almost 7% -
reflecting positive investment performance during 1999 and first quarter
2000.
NELSON
------
Nelson's assets under management increased to (Pound)866 million, a 3% and
17% improvement compared to asset levels at December 31, 1999 and March 31,
1999, respectively. Nelson continues its expansion efforts and Stilwell
expects that during this phase of Nelson's development, Nelson will operate
at a loss. These losses, however, are not expected to have a
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material impact on Stilwell's results of operations or financial position.
YEAR TO YEAR COMPARISONS
Stilwell's revenues, operating income and net income (with subsidiary
information exclusive of amortization and interest costs attributed to the
respective subsidiary) were as follows (in millions):
December 31,
1997 1998 (i) 1999
------- -------- ---------
REVENUES:
Janus $450.1 $626.2 $1,155.3
SMI and Berger 34.9 33.5 40.0
Other 0.1 11.1 17.0
------ ------ --------
Total $485.1 $670.8 $1,212.3
====== ====== ========
OPERATING INCOME (LOSS):
Janus $226.6 $296.7 $ 539.5
SMI and Berger 3.8 4.9 2.9
Other (31.2) (21.0) (24.1)
------ ------ --------
Total $199.2 $280.6 $ 518.3
====== ====== ========
NET INCOME (LOSS):
Janus $119.9 $164.0 $ 284.1
SMI and Berger 2.7 3.9 4.4
Other (4.6) (15.7) 24.6
------ ------ --------
Total $118.0 $152.2 $ 313.1
====== ====== ========
(i) Includes a one-time non-cash charge of $36.0 million ($23.2 million after-
tax) resulting from the merger of a wholly-owned subsidiary of DST with
USCS. The merger was accounted for by DST under the pooling of interests
method. The charge reflects Stilwell's reduced ownership of DST (from 41%
to approximately 32%), together with Stilwell's proportionate share of DST
and USCS costs in the fourth quarter related to the merger.
Assets under management as of December 31, 1996, 1997 and 1998 were as follows
(in billions):
December 31,
1997 1998 1999
----- ------ ------
JANUS
Janus Advised Funds
Janus Investment Funds $48.7 $ 75.9 $171.8
Janus Aspen Series 3.3 6.2 17.4
Janus Money Market Funds 2.6 4.8 1.4
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Janus World Funds Plc -- 0.1 9.4
----- ------ ------
Total Janus Advised Funds 54.6 87.0 200.0
Janus Sub-Advised Funds
and Private Accounts 13.2 21.3 49.5
----- ------ ------
Total Janus 67.8 108.3 249.5
----- ------ ------
BERGER
Berger Advised Funds 3.2 3.3 5.7
Berger Sub-Advised Funds and
Private Accounts 0.6 0.4 0.9
----- ------ ------
Total Berger 3.8 3.7 6.6
----- ------ ------
NELSON -- 1.1 1.3
----- ------ ------
Total Assets Under Management $71.6 $113.1 $257.4
===== ====== ======
Stilwell reported 1999 net income of $313.1 million, an increase of 106%
compared to $152.2 million in 1998. Exclusive of the one-time charges
associated with the DST merger in 1998, net income was $137.7 million (79%)
higher than 1998. Revenues increased $541.5 million, or 81%, over 1998, leading
to higher operating income. Efforts to maintain costs consistent with the level
of revenues resulted in an operating margin of 43%, improved over the 42% in
1998. Total assets under management increased $144.3 billion (128%) during
1999, reaching $257.4 billion at December 31, 1999. Total shareowner accounts
exceeded 4.3 million as of December 31, 1999, a 43% increase over 1998. Equity
earnings from DST for the year ended December 31, 1999 increased 45% versus
comparable 1998 (exclusive of fourth quarter merger-related costs).
Stilwell reported earnings of $152.2 million in 1998 versus $118.0 million
in 1997. Exclusive of the one-time items recorded in both years as discussed in
the "Significant Developments" section above, earnings were $42.8 million, or
32%, higher than 1997. Revenues increased $185.7 million, or 38%, over 1997,
leading to higher operating income. While operating income increased, efforts
to ensure an adequate infrastructure to provide for consistent, reliable and
accurate service to investors caused a decrease in operating margins in 1998,
from 44% for the year ended December 31, 1997 (exclusive of one-time charges) to
42% for the year ended December 31, 1998. Total assets under management
increased $41.5 billion, or 58%, during 1998, reaching $113.1 billion at
December 31, 1998. Total shareowner accounts exceeded three million as of
December 31, 1998, a 12% increase over 1997.
Increases in Stilwell's revenue and operating income are a direct result of
growth in assets under management. Assets under management and shareowner
accounts have grown in recent years from a combination of new money investments
(i.e., fund sales) and market appreciation. Fund sales have risen in response
to marketing efforts, favorable fund performance, introduction and market
reception of new products and the current popularity of no-load mutual funds.
Market appreciation has resulted from increases in investment values.
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Following is a detailed discussion of the operating results of the primary
subsidiaries of Stilwell.
JANUS CAPITAL CORPORATION
1999
In 1999, assets under management increased 130.5% to $249.5 billion from
$108.3 billion, as a result of net sales of $56.3 billion and market
appreciation of $84.9 billion. Equity portfolios comprise 95% of all assets
under management at the end of 1999.
Excluding money market funds, 1999 net sales of Janus Investment Funds,
Janus Aspen Series and Janus World Funds were $42.2 billion and net sales of the
Janus Subadvised Funds and Private Accounts totaled $10.0 billion. Total Janus
shareowner accounts increased over 1.3 million, or 49%, to 4.1 million.
Investment management, shareholder servicing and fund administration revenue
increased $529.1 million, or 85% in 1999, to $1.2 billion as a result of the
increase in assets under management. Aggregate fee rates declined from 1997 to
1999.
Operating expenses increased 87% from $329.5 million to $615.8 million in
1999 as a result of the significant increase in assets under management,
additional employees, facilities and other infrastructure-related costs.
Approximately 56% of Janus' 1999 operating expenses consist of variable costs
that generally increase or decrease with fluctuations in management fee revenue.
An additional 15% of operating expenses (principally advertising, promotion,
sponsorships, pension plan and other contributions) are discretionary on a
short-term basis.
The following highlights changes in key expenses in 1999 from 1998:
- - Employee compensation and benefits increased $144 million, or 91%, primarily
attributable to increased incentive and base compensation. Additionally,
Janus experienced significant overtime compensation, which was required to
manage the rapid growth in investor activity. Incentive compensation
increased due to the growth in management fee revenue and achievement of
investment and financial performance goals. For the twelve months and
thirty-six months ended December 31, 1999, over 99% of assets under
management were ranked within the first quartile of investment performance
as compared to their respective peer groups and over 97% outperformed their
respective index (as defined pursuant to compensation agreements). Base
compensation increased due to a 68% increase in full-time employees from
approximately 1,300 at the end of 1998 to approximately 2,200 at December
31, 1999.
- - Fees paid to alliance and mutual fund supermarket increased $77 million, or
124%, due principally to the growth in assets under management being
distributed through these channels. Such assets increased from $32.3 billion
at December 31, 1998 to $82.4 billion at December 31, 1999.
- - Marketing, promotional and advertising expenditures increased 41% to $56.9
million. Janus continued to promote brand awareness through print,
television and radio media channels.
- - Depreciation and amortization increased $9.8 million, or 141%, due to
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continued infrastructure spending discussed below.
- - Sales commissions paid in 1999 related to sales of certain fund shares,
known as B shares, in Janus World Funds Plc. These payments increased by
$29.5 million to $31.7 million from $2.2 million in 1998. Amortization of
these payments amounted to $8.1 million and $154,000 in 1999 and 1988,
respectively.
1998
In 1998, assets under management increased 59.7% to $108.3 billion as a
result of net fund sales of $13.4 billion and market appreciation of $27.1
billion. Approximately $87.0 billion was invested in the Janus Advised Funds
with the remainder held by the Janus Sub-Advised Funds and Private Accounts.
Equity portfolios comprised 94% of total assets under management at December 31,
1998.
Excluding money market funds, 1998 net sales of the Janus Investment Funds,
Janus Aspen Series and Janus World Funds were $11.3 billion and net sales of
Janus Sub-Advised Funds and Private Accounts totaled $1.6 billion. Total Janus
shareowner accounts increased 353,000, or 15%, to 2.7 million.
Janus' revenues increased $176.1 million (39%) to $626.2 million in 1998,
driven by the significant growth in assets under management year to year.
Exclusive of $2.6 and $2.2 million in amortization costs attributed to Janus
in 1998 and 1997, respectively, operating expenses increased 47% from $223.5
million in 1997 to $329.5 million in 1998. This increase reflects the
significant growth in assets under management and revenues, as well as Janus'
efforts to develop its infrastructure to ensure consistent quality of service.
Approximately 47% of Janus' 1998 operating expenses were variable items such as
incentive compensation and mutual fund supermarket fees, 19% were discretionary
items such as marketing and pension plan contributions and the remainder were
fixed. The levels of profitability sustained in the recent past may not
continue.
A brief discussion of key expense increases follows:
- - Employee compensation and benefits increased $45 million, or 40%, in 1998
compared to 1997 due to an increased number of employees (including senior
investment management, marketing and administration employees, as well as
additional shareowner servicing and technology support personnel) and
incentive compensation. Incentive compensation increased principally due to
growth in assets under management combined with strong investment
performance. In particular, portfolio management incentive compensation -
formulated to reward top investment performance - approached its highest
possible rate in 1998 as a result of more than 93% of assets under
management ending 1998 in the top quartile of investment performance
compared to their respective peer groups (as defined pursuant to
compensation agreements).
- - Alliance and mutual fund supermarket fees increased 65% in 1998 to $62.3
million. This increase was principally due to an increase in assets under
management being distributed through these channels, from $19.0 billion at
December 31, 1997 to $32.3 billion at December 31, 1998.
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- - Marketing, promotional and advertising expenditures increased $17.5 million
during 1998 to capitalize on generally favorable market conditions, to
respond to market volatility and to continue establishing the Janus brand.
- - Depreciation and amortization increased $2.3 million in 1998 compared to
1997 due to increased infrastructure spending as discussed below.
GENERAL
The growth in Janus' assets under management over the past several years is
a function of several factors including, among others: (i) market-leading,
exceptional investment performance for the one and three year periods and for
the life of fund for most mutual funds under management; (ii) strong equity
securities markets worldwide; (iii) a strong brand awareness; and (iv) effective
use of third party distribution channels for both retail and sub-advised
products.
Since 1996, Janus has introduced eight new domestic funds -- four in the
Janus Investment Funds and four in the Janus Aspen Series. Additionally, to
continue to achieve optimal results for investors, Janus closed two of its most
popular funds recently. With assets growing substantially during the year,
Janus Twenty Fund was closed in April 1999 and Janus Global Technology Fund was
closed in January 2000. In December 1999, Janus announced plans to open Janus
Strategic Value Fund, which opened in early 2000.
International, or offshore, operations increased assets under management by
$1.4 billion in 1999, due to $1.1 billion in net sales and $337 million in
market appreciation. Most of this growth was in the Janus World Funds which is
a group of offshore multiclass funds introduced in December 1998 modeled after
certain of the Janus Investment Funds and domiciled in Dublin, Ireland. These
operations incurred an operating loss of $7.8 million (before taxes). Due to
significant expansion currently underway, such operations are not expected to
generate a profit in 2000. The majority of Janus World Funds sales were made
into the funds' class B shares, which require Janus to advance sales commissions
to various financial intermediaries. Janus paid $29.5 million in commissions
during 1999. Amounts paid for commissions were not material in 1998. Continued
growth in these funds may impact liquidity and cash resources. See "Results of
Operations-Liquidity."
In 1999 and 1998, Janus invested more than $56 million and $37 million,
respectively, on infrastructure development to ensure uninterrupted service to
shareowners; to provide up-to-the minute investment and securities trading data;
to improve operating efficiency; to integrate information systems; and to obtain
additional physical space for expansion. Net occupied lease space increased by
251,000 square feet during 1999 to 686,000 square feet, with commitments to
occupy an additional 67,000 square feet by March 2000. Infrastructure efforts in
1999 focused on the following:
- - Increases in shareholder servicing capacity. Over 170,000 square feet was
added in Denver and Austin to accommodate additional telephone
representatives and shareholder processing personnel. Additions to telephone
infrastructure were made during 1999 that allow for over 2,600 concurrent
investor service calls to be received versus approximately 1,600 at the
start of 1999. Additionally, XpressLine,
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Janus' automated call system, was expanded to handle 218,000 calls per day
and 35,000 calls per hour.
- - Continued development and enhancement of Janus' web site. In 1999, features
were added to allow investors to execute most transactions (purchases,
redemptions and exchanges) on-line, to access account information on-line,
to select the preferred method of statement delivery (paper or electronic),
to allow a Janus Investor Services representative to access copies of
shareholder statements to assist with investor questions, and to provide
information for institutional relationships. Capacity was expanded to handle
over 300,000 visits per day. Janus intends to maintain a 100% web capacity
reserve.
Infrastructure efforts in 1998 included the following:
- - an enterprise-wide reporting system, producing more efficient and timely
management reporting and allowing full integration of portfolio management,
human resources, budgeting and financial systems;
- - a second investor service and data center opened in Austin, Texas in 1998,
including redundant data and telephone connections to allow the facility to
operate in the event that Denver facilities and personnel become
unavailable;
- - an upgrade of Janus' web site, providing shareowners the opportunity to
customize their respective personal Janus home pages and to process most
transactions on-line; and
- - improvements of physical facilities, producing a more efficient workspace
and allowing Janus to accommodate additional growth and technology.
SMI AND BERGER
- --------------
1999
Berger reported 1999 net earnings of $4.4 million compared to $3.9 million
in 1998, exclusive of $4.5 million in holding company amortization charges
attributed to the investment in Berger in 1999 and 1998. Total assets under
management held by the Berger funds as of December 31, 1999 increased to $6.6
billion, up 78% from the $3.7 billion as of December 31, 1998. This increase
resulted from market appreciation of $2.3 billion and net sales of $0.6 billion.
Total Berger shareowner accounts decreased approximately 13% during 1999,
primarily within Berger funds introduced prior to 1997 (e.g., Berger Growth
Fund - formerly the Berger One Hundred Fund and the Berger Growth & Income Fund,
formerly the Berger One Hundred and One Fund). In contrast, the number of
accounts in the funds introduced since 1997 increased 56% year to year. These
fluctuations in shareowner accounts generally are indicative of recent
performance compared to peer groups.
Due to the increased level of assets under management throughout 1999,
revenues increased approximately 19% compared to 1998. Berger's 1999 operating
expenses increased approximately $8.5 million (30%) over 1998, resulting in
lower operating margins in 1999 versus 1998. This increase in expenses was
primarily due to higher salaries and wages costs in second and third quarters
associated with management realignment and a change in
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corporate structure as discussed below. Without these reorganization costs,
margins improved approximately four percentage points. Higher costs also
occurred in third party distribution costs and investment performance-based
incentive compensation.
Berger recorded $2.3 million in equity earnings from its joint venture
investment, BBOI Worldwide LLC ("BBOI"), for the year ended December 31, 1999
compared to $1.5 million in 1998. This increase reflects continued growth in
BBOI assets under management, which totaled $943 million at December 31, 1999
versus $522 million at December 31, 1998 (including, in both years, private
accounts not reported in Berger's total assets under management). However, as
discussed previously, Berger and BIAM have entered into a plan to dissolve BBOI
in the first half of 2000.
1998
Berger reported 1998 net earnings of $3.9 million compared to $2.7 million
in 1997, exclusive of amortization charges attributed to Berger in both years.
Total assets under management held by the Berger Complex declined slightly to
$3.7 billion as of December 31, 1998. This decline was attributable to market
appreciation of $0.6 billion, more than offset by net redemptions of $0.7
billion. While total Berger shareowner accounts decreased approximately 13%
during 1998, primarily within the Berger Growth Fund, the number of accounts in
the funds introduced during 1997 and 1998 increased 88% year to year. These
fluctuations in shareowner accounts generally are indicative of recent
performance compared to peer groups.
As a result of fluctuations in the level of assets under management
throughout 1998, revenues decreased approximately 4% in 1998 from 1997. Berger's
1998 operating expenses were essentially even with 1997. While reductions in
marketing costs resulted from a more targeted advertising program, these savings
were offset by higher salaries and wages resulting from an increased average
number of employees during 1998 versus 1997. Amortization expense attributed to
Berger was lower in 1998 due to reduced goodwill from the 1997 impairment
discussed previously.
Berger recorded $1.5 million in equity earnings from its joint venture
investment, BBOI, for the year ended December 31, 1998 compared to $0.6 million
in 1997. This increase reflects continued growth in BBOI assets under
management, which totaled (including, in both years, private accounts not
reported in Berger's total assets under management) $522 million at December 31,
1998 versus $161 million at December 31, 1997.
GENERAL
- -------
BERGER LLC FORMATION AND OWNERSHIP HISTORY. On September 30, 1999, Berger
Associates, Inc. ("BAI") assigned and transferred its operating assets and
business to its subsidiary, Berger LLC, a limited liability company. In
addition, BAI changed its name to Stilwell Management, Inc. ("SMI"). SMI owns
100% of the preferred limited liability company interests and approximately 86%
of the regular limited liability company interests in Berger. The remaining 14%
of regular limited liability company interests were issued to key SMI and Berger
employees, resulting in a non-cash compensation charge. Additionally, in late
1999 Stilwell contributed to SMI the approximate 32% investment in DST.
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<PAGE>
Prior to the change in corporate form discussed above, the Company owned
100% of BAI. The Company increased its ownership in BAI to 100% during 1997 as a
result of BAI's purchase, for treasury, of common stock from minority
shareholders and the acquisition by KCSI of additional BAI shares from a
minority shareholder through the issuance of 330,000 shares of KCSI common
stock. In connection with these transactions, BAI granted options to acquire
shares of its stock to certain employees. All of the outstanding options were
cancelled upon formation of Berger. This transaction resulted in approximately
$17.8 million of goodwill, which is being amortized over 15 years. However, the
Company recorded a $12.7 million impairment of goodwill associated with the
investment in Berger. The Company determined that a portion of the goodwill
recorded in connection with the Berger investment was not recoverable, primarily
due to below-peer performance and growth of the core Berger funds in 1996 and
1997.
The Company's 1994 acquisition of a controlling interest in BAI was
completed under a Stock Purchase Agreement ("BAI SPA") covering a five-year
period ending in October 1999. Pursuant to the BAI SPA, the Company was
required to make additional purchase price payments based upon BAI attaining
certain incremental levels of assets under management up to $10 billion by
October 1999. The Company paid $3.0 million under this BAI SPA in 1999. No
payments were made during 1998. In 1997, the Company made additional payments
of $3.1 million. These payments represent adjustments to the purchase price and
the resulting goodwill is being amortized over 15 years.
During the period from 1997 to 1999, Berger introduced six new equity funds:
the Berger Mid Cap Value Fund; the Berger Small Cap Value Fund; the Berger
Balanced Fund; the Berger Mid Cap Growth Fund; the Berger Select Fund; and, most
recently, the Berger Information Technology Fund. These funds held approximately
$1.5 billion of assets under management at December 31, 1999, more than three
times the $493 million at December 31, 1998. The core Berger funds (i.e., those
introduced by Berger prior to 1997) gained more than $1.4 billion in assets
under management during 1999, reversing these funds' experience during 1998 and
1997.
In second quarter 1999, Berger appointed a new president and chief executive
officer and realigned the management of several of its advised funds, including
the Berger Growth Fund, the Berger Balanced Fund and the Berger Select Fund.
Berger believes these changes improve its opportunity for growth in the future.
At December 31, 1999 and 1998, approximately 28.0% and 27.6%, respectively,
of Berger's total assets under management were generated through mutual fund
supermarkets and other third party distribution channels.
NELSON MONEY MANAGERS PLC
ACQUISITION OF NELSON. On April 20, 1998, Stilwell completed the acquisition of
80% of Nelson, an investment adviser and manager based in the United Kingdom.
Nelson provides investment advice and investment management services in the
United Kingdom primarily to individuals who are retired or contemplating
retirement. Nelson managed approximately $1.3 billion ((Pound)844 million) in
assets as of December 31, 1999. The acquisition, which was accounted for as a
purchase, was completed using a combination of cash, KCSI Common Stock and notes
payable. The KCSI Common Stock issued in connection with the transaction has
been reflected as a contribution from KCSI to Stilwell in the consolidated
financial statements. The total
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<PAGE>
purchase price was approximately $33 million, and the amount in excess of the
fair market value of the net tangible and identifiable intangible assets
received was recorded as goodwill, to be amortized over a period of 20 years. If
the acquisition of Nelson had been completed January 1, 1998, inclusion of
Nelson's results on a pro forma basis would not have been material to Stilwell's
consolidated results of operations for the year ended December 31, 1998.
1999
For the year ended December 31, 1999, Nelson reported a net loss of $1.4
million compared to net income of $0.6 million for the period from acquisition
to December 31, 1998 (exclusive of holding company amortization costs attributed
to the investment in Nelson in both years). This decline resulted from Nelson's
efforts to expand its revenue base through the use of its proprietary investment
services in broader markets, as well as through brand-awareness and marketing
programs initiated late in second quarter 1999. Revenues, which are earned based
on a percentage of funds under management together with a fee on the client's
initial investment, were higher in 1999 compared to 1998 due to higher assets
under management and inclusive of a full year of Nelson revenues. Costs were
higher in 1999, indicative of Nelson's growth efforts. Specifically, increases
occurred in salaries and wages (reflecting growth in the number of employees),
administration costs (infrastructure and training efforts) and advertising
costs.
1998
Nelson contributed $0.6 million to consolidated net income in 1998
(exclusive of the $1.3 million of holding company amortization charges
attributed to the investment in Nelson), reflecting the nine months of results
since being acquired by KCSI. Nelson revenues were $11.1 million for the period
from acquisition to year end 1998. Operating expenses, exclusive of
amortization of intangibles, totaled $9.9 million. The intangible amounts
associated with the acquisition of Nelson are being amortized over a 20 year
period.
EQUITY IN EARNINGS OF DST
Equity earnings from DST totaled $44.4 million for 1999 versus $30.6 million
in 1998 (exclusive of one-time fourth quarter merger-related charges).
Improvement in revenues, operating margins and DST's equity earnings of
unconsolidated affiliates contributed to this increase year to year, as did the
required capitalization of internal use software development costs totaling
approximately $20.9 million (DST's pretax total). Consolidated DST revenues
increased 9.8% over the prior year, reflecting higher financial services and
output solutions revenues. U.S. mutual fund shareowner accounts processed
increased to 56.4 million compared to 49.8 million as of December 31, 1998.
Exclusive of the one-time fourth quarter merger-related charges resulting
from the DST and USCS merger, equity earnings from DST increased $6.3 million to
$30.6 million for the year ended December 31, 1998. This improvement over 1997
was attributable to revenue growth resulting from a 10.7% increase in mutual
fund shareowner accounts serviced (reaching 49.8 million at December 31, 1998),
improved international operating results and higher operating margins year to
year (15.1% versus 14.2% in 1997).
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<PAGE>
As discussed in the "Significant Developments" section above, fourth quarter
and year ended 1998 include a one-time $23.2 million (after-tax) non-cash charge
resulting from the merger of a wholly-owned subsidiary of DST and USCS. This
charge reflects Stilwell's reduced ownership of DST (from 41% to approximately
32%), together with Stilwell's proportionate share of DST and USCS fourth
quarter merger-related costs.
INTEREST EXPENSE AND OTHER, NET
Fluctuations in interest expense from 1997 through 1999 reflect declining
average debt balances over the period. The effect on interest resulting from
these lower balances was partially offset by a modest increase in charges on
other interest-bearing balances during the three year period. Interest expense
in 1999 reflects this trend as the decline in debt-related interest from 1998
exceeded the increase resulting from higher average balances for other interest-
bearing balances. Average debt balances in 1998 were lower than 1997 due to
repayments of outstanding balances early in 1998; accordingly, 1998 interest
expense declined from 1997. Interest expense in 1997 reflected borrowings in
connection with KCSI common stock repurchases.
Other, net for full year 1999 increased $17.1 million compared to 1998,
exclusive of the $8.8 million (pretax) gain on the sale of Janus' 50% interest
in IDEX Management, Inc. ("IDEX"). Janus continues as sub-advisor to the five
portfolios in the IDEX group of mutual funds it served prior to the sale. This
increase year-to-year resulted from the following: i) realized gains by Janus
and Berger on the sale of short-term investments; ii) higher interest income
resulting from an increase in cash; iii) an increase in investment income; and
iv) gains resulting from the issuance of Janus shares to certain of its
employees. Other, net increased in 1998 versus 1997 as a result of the gain on
the sale of IDEX, partially offset by reduced 1998 other income recorded at the
financial services holding company level relating to a sales agreement with a
former affiliate.
STILWELL TRENDS AND OUTLOOK
Stilwell's earnings and cash flows are heavily dependent on prevailing
financial market conditions. Significant increases or decreases in the various
securities markets, particularly the equity markets, can have a material impact
on Stilwell's results of operations, financial condition and cash flows.
Additionally, Stilwell results are affected by the relative performance of
Janus, Berger and Nelson products, introduction and market reception of new
products, as well as other factors, including increases in the rate of return of
alternative investment products, increasing competition as the number of mutual
funds continues to grow, and changes in marketing and distribution channels.
As a result of the rapid revenue growth during the last two years,
Stilwell's operating margins have been strong. Management expects that Stilwell
will experience margin pressures in the future as the various subsidiaries
strive to ensure that the operational and administrative infrastructure
continues to meet the high standards of quality and service historically
provided to investors.
Stilwell expects to continue to participate in the earnings or losses from
its DST investment.
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<PAGE>
LIQUIDITY
Summary cash flow data is as follows (in millions):
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
1997 1998 1999 1999 2000
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used for):
Operating activities $147.4 $176.0 $ 358.2 $ 89.2 $ 189.4
Investing activities (15.4) (51.9) (45.2) (7.3) (38.7)
Financing activities (91.1) (95.3) (127.4) (75.2) (124.1)
------- ------- -------- ------- --------
Net increase in cash
and cash equivalents 40.9 28.8 185.6 6.7 26.6
Cash and cash equivalents at beginning
of period 68.8 109.7 138.5 138.5 324.1
------- ------- -------- ------- --------
Cash and cash equivalents at end
of period $109.7 $138.5 $ 324.1 $145.2 $ 350.7
======= ======= ======== ======= ========
</TABLE>
OPERATING CASH FLOWS. Stilwell's cash flow from operations has historically
been positive and sufficient to fund operations, property acquisitions, and
investments in and loans with affiliates. Borrowings from KCSI, when necessary,
have typically been used in connection with acquisitions and the KCSI Common
Stock repurchase program.
The following table summarizes consolidated operating cash flow information.
<TABLE>
<CAPTION>
(in millions):
Three Months
Ended
Year Ended December 31, March 31,
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net income $118.0 $152.2 $313.1 $ 61.0 $188.7
Depreciation and amortization 13.1 16.8 35.4 6.8 15.6
Equity in undistributed earnings (24.7) (24.7) (46.4) (11.1) (18.8)
Reduction in ownership of DST -- 29.7 -- -- --
Asset impairment charges 15.7 -- -- -- --
Gain on sale of Janus common stock -- -- -- -- (15.1)
Employee deferred compensation 8.7 3.8 5.2 (3.6) 1.0
Deferred income taxes (4.4) (12.4) 11.8 7.9 27.5
Minority interest in consolidated
earnings 24.9 33.4 57.3 11.2 27.3
Change in working capital items (4.2) (12.3) 10.4 22.2 17.2
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Deferred Commissions -- -- (29.5) (8.1) (44.7)
Other 0.3 (10.5) 0.9 2.9 (9.3)
------ ------ ------ ------ ------
Net operating cash flow $147.4 $176.0 $358.2 $ 89.2 $189.4
====== ====== ====== ====== ======
</TABLE>
Operating cash flow for the three months ended March 31, 2000 exceeded
comparable 1999 by $100.2 million, primarily due to higher net income (including
one-time gain from litigation settlement) partially offset by deferred
commission payments in 2000. Operating cash flows for the year ended December
31, 1999 exceeded 1998 by $182.2 million, primarily due to higher net income,
partially offset by deferred commission payments by Janus from sales of Janus
World Fund shares. Operating cash flows for the year ended December 31, 1998
increased by $28.6 million compared to 1997. This increase was attributable to
higher ongoing earnings in 1998, offset by various changes in working capital
items.
INVESTING CASH FLOWS. Stilwell used investing cash for property acquisitions
of $5.8, $35.0 and $50.5 million in 1997, 1998 and 1999, respectively, and $7.7
and $31.5 million during the three months ended March 31, 1999 and 2000,
respectively. The significant increase in property acquisitions in 1998, 1999
and first quarter 2000 reflects the infrastructure enhancements at Janus.
Investments in and loans with affiliates totaled $12.0, $24.3 and $17.5 million
during 1997, 1998 and 1999, respectively. The 1998 activity reflects the
acquisition of Nelson in April. The 1999 activity relates to repurchases of
Janus common stock by Janus, which resulted in additional goodwill associated
with the Stilwell Financial, Inc. investment in Janus. Net sales of investments
in advised funds in 1999 were $16.6 million compared to net purchases of $2.2
million in 1998 and $1.4 million in 1997. Stilwell reported $6.8 million in net
purchases of investments in advised funds during first quarter 2000 versus no
activity during first quarter 1999.
FINANCING CASH FLOWS. For the years ended December 31, 1997, 1998 and 1999,
the net activity with KCSI resulted in cash payments to KCSI of $73.7, $55.1 and
$89.3 million, respectively. For the three months ended March 31, 1999 and
2000, the net activity with KCSI resulted in cash payments to KCSI of $53.4
million and cash receipts from KCSI of $7.6 million, respectively. Generally,
net outflows to KCSI represent dividends received by Stilwell from Janus and
Berger treated as passed through to KCSI (after satisfaction of ongoing Stilwell
operational obligations), as well as repayments of indebtedness to KCSI. In
1998, the net activity declined from 1997 reflecting the repayment of
indebtedness to KCSI, partially offset by amounts treated as transfers to
Stilwell associated with Stilwell's acquisition of 80% of Nelson.
During the period from 1997 to 1999, the amount of distributions to minority
stockholders has continued to grow based on improved earnings at Janus. During
that period, Janus distributed at least 90% of its net income to its
stockholders each year.
See discussion under "Minority Purchase Agreements" for information relative
to existing contingencies and "Capital-Stilwell/KCSI Credit Agreements" for
information on the assumption by Stilwell of $125 million of indebtedness in
January 2000.
CAPITAL STRUCTURE
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<PAGE>
CAPITAL REQUIREMENTS. Capital requirements, when necessary, for Janus,
Berger, Nelson and other subsidiaries have been funded with cash flows from
operations and negotiated term financing.
During 1998, Janus opened a new facility in Austin, Texas as an investor
service and data center for transfer agent operations, allowing for continuous
service in the event the Denver facility is unavailable. Also, throughout the
period from 1997 to 1999, Janus has continued efforts to upgrade and expand its
information technology and facilities infrastructure (as discussed in detail
above). These efforts were generally funded with existing cash flows.
CAPITAL
Components of capital are shown as follows (in millions):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998 1999 2000
------ ------ ------ ---------
<S> <C> <C> <C> <C>
Debt due within one year $ 0.1 $ -- $ -- $ --
Long-term debt (third parties and KCSI) 84.1 16.6 -- --
------ ------ ------ ---------
Total debt (third parties and KCSI) 84.2 16.6 -- --
Stockholder's equity 348.3 540.2 814.6 889.0
------ ------ ------ ---------
Total debt plus equity $432.5 $556.8 $814.6 $889.0
====== ====== ====== =========
Total debt as a percent of
total debt plus equity 19.5% 3.0% 0.0% 0.0%
====== ====== ====== =========
</TABLE>
During the period from December 31, 1997 to March 31, 2000, Stilwell's
consolidated debt ratio (total debt as a percent of total debt plus equity)
declined as a result of debt repayments and increased earnings. Also, positive
non-cash equity adjustments related to unrealized gains (net of deferred income
tax) on "available for sale" securities held primarily by DST contributed to
higher equity.
Management anticipates that the debt ratio will remain low as a result of
profitable operations and positive operating cash flows (subject to, among
others, any stock repurchase programs approved by Stilwell's Board of Directors,
acquisitions using debt and/or any required funding pursuant to mandatory put
rights under the Janus minority purchase agreements -- see below). Note,
however, that unrealized gains on "available for sale" securities held by
Stilwell and DST, which are included net of deferred income taxes as accumulated
other comprehensive income, are contingent on market conditions and thus, are
subject to significant fluctuations in value. Significant declines in the value
of these securities would negatively impact stockholder's equity and impact
Stilwell's debt ratio.
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STILWELL / KCSI CREDIT AGREEMENTS. In May 1998, KCSI established the Credit
Facility assumable by Stilwell for its use upon separation of KCSI's two
business segments. On May 14, 1999 KCSI renewed the Credit Facility. The Credit
Facility has been transferred to Stilwell. The Credit Facility contains
interest rates below prime and terms which can be fixed up to the expiration
date. At December 31, 1999, the full $100 million was available under the
Credit Facility. Management elected to not renew the Credit Facility upon its
expiration on May 13, 2000.
On January 11, 2000, KCSI arranged a new $200 million 364-day senior
unsecured competitive Advance/Revolving Credit Facility ("New Credit Facility").
KCSI borrowed $125 million under this facility and used the proceeds to retire
other debt obligations. Stilwell has assumed the New Credit Facility, including
the $125 million borrowed thereunder, thereby reducing its stockholders' equity.
Upon such assumption, KCSI was released from all obligations, and Stilwell
became the sole obligor, under the New Credit Facility. Stilwell may assign and
delegate all or a portion of its rights and obligations under the New Credit
Facility to one or more of its domestic subsidiaries. In March 2000, Stilwell
repaid the $125 million borrowed under the New Credit Facility.
Two borrowing options are available under the New Credit Facility: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive advance option is based on rates
obtained from bids as selected by Stilwell in accordance with the lenders'
standard competitive auction procedures. Interest on the revolving credit
option accrued based on the type of loan (e.g., Eurodollar, Swingline, etc.),
with rates computed using LIBOR plus 0.35% per annum or, alternatively, the
highest of the prime rate, the Federal Funds Effective Rate plus 0.005% or the
Base Certificate of Deposit Rate plus 1%.
Stilwell, as a continuation of its practice of providing credit facilities
to its subsidiaries, has provided an intercompany credit facility to Janus for
use by Janus for general corporate purposes, effectively reducing the amount of
the credit facilities available for Stilwell's other purposes. Stilwell may
also require additional capital sooner than anticipated to the extent that
Stilwell's operations do not progress as anticipated or if certain put rights
are exercised by Janus stockholders. Stilwell intends to obtain any additional
financing for general corporate purposes on substantially the same terms and
conditions as the Credit Facility and New Credit Facility.
The credit facilities contain a number of covenants, including various
financial covenants. With respect to the Credit Facility, Stilwell was in
compliance with these various provisions, including the financial covenants, as
of December 31, 1998 and 1999 and March 31, 2000. Because of certain financial
covenants contained in the credit facilities, however, maximum utilization of
Stilwell's lines of credit may be restricted. Based on financial information as
of March 31, 2000, Stilwell would have the ability to fund the purchase of stock
required if all such put rights had been exercised without, in management's
judgment, causing a breach of any of Stilwell's current credit facility
restrictions. See "Risk Factors-Stilwell May be Required to Purchase or Sell
Janus Common Stock." Stilwell has not obtained the concurrence of its lenders
with this judgment but the existence of the Janus put rights was disclosed to
those lenders at the time they provided the existing credit facilities. In any
event, if additional capital is needed for operations or
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the honoring of the Janus put rights, management would not necessarily rely on
existing credit facilities but would likely seek to obtain additional financing
on substantially the same terms and conditions as existing credit facilities.
MINORITY PURCHASE AGREEMENTS. A stock purchase agreement with Thomas H.
Bailey ("Mr. Bailey"), Janus' Chairman, President and Chief Executive Officer,
and another Janus stockholder (the "Janus Stock Purchase Agreement") and certain
restriction agreements with other Janus minority stockholders contain, among
other provisions, mandatory put rights whereby under certain circumstances,
Stilwell would be required to purchase the minority interests of such Janus
minority stockholders at a fair market value purchase price equal to fifteen
times the net after-tax earnings over the period indicated in the relevant
agreement, or in some circumstances as determined by an independent appraisal.
The purchase price will be determined by independent appraisal if the appraisal
process is elected by either the selling stockholder or Stilwell, except that no
appraisal process is applicable to shares held by Mr. Bailey and one other
stockholder. Under the Janus Stock Purchase Agreement, termination of Mr.
Bailey's employment could require a purchase and sale of the Janus common stock
held by him. If other minority holders terminated their employment, some or all
of their shares also could be subject to mandatory purchase and sale
obligations. Certain other minority holders who continue their employment also
could exercise puts. If all of the mandatory purchase and sale provisions and
all the puts under such Janus minority stockholder agreements were implemented,
Stilwell would have been required to pay approximately $833 million as of March
31, 2000, compared to $789, $447 and $337 million at December 31, 1999, 1998 and
1997, respectively. In the future these amounts may be higher or lower depending
on Janus' earnings, fair market value and the timing of the exercise. Payment
for the purchase of the respective minority interests is to be made under the
Janus Stock Purchase Agreement within 120 days after receiving notification of
exercise of the put rights. Under the restriction agreements with certain other
Janus minority stockholders, payment for the purchase of the respective minority
interests is to be made 30 days after the later to occur of (i) receiving
notification of exercise of the put rights or (ii) determination of the purchase
price through the independent appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements and
restriction agreements with other minority stockholders also contain provisions
whereby upon the occurrence of a Change in Ownership (as defined in such
agreements) of KCSI or Stilwell, Stilwell may be required to purchase such
holders' Janus stock or, as to the stockholders that are parties to the Janus
Stock Purchase Agreement, at such holders' option, to sell its Janus stock to
such minority stockholders. The price for such purchase or sale would be at a
fair market value purchase price equal to fifteen times the net after-tax
earnings over the period indicated in the relevant agreement, or in some
circumstances as determined by Janus' Stock Option Committee or as determined by
an independent appraisal. If Stilwell had been required to purchase the
holders' Janus common stock after a Change in Ownership as of March 31, 2000,
the purchase price would have been approximately $1.14 billion (reduced by the
amount paid upon exercise of any mandatory put rights) (see additional
information in Note 13 to the Stilwell consolidated financial statements).
Stilwell would account for any such purchase as the acquisition of a
minority interest under Accounting Principles Board Opinion No. 16, Business
Combinations.
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As of March 31, 2000, Stilwell had $200 million in credit facilities
available and had cash balances at the Stilwell holding company level in excess
of $147.5 million. The market value of Stilwell's 32% investment in DST was
approximately $1.38 billion using DST's closing price on the New York Stock
Exchange on May 22, 2000. Although Stilwell has no intention of converting this
investment into cash, management believes that, if cash were needed to fund the
purchase of Janus common stock from minority stockholders, it could liquidate
its investment in DST within 120 days and receive approximately $826 million
after taking into account payment of approximately $512 million in federal and
state income taxes under current statutory rates, underwriting discounts and
commissions estimated at $41 million and payment of associated transaction
costs, estimated at $900,000. To the extent that available credit facilities,
existing cash balances and proceeds from the liquidation of Stilwell's
investment in DST were insufficient to fund its purchase obligations, Stilwell
had access to the capital markets and, with respect to the Janus Stock Purchase
Agreement, had 120 days to raise additional sums.
OVERALL LIQUIDITY. Stilwell's cash management approach generally
reflects efforts to minimize cash balances through debt repayment, when
applicable. Cash not required for immediate operating or investing activities
will be utilized to repay indebtedness under lines of credit. This approach is
used to help mitigate Stilwell's floating-rate debt exposure to fluctuations in
interest rates. If all indebtedness has been paid, Stilwell generally invests
cash in a money market or similar account.
Pursuant to the Janus Stock Purchase Agreement, Janus has distributed at
least 90% of its net income to its stockholders each year. Stilwell uses its
portion of these dividends in accordance with its strategic plans, which plans
have included, among others, repayment of indebtedness to KCSI, funding in
connection with KCSI's Common Stock repurchase program, and investments in
affiliates. Subsequent to December 31, 1999, Janus' Board of Directors declared
and Janus paid approximately $100 million in dividends, of which approximately
$17.9 million was paid to minority stockholders.
Purchases of class B shares in the Janus World Funds require a commission to
be advanced by Janus. Deferred commissions were not material to the December
31, 1998 consolidated financial statements. Funding during the year ended
December 31, 1999 totaled $29.5 million and during the three months ended March
31, 2000 totaled $44.7 million. As funding requirements grow in future years,
Janus expects to obtain a credit line either through assignment of the New
Credit Facility (see above) or from third parties.
Stilwell believes it has adequate resources available - including a
sufficient line of credit (within the financial covenants referred to above) and
businesses which have historically been positive cash flow generators - to
satisfy its operating and capital requirements, and the continuing business
needs of Stilwell during 2000.
OTHER
JANUS CAPITAL CORPORATION
The Janus Stock Purchase Agreement, as amended, provides that so long as Mr.
Bailey is a holder of at least 5% of the common stock of Janus and continues to
be employed as President or Chairman of the Board of Janus (or, if he does not
serve as President, James P. Craig, III serves as President and Chief Executive
Officer or Co-Chief Executive Officer with Mr. Bailey),
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Mr. Bailey shall continue to establish and implement policy with respect to the
investment advisory and portfolio management activity of Janus. The agreement
also provides that, in furtherance of such objective, so long as both the
ownership threshold and officer status conditions described above are satisfied,
Stilwell will vote its shares of Janus common stock to elect directors of Janus,
at least the majority of whom are selected by Mr. Bailey, subject to Stilwell's
approval, which approval may not be unreasonably withheld. The agreement further
provides that any change in management philosophy, style or approach with
respect to investment advisory and portfolio management policies of Janus shall
be mutually agreed upon by Stilwell and Mr. Bailey.
Stilwell does not believe Mr. Bailey's rights under the Janus Stock Purchase
Agreement are "substantive," within the meaning of Issue 96-16 of the Emerging
Issue Task Force ("EITF 96-16") of the Financial Accounting Standards Board,
because Stilwell can terminate those rights at any time by removing Mr. Bailey
as an officer of Janus. Stilwell also believes that the removal of Mr. Bailey
would not result in significant harm to Stilwell based on the factors discussed
below. Colorado law provides that removal of an officer of a Colorado
corporation may be done directly by its stockholders if the corporation's bylaws
so provide. While Janus' bylaws contain no such provision currently, Stilwell
has the ability to cause Janus to amend its bylaws to include such a provision.
Under Colorado law, Stilwell could take such action at an annual meeting of
stockholders or make a demand for a special meeting of stockholders. Janus is
required to hold a special stockholders' meeting upon demand from a holder of
more than 10% of its common stock and to give notice of the meeting to all
stockholders. If notice of the meeting is not given within 30 days of such a
demand, the District Court is empowered to summarily order the holding of the
meeting. As the holder of more than 80% of the common stock of Janus, Stilwell
has the requisite votes to compel a meeting and to obtain approval of the
required actions at such a meeting.
Stilwell has concluded, supported by an opinion of legal counsel, that it
could carry out the above steps to remove Mr. Bailey without breaching the Janus
Stock Purchase Agreement and that if Mr. Bailey were to challenge his removal by
instituting litigation, his sole remedy would be for damages and not injunctive
relief and that Stilwell would likely prevail in that litigation.
Although Stilwell has the ability to remove Mr. Bailey, it has no present
plan or intention to do so, as he is one of the persons regarded as most
responsible for the success of Janus. The consequences of any removal of Mr.
Bailey would depend upon the timing and circumstances of such removal. Mr.
Bailey could be required to sell, and Stilwell could be required to purchase,
his Janus common stock, unless he were terminated for cause. Certain other
Janus minority stockholders would also be able, and, if they terminated
employment, required, to sell to Stilwell their shares of Janus common stock.
The amounts that Stilwell would be required to pay in the event of such purchase
and sale transactions could be material. See Note 13 to the Stilwell
consolidated financial statements. Such removal would have also resulted in
acceleration of the vesting of a portion of the shares of restricted Janus
common stock held by other minority stockholders, having an approximate
aggregate value of $16.3 million as of December 31, 1999.
There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in
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the loss of other valuable employees or clients of Janus. The likelihood of
occurrence and the effects of any such employee or client departures cannot be
predicted and may depend on the reasons for and circumstances of Mr. Bailey's
removal. However, Stilwell believes that Janus would be able in such a situation
to retain or attract talented employees because: (i) of Janus' prominence; (ii)
Janus' compensation scale is at the upper end of its peer group; (iii) some or
all of Mr. Bailey's repurchased Janus stock could be then available for sale or
grants to other employees; and (iv) many key Janus employees must continue to be
employed at Janus to become vested in currently unvested restricted stock valued
in the aggregate (after considering additional vesting that would occur upon the
termination of Mr. Bailey) at approximately $36 million as of December 31, 1999.
In addition, notwithstanding any removal of Mr. Bailey, Stilwell would expect to
continue its practice of encouraging autonomy by its subsidiaries and their
boards of directors so that management of Janus would continue to have
responsibility for Janus' day-to-day operations and investment advisory and
portfolio management policies and, because it would continue that autonomy,
Stilwell would expect many current Janus employees to remain with Janus.
With respect to clients, Janus' investment advisory contracts with its
clients are terminable upon 60 days' notice and in the event of a change in
control of Janus. Under certain circumstances a material reduction in the
ownership of Janus common stock by Mr. Bailey or his departure from Janus by
removal, death, or resignation could be a change of control, resulting in an
assignment, because he has contractual rights to select a majority of the
directors of Janus, pursuant to the Janus Board Selection Rights. Under the
1940 Act, "control" is defined as "the power to exercise a controlling influence
over the management or policies of a company, unless such power is solely the
result of an official position with the company." The 1940 Act establishes a
presumption that any person who owns less than 25% of the voting securities of a
company does not control that company. Since Mr. Bailey owns less than 25% of
Janus, he is presumed to not control Janus. That presumption can be rebutted by
evidence but, under the 1940 Act, it continues until the SEC issues an order
determining that the presumption has been rebutted. The SEC has issued such an
order in the past with regard to a holder of less than 25% of the voting
securities of a company, but on facts much different from Mr. Bailey's
circumstances. The SEC has not issued such an order with respect to Mr. Bailey
and it is unclear whether it would do so. If the SEC were to issue such an
order, Mr. Bailey's departure from Janus, or a material reduction in his
ownership of Janus common stock, which eliminated his Janus Board Selection
Rights could be deemed a change in control of Janus. Such a change in control
would result, under the 1940 Act and under the Advisers Act, in an assignment
and termination of Janus' investment advisory contracts, requiring approval of
fund shareowners and other advisory clients to obtain new agreements. However,
in view of Janus' investment record, Stilwell has concluded it is reasonable to
expect that in such an event most of Janus' clients would renew their investment
advisory contracts, requiring approval of fund shareowners and other advisory
clients to obtain new agreements. This conclusion is reached because (i) Janus
relies on a team approach to investment management and development of investment
expertise, (ii) Mr. Bailey has not served as a portfolio manager for any Janus
fund for several years, (iii) a succession plan exists under which Mr. James P.
Craig, III would succeed Mr. Bailey, and (iv) Janus should be able to continue
to attract talented portfolio managers. It is reasonable to expect that Janus'
clients' reaction will depend on the circumstances, including, for example, how
much of the Janus team remained in place and what investment advisory
alternatives were available.
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The Janus Stock Purchase Agreement and other agreements provide for rights
of first refusal on the part of Janus minority stockholders, Janus and Stilwell,
with respect to certain sales of Janus stock. These agreements also require
Stilwell to purchase the shares of Janus minority stockholders in certain
circumstances. In addition, in the event of a Change in Ownership of Stilwell,
as defined in the Janus Stock Purchase Agreement, Stilwell may be required to
sell its stock of Janus to the stockholders who are parties to such agreement or
to purchase such holders' Janus stock. In the event Mr. Bailey were terminated
for any reason within one year following a Change in Ownership, he would be
entitled to a severance payment, amounting, at December 31, 1999, to
approximately $2 million. Purchase and sales transactions under these
agreements are to be made based upon a multiple of the net earnings of Janus
and/or other fair market value determinations, as defined therein. See Note 13
to the Stilwell consolidated financial statements.
Some Janus officers and directors serve as officers and/or directors of
certain of the registered investment companies to which Janus acts as investment
advisor.
Year 2000.
The Year 2000 discussion below contains forward-looking statements,
including those concerning Stilwell's plans and expected completion dates, cost
estimates, assessments of Year 2000 readiness for Stilwell as well as for third
parties, and the potential risks of any failure on the part of Stilwell or third
parties to be Year 2000 ready on a timely basis. Forward-looking statements
involve a number of risks and uncertainties that could cause actual results to
differ from those projected. See additional information in the opening
paragraph under "Introduction" in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the opening paragraph under
"Risk Factors" in this Information Statement.
CURRENT STATUS. Stilwell and its subsidiaries experienced no material year 2000
related issues when the date moved to January 1, 2000, nor have any issues
arisen as of the date of this Information Statement. Although this initial
transition to year 2000 occurred without adverse effects, there still exists
possible year 2000 issues for those applications, systems, processes and system
hardware which have yet to be used in live activities and transactions.
Stilwell continues to evaluate and pursue discussions with its various
customers, partners and vendors with respect to Year 2000 issues, and all such
parties may not be Year 2000 ready. While Stilwell cannot fully determine its
impact, the inability of its computer systems to operate properly in year 2000
could result in significant difficulties in processing and completing
fundamental transactions. In such events, Stilwell's results of operations,
financial position and cash flows could be materially adversely affected.
GENERAL. Many existing computer programs and microprocessors that use only two
digits (rather than four) to identify a year could fail or create erroneous
results with respect to dates after December 31, 1999 if not corrected to read
all four digits. This computer program flaw is expected to affect all companies
and organizations, either directly (through a company's own computer programs or
systems that use computer programs, such as telephone systems) or indirectly
(through customers and vendors of the
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company).
Stilwell (including its subsidiaries and affiliates) depends upon its
computer and other systems and the computers and other systems of third parties
to conduct and manage its businesses. Additionally, Stilwell's products and
services are heavily dependent upon using accurate dates in order to function
properly. These Year 2000 related issues may also adversely affect the
operations and financial performance of one or more of Stilwell's customers and
suppliers as well as the companies in which Janus, Berger and Nelson invest. As
a result, the failure of Stilwell's computer and other systems, products or
services, the computer systems and other systems upon which Stilwell depends, or
Stilwell's customers, suppliers or the companies in which Janus, Berger and
Nelson invest to be Year 2000 ready could have a material adverse impact on
Stilwell's results of operations, financial position and cash flows. Stilwell
is unable to assess the extent or duration of that impact at this time, but they
could be substantial.
KEY AREAS AND PROGRESS. The following provides a summary of each area and
the progress toward identifying and resolving Year 2000 issues:
IT SYSTEMS. The IT systems (including mission critical and significant non-
critical operating, accounting and supporting systems) and underlying hardware
for Stilwell have operated in the year 2000 and no material failures or problems
have arisen.
NON-IT SYSTEMS. All equipment that contains an internal clock or embedded
micro-processor has been analyzed for Year 2000 and replacement and upgrades of
this type of equipment is completed.
THIRD PARTY SYSTEMS. Stilwell depends heavily on third party systems in the
operation of its businesses. As part of the Year 2000 project, significant
third party relationships were evaluated to determine the status of their Year
2000 readiness and the potential impact on Stilwell's operations if those
significant third parties fail to become Year 2000 ready.
Both Janus and Berger participated in various industry-wide efforts and were
required to periodically report to the SEC their progress with respect to Year
2000 preparedness. Transactions and other activities have been successfully
performed in the year 2000 for certain third party entities. Stilwell will
continue to monitor its third party relationships for Year 2000 issues.
TESTING AND DOCUMENTATION PROCEDURES. All material modifications to IT and
non-IT systems are being documented and maintained by the project teams for
purposes of tracking the Year 2000 project and as a part of Stilwell's due
diligence process.
YEAR 2000 RISKS. Stilwell continues to evaluate the principal risks
associated with its IT and non-IT systems, as well as third party systems if
they were not to operate properly in the Year 2000. Areas that could be
affected include, but are not limited to, the ability to accurately track
pricing and trading information, obtain and process customer orders and investor
transactions, order and obtain critical supplies, and operate equipment and
control systems. In addition, the investment performance of various funds could
be adversely affected if the trading prices of the capital stock of a number of
companies within such funds are lower as a
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result of Year 2000 related issues. Stilwell has no basis to form an estimate of
costs or lost revenues at this time.
Stilwell believes, however, that the risks involved with the successful
completion of its Year 2000 conversion relate primarily to available resources
and third party readiness. Stilwell has allocated substantial resources to the
Year 2000 project and believes that it is adequately staffed by employees,
consultants and contractors.
Based on work performed and information received, Stilwell believes its key
suppliers, customers and other significant third party relationships are
prepared for the Year 2000 in all material respects (or that acceptable
alternatives are available); however, management of Stilwell makes no assurances
that all such parties are Year 2000 compliant.
In the event that Stilwell or key third parties are not Year 2000 ready,
Stilwell's results of operations, financial position and cash flows could be
materially adversely affected.
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CONTINGENCY PLANS. Stilwell and its subsidiaries have identified
alternative plans in the event that the Year 2000 project is not completed on a
timely basis or otherwise does not meet anticipated needs. Stilwell has made
alternative arrangements in the event that critical suppliers, customers,
utility providers and other significant third parties are not Year 2000 ready.
YEAR 2000 COSTS. Through December 31, 1999, Stilwell has spent
approximately $13 million in connection with ensuring that all computer programs
are compatible with Year 2000 requirements. Stilwell anticipates future
spending of less than $1 million in connection with this process. Current
accounting principles require all costs associated with Year 2000 issues to be
expensed as incurred. A portion of these costs will not result in an increase
in expense to Stilwell because existing employees and equipment are being used
to complete the project.
FOREIGN EXCHANGE MATTERS AND OTHER FINANCIAL INSTRUMENTS. In connection
with Stilwell's investment in Nelson, an 80% owned subsidiary operating in the
United Kingdom, and Janus' investment in Janus International (UK) Limited
("Janus UK"), matters arise with respect to financial accounting and reporting
for foreign currency transactions and for translating foreign currency financial
statements into U.S. dollars. Stilwell and Janus follow the requirements
outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation", and related authoritative guidance.
Nelson's and Janus UK's financial statements are accounted for using the
British pound as the functional currency. Any gains or losses arising from
transactions not denominated in the British pound are recorded as a foreign
currency gain or loss and included in the results of operations of the
respective companies. The translation of those companies' financial statements
from the British pound into the U.S. dollar results in an adjustment to
accumulated other comprehensive income. At December 31, 1998 and 1999, the
cumulative translation adjustment was not material.
Stilwell continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
Nelson as market conditions change or exchange rates fluctuate. At March 31,
2000, Stilwell had no material outstanding foreign currency hedging instruments.
Stilwell intends to respond to evolving business and market conditions in order
to manage risks and exposures associated with Stilwell's various operations.
NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities measured at fair value. Pursuant to
an amendment by the FASB, FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000 and should not be retroactively applied to
financial statements of periods prior to adoption.
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SEGMENT DISCLOSURES. In 1998, Stilwell adopted the provisions of
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires disclosure
of selected information about operating segments in interim financial reports
issued to stockholders. FAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of FAS 131 did not have a material impact on the disclosures of
Stilwell.
COMPREHENSIVE INCOME. Effective January 1, 1998, Stilwell adopted the
provisions of Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("FAS 130"), which establishes standards for reporting and
disclosure of comprehensive income and its components in the financial
statements. Prior year information has been included pursuant to FAS 130.
Stilwell's other comprehensive income consists primarily of unrealized gains and
losses relating to investments held by Stilwell and DST as "available for sale"
securities as defined by FAS 115. Stilwell records its proportionate share of
any unrealized gains or losses related to these investments, net of deferred
income taxes, in stockholder's equity as accumulated other comprehensive income.
The unrealized gain related to these investments increased $42.6, $39.5 and
$63.8 million ($25.9, $24.3 and $39.3 million, net of deferred income taxes) for
the years ended December 31, 1997, 1998 and 1999, respectively. The unrealized
gain related to these investments increased $0.3 and $8.0 million ($0.2 and $5.0
million, net of deferred income taxes) for the three months ended March 31, 1999
and 2000, respectively.
MINORITY RIGHTS. EITF 96-16 of the FASB reached a consensus that
substantive "participating" minority rights which provide the minority
stockholder with the right to effectively control significant decisions in the
ordinary course of an investee's business could impact whether the majority
stockholder should consolidate the investee. After evaluation of the rights of
the minority stockholders of its consolidated subsidiaries and in particular the
contractual rights of Mr. Bailey described in "Other--Janus Capital
Corporation," KCSI management concluded that application of EITF 96-16 did not
affect the Company's consolidated financial statements. This conclusion with
respect to Janus is currently under discussion with the Staff of the SEC and,
accordingly, is subject to change. If the consolidation of Janus is
discontinued, the Company will restate certain of its financial statements. See
Notes 13 and 15 to the Stilwell consolidated financial statements.
INTERNALLY DEVELOPED SOFTWARE. In 1998, Stilwell adopted the guidance
outlined in American Institute of Certified Public Accountant's Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that computer
software costs incurred in the preliminary project stage, as well as training
and maintenance costs be expensed as incurred. This guidance also requires that
direct and indirect costs associated with the application development stage of
internal use software be capitalized until such time that the software is
substantially complete and ready for its intended use. Capitalized costs are to
be amortized on a straight line basis over the useful life of the software. The
adoption of this guidance did not have a
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material impact on Stilwell's results of operations, financial position or cash
flows.
LITIGATION. From time to time Stilwell is involved in various legal
actions arising in the normal course of business. While the outcome of the
various legal proceedings involving Stilwell cannot be predicted with certainty,
it is the opinion of management (after consultation with legal counsel) that the
litigation reserves of Stilwell are adequate and that legal actions involving
Stilwell and ultimate resolution of these matters will not be material to
Stilwell's consolidated financial position, results of operations or cash flows.
REGULATORY INFLUENCE. Virtually all aspects of Stilwell's business is
subject to various laws and regulations. Applicable laws include the 1940 Act,
the Investment Advisers Act of 1940, as amended (the "Advisers Act"), the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and various state securities and related laws (including laws in the United
Kingdom). Applicable regulations include, but are not limited to, in the United
States, the rules and regulations of the SEC, the Department of Labor (the
"DOL"), securities exchanges and the National Association of Securities Dealers
(the "NASD") and in the United Kingdom, the Investment Management Regulatory
Organization Limited ("IMRO"), the Personal Investment Authority ("PIA") and the
Financial Services Authority ("FSA"). While management of Stilwell is required
to devote substantial time and effort in regulatory compliance issues, Stilwell
does not foresee that such compliance under present statutes will impair its
competitive capability or result in any material effect on results of
operations.
INFLATION. Inflation has not had a significant impact on Stilwell's
operations in the past three years. Generally accepted accounting principles
require the use of historical costs. Replacement cost and related depreciation
expense of Stilwell's property would be higher than the historical costs
reported. Any increase in expenses from these fixed costs, coupled with
variable cost increases due to significant inflation, would be difficult to
recover through price increases given the competitive environments of Stilwell's
principal subsidiaries.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Stilwell utilizes various financial instruments which entail certain
inherent market risks. Generally, these instruments have not been entered into
for trading purposes. The following information, together with information
included in other parts of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, describe the key aspects of
certain financial instruments which have market risk to Stilwell.
INTEREST RATE SENSITIVITY
Stilwell's interest sensitive liabilities include its long-term floating-
rate debt obligations. At December 31, 1998 and 1999, Stilwell had no
indebtedness outstanding under any line of credit.
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FOREIGN EXCHANGE SENSITIVITY
Stilwell owns 80% of Nelson, a United Kingdom based financial services
corporation and Janus indirectly owns 100% of Janus UK. In connection with
these investments, matters arise with respect to financial accounting and
reporting for foreign currency transactions and for translating foreign currency
financial statements into U.S. dollars. Therefore, Stilwell is exposed to
fluctuations in the value of the British pound.
As the relative price of the British pound fluctuates versus the U.S.
dollar, Stilwell's proportionate share of the earnings or losses of the
respective companies is affected. The following table provides an example of
the potential impact of a 10% change in the price of the British pound assuming
that Nelson and Janus UK each have earnings of $1,000 and using ownership
interests at December 31, 1998. The British pound is the functional currency.
<TABLE>
<CAPTION>
Nelson Janus UK
------ --------
<S> <C> <C>
Assumed Earnings (Pound) 1,000 (Pound) 1,000
Exchange Rate (to U.S. $) 0.5 to 1 0.5 to 1
------------ -------------
Converted U.S. Dollars $2,000 $2,000
Stilwell Ownership Percentage
of Nelson and Janus UK 80% 100%
------------- -------------
Assumed Earnings $1,600 $2,000
Assumed 10% increase in
Exchange Rate 0.55 to 1 0.55 to 1
------------- -------------
Converted to U.S. Dollars $1,818 $1,818
Stilwell Ownership Percentage
of Nelson and Janus UK 80% 100%
------------- -------------
Assumed Earnings $1,454 $1,818
------ ------
Effect of 10% increase in
Exchange Rate $ (146) $ (182)
====== ======
</TABLE>
The impact of changes in exchange rates on the balance sheet are reflected
in a cumulative translation adjustment account as a part of accumulated other
comprehensive income and do not affect earnings.
While not currently utilizing foreign currency instruments to hedge its
U.S. dollar investment in Nelson, Stilwell continues to evaluate existing
alternatives with respect to its investment in Nelson as market conditions and
exchange rates fluctuate.
AVAILABLE FOR SALE INVESTMENT SENSITIVITY
Both Janus and Berger invest a portion of the revenues earned from
providing investment advisory services in certain of their respective non-money
market sponsored funds. These investments are classified as available for sale
securities pursuant to FAS 115. Accordingly, these investments are carried in
Stilwell's consolidated financial statements at fair market value
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and are subject to the investment performance of the underlying sponsored fund.
Any unrealized gain or loss is recognized upon the sale of the investment.
Additionally, DST, a 32% owned equity investment, holds available for sale
investments which may affect Stilwell's consolidated financial statements.
Similarly to the Janus and Berger securities, any changes to the market value of
the DST available for sale investments are reflected, net of deferred income
tax, in DST's "accumulated other comprehensive income" component of its equity.
Accordingly, Stilwell records its proportionate share of this amount as part of
the investment in DST. While these changes in market value do not result in any
impact to Stilwell's consolidated results of operations currently, upon
disposition by DST of these investments, Stilwell will record its proportionate
share of the gain or loss as a component of equity earnings.
EQUITY PRICE SENSITIVITY
As noted above, Stilwell owns 32% of DST, a publicly traded company. While
changes in the market price of DST are not reflected in Stilwell's consolidated
results of operation or financial position, they may affect the perceived value
of the Stilwell Common Stock. Specifically, the market value of DST shares at
any given point in time multiplied by the number of shares owned by Stilwell
provides an amount, which when divided by the outstanding number of shares of
Stilwell Common Stock, derives a per share "value" presumably attributable to
Stilwell's investment in DST. Fluctuations in this "value" as a result of
changes in the DST market price may affect Stilwell's stock price.
The revenues earned by Janus, Berger and Nelson are dependent on the
underlying assets under management in the funds to which investment advisory
services are provided. The portfolio of investments included in these various
funds include combinations of equity, bond, annuity and other types of
securities. Fluctuations in the value of these various securities are common
and are generated by numerous factors, including, among others, market
volatility, the overall economy, inflation, changes in investor strategies,
availability of alternative investment vehicles, government regulations and
others. Accordingly, declines in any one or a combination of these factors, or
other factors not separately identified, may reduce the value of investment
securities and, in turn, the underlying assets under management on which
Stilwell revenues are earned.
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BUSINESS
BACKGROUND
KCSI is a holding company that has owned and managed, through its direct
and indirect subsidiaries, two principal business segments: rail transportation
and financial services. ONLY THE FINANCIAL SERVICES SEGMENT IS INCLUDED IN THE
DISTRIBUTION. The primary entities comprising the financial services segment are
Janus, an approximately 81.5% owned subsidiary; Berger, of which SMI owns 100%
of Berger preferred limited liability company interests and approximately 86% of
the Berger regular limited liability company interests; Nelson, an 80% owned
subsidiary; DST, an equity investment in which SMI holds an approximately 32%
interest, and the Miscellaneous Corporations. Janus is the principal business of
the financial services segment of KCSI, representing 97% of assets under
management at December 31, 1999 and 95% of revenues and 91% of net income for
the year ended December 31, 1999. The businesses which comprise the financial
services segment offer a variety of asset management and related financial
services to registered investment companies, retail investors, institutions and
individuals.
After extensive review and discussion, the Board of Directors of KCSI
concluded that it is in the best interests of KCSI and its stockholders for KCSI
to focus on the rail transportation business and for a separate company to focus
on the financial services business. See "The Distribution-Background and
Reasons for the Distribution." On January 23, 1998, KCSI formed Stilwell as a
holding company for the group of businesses and investments that comprised the
financial services segment of KCSI. In connection with the Distribution, KCSI
transferred to Stilwell KCSI's ownership interests in Janus, Berger, Nelson,
DST, the Miscellaneous Corporations and certain other financial services-related
assets, and Stilwell assumed all of KCSI's liabilities associated with the
assets transferred, effective July 1, 1999.
STILWELL FINANCIAL, INC.
Stilwell Financial, Inc. is a holding company that manages its investments
in the principal subsidiaries and equity investments more particularly described
below and elsewhere in this Information Statement. The functions performed by
Stilwell Financial, Inc. include consolidated accounting; consolidated tax
return preparation and filing; corporate secretarial functions; banking and
financing; administration of retirement and stock option plans; internal
auditing; investor relations; analysis and evaluation of acquisition and
strategic business opportunities; insurance assessment and coverage and holding
company legal services. Stilwell management does not have direct experience in
mutual fund investment advisory or portfolio management services and will rely
on it subsidiaries' managements to perform such functions. At Janus, Mr. Bailey
will continue to establish and implement policy with respect to the investment
advisory and portfolio management activity of that subsidiary, and has the right
to select a majority of the directors of Janus, pursuant to the Janus Board
Selection Rights.
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STILWELL'S PRINCIPAL SUBSIDIARIES AND EQUITY INVESTMENTS
JANUS CAPITAL CORPORATION
-------------------------
Janus and its adviser subsidiaries are investment advisers registered with
the SEC or other regulatory bodies, and are the investment advisers or sub-
advisers to the Janus Advised Funds and Janus Sub-Advised Funds and Private
Accounts. As of March 31, 2000, Janus had total assets under management of
$315.3 billion, of which $255.0 billion were in the Janus Advised Funds and the
remainder were in the Janus Sub-Advised Funds and Private Accounts. Janus
primarily offers equity portfolios to investors, which comprised approximately
95% of total assets under management for Janus and its affiliates at March 31,
2000. At that date, funds advised by Janus had approximately 5.4 million
shareowner accounts. For the five-year period ended March 31, 2000, Janus'
total assets under management increased 1,198 percent.
Janus Management Corporation was formed in 1969 by Mr. Bailey (Janus'
current president and chairman) and served as the initial investment adviser to
the Janus Advised Funds, which began selling shares in 1970. Janus Capital
Corporation was incorporated on June 27, 1978 as Bailey & Griffiths, Ltd.
(Bailey & Griffiths, Ltd. was the successor to an investment adviser partnership
which originally was named Logan Capital Management). In 1984, Janus Management
Corporation was merged into Janus Capital Corporation. In 1984 and 1985, KCSI
acquired an 80% ownership interest in Janus. Subsequent sales of stock in 1995,
1997, 1998 and 1999 resulted in approximately 6% of Janus being owned by
approximately 63 employees (subject to vesting), in addition to the 12% owned by
Mr. Bailey, as of December 31, 1999.
Janus has four operating subsidiaries. One such subsidiary, Janus Service
Corporation ("Janus Service"), provides administrative and shareowner services
to the Janus Advised Funds, and is a registered transfer agent. Another
subsidiary, Janus Distributors, Inc. ("Janus Distributors"), serves as a
distributor of the Janus Advised Funds and is a registered broker-dealer. Janus
Capital International, Ltd. ("Janus International"), is an investment advisor
registered with the SEC. Janus International also provides marketing and client
services for Janus World Funds outside of Europe. Janus UK, an England and
Wales company, is an investment advisor for certain non-U.S. customers,
including Janus World Funds, and is registered with the United Kingdom's IMRO.
Janus UK conducts securities trading from London and handles marketing and
client servicing for Janus World Funds in Europe.
The following table sets forth (in millions) beginning assets, the changes
during each period and ending assets for the Janus Advised Funds and the Janus
Sub-Advised Funds and Private Accounts.
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Janus Advised Funds:
Beginning Assets $18,013.2 $24,633.7 $37,123.0 $ 54,572.2 $ 86,983.3 $ 86,983.3 $200,019.6
Net Sales 1,487.8 7,487.0 9,141.6 11,848.0 46,328.7 11,783.3 35,361.5
Appreciation 5,132.7 5,002.3 8,307.6 20,563.1 66,707.6 11,550.3 19,600.7
--------- --------- --------- ---------- ---------- ---------- ----------
Ending Assets 24,633.7 37,123.0 54,572.2 86,983.3 200,019.6 110,316.9 254,981.8
--------- --------- --------- ---------- ---------- ---------- ----------
Janus Sub-Advised Funds
and Private Accounts:
Beginning Assets 4,848.2 6,495.3 9,551.2 13,224.6 21,274.3 21,274.3 49,494.2
Net Sales (redemptions) (148.0) 1,812.4 1,576.1 1,529.3 10,037.9 1,491.3 6,725.6
Appreciation 1,795.1 1,243.5 2,097.3 6,520.4 18,182.0 3,754.5 4,057.9
--------- --------- --------- ---------- ---------- ---------- ----------
Ending Assets 6,495.3 9,551.2 13,224.6 21,274.3 49,494.2 26,520.1 60,277.7
--------- --------- --------- ---------- ---------- ---------- ----------
Total assets
under management $31,129.0 $46,674.2 $67,796.8 $108,257.6 $249,513.8 $136,837.0 $315,259.5
========= ========= ========= ========== ========== ========== ==========
</TABLE>
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JANUS INVESTMENT MANAGEMENT
Pursuant to investment advisory agreements with each of the Janus Advised
Funds and the Janus Sub-Advised Funds and Private Accounts, Janus provides
overall investment management services. The investment advisory agreements
generally provide that Janus will furnish continuous advice and recommendations
concerning investments and reinvestments in conformity with the investment
objectives and restrictions of the applicable fund or account. With respect to
the Janus Advised Funds and the Janus Sub-Advised Funds, each investment
advisory agreement must be approved and renewed annually by the fund's Board of
Directors or Trustees who are not "interested persons" (as defined in the 1940
Act) of any such party. Amendments to such agreements generally must be
approved by a majority of the shareowners of the affected fund and a majority of
the Trustees or Board of Directors of the affected fund, including the Trustees
or Directors who are not "interested persons" of that fund or Janus. Each
agreement automatically terminates in the event of its "assignment" (as defined
in the 1940 Act or the Advisers Act) and either party may terminate the
agreement without penalty after written notice. The Distribution is not
expected to result in a change of control of Janus and therefore under the
applicable rules of the SEC would not constitute such an assignment.
Janus derives its revenue and net income primarily from diversified
investment advisory services provided to the Janus Advised Funds and the Janus
Sub-Advised Funds and Private Accounts. For the year ended December 31, 1999,
Janus derived approximately $944 million in revenue from investment advisory
services, representing approximately 82% of total revenue for Janus. Investment
advisory fees for the Janus Advised Funds and the Janus Sub-Advised Funds and
Private Accounts are negotiated separately and subject to extreme market
pressures. Such fees vary depending on the type of the fund or account and the
size of the assets managed, with fee rates above specified asset levels being
reduced. The fees for the Janus Advised Funds (exclusive of Janus World Funds,
which has B share arrangements) generally range from .20% to .75% depending on
the type of portfolio and the amount of assets under management. With respect
to the Janus Advised Funds, Janus may from time to time agree to waive all or a
portion of its management fees, agree to expense caps and/or waive all or a
portion of the operating expenses for marketing reasons. Additional information
on the services provided to and all fees payable by the Janus Advised Funds and
the Janus Sub-Advised Funds is contained in the prospectus for each of the
funds, copies of which are available from Janus. The Private Accounts' fees
generally are computed on the basis of the market value of the assets managed at
the end of the preceding month and generally are paid in arrears on a monthly
basis.
The Janus Advised Funds and the Janus Sub-Advised Funds generally bear the
expenses associated with the operation of each fund and the issuance and
redemption of its securities, except that advertising, promotional, and sales
expenses of the Janus Advised Funds are assumed by Janus. In particular, the
expenses for the Janus Advised Funds and the Janus Sub-Advised Funds include but
are not limited to investment advisory fees; shareowner servicing fees and
expenses; transfer agent fees and expenses; custodian fees and expenses; legal
and auditing fees; expenses of preparing, printing, and mailing prospectuses and
shareowner reports distributed to existing shareowners; registration fees and
expenses; proxy and annual meeting expenses (if any); and outside
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directors' fees and expenses. Certain of these services are furnished to the
Janus Advised Funds by Janus Service. The investment advisory agreements with
the Janus Advised Funds provide that the Janus Advised Funds reimburse Janus for
expenses incurred by Janus in providing certain services to the Janus Advised
Funds. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 15 to the Stilwell consolidated financial
statements.
JANUS DISTRIBUTION SERVICES AND THIRD PARTY DISTRIBUTION
Pursuant to a distribution agreement, Janus Distributors acts as principal
underwriter for and distributes the Janus Advised Funds. Janus expends
substantial resources in media advertising and direct mail communications to its
existing and potential Janus Advised Funds' shareowners and in providing a staff
and telecommunications equipment to respond to inquiries via toll-free telephone
lines. Such expenses, particularly advertising, are expected to continue to
increase.
Janus Distributors acts pursuant to distribution agreements that must be
approved and renewed annually by the Trustees or by vote of a majority of the
outstanding securities of the Janus Investment Fund or, with respect to the
retirement shares class of the Janus Aspen Series, the Janus Aspen Series, and,
in any case, by vote of a majority of the Trustees who are not "interested
persons" (as that term is defined in the 1940 Act) of the Janus Advised Funds.
The distribution agreements are subject to termination by each fund or Janus
Distributors (or, with respect to the retirement shares class of the Janus Aspen
Series, by an individual portfolio) on 60 days' written notice and terminate
automatically in the event of their "assignment" (as defined in the 1940 Act).
The Distribution is not expected to result in a change of control of Janus and
therefore under the applicable rules of the SEC would not constitute such an
assignment. Janus Investment Fund does not compensate Janus Distributors for
its services under the distribution agreement, but Janus Distributors may be
reimbursed by Janus for certain expenses in distributing shares.
Many of the Janus funds are available through mutual fund supermarkets and
other third party distribution channels. Such distribution channels provide an
alternative to the direct sales approach utilized by Janus with most of its
funds. All shareowner accounting and servicing is handled by the mutual fund
supermarket or third party sponsor and Janus pays a fee equal to a percentage of
the assets under management acquired through such distribution channels to the
appropriate sponsor for these services. As of December 31, 1998 and 1999,
approximately 30% and 33%, respectively, of total Janus assets under management
were generated through these third party distribution channels.
JANUS ADMINISTRATIVE AND SHAREOWNER SERVICES
Pursuant to transfer agency agreements with each of the Janus Advised
Funds, Janus Service performs accounting, recordkeeping and shareowner services
for the funds and their shareowners. Each fund pays Janus Service fees for these
services. Complete information on the services provided to and all fees payable
by the Janus Advised Funds is contained in the prospectus for each of the funds,
copies of which are available from Janus. The accounting services provided
include maintaining all shareowner accounts; mailing shareowner reports and
prospectuses; withholding taxes on nonresident
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alien and foreign corporation accounts; backup withholding for pension and
deferred income; preparing and mailing checks for disbursement of income
dividends and capital gains distributions; preparing and filing various U.S.
Treasury Department forms (such as Form 1099-DIV and B) for all shareowners;
preparing and mailing confirmation forms to shareowners and dealers with respect
to all purchases and redemptions of shares and other transactions in shareowner
accounts for which confirmations are required; recording reinvestments of
dividends and distributions in shares; and, as necessary, preparing shareowner
meeting lists; mailing proxies; and receiving and tabulating proxies.
Shareowner servicing functions include maintenance of a staff to respond to
all telephone inquiries from existing shareowners. Janus Service has purchased
or leased sophisticated telecommunications systems to handle inquiries from
existing shareowners. "Intelligent" workstation applications, document imaging,
an automated work distributor and an automated call management system are used
by customer service and back office personnel. Additionally, Janus Service
offers investors access to their accounts, with the ability to perform certain
transactions, using touch tone telephones or personal computers. These services
are supported through a distributed automated voice response system and an
interactive Internet web site called www.janus.com.
In addition, Janus Service provides all administrative and operational
support for the Janus Advised Funds, including accounting, tax reporting,
compliance, institutional sales, in-house legal, marketing, public relations,
and federal and blue sky registration and reporting.
The transfer agency agreements with each of the Janus Advised Funds must be
approved and renewed annually by the Trustees of the Janus Advised Funds or by
an affirmative vote of a majority of the outstanding voting securities of each
of the Janus Advised Funds and in either case by vote of a majority of the
Boards of Trustees who are not "interested persons" (as defined in the 1940 Act)
of any such party. Amendments to the agreements of the Janus Advised Funds
generally must be approved by a majority of the Trustees of the affected fund.
Each agreement may only be assigned with the prior written consent of the other
party and either party may terminate the agreement without penalty after written
notice of at least 60 days.
From time to time, Janus Service contracts with DST to provide fund
accounting and shareowner recordkeeping services to the Janus funds. In
addition, DST Securities, Inc., a wholly-owned subsidiary of DST, is designated
as an introductory broker on certain portfolio transactions.
JANUS PORTFOLIO MANAGEMENT AND RESEARCH
Janus' investment philosophy generally embraces a belief that the earnings
growth of individual companies ultimately determines the valuation of their
stock. For this reason, Janus' proprietary analysis is geared to understanding
the earnings potential of the companies in which it invests. Janus believes
that intensive research, focusing on the fundamental factors affecting the
business prospects of companies, can uncover growth opportunities.
Janus portfolios are constructed one security at a time rather than in
response to preset regional, country, economic sector, or industry
diversification guidelines. Security selection is based on the earnings
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growth outlook for individual companies, wherever they may exist, with all other
factors being a residual of the investment process. Likewise, cash position is a
function of the ability to find attractive investment opportunities at
reasonable valuations. Cash may occasionally build during periods of high equity
valuations when otherwise appealing investments appear to be expensive relative
to their growth prospects.
Emphasizing the proprietary work of Janus' own analysts, most research is
performed in-house. Securities analysts follow a large universe of stocks,
reviewing earnings reports, corporate and industry developments, trading
activity, research reports and other data. For a smaller universe of companies,
very close and continuing scrutiny is applied, including direct contacts with
corporate management, analysis of contracts with competitors, customers and
suppliers, frequent on-site visitation of facilities, media coverage, and other
qualitative factors. Hundreds of individual companies are visited each year,
and many more visit Janus' offices in Denver and London. Particularly close
attention is paid to a company's stock on occasions when earnings estimates
differ significantly from the rest of the investment community.
Janus does not employ a committee system of portfolio management. Subject
to general oversight by the senior officer of the investment management group,
each portfolio manager has autonomy in security selection and is able to
implement portfolio decisions immediately with the goal of providing timeliness
in trade execution.
Janus predominantly focuses on common stocks of two types of companies -
those experiencing or expected to experience above-average unit growth relative
to their peer group or the economy generally; and those realizing or expected to
realize positive change as a result of catalysts such as new product
development, an improved regulatory environment, changing demographics or strong
management team. Restructurings, acquisitions or divestitures are also
significant factors in analyzing a company's potential growth.
BERGER LLC
----------
Berger is an investment adviser registered with the SEC and serves as an
investment adviser to the Berger Growth Fund (formerly the Berger One Hundred
Fund), the Berger Growth and Income Fund, the Berger Investment Portfolio Trust
(comprising the Berger Small Company Growth Fund, the Berger New Generation
Fund, the Berger Balanced Fund, the Berger Select Fund, the Berger Mid Cap
Growth Fund, the Berger Mid Cap Value Fund and the Berger Information Technology
Fund (offering investor and institutional share classes)), the Berger Omni
Investment Trust (comprising the Berger Small Cap Value Fund (offering investor
and institutional share classes)) and a portion of the Berger Institutional
Products Trust (with respect to the Berger IPT-100 Fund, Berger IPT-Growth and
Income Fund and Berger IPT-Small Company Growth Fund) (collectively, the "Berger
Advised Funds"). Berger also serves as investment adviser to certain registered
mutual funds and separate accounts (together with the Berger/BIAM Funds
described below, the "Berger Sub-Advised Funds and Private Accounts"). Berger
owns 50% of BBOI in a joint venture with BIAM. Berger and BIAM have negotiated
the dissolution of BBOI and the distribution of BBOI's assets. The dissolution
of BBOI is contingent upon approval of the shareholders of the Berger/BIAM
Funds. A meeting of the shareholders is scheduled for May 5, 2000. BBOI serves
as the investment adviser and sub-
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administrator to the Berger/BIAM Worldwide Portfolios Trust (which serves as a
master portfolio for the Berger/BIAM International Fund, the International
Equity Fund and the Berger/BIAM International Core Fund, all series of the
Berger/BIAM Worldwide Funds Trust) and the Berger/BIAM IPT International Fund (a
series of the Berger Institutional Products Trust), all open end management
investment companies, as well as administrator to the Berger/BIAM Worldwide
Funds Trust (collectively, the "Berger/BIAM Funds"). Berger expects to become
the adviser and administrator to the Berger/BIAM Funds upon dissolution of BBOI
with BIAM serving as sub-adviser to such funds for a period of five years.
Moreover, BBOI acts as investment adviser to the BBOI Sub-Advised Funds. BIAM is
expected to become adviser to the BBOI Sub-Advised Funds upon dissolution of
BBOI. Berger owns 80% of B/B Isle in a joint venture with Bay Isle Financial
Corporation. B/B Isle serves as investment adviser to the B/B Isle Separate
Accounts. The Berger Advised Funds and Berger Sub-Advised Funds and Private
Accounts are collectively referred to as the "Berger Funds." The Berger Advised
Funds, Berger Sub-Advised Funds, Berger/BIAM Funds, and B/B Isle Separate
Accounts are collectively referred to as the "Berger Complex." As of March 31,
2000, the Berger Complex (as defined in "Business--Stilwell's Principal
Subsidiaries and Equity Investments-Berger LLC") had total assets under
management of $8.2 billion. Of this amount, Berger managed $7.1 billion in the
Berger Advised Funds and $1.0 billion in the Berger Sub-Advised Funds and
Private Accounts; and B/B Isle managed approximately $0.1 billion in the B/B
Isle Separate Accounts. As of March 31, 2000, funds included in the Berger
Complex had more than 258,000 shareowner accounts. For the five-year period
ended March 31, 2000, assets under management in the Berger Complex increased by
173%. See "Business-Stilwell's Principal Subsidiaries and Equity Investments-
Berger LLC."
Berger was incorporated on April 23, 1973 as Robert Fleming Services Corp.
On May 22, 1973, Robert Fleming Services Corp. changed its name to Fleming
Berger Associates, Inc. On February 23, 1975 the name was changed to Berger
Associates, Inc. In 1974, Berger's predecessors began managing the Berger One
Hundred Fund (renamed the Berger Growth Fund in 2000) and the Berger One Hundred
and One Fund (renamed the Berger Growth and Income Fund in 1996). KCSI acquired
a minority interest in Berger in 1992, which interest KCSI increased to over 80%
in 1994, and then to 100% in 1997. During 1996, Berger entered into a joint
venture agreement with BIAM, forming BBOI to develop and market a series of
international and global mutual funds. In late 1998, Berger entered into a joint
venture arrangement with Bay Isle Financial Corporation, forming B/B Isle to
manage separate accounts, primarily large cap value accounts. The Berger Complex
currently maintains eleven retail mutual fund products and eight institutional
mutual fund products of which BBOI advises one and three, respectively. On
September 30, 1999, Berger Associates, Inc. assigned and transferred its
operating assets and business to Berger LLC, and then changed its name to
Stilwell Management, Inc. ("SMI"). SMI owns 100% of the preferred limited
liability company interests and approximately 86% of the regular limited
liability company interests of Berger LLC. The remaining 14% of regular limited
liability company interests was issued to key SMI and Berger LLC employees,
resulting in a noncash compensation charge. SMI also holds the 32% equity
investment in DST.
Berger Distributors LLC, a wholly-owned subsidiary of Berger LLC ("Berger
Distributors"), which converted from a Colorado corporation to a Colorado
limited liability company on September 30, 1999 serves as distributor of the
Berger Advised Funds and Berger/BIAM Funds and is a limited registered broker-
dealer.
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The following table sets forth (in millions) beginning assets, the changes
during each period and ending assets for the Berger Advised Funds, the
Berger/BIAM Funds, and the Berger Sub-Advised Funds and Private Accounts.
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<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S>
Berger Advised Funds: <C> <C> <C> <C> <C> <C> <C>
Beginning assets $2,870.6 $3,134.1 $3,272.7 $3,178.8 $3,274.0 $3,274.0 $5,703.6
Net sales (redemptions) (340.3) (225.4) (559.9) (284.8) 463.5 (160.0) 557.1
Appreciation 603.8 364.0 466.0 380.0 1,966.1 109.3 881.1
-------- -------- -------- -------- -------- -------- --------
Ending assets 3,134.1 3,272.7 3,178.8 3,274.0 5,703.6 3,223.3 7,141.8
-------- -------- -------- -------- -------- -------- --------
Berger/BIAM Funds:
Beginning assets -- -- 38.6 127.4 209.8 209.8 320.4
Net sales (redemptions) -- 36.7 87.1 57.8 34.7 (3.0) 15.0
Appreciation -- 1.9 1.7 24.6 75.9 6.8 4.1
-------- -------- -------- -------- -------- -------- --------
Ending assets -- 38.6 127.4 209.8 320.4 213.6 339.5
-------- -------- -------- -------- -------- -------- --------
Berger Sub-Advised Funds and Private Accounts:
Beginning assets 118.9 188.0 342.2 487.4 200.3 200.3 541.4
Net sales (redemptions) 53.6 119.1 31.0 (444.4) 101.4 (0.1) 112.0
Appreciation 15.5 35.1 114.2 157.3 239.7 15.7 106.3
-------- -------- -------- -------- -------- -------- --------
Ending assets 188.0 342.2 487.4 200.3 541.4 215.9 759.7
-------- -------- -------- -------- -------- -------- --------
Total assets under
management $3,322.1 $3,653.5 $3,793.6 $3,684.1 $6,565.4 $3,652.8 $8,241.0
======== ======== ======== ======== ======== ======== ========
</TABLE>
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BERGER INVESTMENT MANAGEMENT
Berger provides investment advisory services to the Berger Funds. In
addition, BBOI serves as the investment adviser to the Berger/BIAM Funds. Such
investment advisory services for both retail and institutional funds are
provided pursuant to investment advisory agreements which have been approved by,
and the continuation of which is approved on an annual basis by, each of the
Board of Directors or Trustees of the Berger Funds or Berger/BIAM Funds or by an
affirmative vote of a majority of the outstanding voting securities of each of
the Berger Funds or Berger/BIAM Funds and in either case by vote of a majority
of the Board of Directors or Trustees who are not "interested persons" (as that
term is defined in the 1940 Act) of the Berger Funds, the Berger/BIAM Funds,
Berger or BBOI. The investment advisory agreements generally provide that Berger
and BBOI manage the investment and reinvestment of assets of the Berger Funds
and Berger/BIAM Funds, respectively, in conformity with their investment
objectives and restrictions. Amendments to such investment advisory agreements
generally must by approved by a majority of the shareowners of the affected fund
and a majority of the Trustees or Board of Directors of the affected fund,
including the Trustees or Directors who are not "interested persons" (as defined
in the 1940 Act) of that fund or Berger. The investment advisory agreements with
the Berger Funds and Berger/BIAM Funds are generally terminable without penalty
by either party with written notice. Each agreement automatically terminates in
the event of its "assignment" (as defined in the 1940 Act). The Distribution is
not expected to result in a change of control of Berger and therefore under the
applicable rules of the SEC would not constitute such an assignment.
Berger and BBOI derive revenue primarily from investment advisory services
provided to the Berger Advised Funds and Berger/BIAM Funds, respectively. For
the year ended December 31, 1999, Berger derived approximately $28.6 million in
revenue from investment advisory services provided to the Berger Advised Funds,
representing approximately 72% of total revenue of Berger. Berger's and BBOI's
revenues from investment advisory fees for each of the Berger Advised Funds and
Berger/BIAM Funds are negotiated separately with each fund. The investment
advisory fees for these funds vary depending on the type of fund. They generally
range from .70% to .90% depending on the type of fund. Berger and BBOI from time
to time may agree to waive all or a portion of their investment advisory fees
and/or assume all or a portion of the operating expenses of a Berger Advised
Fund or Berger/BIAM Fund for competitive reasons. Additional information on the
services provided to and all fees payable by the Berger Advised Funds and
Berger/BIAM Funds is contained in the prospectus for each of the funds, copies
of which are available from Berger. The management fees for the Berger Sub-
Advised Funds, BBOI Sub-Advised Funds and B/B Isle Separate Accounts vary
depending upon the type of fund or account and, in some circumstances, size of
assets managed, with fee rates above specified asset levels being reduced.
Berger and BBOI generally pay most expenses incurred in connection with
Berger's and BBOI's provision of investment management and advisory services to
the Berger Funds and the Berger/BIAM Funds, respectively. All charges and
expenses other than those specifically assumed by Berger and BBOI are paid by
the Berger Funds and Berger/BIAM Funds. Such expenses include, but are not
limited to, brokerage commissions, custodian and transfer agency fees, legal and
accounting expenses, administrative expenses, interest charges and the expenses
of printing and distributing reports to shareowners.
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BERGER ADMINISTRATIVE SERVICES
Under a separate administrative services agreement with respect to each of
the Berger Funds, Berger performs certain administrative and recordkeeping
services not otherwise performed by the Berger Fund's custodian and
recordkeeper, including the supervision of the Berger Funds' vendors and the
preparation of financial statements and reports to be filed with the SEC and
state regulatory authorities. Each Berger Fund pays Berger fees for these
services in addition to the investment advisory fees paid under the investment
advisory agreements. The administrative services fees may be changed by each
Berger Fund's Board of Directors or Trustees without shareowner approval.
Under administrative services agreements with the Berger/BIAM Funds, BBOI
serves as the administrator of the Berger/BIAM Funds. In this capacity, BBOI is
responsible for administering and managing all aspects of the Berger/BIAM Fund's
day-to-day operations, subject to the oversight of the Trustees or Board of
Directors of the Berger/BIAM Funds. The Berger/BIAM Funds pay BBOI fees for
these services in addition to the investment advisory fees paid under the
investment advisory agreements.
Under a sub-administration agreement between BBOI and Berger, Berger has
been delegated the responsibility to perform certain of the administrative and
recordkeeping services required under BBOI's administrative services agreements.
Berger is paid certain fees by BBOI for its services. Additional information on
the services provided to and the fees payable by the Berger Advised Funds and
Berger/BIAM Funds is contained in the prospectus for each of the funds, copies
of which are available from Berger.
The administrative services agreements for the Berger/BIAM Funds must be
approved and renewed annually by the Board of Directors or Trustees of the
Berger/BIAM Funds or by an affirmative vote of a majority of the outstanding
voting securities of each of the Berger/BIAM Funds and in either case by vote of
a majority of the Board of Directors or Trustees who are not "interested
persons" (as defined in the 1940 Act) of any such party. Amendments to the
agreements of the Berger Funds and Berger/BIAM Funds generally must be approved
by a majority of the Trustees or Board of Directors of the affected fund. Each
agreement may only be assigned with the prior written consent of the other party
and either party may terminate the agreement without penalty after written
notice.
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<PAGE>
BERGER DISTRIBUTION SERVICES AND THIRD PARTY DISTRIBUTION
Berger Distributors, as the distributor of the Berger Advised Funds and
Berger/BIAM Funds, is the principal underwriter of all the shares of such funds.
Berger Distributors is registered with the NASD and the SEC as a limited
registered broker-dealer. Berger Distributors acts as the agent of the Berger
Advised Funds and Berger/BIAM Funds in connection with the sale of each fund's
shares in all states in which the shares are eligible for sale and in which
Berger Distributors is qualified as a broker-dealer. Berger Distributors
continuously offers shares of the Berger Funds and Berger/BIAM Funds and
solicits orders to purchase shares at net asset value. In its capacity as
distributor, Berger Distributors utilizes Berger to perform such distribution
services. Berger Distributors supervises Berger in this capacity.
Berger Distributors acts pursuant to a distribution agreement that must be
approved and renewed annually by the Board of Directors or Trustees or by vote
of a majority of the outstanding securities of the Berger Advised Funds and
Berger/BIAM Funds and in either case by vote of a majority of the Board of
Directors or Trustees who are not "interested persons" (as defined in the 1940
Act) of the Berger Advised Funds, Berger/BIAM Funds or Berger Distributors. The
distribution agreement is subject to termination by each fund or Berger
Distributors on written notice and terminates automatically in the event of its
"assignment" (as defined in the 1940 Act). The Distribution is not expected to
result in a change of control of Berger and therefore under the applicable rules
of the SEC would not constitute such an assignment. Berger Distributors is not
compensated for its services under the distribution agreement, but is reimbursed
by Berger for its costs in distributing shares.
Since 1992, Berger has participated in arrangements with broker-dealers,
recordkeepers and administrators to provide sub-accounting and/or other services
to investors purchasing shares of the funds in the Berger Complex through
investment programs, such as no-transaction fee programs and mutual fund
supermarkets. Many of the Berger funds are available through mutual fund
supermarkets and other third party distribution channels. Such distribution
channels provide an alternative to the direct sales approach utilized by Berger
with most of its funds. All shareowner accounting and servicing is handled by
the mutual fund supermarket or third party sponsor and Berger pays a fee equal
to a percentage of the assets under management acquired through such
distribution channels to the appropriate sponsor for these services. As of
December 31, 1998 and 1999, approximately 28% of total Berger assets under
management were generated through these third party distribution channels.
BERGER MARKETING SERVICES
Marketing within Berger is balanced between institutional and retail
distribution opportunities. Retail marketing, which traces back to the inception
of Berger, is focused on serving and cross-selling to existing fund shareowners.
Institutional marketing, an effort that began in late 1995, pursues
opportunities with pension, profit-sharing and high net worth investors through
relationships with consulting, advisory and brokerage firms, insurance companies
and banks. Institutional assets now comprise one-third of Berger's assets under
management.
The Berger Funds and Berger/BIAM Funds are sold as no-load funds and
distributed primarily through direct marketing and third party intermediaries,
such as broker-dealers, and retirement plan administrators.
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Certain of the Berger Funds and Berger/BIAM Funds sold in retail markets have
approved distribution plans ("12b-1 Plans") pursuant to Rule 12b-1 under the
1940 Act. The 12b-1 Plans provide that Berger shall engage in activities that
are intended to result in sales of the shares of the Berger Funds or Berger/BIAM
Funds. Such activities include advertising, marketing and promotion, printing
and distributing prospectuses and sales literature and support services. In
addition, Berger, BBOI and certain mutual funds for whom they serve as an
administrator or sub-administrator have entered into agreements with certain
broker-dealers or other organizations (such as recordkeepers and administrators)
to provide subtransfer agency, recordkeeping, shareowner communications,
subaccounting and/or other services to investors who have purchased shares of
the Berger Funds or Berger/BIAM Funds through investment programs or pension
plans established or serviced by such organizations. As a result, Berger, BBOI
or a Fund (if approved by its Board of Directors or Trustees) may pay fees to
such companies for their services. The agreements pursuant to which such
services are performed are generally terminable upon 90 days written notice.
However, fees under such agreements are generally continual despite such
termination so long as the contracted services are provided to those shareowners
who purchased shares under the program. Complete information on the services
provided to and the fees payable by the Berger Advised Funds and Berger/BIAM
Funds is contained in the prospectus for each of the funds, copies of which are
available from Berger. The 12b-1 Plans must be approved and renewed on an annual
basis by each of the Board of Directors or Trustees of the Berger Funds or
Berger/BIAM Funds and by an affirmative vote of those members of the Board of
Directors or Trustees who are not "interested persons" (as defined in the 1940
Act) of the Berger Funds or Berger/BIAM Funds, as the case may be, and have no
direct or indirect financial interest in the operations of the 12b-1 Plans or
any related agreements. Amendments to such agreements generally must be approved
by a majority of the shareowners of the affected Fund and a majority of the
Board of Directors or Trustees of the affected Fund who are not "interested
person" (as defined in the 1940 Act) and have no direct or indirect financial
interest in the operations of the 12b-1 Plans or any related agreements. Each
12b-1 Plan may be terminated by a vote of a majority of the Board of Directors
or Trustees of the Fund or a majority of the Fund's outstanding voting
securities.
Berger maintains a sales staff funded by Berger to market directly to new
institutional investors and to serve current investors in the institutional
funds. Sales of the institutional funds are made directly or through banks and
other financial institutions. In addition, certain banks and financial
institutions invest in institutional funds through financial intermediaries such
as broker-dealers. Neither Berger nor BBOI has any marketing responsibility for
Berger Sub-Advised Funds or BBOI Sub-Advised Funds. Berger also has marketing
responsibility for B/B Isle Separate Accounts.
BERGER SHAREOWNER SERVICES
The Berger Advised Funds and Berger/BIAM Funds have agreements with a trust
company to provide accounting, recordkeeping and pricing services, custody
services, transfer agency, dividend disbursing and shareowner services. The
trust company has engaged DST as sub-agent to provide transfer agency and
dividend disbursing services for the Berger Advised Funds and Berger/BIAM Funds.
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As recordkeeping and pricing agent, the trust company calculates the daily
net asset value of each of the Berger Advised Funds and Berger/BIAM Funds and
performs certain accounting and recordkeeping functions required by the Berger
Advised Funds and Berger/BIAM Funds. The trust company, as custodian, and its
subcustodians have custody and provide for the safekeeping of the securities and
cash of the Berger Advised Funds and Berger/BIAM Funds, and receive and remit
the income thereon as directed by the management of the Berger Advised Funds and
Berger/BIAM Funds. As sub-transfer agent and dividend disbursing agent, the
trust company (through DST, as sub-agent) maintains all shareowner accounts of
record; assists in mailing all reports, proxies and other information to the
shareowners of the Berger Advised Funds and Berger/BIAM Funds; calculates the
amount of, and delivers to the shareowners of the Berger Advised Funds and
Berger/BIAM Funds, proceeds representing all dividends and distributions; and
performs other related services.
In addition to these services, investors have access to their accounts with
the ability to perform certain transactions using personal computers. These
services are supported through an Internet site called www.bergerfunds.com. At
this site, investors may also obtain account information and learn general
history and information regarding Berger, the Berger Funds and the Berger/BIAM
Funds.
BERGER PORTFOLIO MANAGEMENT AND RESEARCH
Berger's principal method of securities evaluation is based on growth-style
investing, using a "bottom-up" fundamental research and valuation analysis
undertaken by its internal staff of full-time research analysts, supplemented by
research undertaken by Berger's portfolio managers. Berger's predominantly
growth-style approach toward equity investing requires the companies in which
Berger invests to have high relative earnings per share growth potential, to
participate in large and growing markets, to have a strong management team, to
have strong overall financial characteristics, and to have above average
expected total returns. Analysts and portfolio managers of Berger often meet
personally with the management of the companies in which Berger invests. The
main sources of information Berger uses include financial publications and on-
line services, inspections of activities (including company visits and
interviews), research materials prepared in-house and by others, corporate
rating services, SEC filings and company press releases. Berger holds frequent
investment strategy meetings in which portfolio managers and research analysts
discuss investment strategy.
Berger and BIAM formed BBOI to bring international investment products to
investors. These investment products focus on long-term capital appreciation
pursued by investing in a portfolio consisting primarily of common stocks of
well-established foreign companies. The investment manager for these funds
identifies economic and business themes that are believed to provide a favorable
framework for selecting stocks and selects individual companies best positioned
to take advantage of opportunities presented by these themes. The investment
manager generally looks for companies with securities that are fundamentally
undervalued relative to their long-term prospective earnings growth rates, their
historic valuation levels and their competitors. In addition, the investment
manager searches for companies with business operations predominantly in well-
regulated and more stable foreign markets and companies with substantial size
and liquidity, strong balance sheets, proven management and diversified
earnings.
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Certain of the Berger Advised Funds emphasize value-style investing. These
investment products focus on capital appreciation. In pursuit of that goal,
these funds primarily invest in companies that are out of favor with markets or
otherwise believed to be undervalued. The investment managers of these funds
generally look for companies with low prices relative to their assets, earnings
and cash flows or companies with competitive advantages because of quality
products and services, strong balance sheets and exceptional management. The B/B
Isle Separate Accounts also emphasize value-style investing. This product
focuses on companies with strong fundamentals and management that are at
discounts to their estimated fair value and are expected to outperform their
peers.
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NELSON MONEY MANAGERS PLC
-------------------------
Founded in Chester, England as a general brokerage firm in 1970, Nelson
began specializing in the provision of investment advice and planning in 1980.
In 1988, a separate asset management division was incorporated and regulatory
approval was obtained to carry on the investment management business. At the
same time, Nelson began an expansion program and since that time has opened
regional offices in Durham, Bath, York, London and Lichfield in England and
Stirling in Scotland. In April 1998, KCSI purchased an 80% equity interest in
Nelson.
Nelson provides investment advice and investment management services in the
United Kingdom, primarily to individuals who are retired or contemplating
retirement. In order to reach these clients, Nelson has traditionally performed
financial planning seminars for employees of companies in the United Kingdom. At
these seminars, Nelson's investment advisers outline the range of investment
strategies and instruments available to individual investors. At a subsequent
meeting, Nelson's investment advisers discuss the advantages and disadvantages
of these strategies and instruments and recommendations are made in writing.
More recently, Nelson has also been offering services directly to the public via
advertisements in the media. At March 31, 2000, Nelson employed more than 40
investment advisers and managed approximately $1.4 billion ((Pound)866 million)
in assets. At March 31, 2000, Nelson managed assets for more than 15,000
individuals. For the five-year period ended March 31, 2000, Nelson's total
assets under management increased by approximately 130 percent. See "Business-
Stilwell's Principal Subsidiaries and Equity Investments-Nelson Money Managers
Plc."
For individuals interested in Nelson's services, Nelson assigns a specific
investment adviser to have a one-on-one consultation. The investment adviser
works with each client individually to conduct an analysis of the client's
investment objectives and then recommends the construction of a portfolio to
meet those objectives. These recommendations are contained in a personal
investment report for the client which discusses and outlines the client's
investment portfolio. Recommendations for the design and ongoing maintenance of
the portfolio structure are the responsibility of the investment adviser. The
selection and management of the instruments which constitute the portfolio are
the responsibility of Nelson's investment management team. Taking into account
the client's attitude towards risk, Nelson's investment managers utilize a "top
down" investment methodology in structuring investment portfolios, beginning
with an analysis of macro-economic and capital market conditions. Nelson's
investment managers undertake quantitative analyses, including asset/liability
analyses, yield curve analyses and asset allocation modeling to examine these
areas. Using this information, Nelson's investment managers construct an
investment portfolio that adheres to each client's objectives as well as
Nelson's investment strategy.
Nelson, through continued investment in technology, has developed
proprietary systems delivering economies of scale to provide a broad range of
investment instruments used by Nelson's investment managers to construct a
balanced investment portfolio. Nelson's investment managers invest in fixed
interest securities, international and domestic securities, sterling deposits,
sterling commercial paper, floating rate notes, certificates of deposit and tax-
free and fixed income corporate bonds. Nelson also invests
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directly in equities, unit trusts and investment trusts with characteristics
ranging from conservative to aggressive.
After establishment of a client's portfolio, Nelson provides several
services aimed at establishing a long-term relationship with each client. Each
investment adviser meets periodically with each client to discuss reinvestment
of maturing investments as they arise and to ensure that the balance of
deposits, bonds and equities in each investor's portfolio continues to meet the
investor's investment strategy. Nelson also maintains a staff to respond to
inquiries from clients. In addition, Nelson distributes a personal investment
portfolio report to each investor every six months which details his or her
current portfolio investments and outlines all transactions that have taken
place in the prior six months together with a commentary from the investment
management team. Furthermore, Nelson distributes investment and budget
newsletters to investors. Finally, Nelson regularly holds investment road shows
throughout the United Kingdom so that clients can meet Nelson's directors,
investment managers and staff.
For providing investment advice, Nelson charges an initial fee calculated
as a percentage of capital invested into each individual investment portfolio.
Nelson also charges annual fees for the ongoing management and administration of
each investment portfolio. These fees are based on the type of investments and
amount of assets contained in each investor's portfolio. The fee schedules
typically provide lower incremental fees for assets under management above
certain levels.
Nelson maintains an internal investment research staff which provides
several sources of information for making investment decisions. In addition,
Nelson utilizes research provided by London's leading investment houses, certain
credit rating agencies, Moody's Investor Service and Standard and Poor's. Nelson
holds frequent investment strategy meetings with senior management, portfolio
managers and research analysts to discuss investment strategy.
DST SYSTEMS, INC.
-----------------
DST, together with its subsidiaries and joint ventures, provides
information processing, printing and mailing and computer software services and
products to mutual funds, investment managers, communications industries and
other service industries. DST has organized its business units into three
operating segments: Financial Services, Customer Management and Output
Solutions.
DST FINANCIAL SERVICES
DST's financial services segment serves primarily mutual funds, investment
managers, insurance companies, banks and other financial services organizations.
DST's proprietary software systems include shareowner accounting and
recordkeeping systems offered to the U.S. mutual fund industry; shareowner
accounting and recordkeeping systems offered to non-U.S. mutual funds and unit
trusts; a securities transfer system offered primarily to corporate trustees and
securities transfer agents; portfolio accounting and investment management
systems offered to U.S. and international fund accountants and investment
managers; image-based work management system offered primarily to mutual funds,
insurance companies and other financial services organizations; and securities
exchange and broker order systems
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offered to brokers and companies involved in the exchange of equity, bond and
derivative securities primarily outside the U.S. DST was a pioneer in the
development of on-line automated recordkeeping and accounting for U.S. mutual
fund shareowner accounts. As discussed above, DST provides full-service
shareowner accounting and recordkeeping to Berger. In addition, DST provides
remote services to Janus, primarily shareowner recordkeeping and other
shareowner services.
DST CUSTOMER MANAGEMENT
DST's Customer Management segment provides sophisticated customer
management processing and computer software services and products to the
video/broadband, direct broadcast satellite, wireless and Internet-protocol
telephony, Internet and utilities markets worldwide. Its proprietary software
systems enables clients to manage customer relationship functions, including new
account set-up, order processing, customer support, management reporting and
marketing analysis.
DST OUTPUT SOLUTIONS
DST's Output Solutions segment provides bill and statement processing
services and solutions, including electronic presentment and generation of
customized statements. Output processing services and solutions are provided to
customers of DST's other segments as well as to other industries.
DST INVESTMENTS
DST also held significant investments in equity securities with a market
value of approximately $1.3 billion at December 31, 1999, including shares of
Computer Sciences Corporation and State Street Corporation
DST common stock is listed on the New York Stock Exchange and the Chicago
Stock Exchange under the symbol "DST."
PROPERTIES
In the opinion of management, the various facilities, office space and
other properties owned by and/or leased by Stilwell are adequate for existing
operating needs.
Janus leases from non-affiliates approximately 455,400 square feet of
office space in three facilities for investment, administrative, marketing,
information technology, and shareowner processing operations, and approximately
52,700 square feet for mail processing and storage requirements. These corporate
offices and mail processing facilities are located in Denver, Colorado. In
September 1998, Janus opened an investor service and data center in Austin,
Texas and currently leases approximately 170,200 square feet at the facility.
Janus also leases 4,200 square feet of office space in Westport, Connecticut for
development of the Janus World Funds and 2,500 square feet of office space in
London, England for securities research and trading.
Berger leases approximately 29,800 square feet of office space in Denver,
Colorado for its administrative and corporate functions.
Nelson leases 10,300 square feet of office space in Chester, England, the
location of its corporate headquarters, investment operations and one of
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its marketing offices. During 1998, Nelson acquired additional office space
adjacent to its Chester location to accommodate expansion efforts. Also, Nelson
leases or owns six branch marketing offices totaling approximately 13,800 square
feet in the following locations in the United Kingdom: London, Lichfield, Bath,
York, Durham and Stirling.
STILWELL HOLDING COMPANY
The Stilwell holding company leases approximately 12,500 square feet of office
space in Kansas City, Missouri from a non-affiliate for its corporate functions.
EMPLOYEES
As of December 31, 1999, Janus had approximately 2,500 employees, Berger
had approximately 75 employees, Nelson had approximately 200 employees and
Stilwell Financial, Inc. had 17 employees. None of the employees of Stilwell are
represented by a labor union.
STILWELL BUSINESS STRATEGY
Stilwell believes that it has established a strong platform to support
future growth in revenues, deriving its strength in large part from the
experience and capabilities of Stilwell's subsidiaries and equity investments as
full service providers of asset management and related financial services. The
strength of Stilwell's subsidiaries and equity investments is based on core
investment professionals, solid investment performance results, sophisticated
distribution systems, quality customer service, talented support and service
staff and product expertise and systems. In addition, Stilwell believes that it
will benefit from the brand name equity associated with the names JANUS, BERGER,
NELSON and DST. Opportunities for growth for Stilwell are expected to come,
principally through its subsidiaries and equity investments, from new and
existing clients, strategic acquisitions and alliances and strengthening the
brand name and brand image of Stilwell's subsidiaries and equity investments.
MAINTAIN AND ENHANCE EXISTING CLIENT RELATIONSHIPS. As one of its primary
business objectives, Stilwell intends to maintain and enhance existing client
relationships by continuing to provide a high level of quality service to
existing clients through strong support and service staff, excellent customer
service and product expertise and systems.
GENERATE GROWTH FROM NEW AND EXISTING CLIENTS. Stilwell will pursue growth
from new clients through on-going sales and marketing efforts. Additionally,
Stilwell will seek to increase its share of existing clients' managed assets.
To encourage growth, Stilwell intends to continue compensation programs
with equity incentives for key management employees of its principal
subsidiaries to provide incentives through ownership of stock in the enterprises
in which they are employed. Stilwell seeks to facilitate the acquisition of such
ownership through such compensation programs and by making such programs
competitive with, if not superior to, compensation programs of other financial
services companies.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. Stilwell plans to regularly
evaluate strategic acquisitions, joint ventures and alliances and pursue those
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that appear appropriate as a means of expanding the range of its product
offerings and distribution, as well as for increasing its sales and marketing
capabilities.
STRENGTHEN BRAND NAME AND BRAND IMAGE. Stilwell intends to continue
developing several independent financial services businesses with
autonomous management and separate brand names. Stilwell believes it has a
strong starting position for this strategy, based on its existing ownership
of Janus, Berger and Nelson, as well as its equity investment in DST.
Management of each of Stilwell's affiliates has general autonomy over its
respective day-to-day operations, allowing each business to develop a
separate public identity, satisfy legal requirements regarding separation
of investment decisions and maintain compliance with certain minority
stockholder agreements. Consistent with the prior philosophy of KCSI,
Stilwell expects to encourage autonomy by its subsidiaries in the operation
of their businesses. Stilwell has agreed that the management of Janus will
continue to operate the business of Janus of providing investment advice
and management services, on the basis provided in the Janus Stock Purchase
Agreement. Stilwell has agreed that Mr. Bailey will continue to establish
and implement policy with respect to the investment advisory and portfolio
management activity of Janus, and to select a majority of the directors of
Janus, pursuant to the Janus Board Selection Rights. See Stilwell
Financial, Inc., "Stilwell Business Strategy" and "Business - Stilwell
Business Strategy."
COMPETITION
Stilwell is subject to substantial and growing competition in all aspects
of its business. Such competition could reduce the demand for Stilwell's
products and services and could have a material adverse effect on Stilwell's
business, financial condition, results of operations and business prospects.
Janus and Berger compete with hundreds of other mutual fund management
distribution and service companies that distribute their fund shares through a
variety of methods including affiliated and unaffiliated sales forces, broker-
dealers, and direct sales to the public. Nelson competes with other money
managers in obtaining new client business. DST competes with third party
providers, in-house systems and broker-dealers for the provision of processing
services. In addition, Stilwell's subsidiaries and equity investments compete
with brokerage and investment banking firms, insurance companies, banks, and
other financial institutions in all aspects of its business. Although no one
company or group of companies dominates the financial services industry, many
are larger, better known and have greater resources than Stilwell. Stilwell
believes that competition in the mutual fund industry will increase as a result
of increased flexibility afforded to banks and other financial institutions to
sponsor mutual funds and distribute mutual fund shares, and as a result of
consolidation and acquisition activity within the industry. In addition, the
mutual fund industry, in general, faces significant competition as the number of
mutual funds continues to increase, marketing and distribution channels become
more creative and complex, and investors place greater emphasis on published
fund recommendations and investment category rankings. Barriers to entry to the
investment management business are relatively few, and management of Stilwell
anticipates Janus, Berger and Nelson will face a growing number of competitors.
Competition for Janus and Berger is based on the methods of distribution of fund
shares, the ability to meet the changing needs of investors, the ability to
achieve superior investment management performance,
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the type and quality of shareowner services, and the success of marketing
efforts. Competition for Nelson is based on the ability to achieve reasonable
investment management returns, the quality of investor services and the success
of marketing efforts. DST's ability to compete is based on the quality of
service and features offered, including the ability to handle rapidly changing
transaction volumes, commitment to hardware capacity and software development
and price.
While Stilwell's subsidiaries and equity investments have implemented
programs to improve performance in all of these areas, Stilwell's subsidiaries
and equity investments may not be able to compete successfully against current
and future competitors. In addition, competitive pressures faced by Stilwell's
subsidiaries and equity investments may materially and adversely affect
Stilwell's business, financial condition, results of operations and business
prospects.
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REGULATION
Virtually all aspects of Stilwell's business are subject to various laws
and regulations. Applicable laws include the 1940 Act, the Advisers Act, the
Securities Act, the Exchange Act, ERISA and various state securities and related
laws (including laws in the United Kingdom). Applicable regulations include, but
are not limited to, in the United States, the rules and regulations of the SEC,
the NASD and other securities exchanges and the DOL, and generally in the United
Kingdom, IMRO, PIA and FSA. These laws and regulations generally grant
regulatory agencies and bodies broad administrative powers, including in some
cases the power to limit or restrict Stilwell from operating its businesses in
the event it fails to comply with such laws and regulations. Due to the
extensive regulations and laws to which Stilwell is subject, management of
Stilwell is required to devote substantial time and effort to legal and
regulatory compliance issues. Violations of such laws or regulations could
subject Stilwell and/or its employees to disciplinary proceedings or civil or
criminal liability, including revocation of licenses, censures, fines or
temporary suspension or permanent bar from the conduct of their business.
Stilwell believes that it is in substantial compliance with all material laws
and regulations.
Janus and Berger are registered with the SEC as investment advisers under
the Advisers Act and with the appropriate authorities in each of the states in
which registration is required. Each of the funds of Janus and Berger is
registered with the SEC under the 1940 Act. Nelson is regulated by IMRO, PIA and
FSA and Janus International is regulated by IMRO. Various regulations also cover
certain investment strategies that may be used by Janus, Berger and Nelson for
hedging purposes. To the extent that Janus and Berger purchase futures
contracts, Janus and Berger may be subject to the commodities and futures
regulations of the Commodity Futures Trading Commission. Under the rules and
regulations of the SEC promulgated pursuant to the federal securities laws,
Stilwell is subject to periodic examination by the SEC. Stilwell is also subject
to periodic examination by the NASD.
LEGAL MATTERS
From time to time Stilwell is involved in various legal actions arising in
the normal course of business. While the ultimate outcome of the various legal
proceedings involving Stilwell cannot be predicted with certainty, it is the
opinion of management (after consultation with legal counsel) that the
litigation reserves of Stilwell are adequate and that legal actions involving
Stilwell and ultimate resolution of these matters currently are not material to
Stilwell's consolidated financial position, results of operations or cash flows.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the individuals who are
the directors and executive officers of Stilwell. Stilwell's Board of Directors
is comprised of four directors, as indicated in the table below, and is divided
into three classes. The initial term of the first class of directors ("Class I
Directors") will expire at the 2001 annual meeting of stockholders, the initial
term of the second class of directors ("Class II Directors") will expire at the
conclusion of the 2002 annual meeting of stockholders and the initial term of
the third class of directors ("Class III Directors") will expire at the
conclusion of the 2003 annual meeting of stockholders. Commencing with the 2001
annual meeting of stockholders, directors elected to succeed the initial
directors whose terms expire will be elected to serve a three-year term of
office. Officers serve at the discretion of Stilwell's Board of Directors.
NAME AGE POSITION AND OFFICES
- ---- --- --------------------
Landon H. Rowland 63 Director; Chairman of the Board, President
and Chief Executive Officer
Joseph D. Monello 55 Vice President and Chief Operating Officer
Danny R. Carpenter 53 Vice President and Secretary
Anthony P. McCarthy 53 Vice President - Finance
Morton I. Sosland 74 Director
James E. Barnes 65 Director
Paul F. Balser 58 Director
Gwen E. Royle 39 Vice President - Legal
Douglas E. Nickerson 34 Vice President and Controller
LANDON H. ROWLAND (Class III Director) has been a director of KCSI since 1983.
He has been President of KCSI since July 1983, Chief Executive Officer of KCSI
since January 1987 and Chairman of KCSI's Board of Directors since May 1997. Mr.
Rowland is also a director of Janus, Berger, Nelson, Transportacion Maritima
Mexicana, S.A. de C.V. and Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
JOSEPH D. MONELLO has continuously served as Vice President and Chief Financial
Officer of KCSI since March 1994. Mr. Monello is also a director of Berger and
Nelson.
DANNY R. CARPENTER has continuously served as Vice President-Finance of KCSI
since November 1996, and served as Vice President-Finance and Tax of KCSI from
May 1995 to November 1996, and as Vice President-Tax of KCSI from June
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1993 to May 1995. Prior to June 1993, he was a member in the law firm of Watson
& Marshall, L.C., Kansas City, Missouri. Mr. Carpenter is also a director of
Berger and Nelson.
ANTHONY P. MCCARTHY has continuously served as Vice President and Treasurer of
KCSI since May 1996. He was Treasurer of KCSI from December 1989 to May 1996.
MORTON I. SOSLAND (Class I Director) has been a director of KCSI since 1976. He
has been Chairman of the Sosland Companies, Inc. (the "Sosland Companies"),
Kansas City, Missouri, since January 1993 and was President from July 1968
through December 1992. He has also served as Chairman of Sosland Publishing
Company, Kansas City, Missouri, since 1984. The Sosland Companies are publishers
and venture capital investors. Mr. Sosland is also a director of H&R Block,
Inc., Kansas City, Missouri.
JAMES E. BARNES (Class III Director) has been a director of KCSI since 1986.
Prior to retirement, Mr. Barnes was Chairman of the Board of Directors,
President and Chief Executive Officer of MAPCO Inc., Tulsa, Oklahoma. He was
Chairman of the Board of Directors and Chief Executive Officer from December
1991 to September 1995 and Chairman of the Board of Directors, President and
Chief Executive Officer from May 1986 to December 1991. MAPCO processes,
transports, stores, purchases and sells petroleum and natural gas liquid
products. Mr. Barnes is also a director of BOK Financial Corporation, Tulsa,
Oklahoma; SBC Communications Inc., San Antonio, Texas; and Parker Drilling Co.,
Tulsa, Oklahoma.
PAUL F. BALSER (Class II Director) has been a director of KCSI since 1990. He
has been a Managing Partner of Generation Partners, L.P., New York, New York,
since August 1995. Generation Partners is an investment firm specializing in
privately negotiated equity and venture capital investments. He was a Partner of
Centre Partners, L.P., New York, New York, from September 1986 through July
1995, which also specialized in privately negotiated equity and venture capital
investments. Mr. Balser is also a director of the Carbide/Graphite Group, Inc.,
Pittsburgh, Pennsylvania, and Scientific Games, Inc., Atlanta, Georgia, as well
as a number of private companies.
GWEN E. ROYLE has continuously served as Senior Assistant Vice President and Tax
Counsel of KCSI since November 1996. She was Tax Counsel of KCSI from July 1995
to November 1996. She was a member in the law firm Slagle, Bernard & Gorman,
P.C. from 1991 to July 1995.
DOUGLAS E. NICKERSON has continuously served as Assistant Comptroller of KCSI
since September 1997, and served as Manager of Financial Reporting of KCSI from
October 1995 to September 1997. From January 1995 to October 1995, Mr. Nickerson
was financial reporting manager of Ferrellgas Partners, L.P. Ferrellgas
Partners, L.P. is engaged in the sale, distribution, marketing and trading of
propane and other natural gas liquids.
There are no arrangements or understandings between the directors or
executive officers and any other person pursuant to which the director or
executive officer was or is to be selected as a director or officer, except with
respect to the executive officers who have employment agreements with Stilwell.
None of the above directors or officers are related to one another by family.
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COMPOSITION OF STILWELL'S BOARD OF DIRECTORS
Stilwell's Board of Directors will consist of not fewer than 3 nor more
than 18 directors with the number of directors fixed exclusively from time to
time by a majority of Stilwell's entire Board of Directors. Stilwell's Board of
Directors is divided into three classes. The initial term of the first class
expires at the conclusion of the 2001 annual meeting of stockholders, the
initial term of the second class expires at the conclusion of the 2002 annual
meeting of stockholders and the initial term of the third class expires at the
conclusion of the 2003 annual meeting of stockholders. Commencing with the 2001
annual meeting of stockholders, directors elected to succeed the initial
directors whose terms expire will be elected to serve a three-year term of
office. Directors hold office until the next annual meeting of stockholders at
which their terms expire and until their successors are duly elected and
qualified. As a result, approximately one-third of Stilwell's Board of Directors
will be elected each year. Officers are elected by Stilwell's Board of Directors
and serve until their successors are duly elected or appointed and qualified or
until they shall die, resign or be removed. See "Description of Capital Stock-
Certain Antitakeover Effects."
COMMITTEES OF STILWELL'S BOARD OF DIRECTORS
Stilwell's Board of Directors has established an Executive Committee (which
also nominates individuals to serve as directors of Stilwell), an Audit
Committee and a Compensation Committee. Commencing with the 2001 annual meeting
of stockholders, the members of the committees will be elected at the annual
meeting of Stilwell's Board of Directors. Pursuant to the Bylaws of Stilwell,
Stilwell's Board of Directors may also establish other committees from time to
time in its discretion.
EXECUTIVE COMMITTEE. The Executive Committee consists of directors elected
by Stilwell's Board of Directors to serve one-year terms. When Stilwell's Board
of Directors is not in session, the Executive Committee has all powers and
rights necessary to exercise the full authority of Stilwell's Board of Directors
in the management of the business and affairs of Stilwell, except as provided in
the DGCL, the Certificate or the Bylaws of Stilwell. The Executive Committee has
full power to act as the Nominating Committee which, when acting as such, has
the power and duty to make recommendations to Stilwell's Board of Directors as
to suitable nominees for election to Stilwell's Board of Directors by the
stockholders or by the remaining members of Stilwell's Board of Directors, to
fill newly created directorships and to fill any vacancies which shall occur.
When acting as the Nominating Committee, it has the power to meet with and
consider suggestions from such other members of Stilwell's Board of Directors,
stockholders, members of management, consultants and other persons, firms or
corporations as they deem necessary or advisable to assist them in making such
recommendations. The members of the Executive Committee are James E. Barnes,
Morton I. Sosland and Landon H. Rowland.
AUDIT COMMITTEE. The Audit Committee consists of outside directors elected
by Stilwell's Board of Directors to serve staggered three-year terms. The Audit
Committee meets with and considers suggestions from members of management and
members of Stilwell's internal audit staff, as well as Stilwell's independent
accountants, concerning the financial operations of Stilwell. The Audit
Committee also has the power to review audited financial statements of Stilwell
and consider and recommend the employment of, and
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approve the fee arrangement with, independent accountants for both audit
functions and for advisory and other consulting services. The members of the
Audit Committee are Paul F. Balser, James E. Barnes and Morton I. Sosland.
COMPENSATION COMMITTEE. The Compensation Committee consists of outside
directors elected by Stilwell's Board of Directors to serve one-year terms. The
Compensation Committee has the power: to authorize and determine all salaries
for the officers and supervisory employees of Stilwell Financial, Inc.; to
administer the incentive compensation plans of Stilwell Financial, Inc. in
accordance with the powers and authority granted in such plans; to determine any
incentive allowances to be made to officers and staff of Stilwell Financial,
Inc.; to administer all stock option plans, stock purchase plans and other
equity ownership, compensation, retirement and benefit plans of Stilwell
Financial, Inc.; to approve the performance-based compensation of individuals
pursuant to Code Section 162(m); and to administer all other matters relating to
the compensation or benefits of Stilwell Financial, Inc. The members of the
Compensation Committee are Paul F. Balser, James E. Barnes and Morton I.
Sosland.
COMPENSATION OF STILWELL'S DIRECTORS
Directors who are employees of Stilwell do not receive any fees or other
compensation for service on Stilwell's Board of Directors or its committees.
Members of Stilwell's Board of Directors who do not receive compensation as
officers or employees of Stilwell receive a fee of $4,000 for each meeting of
Stilwell's Board of Directors attended, a fee of $2,000 for attendance at any
committee meeting, and a fee of $2,000 or $1,000 for participation in any
telephonic Board of Directors or committee meeting, respectively. In addition,
all members of Stilwell's Board of Directors are reimbursed for reasonable
travel expenses in connection with attending Board of Directors and committee
meetings. The chairman of a committee receives an additional $500 for each
committee meeting attended. Directors will also receive a discretionary grant of
options to purchase shares of Stilwell Common Stock on an annual basis
immediately following each annual meeting of Stilwell's stockholders. To date,
the Board of Directors of Stilwell has not taken any action with respect to such
discretionary grants of options.
EXECUTIVE COMPENSATION
Although Stilwell has entered into employment agreements with certain of
Stilwell's executive officers effective as of the Distribution Date, to date, no
compensation has been paid pursuant to such agreements and the executive
officers have received compensation pursuant to their existing employment
arrangements with KCSI. The information under this heading therefore summarizes
compensation paid by KCSI to the individual that is Stilwell's Chief Executive
Officer and individuals who, based upon employment and compensation paid by KCSI
during the fiscal year ended December 31, 1999, are the four individuals
initially expected to be the most highly compensated executive officers of
Stilwell. As a result, the compensation described below does not reflect the
compensation such executive officers will receive following the Distribution.
See "Management-Employment Agreements With the Named Executive Officers." The
principal positions listed below are those that will be held by the executive
officers in Stilwell following the Distribution.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE*
Long Term
Annual Compensation Compensation Awards
--------------------------------------------- ---------------------------
Securities
Other Annual Underlying All Other
Name and Principal Compensation Options/ Compensation
Position Year Salary($) Bonus($) ($) SARs(#)<6> ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Landon H. Rowland 1999 750,000 --- 46,067<F1> --- 105,490<F1>
Director; Chairman 1998 750,000 --- 53,877 6,138 26,632
of the Board, 1997 750,000 --- 57,900 --- 114,801
President and Chief
Executive Officer
Thomas H. Bailey 1999 900,000 1,000,000<F3> --- --- 121,128<F2>
Chairman of the 1998 900,000 833,000 --- --- 109,000
Board, President and 1997 900,000 675,000 --- --- 75,667
Chief Executive
Officer of Janus
Joseph D. Monello 1999 600,000 --- --- --- 45,671<F3>
Vice President and 1998 250,008 --- --- 65,000 43,754
Chief Operating 1997 250,008 --- --- --- 62,640
Officer
Danny R. Carpenter 1999 330,000 --- --- 980 17,815<F4>
Vice President 1998 190,008 --- --- 31,481 16,000
and Secretary 1997 190,008 --- --- --- 43,751
Anthony P. McCarthy 1999 180,000 --- --- --- 16,963<F5>
Vice President - 1998 110,004 --- --- 10,000 11,052
Finance 1997 110,004 --- --- --- 11,394
</TABLE>
*Reflects compensation paid by KCSI.
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[FN]
<F1>
Other Annual Compensation for Mr. Rowland includes premiums on disability
insurance policy of $46,067. All other compensation for Mr. Rowland for 1999 is
comprised of: (i) contributions to his account under the Stilwell ESOP of
$6,400; (ii) interest on deferred directors' fees of $13,049; (iii) a
contribution to his account under KCSI's 401(k) plan of $4,800; (iv) a
contribution to his account under KCSI's profit sharing plan of $4,800; (v)
premiums on group term life insurance of $4,941; and (vi) an amount paid out to
him pursuant to the KCSI Executive Plan of $71,500. As of December 31, 1999, Mr.
Rowland held no shares of restricted stock.
<F2>
The bonus for Mr. Bailey for 1999 was under a performance based incentive
compensation plan approved by stockholders in 1997. All other compensation for
Mr. Bailey for 1999 is comprised of: (i) directors' fees in the amount of
$31,000 and $65,333, paid to Mr. Bailey in his capacity as director of Janus
Capital Corporation, Janus Investment Fund and the Janus Aspen Series,
respectively; (ii) a contribution to his account under the Stilwell ESOP of
$6,400; (iii) a contribution to his account under KCSI's 401(k) plan of $4,800;
(iv) a contribution to his account under Janus' profit sharing plan of $4,800;
and (v) premiums on group term life insurance of $8,795 paid by Janus Capital
Corporation. As of December 31, 1999, Mr. Bailey held no shares of restricted
stock.
<F3>
All other compensation for Mr. Monello for 1999 is comprised of: (i) a
contribution to his account under the Stilwell ESOP of $6,400; (ii) a
contribution to his account under KCSI's 401(k) plan of $4,800; (iii) a
contribution to his account under KCSI's profit sharing plan of $4,800; (iv)
premiums on group term life insurance of $1,917; and (v) an amount paid out to
him under the KCSI Executive Plan of $27,754. As of December 31, 1999, Mr.
Monello held no shares of restricted stock.
<F4>
All other compensation for Mr. Carpenter for 1999 is comprised of: (i) a
contribution to his account under the Stilwell ESOP of $6,400; (ii) a
contribution to his account under KCSI's 401(k) plan of $4,800; (iii) a
contribution to his account under KCSI's profit sharing plan of $4,800; and (iv)
premiums on group term life insurance of $1,815. As of December 31, 1999, Mr.
Carpenter held no shares of restricted stock.
<F5>
All other compensation for Mr. McCarthy for 1999 is comprised of: (i) a
contribution to his account under the Stilwell ESOP of $6,400; (ii) a
contribution to his account under KCSI's 401(k) plan of $4,800; (iii) a
contribution to his account under KCSI's profit sharing plan of $4,800; and (iv)
premiums on group term life insurance of $963. As of December 31, 1999, Mr.
McCarthy held no shares of restricted stock.
<F6>
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All option award information relates to options to purchase shares of KCSI
Common Stock. In connection with the Distribution, all Options will remain
outstanding with an adjusted exercise price and the holders of the Options will
be granted New Stilwell Options. As a result, the value of the options to
purchase Stilwell Common Stock will depend on the future value of Stilwell
Common Stock. See "Relationship Between KCSI and Stilwell After the
Distribution-Employee Benefits" and "Management-Other Compensatory Plans and
Arrangements."
</FN>
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<TABLE>
<CAPTION>
1999 OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------
Grant Date
Individual Grants Value
(a) (b) (c) (d) (e) (f)
Number of % of Total
Securities Options/SARs Exercise Grant
Underlying Granted to or Base Date
Options/SARs Employees in Price Expiration Present
Name Granted (#) Fiscal Year<3> ($/Sh)<4> Date Value $<5>
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Landon H. Rowland 0 N/A N/A N/A N/A
Thomas H. Bailey 100<1> * 44.00 01/25/09 1,447
Joseph D. Monello 0 N/A N/A N/A N/A
Danny R. Carpenter 980<2> * 44.00 01/25/09 14,181
Anthony P. McCarthy 0 N/A N/A N/A N/A
</TABLE>
* Less than one percent of the total options granted.
[FN]
<F1>
The options were granted under the 1991 Plan. These options were granted on
January 26, 1999 and became exercisable upon January 26, 2000. LSAR's were
granted in tandem with these options. All of the LSAR's are automatically
exercised upon a change in control that is not approved by the incumbent board
of KCSI (as such terms are defined in the 1991 Plan). All the options expire at
the end of ten years, subject to earlier termination as provided in the
individual's option agreement. The options are subject to voluntary tax
withholding rights.
<F2>
The options were granted under the 1991 Plan in connection with KCSI's Executive
Plan. These options were granted on January 26, 1999 and were immediately
exercisable. LSAR's were granted in tandem with these options. All of the LSAR's
are automatically exercised upon a change in control that is not approved by the
incumbent board of KCSI (as such terms are defined in the 1991 Plan). All the
options expire at the end of ten years, subject to earlier termination as
provided in the individual's option agreement. The options are subject to
voluntary tax withholding rights.
<F3>
Total options granted to eligible employees in 1999 were 490,716.
<F4>
Average of the high and low prices of the Common Stock on the date of grant as
reported on the NYSE.
<F5>
Valuation determined using Black-Scholes' option pricing model with the
following assumptions: market price of stock is equal to the exercise price of
options; stock volatility (based on 3-year monthly data) of 42.20%; annualized
risk-free interest rate of 4.6710%; option term (in years) 3; and stock's
dividend yield of 0.36%.
</FN>
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1999 AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information with respect to the aggregate
option exercises during 1999 by the executive officers and the number and value
of options held by such officers as of December 31, 1999 (the last trading day
of the year).
- -------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-End
(#) ($)
Shares
Acquired
on Value
Exercise Realized<1> Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable<1>
- -------------------------------------------------------------------------------
Landon H. Rowland 0 N/A 2,769,138/0 182,179,057/0
Thomas H. Bailey 0 N/A 0/100 0/2,831
Joseph D. Monello 0 N/A 330,000/65,000 18,773,136/
1,950,000
Danny R. Carpenter 0 N/A 263,461/30,000 15,060,840/
900,000
Anthony P. McCarthy 0 N/A 74,250/ 2,515,424/
10,000 54,375
[FN]
<F1>
The dollar value in columns (c) and (e) is calculated by determining the
difference between the fair market value of the securities underlying the
options and the exercise price of the options on the date of exercise or
December 31, 1999 (the last trading day of 1999), respectively, times the number
of options exercised or held at year end.
</FN>
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EMPLOYMENT AGREEMENTS WITH THE NAMED EXECUTIVE OFFICERS
Certain executive officers of Stilwell have entered into employment
agreements with Stilwell that are effective as of the Distribution Date. The
Compensation Committee of the Board of Directors of Janus, with the aid of an
independent compensation consultant, sets Mr. Bailey's base salary and
recommends incentive compensation. Stilwell's Compensation Committee also
approves such incentive compensation.
MR. ROWLAND. Stilwell entered into an employment agreement dated May ___,
2000 with Mr. Rowland effective as of the Distribution Date, which provides for
Mr. Rowland's employment as Chairman of the Board, President and Chief Executive
Officer of Stilwell.
The employment agreement provides that Mr. Rowland is to serve at the
pleasure of Stilwell's Board of Directors and does not contain a fixed term of
employment. Pursuant to the employment agreement, Mr. Rowland will receive a
fixed annual base salary of $825,000, which is not to be increased prior to
January 1, 2003 and is not to be reduced except by mutual agreement of Stilwell
and Mr. Rowland or except as part of a general salary reduction program
applicable to all officers of Stilwell. Mr. Rowland is not entitled to
participate in any Stilwell incentive compensation plan during 2000, 2001 and
2002, but continues to participate in other benefit plans or programs of
Stilwell generally available to executive employees and is provided with certain
disability insurance coverage and life insurance payable to beneficiaries
designated by him. Under the employment agreement the value of Mr. Rowland's
annual compensation is fixed at $the lower of 175% of his annual base salary or
$1,000,000 for purposes of cash compensation-based benefit plans.
In conjunction with entering into the employment agreement with Stilwell
and in lieu of participation in any incentive compensation plan for the period
indicated, Mr. Rowland received a grant of KCSI performance stock options for
215,000 shares and a grant of KCSI standard stock options for 16,100 shares.
Subject to continued employment, the performance stock options will become
exercisable in three equal installments if the price of the KCSI stock increases
above the price at the time of grant ($70.7813) to certain target levels,
computed on the basis of 50% growth in the KCSI stock price for the first
installment and 20% compounded growth in such stock price above the first
installment target for the second and third installments. The standard stock
options for Mr. Rowland will become exercisable one year after the date of
grant, subject to continued employment. At the time of the Distribution,
Stilwell options will be substituted for all such KCSI options in their entirety
and the target stock price levels for the performance options will be adjusted
to Stilwell stock prices.
The employment agreement provides for twenty-four (24) months of severance
pay at an annual rate equal to Mr. Rowland's base salary and for certain health
and life insurance benefits in the event of the termination of his employment
without cause, other than in connection with a change in control of Stilwell (as
defined in the employment agreement), unless such benefits are provided by
another employer. In the year in which termination occurs, Mr. Rowland will
remain eligible to receive benefits under the Stilwell Incentive Compensation
Plan, if any, and the Stilwell Executive Plan. After termination, Mr. Rowland
shall not be entitled to accrue or
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receive any benefits under any other employee benefit plan, except he will be
entitled to participate in the Stilwell Employee Stock Ownership Plan and the
Stilwell 401(k) Plan in the year of termination if he meets the requirements for
participation in such termination year.
As part of the employment agreement, Mr. Rowland has agreed not to use or
disclose any Stilwell trade secret (as defined in the employment agreement)
after any termination of his employment and not to engage in, or manage, a
business in competition with any business conducted by Stilwell or its
subsidiaries, in any country or jurisdiction in which Stilwell or any of its
subsidiaries conduct business, for a period of three years following Mr.
Rowland's resignation or termination of his employment for cause or due to his
disability.
During the period of his employment under the employment agreement, Mr.
Rowland has agreed to retain ownership in himself or members of his immediate
family of at least a majority of the number of shares of (i) Stilwell Common
Stock received in the Distribution and (ii) Stilwell Common Stock acquired upon
exercise of Stilwell stock options (other than shares transferred to Stilwell or
sold to pay the purchase price upon the exercise of stock options or to pay or
satisfy tax obligations resulting from such exercise).
If there is a change in control of Stilwell or its Significant Subsidiaries
(as defined in the employment agreement) during the term of the employment
agreement, Mr. Rowland's employment, executive capacity, salary and benefits
would be continued for a three-year period at levels in effect on the Control
Change Date (as defined in the employment agreement) at a rate not less than
twelve times the highest monthly base salary paid or payable to him in the
twelve months prior to any change in control. During such three-year period, Mr.
Rowland would also be eligible to participate in all benefit plans generally
made available to executives of his level or to the employees of Stilwell
generally, would be eligible to participate in any Stilwell incentive
compensation plan, and would be entitled to immediately exercise all outstanding
stock options and receive a lump-sum cash payment equal to the fair market value
of all non-vested options. If the amounts payable during this three-year period
are discretionary, the benefits continued shall not be less than the average
annual amount for the three years prior to the change in control and incentive
compensation shall not be less than 75% of the maximum amount which could have
been paid to Mr. Rowland under the terms of the incentive compensation plan.
With respect to unfunded employer obligations under the benefit plans, Mr.
Rowland would be entitled to a discounted cash payment of amounts to which he is
entitled. Mr. Rowland's employment may be terminated after the Control Change
Date, but where it is other than For Cause (as defined in the employment
agreement) he would be entitled to payment of his base salary through
termination plus a discounted cash severance payment equal to 175% of three
times his annual base salary and continuation or payment of benefits for a
three-year period at levels in effect on the Control Change Date. Mr. Rowland
also is permitted to resign employment after a change in control upon Good
Reason (as defined in the employment agreement) and advance written notice, and
to receive the same payments and benefits as if his employment had been
terminated by Stilwell. Mr. Rowland's employment agreement also provides for
payments to him necessary to relieve him of certain adverse federal income tax
consequences if amounts received under the employment agreement involve
"parachute payments" under Code Section 4999.
MESSRS. MONELLO, CARPENTER AND MCCARTHY. Stilwell has entered into
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employment agreements dated May __, 2000 with Messrs. Monello, Carpenter and
McCarthy effective as of the Distribution Date. These employment agreements
provide, respectively, for Mr. Monello's employment as Executive Vice President
and Chief Operating Officer of Stilwell, Mr. Carpenter's employment as Vice
President and Secretary of Stilwell and Mr. McCarthy's employment as Vice
President-Finance and Treasurer of Stilwell. The employment agreements are
subject to termination under certain circumstances.
Pursuant to their employment agreements, Messrs. Monello, Carpenter and
McCarthy will receive as compensation for their services an annual base salary
at the rate of $660,000, $400,000 and $200,000, respectively. Such salary shall
not be increased prior to January 1, 2003 and is not to be reduced except as
agreed to by the parties or as part of a general salary reduction by Stilwell
applicable to all officers of Stilwell. Under the employment agreements, Mr.
Monello, Mr. Carpenter and Mr. McCarthy are not entitled to participate in any
Stilwell incentive compensation plan during 2000, 2001 and 2002, but will
receive cash bonuses of $250,000, $400,000 and $150,000, respectively within ten
days after the Distribution Date and all are eligible to participate in other
benefit plans or programs generally made available to executive employees of
Stilwell. The employment agreements provide that the value of Messrs. Monello's,
Carpenter's and McCarthy's annual compensation for purposes of cash compensation
based benefit plans is fixed at the lower of 175% of their annual base salaries
or $1,000,000.
In conjunction with entering into the employment agreements with Stilwell
and in lieu of participation in any incentive compensation plans for the period
indicated (other than the cash bonuses described in the preceding paragraph),
Messrs. Monello, Carpenter and McCarthy received a grant of KCSI performance
stock options for 150,000, 80,000 and 30,000 shares, respectively, and Mr.
Monello received a grant of KCSI standard stock options for 7,500 shares.
Subject to continued employment, the performance stock options will become
exercisable in three equal installments if the price of the KCSI stock increases
above the price at the time of grant ($70.7813) to certain target levels,
computed on the basis of 50% growth in the KCSI stock price, for the first
installment and 20% compounded annual growth in such stock price above the first
target price for the second and third installments. The standard stock options
for Mr. Monello will become exercisable one year after the date of grant,
subject to continued employment. At the time of the Distribution, Stilwell
options will be substituted for all such KCSI options in their entirety and the
target stock price levels for the performance options will be adjusted to
Stilwell stock price.
In the event of termination without cause by Stilwell, Messrs. Monello and
Carpenter would be entitled to 24 months and Mr. McCarthy 12 months of severance
pay at an annual rate equal to their base salary and for reimbursement for the
costs of continuing or obtaining comparable health and life insurance benefits
unless such benefits are provided by another employer. In the year in which
termination occurs, Messrs. Monello, Carpenter and McCarthy will remain eligible
to receive benefits under the Stilwell Incentive Compensation Plan, if any, and
the Stilwell Executive Plan. After termination, the officers shall not be
entitled to accrue or receive benefits under any other employee benefit plan,
except the officers will be entitled to participate in the Stilwell Employee
Stock Ownership Plan and the Stilwell 401(k) Plan in the year of termination if
such officers meet the requirements for participation in such termination year.
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<PAGE>
As part of their employment agreements, Messrs. Monello, Carpenter and
McCarthy have agreed not to use or disclose any Stilwell trade secret (as
defined in the employment agreements) after any termination of their employment
and shall, immediately upon termination of employment, return to Stilwell or its
subsidiaries or affiliates any trade secrets in their possession which exist in
tangible form.
During the period of employment under their employment agreements, Messrs.
Monello, Carpenter and McCarthy each has agreed to retain ownership in himself
or members of his immediate family of at least a majority of the number of
shares of (i) Stilwell Common Stock received in the Distribution and (ii)
Stilwell Common Stock acquired upon exercise of Stilwell stock options (other
than shares transferred to Stilwell or sold to pay the purchase price upon the
exercise of stock options or to pay or satisfy tax obligations resulting from
such exercise.)
If there is a change in control of Stilwell or its Significant Subsidiaries
(as defined in the employment agreements) during the term of the employment
agreements, the officers' employment, executive capacity, salary and benefits
would be continued for a three-year period at levels in effect on the Control
Change Date (as that term is defined in the employment agreements). During the
three-year period, salary is to be paid at a rate not less than twelve times the
highest monthly base salary paid or payable to the officers by Stilwell in the
twelve months immediately prior to any change in control. During the three-year
period, the officers also would be eligible to participate in all benefit plans
generally made available to executives of their level or to the employees of
Stilwell generally, would be eligible to participate in any Stilwell incentive
compensation plan and would be entitled to immediately exercise all outstanding
stock options and receive a lump-sum cash payment equal to the fair market value
of all non-vested options. If the amounts payable during this three-year period
are discretionary, the benefits continued shall not be less than the average
annual amount for the three years prior to the change in control and incentive
compensation shall not be less than 75% of the maximum amount which could have
been paid to the officers under the terms of the incentive compensation plan.
With respect to unfunded employer obligations under benefit plans, the officers
would be entitled to a discounted cash payment of amounts to which they are
entitled. The officers' employment may be terminated after the Control Change
Date, but where it is other than For Cause (as defined in the employment
agreements) they would be entitled to payment of their base salary through
termination plus Messrs. Monello, Carpenter and McCarthy would receive a
discounted cash severance payment equal to 175% for Mr. Monello and Mr.
Carpenter of three times their annual base salaries, and for Mr. McCarthy 175%
of two times his annual base salary, continuation of payment of benefits for a
three-year period at the Control Change Date and certain health, prescription
and dental benefits for the remainder of their lives unless such benefits are
otherwise provided by a subsequent employer. In addition, the officers receive
continuation or payment of benefits for a three-year period at levels in effect
on the Control Change Date. The officers also are permitted to resign
employment after a change in control upon Good Reason (as that term is defined
in the employment agreements) and advance written notice, and to receive the
same payments and benefits as if their employment had been terminated. The
employment agreements also provide for payments to such officers necessary to
relieve them of certain adverse federal income tax consequences if amounts
received under the agreements involve "parachute payments" under Code Section
4999.
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MR. BAILEY. Mr. Bailey has the right under the Janus Stock Purchase
Agreement to require KCSI to purchase his shares of stock of Janus at a per
share price equal to fifteen times the net after-tax earnings per share of Janus
for the year ended immediately prior to the date of notice, or, a price per
share equal to fifteen times the after-tax earnings per share of Janus for the
year ended December 31, 1987, whichever is greater. Under that agreement, Mr.
Bailey is also entitled, upon a termination of his employment within one year of
a defined change of ownership of KCSI, to receive a payment equal to his prior
year's current and deferred compensation.
INDEMNIFICATION AGREEMENTS
Stilwell entered into indemnification agreements with its officers and
directors effective as of the Distribution Date (the "Stilwell Indemnification
Agreements"). Such agreements are intended to supplement Stilwell's officers'
and directors' liability insurance and to provide the officers and directors
with specific contractual assurance that the protection provided by Stilwell's
Certificate will continue to be available regardless of, among other things, an
amendment to the Certificate or a change in management or control of Stilwell.
The Stilwell Indemnification Agreements provide for prompt indemnification to
the fullest extent permitted by law and for the prompt advancement of expenses,
including attorney's fees and all other costs and expenses incurred in
connection with any action, suit or proceeding in which the director or officer
is a witness or other participant, or to which the director or officer is a
party, by reason (in whole or in part) of service in certain capacities. The
Stilwell Indemnification Agreements provide a mechanism to seek court relief if
indemnification or expense advances are denied or not received within the
periods provided in the Stilwell Indemnification Agreements. Indemnification
and advancement of expenses are also provided with respect to a court proceeding
initiated for a determination of rights under the Stilwell Indemnification
Agreements or of certain other matters. Stilwell has entered into such
indemnification agreements with all current directors and officers of Stilwell.
OTHER COMPENSATORY PLANS AND ARRANGEMENTS
STILWELL STOCK PURCHASE PLAN. The main provisions of the Stilwell Stock
Purchase Plan are substantially similar to the KCSI Purchase Plan: eligible
employees may purchase during certain periods Stilwell Common Stock at 85% of
the average market price on either the exercise date or the grant date,
whichever is lower, but in no event at less than the par value of the shares.
Eligible Stilwell employees may elect to have up to a board-determined maximum
percentage of annualized base pay applied to purchase Stilwell Common Stock, and
the purchase price will be collected via employee payroll deductions. With
certain exceptions, all employees of Stilwell or any eligible Stilwell
affiliates who work at least 20 hours per week for five months of the year will
be eligible to participate in the Stilwell Stock Purchase Plan. The right to
participate in the Stilwell Stock Purchase Plan will terminate immediately upon
the date the participant ceases employment with Stilwell or any eligible
Stilwell affiliate except in certain circumstances.
STILWELL EXECUTIVE PLAN. The Stilwell Executive Plan is a non-qualified
plan for participants who are certain officers of Stilwell and is designed to
provide benefits in addition to the annual contributions permitted under the
Stilwell qualified retirement plans.
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<PAGE>
The annual benefit provided on behalf of each participant in the Stilwell
Executive Plan equals the amount which would have been contributed to the
Stilwell qualified retirement plans for such participant based on the
participant's compensation under the Stilwell qualified retirement plans without
regard to statutory contribution limitations or eligibility requirements, less
the amount participants were entitled to receive under such plans (assuming,
with respect to the 401(k) Portion, that the participant was entitled to receive
the maximum matching contribution). Each participant may irrevocably elect in
advance to receive the annual benefit available under the Stilwell Executive
Plan either in cash or through a grant of non-qualified stock options to
purchase shares of Stilwell Common Stock (using a Black-Scholes valuation model
which values the stock options at 125 percent of the annual cash benefit). For
purposes of the Stilwell Executive Plan, compensation includes base compensation
plus cash incentive compensation; certain participants have agreed that their
compensation is a fixed amount or a certain percentage of their annual base
salaries, pursuant to their employment agreements.
After the Distribution, those Stilwell employees in the KCSI Executive Plan
will no longer be eligible to participate in the KCSI Executive Plan, but their
KCSI compensation for the year including the Distribution will be credited under
the Stilwell Executive Plan.
STILWELL STOCK OPTION PLAN. The Stilwell Stock Option Plan provides for the
grant, at the discretion of Stilwell's Board of Directors or of a committee
appointed by Stilwell's Board of Directors (in either case, the "Committee") of
various types of equity incentive awards, including options (incentive and non-
statutory), restricted shares, bonus shares, SARS (freestanding and tandem) and
LSARs (including, in each case, dividend equivalents), performance units and
performance shares. Awards may be made to any employee director or consultant
of Stilwell or of any Stilwell subsidiary. A maximum of 30,000,000 shares of
Stilwell Common Stock may be issued under the Stilwell Stock Option Plan
(subject to adjustment in the event of stock splits, recapitalizations,
reorganizations or similar events), approximately 16,000,000 of which shares
will be subject to New Stilwell Options. The Committee administers the Stilwell
Stock Option Plan and has broad discretionary powers to designate grantees,
determine the number and type of awards, prescribe the terms and conditions of
each award and to modify the terms and conditions of individual awards. The
Committee's discretionary powers extend to awards granted to outside directors
as well as to employees and consultants.
The Stilwell Stock Option Plan will govern the New Stilwell Options as well
as Stilwell stock options and other incentive awards granted pursuant to the
Stilwell Stock Option Plan in connection with and after the Distribution. As
part of the Distribution, KCSI and Stilwell plan to substitute options for
Options held by KCSI and Stilwell employees, former KCSI employees and KCSI
directors (including former directors) to provide for the equitable adjustment
of the Options as allowed by the KCSI Stock Option Plan. Specifically, as part
of the Distribution, all Options will remain outstanding with an adjusted
exercise price as New KCSI Options, and holders of the Options will receive New
Stilwell Options.
The exercise prices of the Substituted Options will be a prorated amount of
the exercise price for the related Options based on the ratio of the trading
price of Stilwell Common Stock to the total of the trading prices of
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both KCSI Common Stock (excluding Stilwell) and Stilwell Common Stock. For this
purpose, the trading prices will be the closing prices of the stocks on the New
York Stock Exchange on the Distribution Date. The other terms of the Substituted
Options will be the same as for the Options.
The New Stilwell Options will be granted in the same proportion as the
distribution of Stilwell Common Stock in the Distribution; i.e., two New
Stilwell Options for each Option held. New KCSI Options and New Stilwell
Options which will be substituted for Options which were subject to time vesting
(under the KCSI Stock Option Plan, vesting means the Options become exercisable;
therefore, Options which time vest are Options which become exercisable after
the passage of a specified period of time) will vest at the time the Options for
which they were substituted would have vested.
The substitution of New KCSI Options and New Stilwell Options for Options is
provided for in the Intercompany Agreement under which (1) the New KCSI Options
and New Stilwell Options will be established with the exercise prices determined
as described above based on an allocation of the exercise price of the Options;
and (2) KCSI and Stilwell assume the obligation to issue shares of their Common
Stock upon the exercise of the New KCSI Options and the New Stilwell Options,
respectively.
STILWELL 401(k) PLAN (WITH PROFIT SHARING PORTION). The 401(k) Portion is a
qualified voluntary self-directed employee contribution plan, and the Profit
Sharing Portion is a qualified, non-contributory defined contribution plan. New
employees of Stilwell and of Stilwell affiliates which participate in the
Stilwell 401(k) Plan, other than certain excluded employees as defined in the
Stilwell 401(k) Plan ("Eligible Employees"), may elect to participate in the
401(k) Portion on the first plan entry date on or after the commencement of
their employment. Under the 401(k) Portion, Eligible Employees may defer up to
10% of their eligible compensation (as defined in the 401(k) Portion) through
payroll deduction, up to certain limits prescribed by the Code. Stilwell will
contribute matching contributions to each participant's account, up to 3% of the
employee's eligible compensation, again subject to certain Code-prescribed
limits. Participants in the 401(k) Portion may choose to invest their 401(k)
Portion accounts in any one or more of 13 diversified investment options. A
participant is always fully vested in his or her contributions to the 401(k)
Portion.
As of the Distribution, the Trustee will transfer the accounts of the
Stilwell participants who will participate in the 401(k) Portion to the 401(k)
Portion. The trustee for the Stilwell 401(k) Plan will accept the transferred
accounts from the KCSI 401(k) Plan, and participants' elections under the KCSI
401(k) Plan will remain in effect under the 401(k) Portion until changed by the
Stilwell participants.
With respect to the Profit Sharing Portion, the Trustee will divide the KCSI
Profit Sharing Plan as of the Distribution and will transfer the accounts of
Stilwell Financial, Inc. participants to the Profit Sharing Portion in a
plan-to-plan transfer of assets. An investment manager will manage the
participant accounts in the Profit Sharing Portion.
With respect to the employer contributions made to the Stilwell 401(k) Plan,
participants vest at the rate of 25% at three years of service, 50% at four
years of service and 100% at five years of service. The Stilwell 401(k) Plan
will treat all service credited with respect to an employee under the KCSI
401(k) Plan, for the 401(k) Portion, and the KCSI Profit Sharing Plan,
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for the Profit Sharing Portion, prior to the Distribution as service with
Stilwell. A participant's interest in employer contributions also becomes fully
vested at retirement, death, disability or a change in control of Stilwell.
Distributions under the Stilwell 401(k) Plan will be made in connection with a
participant's death, disability, retirement or other termination of employment.
A participant has the right to elect whether payment of his or her benefits will
be in a lump sum, in installments, or in a combination thereof.
Stilwell's Board of Directors has appointed a trustee to hold the assets of
the Stilwell 401(k) Plan in a trust fund. The Stilwell Compensation Committee
will appoint a Stilwell 401(k) Plan Advisory Committee (the "Advisory
Committee") to administer the Stilwell 401(k) Plan. Stilwell's Board of
Directors and Stilwell's Compensation Committee may amend the Stilwell 401(k)
Plan, although any amendment may not adversely affect any person's accrued
benefits under the Stilwell 401(k) Plan.
STILWELL ESOP. New employees of Stilwell and of Stilwell affiliates which
participate in the Stilwell ESOP (other than excluded employees as defined in
the Stilwell ESOP), will be eligible to participate in the Stilwell ESOP on the
first plan entry date on or after the commencement of their employment. The
Stilwell ESOP does not permit participant contributions or rollover
contributions.
The KCSI ESOP and the Stilwell ESOP will participate in the Distribution.
Immediately after the Distribution, participants in the Stilwell ESOP will have
two shares of Stilwell Common Stock for each one share of KCSI Common Stock in
their accounts.
To allow Stilwell participants to retain the KCSI Common Stock in their
respective Stilwell ESOP accounts, Stilwell participants will have an election
with respect to the portion of each Stilwell participant's account allocated to
KCSI Common Stock to keep the KCSI Common Stock in their accounts or to have the
trustee for the Stilwell ESOP sell the KCSI Common Stock in their accounts and
reinvest the proceeds in either Stilwell Common Stock or in a guaranteed
investment contract fund. The election may be a partial election; however, once
a participant elects to have the KCSI Common Stock held in his or her ESOP
account sold, the participant may not reinvest in KCSI Common Stock, nor may a
participant elect to sell any of the Stilwell Common Stock in his or her account
to invest in the guaranteed investment contract fund. For any participant who
does not affirmatively elect to retain the KCSI Common Stock in his or her
account, the trustee for the Stilwell ESOP will sell the KCSI Common Stock from
his or her account and will reinvest the proceeds in Stilwell Common Stock.
Stilwell's Compensation Committee will appoint an advisory committee (the
"Stilwell ESOP Advisory Committee") to administer the Stilwell ESOP. Stilwell's
Board of Directors and Stilwell's Compensation Committee may amend the Stilwell
ESOP, although any amendment may not adversely affect any person's accrued
benefits under the Stilwell ESOP. A participant's interest in Stilwell
contributions is 100% vested upon five years of service, with no vesting prior
to that time, but becomes fully vested at retirement, death, disability or a
change in control of Stilwell.
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PRINCIPAL STOCKHOLDERS AND STOCK OWNED BENEFICIALLY BY
STILWELL'S DIRECTORS AND CERTAIN EXECUTIVE OFFICERS
The table below sets forth beneficial ownership of Stilwell Common Stock as
if the Distribution had occurred on [April 28], 2000, based upon beneficial
ownership of KCSI's Common Stock as of [April 28], 2000 by: (i) beneficial
owners of more than 5% of the outstanding Stilwell Common Stock that have
publicly disclosed their ownership of KCSI Common Stock; (ii) the members of
Stilwell's Board of Directors and certain executive officers; and (iii) all
Stilwell officers and directors as a group. The table includes shares of
Stilwell Common Stock that would be deemed beneficially owned by each such
person in connection with the treatment of the Options in the Distribution. See
"Relationship Between KCSI and Stilwell After the Distribution--Employee
Benefits" and "Management--Other Compensatory Plans and Arrangements." No
officer or director of Stilwell Financial, Inc. owns any equity securities of
any subsidiary of Stilwell. Beneficial ownership is generally either the sole or
shared power to vote or dispose of the shares. Neither KCSI nor Stilwell is
aware of any arrangement which would at a subsequent date result in a change in
control of Stilwell.
Common Percent of
Name Stock (1) Outstanding (1)
- ---- --------- ---------------
Amvescap, Plc and certain 18,329,200(2) ----%
affiliates
The TCW Group, Inc. 17,989,988(3) ----%
and certain affiliates
American Express Company 13,717,904(4)
and certain affiliates
Paul F. Balser 132,000(1)(5) *
Director
Thomas H. Bailey 58,936(5) *
Chairman of the Board,
President and Chief Executiv
Officer of Janus
James E. Barnes 186,000(1)(6) *
Director
Danny R. Carpenter 642,632(1)(5) *
Vice President and Secretary
Anthony P. McCarthy 416,676(1)(5) *
Vice President - Finance
Joseph D. Monello 914,204(1)(5) *
Vice President and Chief
Operating Officer
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Landon H. Rowland 6,946,344(1)(5) ----%
Chairman of the
Board, President and Chief Executive Officer
Morton I. Sosland 323,022(1)(6) *
Director
All Directors and Executive 9,619,816 ----%
Officers as a Group
(10 Persons)
- ---------------------------------------------
* Less than 1% of the outstanding shares.
(1) Percentage ownership is based on the number of shares outstanding as of
[April 28], 2000 plus any Additional Shares (as defined below). The holders
may disclaim beneficial ownership of shares included under certain
circumstances. Except as noted, the holders have sole voting and
dispositive power over the shares. Under applicable law, shares that may be
acquired upon the exercise of options or other convertible securities that
are exercisable on the Record Date or will become exercisable within 60
days of that date (the "Additional Shares") are considered beneficially
owned. The Additional Shares included in the amounts shown above are as
follows: Mr. Balser, 132,000; Mr. Barnes, 168,000; Mr. Carpenter, 589,636;
Mr. McCarthy, 168,500; Mr. Monello, 790,000; Mr. Rowland 5,465,290; Mr.
Sosland, 12,000; and all directors and executive officers as a group,
7,325,426. Certain directors and executive officers disclaim beneficial
ownership of 104,800 of these shares.
(2) Based upon information in Schedule 13G filed February 4, 2000, the address
for Amvescap, Plc is 11 Devonshire Square, London EC2M 4YR, England. The
reporting persons expressly declared that the filing of the information on
Schedule 13G shall not be construed as an admission that they are the
beneficial owners of any securities covered by such statement.
(2) Based upon information in Schedule 13G filed February 14, 2000. The address
for The TCW Group, Inc. is 865 South Figueroa Street, Los Angeles,
California 90017. The reporting persons expressly declared that the filing
of the information on Schedule 13G shall not be construed as an admission
that they are the beneficial owners of any securities covered by such
statement.
(3) Based upon information in Schedule 13G filed February 8, 2000. The address
for American Express Company is American Express Tower, 200 Vesey Street,
New York, New York 10285. The reporting persons expressly declared that the
filing of the information on Schedule 13G shall not be construed as an
admission that they are the beneficial owners of any securities covered by
such statement.
(5) Under applicable law, shares that are held indirectly are also considered
beneficially owned. Such shares included in the amounts shown above are as
follows: Mr. Bailey owns 44,006 shares through the Stilwell ESOP; Mr.
Carpenter owns 17,260 shares through the Stilwell ESOP and 5,672 shares
held in a revocable trust of which he is the trustee; Mr. McCarthy owns
54,634 and 7,866 shares through the Stilwell ESOP and KCSI's Profit
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Sharing Plan, respectively. Mr. Monello owns 68,924 shares through the
Stilwell ESOP; Mr. Rowland owns 123,688 and 960 shares through the Stilwell
ESOP and KCSI's Profit Sharing Plan, respectively; and all directors and
executive officers as a group own indirectly 562,674 shares.
(6) Directors and Executive Officers may also be deemed to own beneficially
shares held in other capacities as follows: Mr. Barnes, 18,000 shares held
jointly with his wife; Mr. Carpenter, 30,064 shares held by his wife in a
revocable trust of which she is the trustee; and Mr. Sosland, 9,600 shares
held in trust over which he has sole voting and dispositive power as
trustee, 24,000 shares held by his wife, and 176,000 shares over which he
has shared voting and/or dispositive power but as to which beneficial
ownership is disclaimed, which shares are held as follows: 72,000 shares
held by certain companies of which he is a director, 92,000 shares held as
co-trustee of certain testamentary trusts, and 12,000 shares in a
charitable foundation of which he is a director.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
KCSI will have a transitional relationship with Stilwell as a result of the
Intercompany Agreement, the Tax Disaffiliation Agreement and certain other
agreements and relationships. In addition, Mr. Landon Rowland, who serves as
Chairman of the Board of Directors of Stilwell, will serve as Chairman of the
Board of Directors of KCSI for a transitional period. Mr. Rowland will have no
executive position with KCSI. It is expected that he will be the only director
common to the boards of both KCSI and Stilwell, and KCSI and Stilwell will have
no common employees. Except as contemplated by such agreements or as otherwise
described in this Information Statement, KCSI and Stilwell are not expected to
have any other material relationships with each other. See "Relationship Between
KCSI and Stilwell After the Distribution."
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DESCRIPTION OF CAPITAL STOCK
The Certificate provides that the authorized capital stock of Stilwell
consists of 1,010,000,000 shares, of which 1,000,000,000 shares is Common Stock
and 10,000,000 shares is preferred stock. The following summary of the terms
and provisions of Stilwell's capital stock does not purport to be complete and
is qualified in its entirety by reference to the Certificate and the Bylaws,
copies of which are included as exhibits to the Registration Statement on Form
10 of which this Information Statement is a part, and applicable law.
COMMON STOCK
Following the Distribution, and based upon the ownership of KCSI Common
Stock on March 31, 2000, it is anticipated that there will be approximately
222,800,000 shares of Stilwell Common Stock, par value $.01 per share, issued
and outstanding, held of record by approximately 6,000 stockholders. The
holders of Stilwell Common Stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and may not cumulate votes for the
election of directors. Accordingly, the owners of a majority of the shares of
Stilwell Common Stock outstanding has the power to elect all of Stilwell's Board
of Directors. Each share of Stilwell Common Stock outstanding is entitled to
participate equally in any distribution of net assets made to the stockholders
in liquidation, dissolution or winding up of Stilwell and is entitled to
participate equally in dividends as and when declared by Stilwell's Board of
Directors. There are no redemption, sinking fund, conversion or preemptive
rights with respect to the shares of Stilwell Common Stock. All shares of
Stilwell Common Stock have equal rights and preferences. The rights,
preferences and privileges of the holders of Stilwell Common Stock are subject
to and may be adversely affected by the rights of holders of shares of any
series of preferred stock that Stilwell may designate and issue in the future.
PREFERRED STOCK
Stilwell is authorized to issue 10,000,000 shares of preferred stock, par
value $1.00 per share (the "Stilwell Preferred Stock"). The Certificate
authorizes Stilwell's Board of Directors, subject to certain limitations
prescribed by law, to establish one or more series of Stilwell Preferred Stock,
and by filing a certificate pursuant to the DGCL ("Certificate of Designation"),
to establish from time to time the number of shares to be included in each such
series, and to fix or alter from time to time the designations, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof, including without limitation the dividend
rights, dividend rates, conversion rights, voting rights, liquidation
preferences and the number of shares constituting any series or designation of
such series. Stilwell believes that the ability of Stilwell's Board of
Directors to issue one or more series of Stilwell Preferred Stock provides
Stilwell with flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs which might arise. The
authorized shares of Stilwell Preferred Stock, as well as shares of Stilwell
Common Stock, are available for issuance without further action by Stilwell's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Stilwell's securities
may be listed or traded, or pursuant to the terms of any Certificate of
Designation. If the approval of Stilwell's stockholders is not required for the
issuance of shares of Stilwell Preferred Stock or Stilwell
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Common Stock, Stilwell's Board of Directors may determine not to seek
stockholder approval.
Stilwell's Board of Directors could issue a series of preferred stock that
could, depending on the terms of such series, delay, defer or prevent a change
in control of Stilwell. Stilwell's Board of Directors will make any
determination to issue such shares based on its judgment as to the best
interests of Stilwell and its stockholders. Stilwell's Board of Directors, in
so acting, could issue Stilwell Preferred Stock having terms that could
discourage an acquisition attempt through which an acquiror may be able to
change the composition of Stilwell's Board of Directors, including a tender
offer or other transaction that some, or a majority, of Stilwell's stockholders
might believe to be in their best interests or in which stockholders might
receive a premium for their stock over the then-current market price of such
stock.
CERTAIN ANTITAKEOVER EFFECTS
Stockholders' rights and related matters are governed by the DGCL, the
Certificate and the Bylaws. Certain provisions of Stilwell's Certificate,
Bylaws, Rights Plan and Delaware statutory law described in this section may
delay or make more difficult acquisitions or changes in control of Stilwell.
Such provisions may also adversely affect prevailing market prices for Stilwell
Common Stock, although such transactions might be considered desirable by
Stilwell's stockholders. Stilwell believes that such provisions are necessary
to enable Stilwell to develop its business in a manner that will foster its
long-term growth without disruption caused by the threat of a takeover not
deemed by Stilwell's Board of Directors to be in the best interests of Stilwell
and its stockholders. See "Risk Factors-Antitakeover Provisions: Provisions of
Stilwell's Governing Documents, its Rights Plan and Restrictions Relating to the
Tax Ruling could Delay or Prevent a Change in Control of Stilwell, Thereby
Entrenching Current Management and Possibly Depressing the Market Price of
Stilwell Common Stock."
BOARD OF DIRECTORS. The Certificate provides that the number of directors
of Stilwell will be fixed from time to time exclusively by a majority of the
entire Board of Directors of Stilwell, but cannot be fewer than three nor more
than eighteen. Stilwell's Board of Directors, other than those who may be
elected by the holders of Stilwell Preferred Stock, is divided into three
classes, as nearly equal in number as possible, with one class to be elected for
a term expiring at the annual meeting of stockholders to be held in 2000,
another class to be elected for a term expiring at the annual meeting of
stockholders to be held in 2001, and another class to be elected for a term
expiring at the annual meeting of stockholders to be held in 2002. Commencing
with the 2000 annual meeting of stockholders, successors to Stilwell's Board of
Directors whose terms expire at the annual meeting will be elected for a three-
year term, with each director to hold office until a successor has been duly
elected and qualified. As a result, approximately one-third of Stilwell's Board
of Directors will be elected each year.
The Certificate and Bylaws provide that, except as otherwise provided for or
fixed by or pursuant to a Certificate of Designation, newly created
directorships resulting from any increase in the authorized number of directors
and any vacancies on Stilwell's Board of Directors resulting from death,
resignation, retirement, removal or other cause will be filled by the
affirmative vote of a majority of the remaining directors then in office, even
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though less than a quorum of Stilwell's Board of Directors. Any director elected
in accordance with the provisions described in the preceding sentence will hold
office for the remainder of the full term of the class of directors in which the
new directorship was created or the vacancy occurred, and until his or her
successor is duly elected and qualified, or until his or her earlier resignation
or removal. No decrease in the number of directors constituting Stilwell's Board
of Directors shortens the term of any incumbent director. Subject to the rights
of holders of Stilwell Preferred Stock, any director may be removed from office
only for cause by the affirmative vote of the holders of the majority of the
then-outstanding shares of the capital stock of Stilwell entitled to vote
generally in the election of directors; provided, however, that on and after the
day that someone becomes an Interested Stockholder (as defined in the
Certificate), a director may be removed from office for cause only by the
affirmative vote of the holders of at least 70% of the Voting Stock (as defined
herein).
These provisions would preclude a third party from removing incumbent
directors without cause and simultaneously gaining control of the Stilwell's
Board of Directors by filling the vacancies created by removal with its own
nominees. In addition, such provisions would preclude a third party from
enlarging Stilwell's Board of Directors and filling new directorships with its
own nominees. Under the classified board provisions described above, it would
take at least two elections of directors for any individual or group to gain
control of Stilwell's Board of Directors. Accordingly, these provisions could
discourage a third party from initiating a proxy contest, making a tender offer
or otherwise attempting to gain control of Stilwell.
NO STOCKHOLDER ACTION BY UNANIMOUS WRITTEN CONSENT; LIMITATIONS ON CALL OF
SPECIAL MEETINGS. The Certificate and Bylaws provide that any action required
or permitted to be taken by the stockholders of Stilwell must be effected only
at a duly called annual or special meeting of such stockholders and may not be
effected by any consent in writing by such holders in lieu of a meeting. Except
as otherwise required by law, special meetings of stockholders of Stilwell for
any purpose or purposes may be called only by the Chairman of the Board of
Directors, the Chief Executive Officer or the President of Stilwell pursuant to
a resolution approved by a majority of the entire Board of Directors of
Stilwell. These provisions may have the effect of delaying consideration of a
stockholder proposal until the next annual meeting unless a special meeting is
called by Stilwell's Chairman of the Board of Directors, Chief Executive Officer
or President.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws establish an advance notice procedure for the nomination
of candidates for election as directors by stockholders entitled to vote for the
election of directors as well as for other stockholder proposals to be
considered at annual meetings of stockholders. Notice must be received by
Stilwell, if more than 30 days' notice is given to stockholders, not later than
the close of business on the 15th day following the day on which notice of the
date of the annual meeting was mailed or public disclosure was made, whichever
first occurs, and if less than 30 days' notice is given to stockholders, then
not later than the close of business on the 5th day following the day on which
notice of the date of the annual meeting was mailed or public disclosure of the
date of the meeting was made, whichever first occurs. Such notice must contain
certain specified information concerning the persons to be nominated or the
matters to be brought before the meeting, in addition to information concerning
the stockholder submitting the proposal. The chairperson of the meeting has the
power to determine whether business is
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properly brought before the meeting.
By requiring advance notice of nominations by stockholders, the foregoing
procedures will afford Stilwell's Board of Directors an opportunity to consider
the qualifications of the proposed nominees and, to the extent deemed necessary
or desirable by Stilwell's Board of Directors, to inform stockholders about such
qualifications. By requiring advance notice of other proposed business, such
procedures will provide Stilwell's Board of Directors with an opportunity to
inform stockholders of business proposed to be conducted at such meetings and
the Board of Directors' recommendations with respect to such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding such business.
The above-described procedures may have the effect of precluding a contest
for the election of directors or the consideration of stockholder proposals if
the proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
Stilwell and its stockholders.
AMENDMENTS; BUSINESS COMBINATIONS. Stilwell, in its Certificate, reserves
the right to amend, alter, change or repeal any provisions contained in the
Certificate in the manner prescribed by the DGCL, and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that
the affirmative vote of the holders of at least 70% of the Voting Stock, voting
together as a single class, shall be required to amend, alter, change or repeal
certain provisions of the Certificate and that on and after the day that someone
becomes an Interested Stockholder the affirmative vote of the holders of at
least 70% of the Voting Stock is required to amend, alter, change or repeal
certain other provisions of the Certificate. See "DIFFERENCES IN RIGHTS OF
STOCKHOLDERS ARISING FROM DIFFERENCES BETWEEN THE CERTIFICATES AND BYLAWS OF
STILWELL AND KCSI." The Certificate further provides that provisions of the
Bylaws (including the stockholder notice procedure) may be adopted, amended or
repealed by Stilwell's entire Board of Directors or Stilwell's stockholders;
provided, however, that on and after the day that someone becomes an Interested
Stockholder, the affirmative vote of the holders of at least 70% of the Voting
Stock is required to adopt, amend or repeal, by stockholder action, any
provisions of the Bylaws. In addition, the affirmative vote of at least 70% of
the Voting Stock, voting together as a single class, is required to enter into
certain business combinations (defined broadly to include mergers,
consolidations, certain sales or other dispositions of assets, and certain
transactions that would increase certain interested stockholders' percentage
ownership of stock in Stilwell) with an Interested Stockholder or its
affiliates.
EXPANDED CONSIDERATIONS BY STILWELL'S BOARD OF DIRECTORS WHEN EVALUATING
CERTAIN TRANSACTIONS. The Certificate provides that Stilwell's Board of
Directors, when evaluating a tender offer, exchange offer, merger, consolidation
or offer to purchase all, or substantially all, of the properties and assets of
Stilwell made by another party, may consider expanded factors, including,
without limitation, certain social and economic effects on Stilwell's present
and future customers and employees and those of its subsidiaries, including the
impact on investment companies advised or managed by any of Stilwell's
subsidiaries, the social and economic effect on the communities in which
Stilwell is located or operated, the ability of Stilwell
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to fulfill its corporate objectives, and the consideration being offered in
relation to the current market price of Stilwell's outstanding shares of capital
stock, in relation to the current value of Stilwell in a freely negotiated
transaction and in relation to Stilwell's Board of Director's estimate of the
future value of Stilwell (including the unrealized value of its properties and
assets) as an independent going concern.
DELAWARE BUSINESS COMBINATION STATUTE. Section 203 of the DGCL prohibits
certain transactions between a Delaware corporation and an "interested
stockholder," which is defined as a person who, together with any affiliates
and/or associates of such person, beneficially owns, directly or indirectly, 15%
or more of the outstanding voting stock of a Delaware corporation. This
provision prohibits certain business combinations (defined broadly to include
mergers, consolidations, sales or other dispositions of assets having an
aggregate value of 10% or more of the consolidated assets of the corporation,
and certain transactions that would increase the interested stockholders'
percentage ownership of stock in the corporation) between an interested
stockholder and a corporation for a period of three years after the date the
interested stockholder acquired its stock and became an interested stockholder,
unless: (i) the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder acquired shares; (ii) the
interested stockholder acquired at least 85% of the voting stock of the
corporation in the transaction in which it became an interested stockholder; or
(iii) the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding voting
stock owned by disinterested stockholders at an annual or special meeting. A
Delaware corporation, pursuant to a provision in its certificate of
incorporation or bylaws, may elect not to be governed by Section 203 of the
DGCL.
Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who could be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate does not exclude Stilwell from the restrictions
imposed under Section 203 of the DGCL and, as a result, Stilwell is subject to
its provisions upon consummation of the Distribution. It is anticipated that
the provisions of Section 203 of the DGCL may encourage companies interested in
acquiring Stilwell to negotiate in advance with Stilwell's Board of Directors,
since the stockholder approval requirement would be avoided if a majority of the
directors then in office approves, prior to the date on which a stockholder
becomes an interested stockholder, either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.
Such provisions may also have the effect of preventing changes in the management
of Stilwell. It is possible that such provisions could make it more difficult
to accomplish transactions which stockholders may otherwise deem to be in their
best interest.
LIMITATION ON LIABILITY. The Certificate also provides for expanded
indemnification of Stilwell's Board of Directors and officers of Stilwell and
limits the liability of directors of Stilwell. Pursuant to those provisions,
Stilwell shall indemnify each officer, director, employee, agent, trustee,
committee member or representative of Stilwell, or any officer, director,
employee, agent, trustee, committee member or representative of any other
company or other entity who was serving at the request of Stilwell, to the
fullest extent permitted under the DGCL against all expenses, liability and loss
reasonably incurred by such Indemnitee in any legal proceeding to which
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<PAGE>
such indemnitee is made or is threatened to be made a party by reason of such
indemnitee acting in such capacity. Such right to indemnification includes the
right to advancement of expenses incurred by such person prior to final
disposition of the proceeding, provided that if the DGCL requires, such
indemnitee in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such indemnitee) shall provide
Stilwell with an undertaking to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision that such person is not
entitled to be indemnified for such expenses. The Certificate gives such
indemnitee the right to bring suit against Stilwell if such advancement of
expenses is not paid by Stilwell within the period set forth in the Certificate.
The Certificate provides that a director of Stilwell shall not be personally
liable to Stilwell or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability: (i) for any breach of the
director's duty of loyalty to Stilwell or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the DGCL; or (iv) for any
transaction from which the director derived an improper personal benefit. If the
DGCL is amended to further eliminate or limit the personal liability of
directors, the Certificate provides that the liability of a director of Stilwell
shall be eliminated or limited to the fullest extent permitted by the DGCL, as
so amended.
STOCKHOLDERS' RIGHTS PLAN. Stilwell entered into the Rights Plan with UMB
Bank, N.A., as rights agent as of [________, 2000]. In connection with the
Rights Plan, Stilwell's Board of Directors declared a dividend of one right
("Right") for each outstanding share of Stilwell Common Stock as of the close of
business on [_________, 2000] (the "Rights Record Date"). Shares of Stilwell
Common Stock issued in the Distribution (assuming no triggering event)
automatically receive these Rights upon issuance. The Rights are not
exercisable or transferable separately from the shares of Stilwell Common Stock
until the earlier of: (1) ten days following a public announcement that a
person or group has acquired or obtained the right to acquire beneficial
ownership of 15% or more of the outstanding shares of Stilwell Common Stock; or
(ii) ten days following the commencement or announcement of an intention to make
a tender or exchange offer that would result in an acquiring person or group
beneficially owning 15% or more of the outstanding shares of Stilwell Common
Stock (an "Acquiring Person"), unless Stilwell's Board of Directors sets a later
date in either event (the earlier of (i) or (ii) being the "Rights Distribution
Date"). Under the Rights Plan, Stilwell's Board of Directors has the option to
redeem the Rights at a nominal cost or prevent the Rights from being triggered
by designating certain offers for all the outstanding Stilwell Common Stock as a
Permitted Offer (as defined in the Rights Plan). No supplement or amendment may
be made to the Rights Plan which changes the Redemption Price, the Final
Expiration Date, the Purchase Price (as those terms are defined in the Rights
Plan) or the number of 1/1,000ths of a share of Preferred Stock for which a
Right is exercisable. Subject to the foregoing, prior to the Rights
Distribution Date, Stilwell may amend or supplement the Rights Plan without the
consent of any of the holders of the Rights. Following the Rights Distribution
Date, the Rights Plan may be amended to cure any ambiguity, to correct or
supplement any provision that is defective or inconsistent with any other
provision of the Rights Plan, or to change or supplement any provision so long
as such amendment or supplement does not adversely affect the holders of the
Rights (other than an acquiring person or group). The Rights expire ten years
after the Rights Record Date unless earlier redeemed by Stilwell.
-143-
<PAGE>
The Rights, when exercisable, entitle their holders (other than those held
by an Acquiring Person) to purchase 1/1,000 of a share of Series A Stilwell
Preferred Stock (subject to adjustment) or, in certain instances, other
securities of Stilwell, including Stilwell Common Stock, having a market value
equal to twice the exercise price of the Right. In certain circumstances, if
Stilwell is involved in a merger or consolidation and is not the surviving
entity or disposes of more than 50 percent of its assets or earnings power, the
Rights also entitle their holders (other than an acquiring person or group) to
purchase the highest priority voting shares in the surviving entity or its
affiliates having a market value of two times the exercise price of the Rights.
See "Description of Capital Stock-Stilwell Preferred Stock."
The Rights Plan is intended to encourage a potential acquiring person or group
to negotiate directly with Stilwell's Board of Directors, but may have certain
antitakeover effects. The Rights Plan could significantly dilute the interests
in Stilwell of an Acquiring Person. The Rights Plan may therefore have the
effect of delaying, deterring or preventing a change in control of Stilwell.
TRANSFER AGENT
The transfer agent and registrar of the Stilwell Common Stock is UMB Bank,
N.A.
ADDITIONAL INFORMATION
Stilwell has filed with the SEC a Registration Statement on Form 10 (the
"Registration Statement", including any amendments or supplements thereto) under
the Exchange Act with respect to the shares of Stilwell Common Stock being
received by the holders of KCSI Common Stock in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Information Statement as to
the contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to such exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
This Registration Statement and the exhibits thereto filed by Stilwell with
the SEC may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the regional offices of the SEC at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, 13th Floor, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of fees prescribed by the SEC. The SEC also maintains a website at
http://www.sec.gov that contains reports, proxy and information statements,
Registration Statements and other information that has been or will be filed by
Stilwell.
After the Distribution, Stilwell will be required to comply with the
reporting requirements of the Exchange Act and to file with the SEC reports,
proxy statements and other information as required by the Exchange Act.
Additionally, Stilwell will be required to provide annual reports containing
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<PAGE>
audited financial statements to its stockholders in connection with its annual
meetings of stockholders. After the Distribution, these reports, proxy
statements and other information will be available to be inspected and copied at
the public reference facilities of the SEC or obtained by mail or over the
Internet from the SEC, as described above. [Stilwell has received approval,
subject to official notice of issuance, to have the Stilwell Common Stock listed
on the New York Stock Exchange under the symbol "SV."] When the Stilwell Common
Stock commences trading on the New York Stock Exchange, such reports, proxy
statements and other information will be available for inspection at the offices
of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
-145-
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1998 and 1999................................................ F-3
Consolidated Statements of Income for the three months ended
March 31, 1999 and 2000 (unaudited) and the years ended
December 31, 1997, 1998 and 1999.......................................... F-5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000 (unaudited) and the years ended
December 31, 1997, 1998 and 1999.......................................... F-7
Consolidated Statements of Changes in Stockholder's Equity for the
three months ended March 31, 2000 (unaudited) and the
years ended December 31, 1997, 1998 and 1999.............................. F-9
Notes to Consolidated Financial Statements................................ F-11 to F-39
</TABLE>
All schedules are omitted because they are not applicable, insignificant or the
required information is presented in the consolidated financial statements or
notes thereto.
The consolidated financial statements and related notes of DST Systems, Inc. (an
approximately 32% owned affiliate of Stilwell accounted for under the equity
method), together with the Report of Independent Accountants, for the years
ended December 31, 1997, 1998 and 1999, which are included in the DST Systems,
Inc. Annual Report on Form 10-K for the year ended December 31, 1999 (Commission
File No. 1-14036) are incorporated by reference in this Information Statement.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Stilwell Financial, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in stockholder's
equity present fairly, in all material respects, the financial position of
Stilwell Financial, Inc. (a wholly-owned subsidiary of Kansas City Southern
Industries, Inc.) and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
March 16, 2000
F-2
<PAGE>
STILWELL FINANCIAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KANSAS CITY SOUTHERN INDUSTRIES, INC.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
December 31, March 31,
------------------- -----------
1998 1999 2000
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $138.5 $ 324.1 $ 350.7
Accounts receivable 76.6 155.7 223.5
Investments in advised funds 32.2 23.9 33.0
Other current assets 12.0 21.3 42.1
------ -------- --------
Total current assets 259.3 525.0 649.3
Investments held for
operating purposes 379.2 474.1 498.4
Property and equipment, net 37.4 70.4 94.3
Intangibles and other assets,
net 147.0 162.0 190.7
------ -------- --------
Total assets $822.9 $1,231.5 $1,432.7
====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts and wages payable $ 21.7 $ 43.0 $ 75.9
Accrued compensation and
benefits 40.0 80.9 80.6
Federal income taxes payable
to Parent 3.6 22.3 68.8
Deferred income taxes-current -- 0.4 16.2
Other accrued liabilities 5.8 15.9 24.8
------ -------- --------
Total current liabilities 71.1 162.5 266.3
Other liabilities:
Long-term debt - Parent 16.6 -- --
Deferred income taxes 118.4 151.8 166.0
Other liabilities 42.3 45.3 44.5
------ -------- --------
Total liabilities 248.4 359.6 476.8
------ -------- --------
Commitments and contingencies
(Notes 9, 10, 12, 13, 15) ------ -------- --------
Minority interest in consolidated
subsidiaries 34.3 57.3 66.9
------ -------- --------
STOCKHOLDER'S EQUITY
F-3
<PAGE>
Net investment by Parent 106.8 106.8 106.8
Retained earnings 358.5 598.9 670.2
Accumulated other
comprehensive income 74.9 108.9 112.0
------ -------- --------
Total stockholder's equity 540.2 814.6 889.0
------ -------- --------
Total liabilities and
stockholder's equity $822.9 $1,231.5 $1,432.7
====== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
STILWELL FINANCIAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KANSAS CITY SOUTHERN INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
For the Three
For the year ended Months Ended
December 31, March 31,
---------------------------- ----------------
1997 1998 1999 1999 2000
(unaudited)
REVENUES:
Investment management
fees $389.3 $545.1 $ 992.8 $191.1 $449.9
Shareowner servicing
fees 81.1 108.9 191.4 36.9 83.6
Other 14.7 16.8 28.1 5.3 11.6
------ ------ -------- ------ ------
Total 485.1 670.8 1,212.3 233.3 545.1
------ ------ -------- ------ ------
OPERATING EXPENSES:
Compensation 118.0 167.8 316.5 59.8 124.9
Marketing and promotion 34.2 50.8 71.5 16.3 28.8
Alliance and third party
administrator fees 38.4 64.0 143.0 24.3 72.3
Depreciation and
amortization 13.1 16.8 35.4 6.8 15.6
Other 82.2 90.8 127.6 28.9 58.6
------ ------ -------- ------ ------
Total 285.9 390.2 694.0 136.1 300.2
------ ------ -------- ------ ------
OPERATING INCOME 199.2 280.6 518.3 97.2 244.9
Equity in earnings of
unconsolidated affiliates 24.9 25.8 46.7 11.2 18.8
Interest expense - Parent (10.4) ( 6.5) (5.9) (1.0) (0.7)
Interest expense -
third parties (1.9)
Gain on litigation settlement 44.2
Gain on sale of Janus
common stock 15.1
Reduction in ownership of
DST Systems, Inc. (29.7)
Other, net 16.2 19.1 27.4 4.9 9.9
------ ------ -------- ------ ------
Pretax income 229.9 289.3 586.5 112.3 330.3
Income tax provision 87.0 103.7 216.1 40.1 114.3
Minority interest in
consolidated earnings 24.9 33.4 57.3 11.2 27.3
------ ------ -------- ------ ------
NET INCOME $118.0 $152.2 $ 313.1 $ 61.0 $188.7
====== ====== ======== ====== ======
F-5
<PAGE>
PER SHARE DATA
(Notes 1 and 2):
Weighted Average Common
shares outstanding 1,000 1,000 1,000 1,000 1,000
Basic Earnings per
share $118,000 $152,200 $313,100 $ 61,000 $188,700
Diluted Earnings
per share 117,400 149,900 308,300 60,200 186,400
Pro Forma Per Share Data
(Unaudited) (Notes 2 and 3):
Common shares outstanding
(in thousands) 222,799 222,799 222,799
Basic Earnings per share $ 1.38 $ 0.27 $ 0.85
Diluted Common shares outstanding
(in thousands) 230,760 230,760 230,760
Diluted Earnings per share $ 1.31 $ 0.26 $ 0.81
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
STILWELL FINANCIAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KANSAS CITY SOUTHERN INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
For the Three
Months Ended
For the year ended December 31, March 31,
------------------------------------------- -------------------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
(unaudited)
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 118.0 $ 152.2 $ 313.1 $ 61.0 $ 188.7
Adjustments to net income:
Depreciation and
amortization 13.1 16.8 35.4 6.8 15.6
Deferred income taxes (4.4) (12.4) 11.8 7.9 27.5
Minority interest in
consolidated earnings 24.9 33.4 57.3 11.2 27.3
Equity in undistributed
earnings of unconsolidated
affiliates (24.7) (24.7) (46.4) (11.1) (18.8)
Gain on sale of Janus
Common stock (15.1)
Asset impairment charges 15.7
Gain on sale of equity
investment (8.8)
Reduction in ownership of DST
Systems, Inc. 29.7
Employee deferred
compensation 8.7 3.8 5.2 (3.6) 1.0
Changes in working
capital items:
Accounts receivable (15.0) (21.3) (79.1) (22.5) (67.8)
Other current assets (3.3) (5.3) (1.0) (2.1) (5.6)
Accounts payable and
accrued compensation
and benefits payable 13.4 12.8 61.6 5.4 46.8
Federal income taxes
payable and other
accrued liabilities 0.7 1.5 28.9 41.4 43.8
Changes in other assets (0.3) (1.5) 2.2 2.3 (8.6)
Deferred commissions (29.5) (8.1) (44.7)
Other, net 0.3 (1.7) 0.9 0.6 (0.7)
------ ------ ------- ------ -------
Net operating 147.1 174.5 360.4 89.2 189.4
------ ------ ------- ------ -------
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES:
Property acquisitions (5.8) (35.0) (50.5) (7.7) (31.5)
Investments in and loans
with affiliates (12.0) (24.3) (17.5) (1.4) (1.8)
Sale of investments in
advised funds 5.5 0.3 19.0 11.8
Purchase of investments
in advised funds (6.9) (2.5) (2.4) (18.6)
Other, net 4.1 11.1 4.0 1.8 1.4
------ ------ ------- ------ -------
Net investing (15.1) (50.4) (47.4) (7.3) (38.7)
------ ------ ------- ------ -------
FINANCING ACTIVITIES:
Change in long-term
debt - Parent (33.2) (67.5) (16.6) (16.6)
Repayment of long-term
debt - third parties (0.3) (6.6) (125.0)
Amounts treated as
transfers from
(dividends to)
Parent, net (40.5) 12.4 (72.7) (36.8) 7.6
Distributions to
minority interest (12.9) (32.8) (37.8) (19.5) (7.0)
Other, net (4.2) (0.8) (0.3) (2.3) 0.3
------ ------ ------- ------ -------
Net financing (91.1) (95.3) (127.4) (75.2) (124.1)
------ ------ ------- ------ -------
CASH AND CASH EQUIVALENTS:
Net increase 40.9 28.8 185.6 6.7 26.6
At beginning of year 68.8 109.7 138.5 138.5 324.1
------ ------ ------- ------ -------
At end of year $109.7 $138.5 $ 324.1 $145.2 $ 350.7
====== ====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
STILWELL FINANCIAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KANSAS CITY SOUTHERN INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Accumulated Total
Net other com- stock-
investment Retained prehensive holder's
by Parent earnings income equity
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996 $ 81.1 $ 128.8 $ 24.9 $ 234.8
Comprehensive income:
Net income 118.0
Net unrealized gain on
investments 25.9
COMPREHENSIVE INCOME 143.9
Dividends to Parent, net (40.5) (40.5)
Non-cash contribution
from Parent: additional
investment in Berger
Associates, Inc.
(Note 5) 10.1 10.1
---------- -------- ---------- --------
BALANCE AT DECEMBER 31,
1997 91.2 206.3 50.8 348.3
Comprehensive income:
Net income 152.2
Net unrealized gain on
investments 24.3
Less: Reclassification adjustment
for gains included in net
income (0.2)
COMPREHENSIVE INCOME 176.3
Transfers from Parent,
net 12.4 12.4
Non-cash contribution from Parent:
acquisition of Nelson
Money Managers Plc
(Note 5) 3.2 3.2
---------- -------- ---------- --------
BALANCE AT DECEMBER 31,
1998 106.8 358.5 74.9 540.2
Comprehensive income:
Net income 313.1
Net unrealized gain on 39.3
investments
Less: reclassification
adjustment for gains
included in net income (4.4)
</TABLE>
F-9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Foreign currency translation
adjustment (0.9)
COMPREHENSIVE INCOME 347.1
Dividends to Parent,
net (72.7) (72.7)
-------- ---------- -------- ---------
BALANCE AT December 31,
1999 106.8 598.9 108.9 814.6
Comprehensive income:
Net income (unaudited) 188.7
Net unrealized gain on
investments (unaudited) 5.0
Less: reclassification
adjustment for gains
included in net
income (unaudited) (1.3)
Foreign currency translation
adjustment (unaudited) (0.6)
COMPREHENSIVE INCOME
(unaudited) 191.8
Dividends to Parent,
Net (unaudited) (117.4) (117.4)
-------- ---------- -------- ---------
BALANCE at March 31,
2000 (unaudited) $ 106.8 $ 670.2 $ 112.0 $ 889.0
======== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
STILWELL FINANCIAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KANSAS CITY SOUTHERN INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF THE BUSINESS
FORMATION OF STILWELL FINANCIAL, INC. Kansas City Southern Industries, Inc.
("KCSI"; "Parent") is a holding company that has owned and managed, through its
direct and indirect subsidiaries, two principal business segments: rail
transportation and financial services. The primary entities comprising the
financial services segment as of December 31, 1999 were: Janus Capital
Corporation ("Janus"), an approximate 82% owned subsidiary (approximately 81.5%
as of March 31, 2000); Stilwell Management Inc. ("SMI"), formerly Berger
Associates, Inc. ("BAI"), a wholly-owned subsidiary as of December 31, 1999;
Berger LLC ("Berger"), of which SMI owns 100% of Berger preferred limited
liability interest and approximately 86% of Berger regular limited liability
interests; Nelson Money Managers Plc ("Nelson"), an 80% owned subsidiary; DST
Systems, Inc. ("DST"), an equity investment in which SMI holds an approximate
32% interest; and various other subsidiaries and equity investments (the
"Miscellaneous Corporations"). Janus is the principal business comprising the
financial services segment of KCSI, representing 97% of assets under management
at December 31, 1999 and 95% of revenues and 91% of the net income for the year
ended December 31, 1999. The businesses which comprise the financial services
segment offer a variety of asset management and related financial services to
registered investment companies, retail investors, institutions and individuals.
On January 23, 1998, KCSI formed Stilwell Financial, Inc. ("Stilwell") as a
wholly-owned holding company for the group of businesses and investments that
comprise the financial services segment of KCSI. Unless otherwise stated or the
context otherwise requires, references in these financial statements to Stilwell
include Stilwell's direct and indirect subsidiaries and equity investments. KCSI
transferred to Stilwell KCSI's ownership interest in Janus, Berger, Nelson, DST
and the Miscellaneous Corporations and certain other financial services-related
assets and Stilwell assumed all of KCSI's liabilities associated with the assets
transferred effective July 1, 1999 ("Contribution"). For financial statement
purposes, Stilwell accounted for these transactions at historical cost.
On July 9, 1999, KCSI received a tax ruling from the Internal Revenue
Service ("IRS") which states that for United States federal income tax purposes
the planned separation of Stilwell from KCSI through a pro-rata distribution of
Stilwell common stock to KCSI stockholders (the "Distribution") qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. Additionally in February 2000, the Company received a favorable
supplementary tax ruling from the IRS which states that the assumption of $125
million of KCSI indebtedness by Stilwell (in connection with KCSI's January 2000
recapitalization) would have no effect on the previously issued tax ruling.
On September 30, 1999, BAI assigned and transferred its operating assets
and business to Berger, a limited liability company. In addition, BAI changed
its name to SMI. The remaining 14% of Berger regular limited
F-11
<PAGE>
liability company interests was issued to key SMI and Berger employees,
resulting in a noncash compensation charge.
Within these consolidated financial statements and accompanying notes,
historical transactions and events involving KCSI's financial services segment
are discussed as if Stilwell were the entity involved in the transaction or
event, unless otherwise indicated. In addition, intercompany transactions
between Stilwell and KCSI during the periods covered herein are reflected as
dividends to or transfers from KCSI (see Note 2).
Stilwell has 10,000, $.001 par value, Common shares authorized and 1,000
shares issued and outstanding.
NATURE OF OPERATIONS. Stilwell's principal operations are the management of
its investments in financial services companies. A summary of Stilwell's
principal operations/investments is as follows:
JANUS CAPITAL CORPORATION AND BERGER LLC. Janus and Berger provide
investment management, advisory, distribution and transfer agent services
primarily to U.S. based mutual funds, pension plans, and other institutional and
private account investors. Janus also offers mutual fund products to
international markets through the Janus World Funds plc ("Janus World Funds").
The revenues and operating income of Janus and Berger are driven primarily
by growth in assets under management, and a decline in the U.S. and/or
international stock and/or bond markets or an increase in the rate of return of
alternative investments could negatively impact results. In addition, the mutual
fund industry, in general, faces significant competition as the number of mutual
funds continues to increase, marketing and distribution channels become more
creative and complex, and investors place greater emphasis on published fund
recommendations and investment category rankings.
NELSON MONEY MANAGERS PLC. Nelson, operating in the United Kingdom,
provides investment advice and investment management services primarily to
individuals who are retired or are contemplating retirement.
Nelson's revenues are earned based on an initial fee calculated as a
percentage of capital invested into each individual investment portfolio, as
well as from an annual fee based on the level of assets under management for the
ongoing management and administration of each investment portfolio. Declines in
international stock markets or fluctuations of the relative price of the British
pound versus the U.S. dollar could negatively affect the amount of earnings
reported for Nelson in the consolidated financial statements.
DST SYSTEMS, INC. DST, together with its subsidiaries and joint ventures,
offers information processing and software services and products through three
operating segments: financial services, customer management and output
solutions. Additionally, DST holds certain investments in equity securities,
financial interests and real estate holdings. DST operates throughout the United
States, with operations in Kansas City, Missouri, Northern California and
various locations on the East Coast, among others, as well as internationally in
Canada, Europe, Africa and the Pacific Rim. DST has a single class of common
stock which is publicly traded on the New York Stock Exchange and the Chicago
Stock Exchange.
Prior to November 1995, Stilwell owned all of the stock of DST. In November
1995, a public offering reduced Stilwell's ownership interest in DST
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<PAGE>
to approximately 41%. In December 1998, a wholly-owned subsidiary of DST merged
with USCS International, Inc. ("USCS"). The merger, which was accounted for by
DST as a pooling of interests, reduced Stilwell's ownership of DST to
approximately 32%. Stilwell reports DST as an equity investment in the
consolidated financial statements. See Note 4.
The earnings of DST are dependent in part upon the further growth of mutual
fund and other industries, DST's ability to continue to adapt its technology to
meet clients' needs and demands for the latest technology and various other
factors including, but not limited to, reliance on processing facilities; future
international sales; continued equity in earnings from joint ventures; and
competition from other third party providers of similar services and products as
well as from in-house providers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION. The accompanying financial statements are presented
using the accrual basis of accounting. The financial position, results of
operations and cash flows of Stilwell reflect the combined accounts of those
entities, assets and liabilities which were contributed to Stilwell by KCSI (as
described above).
The financial statements include all majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
The accompanying financial statements were prepared by attributing the
historical data for the financial services segment of KCSI to Stilwell utilizing
accounting policies consistent with those applied to the preparation of KCSI's
historical financial statements. Since the financial services business was
operated as part of KCSI during the periods presented, such financial
information may not necessarily reflect the results of operations or financial
position of Stilwell or what the results of operations would have been if
Stilwell had been a separate, independent company during those periods.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. Investment management fees are recognized as services
are provided. These revenues are generally determined in accordance with
contracts between Stilwell's subsidiaries and their customers based upon a
percentage of assets under management. Shareowner servicing fees and other
revenues are recognized as contractual obligations are fulfilled or as services
are provided.
CASH EQUIVALENTS. Short-term liquid investments with an initial maturity of
generally three months or less, including investments in money market mutual
funds that are managed by Janus, are considered cash equivalents. Janus'
investments in its money market funds are generally used to fund operations and
pay dividends. Pursuant to contractual agreements between KCSI and certain Janus
minority stockholders, Janus has distributed at least 90% of its net income to
its stockholders each year.
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<PAGE>
INVESTMENTS. The equity method of accounting is used for all entities in
which Stilwell has significant influence but not more than a 50% voting
interest; the cost method of accounting is generally used for non-marketable
investments of less than 20%. Investments classified as "available for sale"
pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115"), are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported, net of deferred income taxes, in accumulated other comprehensive
income. Investments classified as "trading" securities are reported at fair
value, with unrealized gains and losses included in earnings.
Investments in advised funds are comprised of shares of certain mutual
funds advised by Janus and Berger. Realized gains and losses are determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Maintenance and repairs are expensed as incurred. Improvements are capitalized.
Depreciation and amortization are recorded using straight line and accelerated
methods over the estimated useful life of the related assets (or the lease term
if shorter), generally three to seven years for furniture, fixtures and
equipment and three to twenty-one years for buildings and leasehold
improvements.
Stilwell adopted Statement of Financial Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("FAS 121"), effective January 1, 1996. This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill, as well as for long-lived assets and certain
identifiable intangibles which are to be disposed of. If events or changes in
circumstances of a long-lived asset indicate that the carrying amount of an
asset may not be recoverable, Stilwell must estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest) is
lower than the carrying amount of the asset, an impairment loss must be
recognized to the extent that the carrying amount of the asset exceeds its fair
value. In accordance with FAS 121, Stilwell periodically evaluates the
recoverability of its long-lived assets. The adoption of FAS 121 did not have a
material effect on Stilwell's financial position or results of operations.
SOFTWARE DEVELOPMENT AND MAINTENANCE. Purchased software is recorded at
cost and amortized over the estimated economic life.
In 1998, Stilwell adopted the guidance outlined in American Institute of
Certified Public Accountant's Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 requires that computer software costs incurred in the preliminary
project stage, as well as training and maintenance costs, be expensed as
incurred. This guidance also requires that direct and indirect costs associated
with the application development stage of internal use software be capitalized
until such time that the software is substantially complete and ready for its
intended use. Capitalized costs are to be amortized on a straight line basis
over the useful life of the software. The adoption of this guidance did not have
a material impact on Stilwell consolidated subsidiaries; however, see Note 4
regarding impact on DST.
F-14
<PAGE>
MARKETING. Stilwell expenses all marketing and promotion costs as incurred.
Direct response advertising for which future economic benefits are probable and
specifically attributable to the advertising is not material. Berger has
marketing agreements with various related mutual funds pursuant to Rule 12b-1
under the Investment Company Act of 1940 ("12b-1 Plan") pursuant to which
certain 12b-1 fees are collected. Under these agreements, which are approved or
renewed on an annual basis by the boards of directors of the respective mutual
funds, Berger must engage in activities that are intended to result in sales of
the shares in the funds. Any fees not spent must be returned to the funds. See
Note 14.
DEFERRED COMMISSIONS. Commissions paid to financial intermediaries on sales
of certain Janus World Funds shares ("B shares") are recorded as deferred
commissions in the accompanying consolidated financial statements. These
deferred commissions are amortized using the sum-of-the-years digits methodology
over four years, or when the B shares are redeemed, if earlier. Early withdrawal
charges received by Janus from redemption of the B shares within four years of
purchase reduce the unamortized deferred commissions balance. Payments of
deferred commissions during 1999 and during the three months ended March 31,
1999 and 2000 were $29.5, $8.1 and $44.7 million, respectively, and associated
amortization expense for the year and quarters then ended totaled $8.1, $0.9 and
$6.2 million, respectively. Payment of deferred commissions and associated
amortization expense were not material to Stilwell's 1998 results of operation,
financial position or cash flows.
INCOME TAXES. Stilwell currently joins with KCSI and other members of the
KCSI affiliated group in filing a consolidated federal income tax return. The
consolidated federal income tax is allocated to Stilwell as if Stilwell filed a
separate consolidated federal income tax return, assuming the utilization of
tax-planning strategies consistent with those utilized by KCSI. Following the
Distribution, Stilwell will no longer be a member of the KCSI affiliated group
and, as a result, will discontinue filing a consolidated federal income tax
return with KCSI. (See Note 10 with respect to a Tax Disaffiliation Agreement
between KCSI and Stilwell.)
Deferred income tax assets and liabilities are determined based on the
differences between the financial statement and income tax bases of assets and
liabilities as measured by the enacted income tax rates which will be in effect
when these differences reverse. Deferred income tax expense is generally the
result of changes in the deferred tax assets and liabilities.
INTANGIBLE ASSETS. Intangible assets principally represent the excess of
cost over the fair value of net underlying assets of acquired companies using
purchase accounting and are amortized over periods ranging from 15 to 40 years
using the straight-line method. Stilwell periodically reviews the recoverability
of intangible assets by comparing the carrying value of the associated
intangible assets to their fair value. The determination of possible impairment
is primarily measured by reference to various valuation techniques commonly used
in the investment management industry. See Note 7 regarding the impairment of
goodwill associated with the Berger investment as of December 31, 1997.
CHANGES OF INTEREST IN SUBSIDIARIES AND EQUITY INVESTEES. A change of
Stilwell's interest in a subsidiary or equity investee resulting from a
subsidiary's or equity investee's issuance of its stock is recorded as a gain or
loss in Stilwell's statement of income in the period that the change of interest
occurs. If an issuance of stock by the subsidiary or affiliate is
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<PAGE>
from treasury shares on which gains have been previously recognized, however,
Stilwell will record the gains directly to its equity and not include the gain
in net income. A change of interest in a subsidiary or equity investee resulting
from a subsidiary's or equity investee's purchase of its stock increases
Stilwell's ownership percentage of the subsidiary. Stilwell records this type of
transaction under the purchase method of accounting, whereby any excess of fair
market value over the net tangible and identifiable intangible assets is
recorded as goodwill. Gains recorded by Stilwell (included in the Other, net
component in the Statement of Income) for the year ended December 31, 1999
totaled $6.2 million. Gains during the year ended December 31, 1997 were not
material. See Note 4 regarding reduction in amount of DST in 1998. Stilwell
recorded approximately $1.2 million in gains during the three months ended March
31, 2000. In addition to these gains, see Note 16 regarding the sale by Stilwell
of 192,408 shares of Janus common stock during first quarter 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting
Standards No. 107 "Disclosures About Fair Value of Financial Instruments" ("FAS
107") requires an entity to disclose the fair value of its financial
instruments. Stilwell's financial instruments include cash and cash equivalents,
investments in advised funds, accounts receivable and payable and long-term
debt.
The carrying value of Stilwell's cash equivalents and accounts receivable
and payable approximate their fair values due to their short-term nature. The
carrying value of Stilwell's investments designated as "available for sale" and
"trading" equals their fair value which is based upon quoted prices in active
markets. Stilwell estimates the fair value of long-term debt based upon
borrowing rates available at the reporting date for indebtedness with similar
terms and average maturities.
STOCK-BASED COMPENSATION. Stilwell accounts for stock options granted to
employees and non-employee directors using the intrinsic value method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). In October 1995, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which permits
companies to use either the APB 25 intrinsic value method or the fair value
method as prescribed by FAS 123. Stilwell uses the APB 25 method and discloses
pro forma net income in the notes to the financial statements, as if it had
adopted the FAS 123 fair value method for grants after December 31, 1994. See
Note 12 for pro forma disclosure assuming that Stilwell would have had higher
compensation cost as a result of accounting for existing KCSI stock options held
by Stilwell employees under FAS 123.
CORPORATE ALLOCATIONS. Prior to the Contribution, KCSI provided certain
managerial, treasury, accounting, tax and legal services to Stilwell.
Additionally, certain other expenses were incurred by KCSI on behalf of Stilwell
(e.g., amortization of identifiable intangible assets and goodwill) prior to the
Contribution. An allocation of the estimated cost of these services and expenses
has been reflected in the accompanying financial statements based on
management's best estimate of financial services-related assets and liabilities,
capital structure and liquidity. In the opinion of management, the costs and
expenses allocated to Stilwell for these services provided by KCSI are
reasonable. These costs and expenses aggregated $18.6, $20.9 and $20.1 million
in 1997, 1998 and 1999, respectively, and $6.2 and $8.4 million for the three
months ended March 31, 1999 and 2000, respectively.
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<PAGE>
INTERCOMPANY AGREEMENT WITH KCSI. Stilwell has entered into an Intercompany
Agreement with KCSI for the purpose of governing certain of the ongoing
relationships during a transitional period after the Distribution and providing
for an orderly transition of Stilwell to a separate company. The Intercompany
Agreement generally provides for certain indemnification rights, insurance
matters, access to records and information, certain transitional support
services and other matters relating to the Distribution. This agreement is not
expected to have a material impact on Stilwell's future results of operation,
financial position or cash flows.
INTERCOMPANY TRANSACTIONS WITH KCSI. Intercompany transactions between
Stilwell and KCSI are reflected as dividends to or transfers from KCSI within
the consolidated financial statements. Amounts treated as net dividends are
recorded as a reduction to Retained Earnings and amounts treated as net
transfers from KCSI are recorded as an increase to the Net investment by Parent
component included in the Consolidated Balance Sheets. Generally, increases in
the Net Investment by Parent component result from the timing of cash
requirements throughout each year, primarily with respect to investing
activities. Amounts treated as net dividends to KCSI generally reflect the
transfer to KCSI of dividends received by Stilwell from subsidiaries, to the
extent such amounts were not required for investing, financing or operating
needs.
EARNINGS PER SHARE. In February 1997, the FASB issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS") and requires the computation of EPS under two
methods: "basic" and "diluted." Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Stilwell currently does not have any potentially dilutive securities that would
affect the denominator in the dilutive computation. The only adjustments that
could affect the numerator of Stilwell's diluted EPS computation include
potentially dilutive securities at Janus, Berger, Nelson and DST. These
adjustments totaled approximately $0.6, $2.3 and $4.8 million for the years
ended December 31, 1997, 1998 and 1999, respectively, and $0.8 and $2.3 million
for the three months ended March 31, 1999 and 2000, respectively. See Note 3 for
computation of pro forma EPS (unaudited) disclosures in the accompanying
financial statements to provide a basis for comparison to future earnings per
share. See Note 12 with regard to current KCSI stock options which are expected
to convert to Stilwell stock options upon completion of the Distribution.
INTERIM FINANCIAL INFORMATION (UNAUDITED). The interim consolidated
financial statements and related disclosures as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 are unaudited. These unaudited
interim consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with Rule 10-01 of the SEC's Regulation S-X. Accordingly, they do not include
all of the information and explanatory notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited interim consolidated financial statements
contain all of the adjustments (consisting of normal interim closing procedures)
necessary to present fairly the financial position of Stilwell as of March 31,
2000 and its results of operations and cash flows for the three
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<PAGE>
months ended March 31, 1999 and 2000. The results of operations and cash flows
for the three months ended March 31, 2000 are not necessarily indicative of the
results that can be expected for the entire fiscal year ending December 31,
2000.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130. In June 1997, the FASB
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting
and disclosure of comprehensive income and its components in the financial
statements (the change in net assets of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources
including all changes in equity other than those resulting from investments by
and distributions to owners). The principal items comprising other comprehensive
income are the effects of DST's investments which are classified as "available
for sale," as defined by FAS 115. The unrealized gain related to these
investments increased $42.6, $39.5 and $63.8 million ($25.9, $24.3 and $39.3
million, net of deferred income taxes) for the years ended December 31, 1997,
1998 and 1999, respectively. The unrealized gain increased $8.0 million ($5.0
million net of deferred income taxes) during the three months ended March 31,
2000. The items affecting comprehensive income were not material during the
three months ended March 31, 1999. Stilwell adopted the provisions of FAS 130
effective January 1, 1998 and has retroactively reclassified the accompanying
financial statements for comparative purposes.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131. In 1998, Stilwell
adopted the provisions of Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 establishes standards for the manner in which public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. FAS 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. Management believes that Stilwell operates
in only one reportable segment and in only one reportable geographic area. The
adoption of FAS 131 did not have a significant impact on Stilwell's financial
statements.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133. In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), which establishes
accounting standards for derivative instruments, the derivative portion of
certain other contracts that have similar characteristics and for hedging
activities. In June 1999, the FASB issued an amendment to FAS 133 changing the
effective date of FAS 133 to fiscal quarters of fiscal years beginning after
June 15, 2000. Stilwell does not generally enter into transactions covered by
this statement. Stilwell does not expect that adoption of FAS 133 will have a
significant impact on Stilwell's financial statements.
EMERGING ISSUES TASK FORCE ISSUE NO. 96-16. In Issue No. 96-16, the
Emerging Issues Task Force ("EITF") of the FASB reached a consensus that
substantive "participating" minority rights which provide a minority stockholder
with the right to effectively control significant decisions in the ordinary
course of an investee's business could impact whether the majority stockholder
should consolidate the investee. Management has evaluated the rights of the
minority stockholders of its consolidated subsidiaries and concluded that
application of EITF 96-16 did not affect Stilwell's consolidated
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financial statements. This conclusion with respect to Janus is currently under
discussion with the Staff of the Securities and Exchange Commission and,
accordingly, is subject to change. See Notes 13 and 15.
NOTE 3 - PRO FORMA EARNINGS PER SHARE (UNAUDITED)
Stilwell intends to issue additional shares of Stilwell common stock to
KCSI pursuant to a stock split to be effected in the form of a stock dividend
prior to the Distribution to provide a sufficient number of shares for the
Distribution. In addition, the par value of the Stilwell common stock will be
changed to $0.01.
Additionally, on January 11, 2000, KCSI arranged a new $200 million 364-day
senior unsecured Competitive Advance/Revolving Credit Facility ("New Credit
Facility"). KCSI borrowed $125 million under this facility and used the proceeds
to retire other debt obligations. Stilwell has assumed the New Credit Facility,
including the $125 million borrowed thereunder, thereby reducing its
stockholder's equity. See Note 16. Accordingly, for purposes of calculating pro
forma earnings per share for the three months ended March 31, 1999 and year
ended December 31, 1999, net income was reduced by the estimated after-tax
effect of interest expense assuming $125 million of indebtedness (at an interest
rate of 6.5%) was outstanding as of January 1, 1999.
To provide a basis for comparison to future earnings per share, pro forma
computations of basic and diluted EPS for the year ended December 31, 1999 and
for three months ended March 31, 1999 and 2000 are included for informational
purposes.
The number of basic shares used for pro forma purposes was derived based
upon an assumed issuance of two shares of Stilwell common stock for every one
share of KCSI common stock. The number of shares of KCSI common stock used in
the computation was 111,399,354, based upon the total number of outstanding
shares of KCSI common stock as of March 31, 2000, resulting in a pro forma
222,798,708 shares of Stilwell common stock.
The number of dilutive shares used in the pro forma computation was derived
based upon the total number of KCSI stock options assumed to be exercised in
connection with the determination of the dilutive number of weighted average
shares of KCSI common stock as of March 31, 2000. These options to purchase KCSI
common stock (3,980,504) were multiplied by two to derive the options to
purchase shares of Stilwell common stock that are assumed to be exercised
(7,961,008).
The number of basic and diluted shares derived in the computations
described above represent the denominator in the earnings per share calculations
required under FAS 128. As discussed in Note 2, for purposes of deriving diluted
EPS, adjustments to the numerator have also been factored into the computation.
NOTE 4 - INVESTMENT IN DST SYSTEMS, INC.
DST MERGER. On December 21, 1998, DST and USCS announced the completion of
the merger of USCS with a wholly-owned DST subsidiary. Under the terms of the
merger, USCS became a wholly-owned subsidiary of DST. The merger, accounted for
as a pooling of interests by DST, expands DST's presence in the output solutions
and customer management software and services industries. DST issued
approximately 13.8 million shares of its common stock in the
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transaction, reducing Stilwell's ownership interest from 41% to approximately
32%. Stilwell recorded a one-time pretax non-cash charge of approximately $36.0
million ($23.2 million after-tax), reflecting Stilwell's reduced ownership of
DST and Stilwell's proportionate share of DST and USCS costs incurred in the
fourth quarter related to the merger. Stilwell accounts for its investment in
DST under the equity method.
SUMMARIZED FINANCIAL INFORMATION. Stilwell's investment in DST, together
with certain condensed DST financial information, is summarized as follows. Note
that for the year ended December 31, 1997, information regarding DST's financial
condition and operating results has been restated to combine the historical
results of DST and USCS as a result of their merger in December 1998.
Additionally, Stilwell's equity in DST net assets was computed for 1997 and 1998
using Stilwell's ownership percentage as of December 31, 1998. Stilwell's
percentage ownership of DST, carrying value of the DST investment and the DST
fair market value were not restated and represent Stilwell's historical
information.
F-20
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(DOLLARS IN MILLIONS)
December 31, March 31,
----------------------------------- -----------
1997 1998 1999 2000
Percentage ownership 41% 32% 32% 32%
Carrying value $ 345.3 $ 376.0 $ 470.2 $ 485.5
Equity in DST net
assets 300.1 376.0 470.2 485.5
Fair market value (a) 865.0 1,156.7 1,547.7 1,316.7
FINANCIAL CONDITION:
Current assets $ 345.3 $ 375.8 $ 464.5 $ 452.1
Non-current assets 1,203.2 1,521.2 1,861.8 1,906.4
-------- -------- -------- --------
Total assets $1,548.5 $1,897.0 $2,326.3 $2,358.5
======== ======== ======== ========
Current liabilities $ 212.0 $ 268.6 $ 285.8 $ 259.2
Non-current liabilities 405.6 462.2 576.9 597.0
Stockholders' equity 930.9 1,166.2 1,463.6 1,502.3
-------- -------- -------- --------
Total liabilities
and stockholders'
equity $1,548.5 $1,897.0 $2,326.3 $2,358.5
======== ======== ======== ========
For the Three
Months Ended
For the year ended December 31, March 31,
------------------------------- --------------------
1997 1998(b) 1999(c) 1999 2000(d)
OPERATING RESULTS:
Revenues $ 950.0 $1,096.1 $1,203.3 $ 298.4 $ 340.4
Costs and expenses 823.1 976.6 1,003.6 248.5 276.7
Net income 79.4 71.6 138.1 33.6 56.2
(a) Based upon DST's closing price on the New York Stock Exchange.
(b) Net income includes $19.4 million, after tax, of DST/USCS fourth quarter
merger-related charges.
(c) Effective January 1, 1999, DST adopted SOP 98-1. DST's net income for the
year ended December 31, 1999 was increased by $15.4 million as a result.
(d) Net income includes two non-recurring items: 1) a gain on litigation
settlement with a former equity affiliate and 2) gains on the sale of marketable
securities.
NOTE 5 - OTHER ACQUISITIONS, DISPOSITIONS AND SIGNIFICANT TRANSACTIONS
BAI. During 1992, Stilwell acquired an 18% interest in BAI for $1.2
million. On October 14, 1994, pursuant to a Stock Purchase Agreement ("BAI
SPA"), Stilwell increased its ownership of BAI to approximately 80%. In
connection with this increase in ownership (which was accounted for as a
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purchase), Stilwell made payments of $47.5 million in cash (resulting in the
recording of $44.0 million of intangible assets which are being amortized over
15 years) and agreed to make additional purchase price payments covering a
period ending no later than October 1999. Stilwell made an additional purchase
price payment of $3.1 million in 1997. Stilwell made no payments under the BAI
SPA during 1998. Pursuant to the BAI SPA, Stilwell made additional purchase
price payments of $3.0 million during third quarter 1999. No additional payments
will be made thereafter. These goodwill amounts are being amortized over 15
years.
As a result of various transactions during 1997, Stilwell increased its
ownership in BAI to 100%. In January and December 1997, BAI purchased, for
treasury, the common stock of minority stockholders. In December 1997, Stilwell
also acquired additional BAI shares from a minority stockholder through the
issuance of 330,000 shares of KCSI common stock valued at $10.1 million. The
shares of KCSI common stock are reflected as a contribution from KCSI to
Stilwell in the accompanying financial statements. These transactions resulted
in approximately $17.8 million of goodwill, which is being amortized over 15
years. However, see discussion of impairment of a portion of this goodwill in
Note 7. In connection with these transactions, BAI also granted options to
acquire shares of its common stock to certain of its employees. All of the
outstanding options were cancelled upon formation of Berger (See Note 1).
NELSON MONEY MANAGERS PLC. On April 20, 1998, Stilwell completed the
acquisition of 80% of Nelson, an investment adviser and manager based in the
United Kingdom. Nelson provides investment advice and investment management
services primarily to individuals who are retired or contemplating retirement.
Nelson managed approximately (Pound) 844 million ($1.3 billion) in assets as of
December 31, 1999. The acquisition, which was accounted for as a purchase, was
completed using a combination of cash, KCSI common stock and notes payable. The
total purchase price was approximately $33 million. The KCSI common stock issued
in the transaction has been reflected as a contribution from KCSI to Stilwell in
the accompanying financial statements.
The purchase price was in excess of the fair market value of the net
tangible and identifiable intangible assets received and this excess was
recorded as goodwill to be amortized over a period of 20 years. If the
acquisition of Nelson had been completed January 1, 1998, inclusion of Nelson's
results on a pro forma basis would not have been material to Stilwell's
consolidated results of operations for the year ended December 31, 1998.
NOTE 6 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid (to KCSI) for income taxes and interest is summarized as follows (in
millions):
For the Three
Months Ended
For the year ended December 31, March 31,
------------------------------- ------------------
1997 1998 1999 1999 2000
Interest $ 13.7 $ 7.9 $ 1.5 $ 0.6 $ 1.9
Income taxes 64.5 83.1 142.9 6.1 22.4
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As discussed in Note 5 during second quarter 1998, in connection with
Stilwell's acquisition of Nelson, KCSI issued approximately 67,000 shares of
KCSI common stock (valued at $3.2 million) to certain of the sellers of the
shares of Nelson. The use of these shares by Stilwell is reflected as a capital
contribution from KCSI to Stilwell in the accompanying consolidated financial
statements. Also, notes payable of $4.9 million were recorded as part of the
purchase price, payable by March 31, 2005, bearing interest at seven percent.
NOTE 7 - OTHER BALANCE SHEET CAPTIONS
ACCOUNTS RECEIVABLE. Stilwell's accounts receivable balances do not include
any allowance for doubtful accounts nor has any bad debt expense been recorded
for the years ended 1997 through 1999. The majority of the balances are amounts
due from the investment companies for which Stilwell subsidiaries act as
investment adviser or sub-adviser (see Note 14).
OTHER CURRENT ASSETS. Other current assets are comprised of the following
(in millions):
December 31,
---------------------
1998 1999
Deferred commissions - current $ 0.7 $10.2
Deferred income taxes 2.1 0.4
Other 9.2 10.7
----- -----
Total $12.0 $21.3
===== =====
INVESTMENTS IN ADVISED FUNDS. Investments in advised funds are summarized
as follows (in millions):
December 31,
---------------------
1998 1999
AVAILABLE FOR SALE:
Cost basis $23.9 $22.2
Gross unrealized gains 5.4 2.0
Gross unrealized losses -- (0.3)
----- -----
29.3 23.9
----- -----
TRADING:
Cost basis 3.2 --
Gross unrealized losses (0.3) --
----- -----
2.9 --
----- -----
Total $32.2 $23.9
===== =====
Gross realized gains (losses) were not material to Stilwell's consolidated
results of operations for the years ended 1997 and 1998. Gross realized
F-23
<PAGE>
gains totaled $5.3 million for the year ended December 31, 1999 and $2.1 million
for the three months ended March 31, 2000.
F-24
<PAGE>
PROPERTY AND EQUIPMENT, NET. Property and equipment are summarized as follows
(in millions):
December 31,
-----------------------
1998 1999
Furniture, fixtures and
equipment $ 59.2 $ 89.1
Buildings and leasehold
improvements 10.5 26.6
------ ------
Subtotal 69.7 115.7
Less accumulated depreciation
and amortization (32.3) (45.3)
------ ------
Net property and equipment $ 37.4 $ 70.4
====== ======
INTANGIBLES AND OTHER ASSETS. Intangibles and other assets are summarized as
follows (in millions):
December 31,
-----------------------
1998 1999
Goodwill $ 93.1 $110.1
Identifiable intangible assets 59.0 59.0
Accumulated amortization (22.9) (32.6)
------ ------
Net 129.2 136.5
Deferred Commissions 1.3 13.2
Employee loans 11.6 7.7
Other assets, net 4.9 4.6
------ ------
Total $147.0 $162.0
====== ======
Identifiable intangible assets include, among others, investment advisory
relationships and shareowner lists, as well as existing distribution
arrangements.
In connection with a review of its intangible and other assets, Stilwell
determined as of December 31, 1997 that the carrying value of the investment in
Berger, including associated identifiable intangible assets and goodwill,
exceeded its fair value (measured by reference to various valuation techniques
commonly used in the investment management industry) as a result of below-peer
performance and growth of the core Berger funds. Accordingly, Stilwell recorded
an impairment loss of $12.7 million, which is reflected as an other operating
expense in the accompanying financial statements. Additionally, a $3.0 million
allowance was recorded for a non-core investment reflecting recoverability
issues.
Amortization expense related to identifiable intangible assets, goodwill
and other assets aggregated $8.1, $8.8 and $17.8 million in 1997, 1998 and 1999,
respectively, and $3.3 and $8.6 million for the three months ended March 31,
1999 and 2000, respectively.
F-25
<PAGE>
OTHER LIABILITIES. Other liabilities are summarized as follows (in millions):
December 31,
----------------
1998 1999
Deferred compensation (See Note 12) $ 20.5 $ 22.7
Other 21.8 22.6
------ ------
Total $ 42.3 $ 45.3
====== ======
NOTE 8 - LONG-TERM DEBT - PARENT
Stilwell had $16.6 million of outstanding long-term indebtedness to KCSI at
December 31, 1998, which was repaid during first quarter 1999. This amount
represents indebtedness of Stilwell based upon the underlying assets associated
with the financial services businesses of KCSI. The indebtedness generally
represents borrowings in connection with KCSI's common stock repurchase program,
Stilwell acquisitions and operations of Stilwell Financial, Inc. Interest
expense related to the indebtedness was determined using the average level of
Stilwell debt under a reasonably blended KCSI interest rate, approximately seven
percent. Based on the nature of the borrowings (i.e. a variable line of credit
between Stilwell and KCSI), the carrying value of the debt approximates its fair
value.
NOTE 9 - LONG-TERM DEBT - THIRD PARTIES
All third party indebtedness had been paid in full as of December 31, 1998.
Subsequent to Stilwell's acquisition of Nelson in April 1998, Nelson repaid
approximately $6.6 million in outstanding indebtedness.
In May 1998, KCSI established a $100 million 364-day senior unsecured
competitive advance/revolving credit facility (the "Credit Facility") that was
assumed by Stilwell effective July 1, 1999 for its use upon separation of KCSI's
two business segments. On May 14, 1999, KCSI renewed the Credit Facility. The
Credit Facility contains interest rates below prime and terms which can be fixed
up to the expiration date. Stilwell paid approximately $0.5 million in facility
and arrangement fees for the year ended December 31, 1999. At December 31, 1999,
the full $100 million was available under the Credit Facility.
On January 11, 2000 KCSI arranged a new $200 million 364-day senior
unsecured competitive Advance/Revolving Credit Facility ("New Credit Facility").
KCSI borrowed $125 million under this facility and used the proceeds to retire
other debt obligations. Stilwell has assumed the New Credit Facility, including
the $125 million borrowed thereunder, thereby reducing its stockholder's equity.
Upon such assumption, KCSI was released from all obligations, and Stilwell
became the sole obligor, under the New Credit Facility. Stilwell may assign and
delegate all or a portion of its rights and obligations under the New Credit
Facility to one or more of its domestic subsidiaries. Stilwell repaid the $125
million in first quarter 2000.
Two borrowing options are available under the New Credit Facility: a
competitive advance option, which is uncommitted, and a committed revolving
F-26
<PAGE>
credit option. Interest on the competitive advance option is based on rates
obtained from bids as selected by Stilwell in accordance with the lender's
standard competitive auction procedures. Interest on the revolving credit option
accrued based on the type of loan (e.g., Eurodollar, Swingline, etc.), with
rates computed using LIBOR plus 0.35% per annum or, alternatively, the highest
of the prime rate, the Federal Funds Effective Rate plus 0.005% or the Base
Certificate of Deposit Rate plus 1%.
Stilwell, as a continuation of its practice of providing credit facilities
to its subsidiaries, has provided an intercompany credit facility to Janus for
use by Janus for general corporate purposes, effectively reducing the amount of
the credit facilities available for Stilwell's other purposes.
The credit facilities contain a number of covenants, including various
financial covenants. With respect to the Credit Facility, Stilwell was in
compliance with these various provisions, including the financial covenants, as
of December 31, 1998 and 1999 and as of March 31, 2000. Because of certain
financial covenants contained in the credit facilities, however, maximum
utilization of Stilwell's lines of credit may be restricted. See Note 16.
NOTE 10 - INCOME TAXES
Stilwell's provision for income taxes is summarized as follows (in millions):
December 31,
----------------------------------
1997 1998 1999
CURRENT:
Federal $ 79.2 $ 100.2 $ 182.6
State and local 12.2 15.9 21.7
------- ------- -------
Total current 91.4 116.1 204.3
------- ------- -------
DEFERRED:
Federal (3.8) (10.0) 9.3
State and local (0.6) (2.4) 2.5
------- ------- -------
Total deferred (4.4) (12.4) 11.8
------- ------- -------
Total income tax expense $ 87.0 $ 103.7 $ 216.1
======= ======= =======
Stilwell's deferred income tax liabilities (assets) are summarized as follows
(in millions):
December 31,
-----------------------
1998 1999
INCOME TAX LIABILITIES:
Unconsolidated affiliates $ 138.7 $ 171.1
Deferred commissions -- 12.2
Other 7.0 --
------- -------
Gross deferred tax
liabilities 145.7 183.3
------- -------
F-27
<PAGE>
INCOME TAX ASSETS:
Book reserves (7.3) (8.1)
Deferred compensation (14.7) (18.7)
Vacation (1.7) (0.9)
Deferred revenue (3.5) (1.8)
Other (2.2) (2.4)
------- -------
Gross deferred tax assets (29.4) (31.9)
------- -------
Net deferred income tax
liabilities $ 116.3 $ 151.4
======= =======
Based upon Stilwell's history of operating income and its expectation for the
future, management has determined that operating income of Stilwell will, more
likely than not, be sufficient to recognize fully the gross deferred tax assets
set forth above.
Stilwell's effective income tax rate differs from the statutory federal income
tax rate as follows (in millions):
December 31,
---------------------------
1997 1998 1999
Statutory U.S. federal rate $ 80.5 $ 101.3 $ 205.3
State and local income taxes 11.6 13.5 24.2
Non-deductible goodwill 6.5 2.3 2.5
Equity in earnings of
unconsolidated affiliates (6.8) (6.8) (12.4)
Other (4.8) (6.6) (3.5)
------ ------- -------
Total income tax expense $ 87.0 $ 103.7 $ 216.1
====== ======= =======
Effective tax rate 37.8% 35.8% 36.8%
====== ======= =======
In connection with the initial public offering of DST in fourth quarter
1995, Stilwell began providing deferred income taxes for unremitted earnings of
qualifying U.S. unconsolidated affiliates net of the 80% dividends received
deduction provided for under current tax law. As of December 31, 1999, the
cumulative amount of unremitted earnings qualifying for this deduction
aggregated $165.8 million. These amounts would become taxable to Stilwell if
distributed by the affiliates as dividends, in which case Stilwell would be
entitled to the dividends received deduction for 80% of the dividends;
alternatively, these earnings could be realized by the sale of the affiliates'
stock, which would give rise to tax at federal capital gains rate and state
ordinary income tax rates, to the extent the stock sales proceeds exceeded
Stilwell's income tax basis. Deferred income taxes provided on unremitted
earnings of unconsolidated affiliates aggregated $9.7 and $13.3 million as of
December 31, 1998 and 1999, respectively.
The IRS has completed examinations of KCSI's consolidated federal income
tax returns for the years 1990-1992 and has proposed certain tax assessments for
these years. For years prior to 1988, the statute of limitations has closed, and
for 1988-1989, all issues raised by the IRS examinations have been resolved,
except for one refund claim related to DST. In addition, other
F-28
<PAGE>
taxing authorities have also completed examinations principally through 1992,
and have proposed additional tax assessments for which Stilwell believes it has
adequate reserves accrued.
In as much as most of these asserted tax deficiencies represent temporary
differences, subsequent payments of taxes are not expected to require additional
charges to income tax expense. In addition, accruals have been made for interest
(net of the related income tax benefit) for estimated settlement of the proposed
tax assessments. Thus, management believes that final settlement of these
matters will not have a material adverse effect on Stilwell's consolidated
results of operations, cash flows or financial position.
As described in Notes 1 and 2, Stilwell will no longer join with KCSI in
filing a consolidated federal income tax return after the Distribution. As a
result, Stilwell's ability to reduce income taxes currently payable after the
Distribution will be determined primarily on the basis of the taxable income and
income taxes paid by Stilwell in its separate consolidated return. Stilwell has
entered into a Tax Disaffiliation Agreement with KCSI which establishes, among
other things, the procedures, rights and indemnities between the two entities
with respect to historical tax items. This agreement is not expected to have a
material impact on Stilwell's future results of operations, financial position
or cash flows.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Substantially all full-time employees of Stilwell participate in the
Stilwell Employee Stock Ownership Plan (the "ESOP") and KCSI's qualified 401(k)
plan (the "KCSI 401(k) Plan"). Employees of Stilwell Financial, Inc. participate
in KCSI's qualified profit sharing plan (the "KCSI Profit Sharing Plan"). Janus
and Berger employees participate in the qualified profit sharing plans sponsored
by each of those companies.
Contributions to the ESOP and KCSI Profit Sharing Plan are made at the
discretion of the KCSI Board of Directors in amounts not to exceed the maximum
allowable for income tax purposes. Stilwell matches a maximum of 3% of employee
compensation deferrals in the KSCI 401(k) Plan, subject to a maximum allowable
for income tax purposes. Contributions to the Janus and Berger profit sharing
plans are made at the discretion of the respective boards of directors in
amounts not to exceed the maximum allowable for income tax purposes.
Expense related to the Stilwell participants in the qualified plans
aggregated $4.6, $5.7 and $8.1 million in 1997, 1998 and 1999, respectively.
NOTE 12 - STOCK PLANS
PRO FORMA DISCLOSURE. Under FAS 123, companies must either record
compensation expense based on the estimated grant date fair value of stock
options granted or disclose the impact on net income as if they had adopted the
fair value method (for grants subsequent to December 31, 1994). If Stilwell had
measured compensation cost for the KCSI stock options granted to its employees
and shares subscribed by its employees under the KCSI employee stock purchase
plan, as well as the Janus and Berger stock-based compensation plans discussed
below, under the fair value based method prescribed by FAS 123, net income and
earnings per share would have been as follows:
F-29
<PAGE>
Year Ended December 31,
1997 1998 1999
---- ---- ----
Net income (in millions)
As reported $ 118.0 $ 152.2 $ 313.1
Pro forma 117.0 149.0 310.1
Earnings per Basic share:
As reported $ 118,000 $ 152,200 $ 313,100
Pro forma 117,000 149,000 310,100
Earnings per Diluted share:
As reported $ 117,400 $ 149,900 $ 308,300
Pro forma 116,400 146,700 305,300
For the years presented in these financial statements, there are no
outstanding stock options for Stilwell common stock. However, at the time of the
Distribution, in order to provide for the equitable adjustment of existing KCSI
stock options ("Options"), KCSI and Stilwell intend to substitute two separately
exercisable options - New KCSI Options and New Stilwell Options (collectively,
the "Substituted Options") - for the Options held by KCSI and Stilwell
employees, former KCSI employees and KCSI directors (including former
directors). Upon issuance of these Substituted Options, Stilwell will have
potentially dilutive securities for purposes of the diluted EPS computation.
KCSI STOCK OPTION PLANS. The table below summarizes KCSI outstanding
options held by Stilwell employees as of December 31, 1997, 1998 and 1999, and
changes during the years then ended. These options generally vest over periods
ranging from one to three years with a maximum exercise term of ten years. The
number of options and activity related thereto for the years ended December 31,
1997 through 1999 are not necessarily indicative of the number of options and
associated activity in the future.
F-30
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
---------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 5,645,310 $ 8.87 4,794,527 $ 8.84 4,768,226 $ 11.33
Granted 46,452 16.80 445,364 35.98 356,142 49.40
Exercised (882,187) 9.30 (467,257) 9.17 (378,708) 12.28
Expired/Canceled (15,048) 15.62 (4,408) 27.33 (52,600) 43.70
---------- ---------- -----------
Outstanding at December 31 4,794,527 $ 8.84 4,768,226 $ 11.33 4,693,060 $ 13.78
========== ========== ===========
Exercisable 4,227,212 $ 7.87 4,172,257 $ 8.52 4,183,660 $ 9.64
========== ========== ===========
Weighted Average Fair
Value of Options granted
during the year $4.18 $10.42 $16.53
</TABLE>
The following table summarizes the information about KCSI stock options held by
Stilwell employees that were outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------- -------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
-------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C>
$2 to $10 2,544,815 1.9 years $ 4.72 2,544,815 $ 4.72
</TABLE>
F-31
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
$10 to $15 184,605 5.2 12.62 184,605 12.62
$15 to $20 1,243,468 6.3 15.95 1,243,468 15.95
$20 to $64 720,172 9.4 42.36 210,772 29.22
---------
$2 to $64 4,693,060 4.4 $ 13.78 4,183,660 $ 9.64
=========
</TABLE>
F-32
<PAGE>
The fair value of KCSI stock options granted by KCSI to Stilwell employees
used to compute pro forma net income disclosures was estimated on the date of
grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions used by KCSI:
1997 1998 1999
---- ---- ----
Dividend yield .62% to .82% .34% to .56% .25% to .36%
Expected volatility 24% to 30% 30% to 42% 42% to 43%
Risk-free interest rate 6.20% to 6.44% 4.74% to 5.64% 4.67% to 5.75%
Expected life 3 years 3 to 5 years 3 years
KCSI ESPP. KCSI periodically sponsors an employee stock purchase plan
("ESPP") under which substantially all full-time employees of Stilwell were
granted the right to subscribe to KCSI common stock at a per share price equal
to the lesser of 85% of the KCSI stock price on the date of grant or the date
that such shares are purchased. The weighted average per share fair value of the
stock purchase rights granted to Stilwell employees under the Eleventh Offering
of the ESPP was $10.76 in 1999. KCSI did not sponsor an ESPP grant for 1998.
The fair value of ESPP purchase rights granted to Stilwell employees used
to compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions used by KCSI:
1998
----
Dividend yield 0.95%
Expected volatility 42%
Risk-free interest rate 4.63%
Term 1 year
JANUS RESTRICTED STOCK. During 1998, Janus granted 125,900 restricted
shares of Janus' common stock to certain Janus employees pursuant to a
restricted stock agreement ("Stock Agreement"). The restricted stock was
recorded at fair market value (approximately $28.9 million) at the time of grant
as a separate component of Janus' stockholders' equity. The restricted stock
vests at the end of 10 years. The Stock Agreement also includes an accelerated
vesting provision whereby the vesting rate will be accelerated to 20% of the
shares in any one year if certain specific investment performance goals are met
(to be effective on January 1st of the following year). Janus records
compensation expense based on the applicable vesting rate, which was 20% in 1998
and 1999 based on attainment of investment performance goals. The impact of
subsequent Janus amortization charges will be reduced by gain recognition at
Stilwell Financial, Inc., reflecting Stilwell's reduced ownership of Janus upon
vesting by the restricted stockholders.
During 1999, Janus granted 33,000 shares of Janus common stock to certain
Janus employees pursuant to the Stock Agreement. The restricted stock was
recorded at fair market value (approximately $10.8 million) at the time of grant
as a separate component of Janus' stockholders' equity. Similar to the 1998
grant, the Stock Agreement includes an accelerated vesting provision whereby the
vesting rate will be accelerated to 20% of the shares in any one year if certain
specific investment performance goals are met (to be effective
F-33
<PAGE>
on January 1st of the following year). Janus records compensation expense based
on the applicable vesting rate, currently at 20% based on attainment of
investment performance goals.
The shares made available for the restricted stock grant were obtained
through the purchase of 35,000 shares of Janus stock from an existing minority
owner. In connection with this transaction, Stilwell Financial, Inc. recorded
approximately $9.5 million of goodwill, which is being amortized over a period
of 15 years.
Because this 1999 issuance was from Janus' treasury shares on which
previous gains have been recognized, the Company will record any gain upon
vesting directly to stockholder's equity. See Note 2.
In first quarter 2000, Janus issued additional restricted stock. See Note
16.
JANUS STOCK OPTION PLAN. During 1997, Janus adopted a stock option plan to
make available shares of Janus common stock for the grant of awards to Janus
employees. Awards under the plan were granted with an exercise price equal to
the fair value of the underlying common stock on the grant date, vested
immediately and were exercisable during an annual 30 day exercise period. The
options expired after 30 months.
A summary of stock option activity under the Janus stock option plan is as
follows:
1997 1998 1999
---- ---- ----
Janus Options outstanding at
January 1 -- 22,100 8,100
Granted 37,700
Exercised (15,300) (13,800) (8,000)
Expired/Canceled (300) (200) (100)
------- ------- ------
Janus Options outstanding at
December 31 22,100 8,100 --
======= ======= ======
Janus options may affect Stilwell's dilutive EPS computation (through a
reduced ownership percentage of Janus by Stilwell) if the average fair value of
the Janus stock exceeds the option price.
BAI STOCK OPTION PLAN. During 1997, BAI adopted a stock option plan which
makes available shares of BAI common stock for the grant of awards to BAI
employees. Awards under the plan were granted with an exercise price equal to
the fair value of the underlying common stock on the grant date, vested
generally over periods ranging up to 10 years, and were exercisable for a period
of 10 years. Certain grants under the BAI stock option plan also included
accelerated vesting provisions based upon pre-established BAI performance
criteria. BAI options would have affected Stilwell's dilutive EPS computation
(through a reduced ownership percentage of BAI by Stilwell) if the average fair
value of the BAI stock exceeded the option price.
F-34
<PAGE>
A summary of stock option activity under the BAI stock option plan is as
follows:
1997 1998
---- ----
BAI Options outstanding at
January 1 -- 192,210
Granted 192,210 9,500
Expired/Canceled -- (69,660)
------- -------
BAI Options outstanding at
December 31 192,210 132,050
======= =======
Exercisable at December 31 127,450 89,290
======= =======
In connection with the formation of Berger, all options were cancelled. See
Note 1.
JANUS STOCK PURCHASES. In connection with a 1995 Janus minority group
restructuring transaction, Janus made 274,300 shares of its common stock
available for purchase by certain key Janus employees. These key employees
purchased the Janus shares at fair value and paid for these shares with a
combination of cash (20%) and full recourse loans (80%) from Stilwell which bear
interest at 8.25% and mature in equal annual installments over 10 years.
In 1997, Janus made available an additional 56,400 shares of its common
stock that had been reacquired from current and former employees for purchase by
certain key employees. 47,300 shares were purchased at fair value and paid for
through a combination of cash (10%) and full recourse loans (90%) from a third
party lending institution. The remaining 9,100 shares were purchased by other
employees at fair value for cash.
In connection with each of these Janus stock purchases, Janus entered into
incentive compensation agreements with the key employees under which each
employee would have the opportunity to earn bonuses (based upon pre-established
Janus performance measures) equal to the debt service requirements of the loans
referred to above. As of December 31, 1999, the employees participating in the
1995 stock purchases had earned 100% of the potential bonus which will be paid
out over the remaining maturities of the notes. As of December 31, 1999, the
employees participating in the 1997 stock purchases had earned over 99% of the
potential bonus. Compensation expense related to these two bonus plans
aggregated $13.2, $2.7 and $7.0 million in 1997, 1998 and 1999, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES. Stilwell rents office space and equipment under the terms
of various operating lease agreements. As of December 31, 1999, future minimum
rental commitments under non-cancelable operating leases aggregated (in
millions):
2000 $15.9
2001 16.0
2002 15.6
2003 13.3
2004 7.0
F-35
<PAGE>
Thereafter 17.0
-----
Total $84.8
=====
Rent expense aggregated $12.6, $17.5 and $17.4 million in 1997, 1998 and 1999,
respectively.
Stilwell is committed for future telecommunications and data service with
minimum payments of $2.5, $1.7 and $0.5 million in 2000, 2001 and 2002,
respectively.
MINORITY PURCHASE AGREEMENTS. A stock purchase agreement with Thomas H.
Bailey ("Mr. Bailey"), Janus' Chairman, President and Chief Executive Officer,
and another Janus stockholder (the "Janus Stock Purchase Agreement") and certain
restriction agreements with other Janus minority stockholders contain, among
other provisions, mandatory put rights whereby under certain circumstances, KCSI
would be required to purchase the minority interests of such Janus minority
stockholders at a fair market value purchase price equal to fifteen times the
net after-tax earnings over the period indicated in the relevant agreement, or
in some circumstances as determined by an independent appraisal. Under the Stock
Purchase Agreement, termination of Mr. Bailey's employment could require a
purchase and sale of the Janus common stock held by him. If other minority
holders terminated their employment, some or all of their shares also could be
subject to mandatory purchase and sale obligations. Certain other minority
holders who continue their employment also could exercise puts. If all of the
mandatory purchase and sale provisions and all the puts under such Janus
minority stockholder agreements were implemented, KCSI would have been required
to pay approximately $833 million as of March 31, 2000, compared to $789, $447
and $337 million at December 31, 1999, 1998 and 1997, respectively. In the
future these amounts may be higher or lower depending on Janus' earnings, fair
market value and the timing of the exercise. Payment for the purchase of the
respective minority interests is to be made under the Janus Stock Purchase
Agreement within 120 days after receiving notification of exercise of the put
rights. Under the restriction agreements with certain other Janus minority
stockholders, payment for the purchase of the respective minority interests is
to be made 30 days after the later to occur of (i) receiving notification of
exercise of the put rights or (ii) determination of the purchase price through
the independent appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements
and restriction agreements with other minority stockholders also contain
provisions whereby upon the occurrence of a Change in Ownership (as defined in
such agreements) of KCSI, KCSI may be required to purchase such holders' Janus
stock or, as to the stockholders that are parties to the Janus Stock Purchase
Agreement, at such holders' option, to sell its stock of Janus to such minority
stockholders. The fair market value price for such purchase or sale would be
equal to fifteen times the net after-tax earnings over the period indicated in
the relevant agreement, in some circumstances as determined by Janus' Stock
Option Committee or as determined by an independent appraisal. If KCSI had been
required to purchase the holders' Janus common stock after a Change in Ownership
as of March 31, 2000, the purchase price would have been approximately $1.14
billion (see additional information in Note 15).
F-36
<PAGE>
KCSI would account for any such purchase as the acquisition of a minority
interest under Accounting Principles Board Opinion No. 16, Business
Combinations.
As of March 31, 2000, Stilwell had $200 million in credit facilities
available, owned securities with a market value in excess of $1.3 billion and
had cash balances at the Stilwell holding company level in excess of $147.5
million. To the extent that available credit facilities, existing cash balances
and proceeds from the liquidation of Stilwell's investment in DST were
insufficient to fund its purchase obligations, Stilwell had access to the
capital markets and, with respect to the Janus Stock Purchase Agreement, had 120
days to raise additional sums.
LITIGATION. From time to time Stilwell is involved in various legal actions
arising in the normal course of business. While the outcome of the various legal
proceedings involving Stilwell cannot be predicted with certainty, it is the
opinion of management (after consultation with legal counsel) that the
litigation reserves of Stilwell are adequate and that legal actions involving
Stilwell and ultimate resolution of these matters will not be material to
Stilwell's consolidated financial position, results of operations or cash flows.
NOTE 14 - RELATED PARTY TRANSACTIONS
Stilwell and its subsidiaries incurred fees to DST for various shareowner
and portfolio accounting and recordkeeping services in the amount of $5.3, $5.5
and $7.3 million in 1997, 1998 and 1999, respectively.
Janus and Berger earn fees from the various registered investment companies
for which they act as investment adviser. Accounts receivable include amounts
due from these investment companies. Additionally, Janus earned $7.1 and $8.9
million in 1997 and 1998, respectively, from sub-advisory fees from IDEX
Management, Inc. ("IDEX"), formerly a 50% joint venture prior to the disposition
of IDEX in second quarter 1998. Janus recognized an $8.8 million pretax gain in
connection with this disposition. Also, Berger receives fees under l2b-1 plans
from various registered investment companies for which it acts as adviser (See
Note 2).
The table below summarizes this related party activity as of and for the years
ended December 31 (in millions):
Accounts
Investment receivable
management and from registered
shareowner investment Berger 12b-1 Plan
servicing fees companies fees earned
-------------- --------------- -----------------
1997 $ 403.0 $ 41.6 $7.6
1998 558.4 59.1 6.9
1999 1,024.7 129.3 8.6
Stilwell's retained earnings include equity in the unremitted earnings of
its unconsolidated affiliates of $99.5, $112.5 and $154.3 million as of December
31, 1997, 1998 and 1999, respectively.
F-37
<PAGE>
Certain officers and directors of Janus and Berger are also officers,
directors and/or trustees for the various registered investment companies for
which Janus and Berger act as investment adviser.
NOTE 15 - CONTROL
SUBSIDIARIES AND AFFILIATES. In connection with its 1984 acquisition of an
80% interest in Janus, KCSI entered into the Janus Stock Purchase Agreement
which, as amended, provides that so long as Mr. Bailey is a holder of at least
5% of the common stock of Janus and continues to be employed as President or
Chairman of the Board of Janus (or, if he does not serve as President, James P.
Craig, III serves as President and Chief Executive Officer or Co-Chief Executive
Officer with Mr. Bailey), Mr. Bailey shall continue to establish and implement
policy with respect to the investment advisory and portfolio management activity
of Janus. The agreement also provides that, in furtherance of such objective, so
long as both the ownership threshold and officer status conditions described
above are satisfied, KCSI will vote its shares of Janus common stock to elect
directors of Janus, at least the majority of whom are selected by Mr. Bailey,
subject to KCSI's approval, which approval may not be unreasonably withheld. The
agreement further provides that any change in management philosophy, style or
approach with respect to investment advisory and portfolio management policies
of Janus shall be mutually agreed upon by KCSI and Mr. Bailey.
KCSI does not believe Mr. Bailey's rights under the Janus Stock Purchase
Agreement are "substantive," within the meaning of EITF 96-16, because KCSI can
terminate those rights at any time, by removing Mr. Bailey as an officer of
Janus. KCSI also believes that the removal of Mr. Bailey would not result in
significant harm to KCSI based on the factors discussed below. Colorado law
provides that removal of an officer of a Colorado corporation may be done
directly by its stockholders if the corporation's bylaws so provide. While
Janus' bylaws contain no such provision currently, KCSI has the ability to cause
Janus to amend its bylaws to include such a provision. Under Colorado law, KCSI
could take such action at an annual meeting of stockholders or make a demand for
a special meeting of stockholders. Janus is required to hold a special
stockholders' meeting upon demand from a holder of more than 10% of its common
stock and to give notice of the meeting to all stockholders. If notice of the
meeting is not given within 30 days of such a demand, the District Court is
empowered to summarily order the holding of the meeting. As the holder of more
than 80% of the common stock of Janus, KCSI has the requisite votes to compel a
meeting and to obtain approval of the required actions at such a meeting.
KCSI has concluded, supported by an opinion of legal counsel, that it could
carry out the above steps to remove Mr. Bailey without breaching the Janus Stock
Purchase Agreement and that if Mr. Bailey were to challenge his removal by
instituting litigation, his sole remedy would be for damages and not injunctive
relief and that KCSI would likely prevail in that litigation.
Although KCSI has the ability to remove Mr. Bailey, it has no present plan
or intention to do so, as he is one of the persons regarded as most responsible
for the success of Janus. The consequences of any removal of Mr. Bailey would
depend upon the timing and circumstances of such removal. Mr. Bailey could be
required to sell, and KCSI could be required to purchase, his Janus common
stock, unless he were terminated for cause. Certain other Janus minority
stockholders would also be able, and, if they terminated employment, required,
to sell to KCSI their shares of Janus common stock. The amounts
F-38
<PAGE>
that KCSI would be required to pay in the event of such purchase and sale
transactions could be material. See Note 13. Such removal would have also
resulted in acceleration of the vesting of a portion of the shares of restricted
Janus common stock held by other minority stockholders, having an approximate
aggregate value of $16.3 million as of December 31, 1999.
There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in the
loss of other valuable employees or clients of Janus. The likelihood of
occurrence and the effects of any such employee or client departures cannot be
predicted and may depend on the reasons for and circumstances of Mr. Bailey's
removal. However, KCSI believes that Janus would be able in such a situation to
retain or attract talented employees because: (i) of Janus' prominence; (ii)
Janus' compensation scale is at the upper end of its peer group; (iii) some or
all of Mr. Bailey's repurchased Janus stock could be then available for sale or
grants to other employees; and (iv) many key Janus employees must continue to be
employed at Janus to become vested in currently unvested restricted stock valued
in the aggregate (after considering additional vesting that would occur upon the
termination of Mr. Bailey) at approximately $36 million as of December 31, 1999.
In addition, notwithstanding any removal of Mr. Bailey, KCSI would expect to
continue its practice of encouraging autonomy by its subsidiaries and their
boards of directors so that management of Janus will continue to have
responsibility for Janus' day-to-day operations and investment advisory and
portfolio management policies and, because it would continue that autonomy, KCSI
would expect many current Janus employees to remain with Janus.
With respect to clients, Janus' investment advisory contracts with its
clients are terminable upon 60 days' notice and in the event of a change in
control of Janus. Because of his rights under the Janus Stock Purchase
Agreement, Mr. Bailey's departure, whether by removal, resignation or death,
might be regarded as such a change in control. However, in view of Janus'
investment record, KCSI has concluded it is reasonable to expect that in such an
event most of Janus' clients would renew their investment advisory contracts.
This conclusion is reached because (i) Janus relies on a team approach to
investment management and development of investment expertise, (ii) Mr. Bailey
has not served as a portfolio manager for any Janus fund for several years,
(iii) a succession plan exists under which Mr. James P. Craig, III would succeed
Mr. Bailey, and (iv) Janus should be able to continue to attract talented
portfolio managers. It is reasonable to expect that Janus' clients' reaction
will depend on the circumstances, including, for example, how much of the Janus
team remains in place and what investment advisory alternatives are available.
The Janus Stock Purchase Agreement and other agreements provide for rights
of first refusal on the part of Janus minority stockholders, Janus and KCSI,
with respect to certain sales of Janus stock. These agreements also require KCSI
to purchase the shares of Janus minority stockholders in certain circumstances.
In addition, in the event of a Change in Ownership of KCSI, as defined in the
Janus Stock Purchase Agreement, KCSI may be required to sell its stock of Janus
to the stockholders who are parties to such agreement or to purchase such
holders' Janus stock. In the event Mr. Bailey were terminated for any reason
within one year following a Change in Ownership, he would be entitled to a
severance payment, amounting, at December 31, 1999, to approximately $2 million.
Purchase and sale transactions under these agreements are to be made based upon
a multiple of the net earnings of Janus or other fair market value
determinations, as defined therein. See Note 13.
F-39
<PAGE>
Generally, any change in control of Janus or Berger would constitute an
"assignment" under the 1940 Act. The Distribution is not expected to result in a
change of control of Janus or Berger and therefore under the applicable rules of
the Securities and Exchange Commission would not constitute such an assignment.
However, a material reduction in the ownership of Janus common stock by Mr.
Bailey may result in an assignment by virtue of certain provisions in an
agreement with him. The Boards of Trustees or Directors of the Janus Advised
Funds ("Trustees") generally may terminate the investment advisory agreements
upon written notice for any reason, including if they believe the Distribution
may adversely affect the funds.
EMPLOYEES. Stilwell Financial, Inc. and certain subsidiaries have entered
into agreements with employees whereby, upon defined circumstances constituting
a change in control of Stilwell or the subsidiary, certain stock options or
similar equity instruments become exercisable, certain benefit entitlements are
automatically funded and such employees are entitled to specified cash payments
upon termination of employment.
DEBT. The Credit Facility provides for default in the event of a specified
change in control of Stilwell or certain subsidiaries of Stilwell.
NOTE 16 - SUBSEQUENT EVENTS
NEW CREDIT FACILITY. KCSI has arranged a new $200 million 364-day senior
unsecured competitive Advance/Revolving Credit Facility ("New Credit Facility").
KCSI borrowed $125 million under this facility and used the proceeds to retire
other debt obligations. Stilwell has assumed the New Credit Facility, including
the $125 million borrowed thereunder, thereby reducing its stockholders' equity.
Upon such assumption, KCSI was released from all obligations, and Stilwell
became the sole obligor, under the New Credit Facility. Stilwell may assign and
delegate all or a portion of its rights and obligations under the New Credit
Facility to one or more of its domestic subsidiaries. Stilwell repaid the $125
million in March 2000.
Two borrowing options are available under the New Credit Facility: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive advance option is based on rates
obtained from bids as selected by Stilwell in accordance with the lender's
standard competitive auction procedures. Interest on the revolving credit option
accrues based on the type of loan (e.g., Eurodollar, Swingline, etc.), with
rates computed using LIBOR plus 0.35% per annum or, alternatively, the highest
of the prime rate, the Federal Funds Effective Rate plus 0.005%, the Base
Certificate of Deposit Rate plus 1%.
The New Credit Facility includes a facility fee of 0.15% per annum and a
utilization fee of 0.125% on the amount of outstanding loans under the New
Credit Facility for each day on which the aggregate utilization of the New
Credit Facility exceeds 33% of the aggregate commitments of the various lenders.
Additionally, the New Credit Facility contains, among other provisions, various
financial covenants, which could restrict maximum utilization of the New Credit
Facility.
Additionally, management elected to not renew the May 14, 1999 364-Day
Credit Facility upon its expiration on May 13, 2000.
F-40
<PAGE>
STILWELL SALE OF JANUS STOCK AND JANUS ISSUANCE OF RESTRICTED STOCK. In the
first quarter of 2000, Stilwell sold to Janus, for treasury, 192,408 shares of
Janus common stock and such shares will be available for awards under Janus'
recently adopted Long Term Incentive Plan. Janus has agreed that for so long as
it has available shares of Janus common stock for grant under that plan, it will
not award phantom stock, stock appreciation rights or similar rights. The sale
of those shares resulted in an after-tax gain of approximately $15.1 million and
reduced Stilwell's ownership to approximately 81.5%.
Subsequent to the repurchase of these shares from Stilwell, Janus granted
35,670 restricted shares of its common stock to certain Janus employees pursuant
to a restricted stock agreement. The grant will be accounted for similarly to
previous restricted stock transactions for Janus. See Note 12. This issuance
reduced Stilwell's ownership percentage to slightly below 81.5%.
After this first quarter 2000 issuance, more than 168,000 shares of Janus
common stock remain in treasury for use in connection with Janus' Long Term
Incentive Plan. Upon issuance of all of these shares in future years, Stilwell's
ownership interest in Janus will be 80.1%.
LITIGATION SETTLEMENT. In January 2000, Stilwell received approximately
$44.2 million in connection with the settlement of a legal dispute related to a
former equity investment. The settlement agreement resolves all outstanding
issues related to this former equity investment. In the first quarter of 2000,
Stilwell recognized an after-tax gain of approximately $27.3 million as a result
of this settlement.
JANUS DIVIDEND PAYMENTS. Subsequent to December 31, 1999, Janus' Board of
Directors declared and Janus paid approximately $100 million in dividends, of
which approximately $17.9 million was paid to minority stockholders.
--------
F-41
<PAGE>
Exhibit 99.4
May 25, 2000
Stilwell Financial, Inc.
114 West 11th Street
Kansas City, Missouri 64105
Ladies and Gentlemen:
You have asked for our opinion as to various matters including whether your
company, Stilwell Financial, Inc., a Delaware corporation ("Stilwell"), controls
Janus Capital Corporation, a Colorado corporation ("Janus"), under Colorado law
notwithstanding certain rights Thomas H. Bailey may have to designate a majority
of the members of the Board of Directors under the Stock Purchase Agreement
described below.
FACTS
The following are the primary relevant facts upon which this opinion is
based:
1. Stilwell owns approximately 81.5% of the outstanding common stock of
Janus.
2. Effective as of April 13, 1984, Stilwell's parent entered into a Stock
Purchase Agreement with Mr. Bailey and others related to the purchase of Janus
common stock which agreement contained in Paragraph 11.01 thereof a provision
requiring Stilwell's parent to vote its Janus shares to elect a majority of
directors of Janus designated by Mr. Bailey under certain specified conditions
("board selection rights").
3. Stilwell became a party to the Stock Purchase Agreement and was
assigned the rights and obligations of its parent as a result of an amendment to
the Stock Purchase Agreement dated November 19, 1999 (the"Amendment"). The
Amendment was effective November 19, 1999, although the assignment to Stilwell
will not become effective until the time of the spinoff of Stilwell to the
shareholders of its parent.
4. The Amendment purports to amend and restate the provisions of
Paragraph 11.01 to read as follows:
11.01 The parties hereto have AGREED that the present management of
JCC shall continue to operate the business of JCC, including the
business of JMC prior to the merger of JMC into JCC, of providing
investment advice and management services to Janus Fund, as
hereinafter provided. So long as Thomas H. Bailey is a holder of at
least 5% of the shares of JCC and continues to be employed as
President or Chairman of the Board of JCC and if Thomas H. Bailey does
not serve as President of JCC, James P. Craig, III serves as President
and Chief Executive Officer (or Co-Chief Executive Officer with Thomas
H. Bailey) of JCC, (i) Thomas H. Bailey shall continue to establish
and implement policy with
<PAGE>
respect to the investment advisory and portfolio management activity
of JCC, (ii) without Thomas H. Bailey's consent, Stilwell shall not
cause JCC to implement, or impose on the management of JCC any
policies, conditions or restrictions regarding the policy referred to
in (i) other than those which were in place at November 15, 1983, and
(iii) any changes in management philosophy, style or approach
influencing the management of JCC with respect to the policy referred
to in (i) shall be mutually agreed to by Thomas H. Bailey and by
Stilwell. In furtherance of this objective, so long as Thomas H.
Bailey is a holder of at least 5% of the shares of JCC and continues
to be employed as President or Chairman of the Board of JCC and if
Thomas H. Bailey does not serve as President of JCC, James P. Craig,
III serves as President and Chief Executive Officer (or Co-Chief
Executive Officer with Thomas H. Bailey) of JCC, Stilwell agrees to
vote its JCC Shares to elect directors of JCC, at least a majority of
whom shall be selected by Thomas H. Bailey, subject to Stilwell's
approval, which approval shall not be unreasonably withheld. Each of
the preceding provisions set forth in this paragraph is expressly
conditioned, however, upon such management and Thomas H. Bailey
continuing to perform their respective duties with reasonable care and
in a manner which is consistent with past practice and not contrary to
the best interests of JCC.
ISSUES CONSIDERED
You have asked us to consider the following issues in connection with the
formulation of our opinion as to whether Stilwell controls Janus notwithstanding
the rights Mr. Bailey may have under Paragraph 11.01 of the Amendment.
1. Did Mr. Bailey's board selection rights under Paragraph 11.01 of the
Stock Purchase Agreement expire on April 13, 1994, and, if so, did Mr. Bailey
regain those rights upon execution and delivery of the Amendment by the parties
thereto?
2. Can the officer status of Thomas H. Bailey as the President and
Chairman of Janus be terminated so as to effectively terminate his rights to
select a majority of the directors of Janus?
3. Would termination of the officer status of Mr. Bailey be a breach of
the Stock Purchase Agreement?
4. If the termination of the officer status of Mr. Bailey were a breach
of the Stock Purchase Agreement, would Mr. Bailey have a right, through
injunctive or other equitable relief, to be reinstated as an officer of Janus or
to enforce his board selection rights?
5. If Mr. Bailey's removal as an officer were threatened, would he be
able to obtain temporary injunctive relief to prevent such removal or to enforce
his board selection rights?
In addition, you have asked whether support is found in Colorado case law
for each of the conclusions reached in our opinion and we are including the
citation of the relevant Colorado cases in support of each of our conclusions.
CONCLUSIONS
Based upon the information, and subject to the qualifications and
limitations, set forth herein, having due regard for such legal considerations
as we deem relevant and our review of the documents
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 3
described herein, we are of the opinion that Stilwell controls Janus
notwithstanding any board selection rights Mr. Bailey may have. This opinion is
based, as more fully discussed below, upon
a. the fact that Stilwell has the right to reasonably reject Mr.
Bailey's board selections,
b. the fact that the Amendment clearly specifies that Mr. Bailey has
these board selection rights only so long as he is President or
Chairman of Janus,
c. our opinion that the officer status of Mr. Bailey, and, therefore
his board selection rights, could be terminated by Stilwell, if it
chose to do so, without breaching the Stock Purchase Agreement or
Amendment, and
d. our opinion, that, even if the termination of the officer status
of Mr. Bailey were a breach of the Stock Purchase Agreement, Mr.
Bailey would not have a right to be reinstated as an officer, and
therefore have his board selection rights reinstated, through
injunctive or other equitable relief.
In addition, we believe that a Colorado court would not give Mr. Bailey
temporary injunctive relief to stop his removal as an officer if such removal
were threatened or to enforce his board selection rights conditioned as they are
on his continuation as an officer of Janus and that the amendments prior to
April 13, 1994 to the Stock Purchase Agreement did not extend the 1994
expiration date of the voting provisions under C.R.S. 1973, Section 7-4-117(6).
It is our opinion that the voting provisions of Paragraph 11.01 expired and were
not enforceable after April 13, 1994, until perhaps November 19, 1999, when the
Amendment was effective. We are unable to express an opinion as to whether Mr.
Bailey regained his board selection rights in November 19, 1999, as a result of
the Amendment for the reasons set forth below, but we note that our inability to
express an opinion as to this specific issue does not affect our conclusions as
to the other matters covered by this opinion.
DISCUSSION
Under the general rule Stilwell controls Janus due to its ownership of 81.5% of
- -------------------------------------------------------------------------------
the Janus' Common Stock
- -----------------------
Under Section 7-101-401 of the Colorado Business Corporation Act (the
"Colorado Act"), "control" is defined as "the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of an
entity, whether through ownership of voting shares, by contract, or otherwise."
Section 7-108-101 of the Colorado Act provides that, unless otherwise indicated
in the articles of incorporation, "all corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation managed
under the direction of, the board of directors or such other persons as the
articles of incorporation provide shall have the authority and perform the
duties of a board of directors." Article VII, Section 1 of Janus' articles of
incorporation provides that "the business and affairs of the corporation shall
be managed by a board of directors . . ." Article III, Section 1 of the Janus
bylaws provides that "the property and business of the corporation shall be
controlled and managed by a board of directors, . . ." Based on the foregoing,
Janus is controlled by its Board of Directors. The question then becomes, does
Stilwell control the Board of Directors of Janus?
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 4
The Directors of Janus are to be elected at each annual meeting of
shareholders. See Section 7-108-103 of the Colorado Act; Article VII, Section 1
---
of Janus' articles of incorporation and Article II, Section 1 of Janus' bylaws.
Section 7-102-102 of the Colorado Act provides that cumulative voting in the
election of directors is mandatory unless the corporation provides otherwise in
its articles of incorporation. Article VIII of the Janus articles of
incorporation prohibits cumulative voting in the election of directors. Article
II, Section 11 of the Janus bylaws provides that directors shall be elected by a
plurality of the votes cast by shareholders entitled to vote for directors.
Section 7-107-202 of the Colorado Act and Section 9 of Article II of Janus'
bylaws provide that each outstanding share shall be entitled to one vote upon
each matter submitted to a vote of shareholders. Therefore, absent any other
limitations, Stilwell, as the holder of approximately 81.5% of the voting power
of Janus, would clearly control the election of the Board of Directors of Janus.
The question then becomes whether Stilwell has transferred to Mr. Bailey the
right to control the Board of Directors of Janus, and, therefore, control of
Janus.
Mr. Bailey's board selection rights under the original Stock Purchase Agreement
- -------------------------------------------------------------------------------
expired on April 13, 1994
- -------------------------
The original Stock Purchase Agreement had provisions pursuant to which
Stilwell's parent agreed to vote its shares to elect a majority of directors of
Janus designated by Mr. Bailey under certain specified conditions. and thus
-
under Colorado law at least this portion of the Stock Purchase Agreement
constituted a voting agreement. At the time this agreement was entered into and
until July 1, 1994, Colorado corporate law provided that
An agreement between two or more shareholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights the
shares held by them shall be voted as provided by the agreement, as the
parties may agree, or as determined in accordance with a procedure agreed
upon by them. No such agreement shall be effective for a term of more than
ten years, but at any time within two years prior to the time of expiration
of such agreement, the parties may extend its duration for as many
additional periods, each not to exceed ten years, as they may desire. See
---
C.R.S. 1973, Section 7-4-117(6).
It is our understanding that the voting provisions of the Stock Purchase
Agreement were not extended in accordance with the above referenced provisions
and that no amendment extending the term of these provisions was entered into
during the two year period preceding the expiration of the statutory term as
provided in the statute./1/ Therefore the voting agreement provisions of the
original agreement terminated as a matter of Colorado law on its tenth
anniversary, April 13, 1994. See Grossman v. Sherman, 599 P.2d 909, 911 (Colo.
--- -------------------
1979) (holding that a contract for a term of one year expired when plaintiff
completed his agreed year of employment and no new agreement was reached by the
parties prior to expiration); McDonald's Corp. v. Rocky Mountain McDonald's,
----------------------------------------------
Inc., 590 P.2d 519, 521 (Colo. App. 1979) (finding that
- ----
________________________
/1/ The first four amendments to the Stock Purchase Agreement were dated January
4, 1985; March 18, 1988; January 1, 1991, and February 5, 1992, respectively.
None of these amendments dealt with the voting agreement or purported to extend
its duration.
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 5
where a contract provides for a manner in which termination can be effected,
those provisions must ordinarily be enforced as written).
The status of the Amendment does not affect our opinion that Stilwell controls
- ------------------------------------------------------------------------------
Janus
- -----
As of November 19, 1999, an Assignment and Assumption Agreement and Fifth
Amendment to Stock Purchase Agreement (the "Amendment") was entered into by the
parties including Stilwell which purported to amend and restate the original
voting agreement provision to replace it with the provision quoted above.
We are unable to express an opinion as to whether a Colorado court would
treat this purported amendment and restatement of an expired voting agreement as
a new voting agreement or as a nullity since the provisions that it was
purporting to amend had already expired as a matter of law. Our inability to
express an opinion is due to the fact that a court's inquiry could center upon
facts which we cannot know; in particular, the intent of the parties other than
Stilwell upon entering into the amendment of the voting provisions. We also
cannot predict how a court would deal with each party's respective intent as
impacted by the knowledge and intent of the other party.
If a court were to hold that the voting provisions of the Amendment were
null and void, then Mr. Bailey lost his voting rights by operation of law in
1994, and neither KCSI nor Stilwell have been bound to vote for any of Mr.
Bailey's nominees since April 13, 1994. If this were the outcome, then our
opinion regarding whether Stilwell controls Janus would not be needed as Mr.
Bailey would have no board selection rights and Stilwell would unquestionably
control Janus .
The alternative to finding that the Amendment was null and void as to the
voting agreement provisions is that the Amendment is valid as a new voting
agreement. For purposes of the remainder of this opinion we will assume that the
voting provisions of Paragraph 11.01 as amended and restated by the Amendment
are currently in effect. It is important to note, however, that our opinion that
Stilwell controls Janus would not be changed if the provisions of Paragraph
11.01 of the Amendment were found to be enforceable against Stilwell. In other
words, regardless of what a court might find with respect to the validity of the
Amendment, our opinion is that Stilwell controls Janus.
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 6
Mr. Bailey's board selection rights are significantly qualified and conditioned
- -------------------------------------------------------------------------------
on the continued employment of Mr. Bailey as President or Chairman
- ------------------------------------------------------------------
Under Colorado law, contracts are to be construed in accordance with the
intent of the parties thereto. See USI Properties East, Inc. v. Simpson, 938
----------------------------------------
P.2d 168 (Colo. 1997); Cache Nat'l Bank v. Lusher, 882 P.2d 952 (Colo. 1994).
--------------------------
The language of Paragraph 11.01 of the Stock Purchase Agreement ("Paragraph
11.01") regarding Stilwell's support of Mr. Bailey's director selections clearly
indicates that the parties intended that Mr. Bailey's board selection rights
were for the limited purpose of assuring that he could control policy regarding
-------------------------
investment by Janus of its advisory clients' assets as long as he was President
- -------------------------------------------------------------------------------
or Chairman. If the selection of directors by Mr. Bailey were to further some
- -----------
other objective, or if the conditions of Paragraph 11.01, as set forth above,
were not met, Stilwell would not be obligated under that agreement to consent
to, or vote for, such directors. Therefore, reasonably Stilwell could refuse to
approve director selections who did not agree with Stilwell on matters other
than policy with respect to investment advisory and portfolio management. If
the parties' intent had been to give Mr. Bailey control over other aspects of
Janus, presumably they would not have required Stilwell's approval for his
director selections and would not have needed to state, as they did, that
Stilwell's obligation to support his nominees was to further the objective of
preserving his control over the investment policy of Janus.
In fact, another provision of the Stock Purchase Agreement, contained in
Paragraph 12.01, reflects the parties' intention that Stilwell control the Board
of Directors of Janus (except with respect to investment policy) because, under
that provision Stilwell is obligated to cause Janus to pay dividends. The
declaration and payment of dividends is, of course, a board function.
The language of Paragraph 11.01 clearly conditions Mr. Bailey's board
selection rights on his continuing employment as Chairman or President and his
continuing as a 5% or greater shareholder.
Stilwell has the power to terminate Mr. Bailey's employment as President and
- ----------------------------------------------------------------------------
Chairman and thus terminate his board selection rights
- ------------------------------------------------------
Stilwell could terminate Mr. Bailey's employment as President and Chairman
--------------------------------------------------------------------------
and thus terminate his board selection rights through shareholder action.
Stilwell also retains the power to unilaterally terminate Mr. Bailey's board
selection rights under the Stock Purchase Agreement by terminating Mr. Bailey's
status as an officer of Janus. Under the Stock Purchase Agreement, if Mr. Bailey
were no longer President or Chairman, his board selection rights would end. (If
he were to cease only to be President and Mr. Craig were President, those rights
would continue, unless Mr. Bailey also were to cease to be Chairman.) The Janus
Bylaws contain no reference to a Chairman, but authorize the Board of Directors
to designate officers in addition to a president. On December 14, 1999, Mr.
Bailey was elected by the Board to the offices of President, Chairman and Chief
Executive Officer as part of a slate of officers of Janus. Under the
circumstances, we believe his position as Chairman is that of an officer. To
remove Mr. Bailey, Stilwell could request the Board of Directors of Janus to
take that action or Stilwell could take direct action to remove him. Stilwell
has the power to amend the bylaws of Janus to allow removal of Mr. Bailey, or
any other Janus officer, by shareholder action without Board action. Section 7-
108-303(4) of the Colorado Act provides "The bylaws or the board of directors
may make provisions for the removal of officers by other officers or by the
shareholders." While the bylaws of Janus do not currently provide for a removal
of officers by shareholders, the bylaws could be amended by shareholder action
to include such a provision.
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 7
Section 7-110-201(2) of the Colorado Act provides "The shareholders may amend
the bylaws even though the bylaws may also be amended by the board of
directors." Such action could be taken at a meeting or by unanimous written
consent of shareholders. See Section 7-107-104 of the Colorado Act. Section 7-
---
107-102 of the Colorado Act requires a corporation to hold a special meeting of
shareholders if it receives written demand for the meeting, stating the
purpose(s) for which it is to be held from holders of shares representing at
least 10% of all the votes entitled to be cast on any issue proposed to be
considered at the meeting. The Board of Directors may fix a record date for such
a meeting not more than 70 days preceding the date of the meeting and if it does
not, the record date is to be the twentieth day preceding the meeting. See
Section 7-107-107 and Article II, Section 4 of the Janus bylaws. Section 7-107-
105 of the Colorado Act and Article II, Section 3 of the Janus bylaws require
notice of the special meeting to be given to shareholders no fewer than 10 nor
more than 60 days' before the date of the meeting. If a corporation does not
give notice of the special meeting within 30 days after the date the last of the
demands necessary to require the calling of the meeting was received by the
corporation, on application of any person who participated in a demand for a
special meeting, the holding of the meeting may be summarily ordered by the
district court of the county in Colorado where the corporation's principal
office is located. See Section 7-107-103 of the Colorado Act.
---
Of importance, the power of shareholders to remove officers has existed
under Colorado law at all times since the Amendment was entered into. See
---
Section 7-108-303(4) of the Colorado Act. If a Colorado court were to find
that the Amendment constituted a new agreement, rather than a nullity, a court
would presume that the parties were aware of the power of shareholders to remove
officers. See Keelan v. Van Waters & Rogers, Inc., 820 P.2d 1145, 1148 (Colo.
--- -----------------------------------
App. 1991)(statutory law which pertains to the terms of a contract is considered
part of that contract). Therefore, the parties would have taken action to modify
or waive this right if it had been the intent of the parties to insure that Mr.
Bailey could not be removed as an officer by shareholder action. See Ziegler
-----------
v. Hendrickson, 528 P.2d 400, 403 (Colo. App. 1974)(waiver of contract
- --------------
terms occurs when party is entitled to assert particular right, knows the right
exists, and intentionally relinquishes such right).
More important, even assuming the original agreement remained in effect, we
believe that Stilwell would be able to avail itself of the shareholder removal
provisions. When the Colorado Corporate Act was enacted effective July 1, 1994,
Section 7-117-101 was included to set forth the applicability of the Act to
existing corporations. Section 7-117-101(2) states that Articles 101 to 117 of
the Act applied to all existing corporations. While Section 7-117-101 does
contain exceptions to certain provisions of the Act for corporations existing
prior to July 1, 1994, no exception was included as to the provisions of Section
7-108-303(4). Therefore, the general rule of Section 7-117-101(2) applies and
Section 7-108-303(4) applies to corporations existing prior to July 1, 1994.
Therefore, we do not believe there is a basis upon which a Colorado court could
find that the shareholder removal provisions were not available to Stilwell.
Stilwell could terminate Mr. Bailey's employment as President and Chairman
--------------------------------------------------------------------------
and thus terminate his board selection rights through Board action. The power to
- ------------------------------------------------------------------
remove directors is further evidence of control of the Board and provides
Stilwell an alternative means to terminate Mr. Bailey's employment as President
and Chairman and thus to terminate his board selection rights. Under Colorado
law, shareholders have the right to remove any or all of the directors of a
Colorado corporation with or without cause at any time, unless the articles of
incorporation provide otherwise. See Section 7-108-108. Janus' articles do not
---
prohibit removal of directors by shareholders. Upon any removal of Janus
directors by Stilwell, the remaining directors
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 8
would have the power to terminate Mr. Bailey's employment and this would
terminate his board selection rights under the Stock Purchase Agreement. The
Board would have to take any such action by unanimous consent or at a meeting
held in compliance with Colorado law, including satisfying quorum requirements.
Section 7-108-205 of the Colorado Act provides that, unless a greater number is
required by the bylaws, a quorum of a board of directors consists of (1) a
majority of the number of directors fixed if the corporation has a fixed board
size, or (2) a majority of the number of directors fixed (or, if no number is
fixed, of the number in office immediately before the meeting begins) if a range
for the size of the board is established pursuant to Section 7-108-103(2).
Section 7-108-103(2) provides that the bylaws may establish a range for the size
of the board of directors by fixing a minimum and maximum number of directors.
Janus has a fixed number of directors (6) under Article III, Section 1 of its
bylaws. Article III, Section 6 of Janus' bylaws provides that a majority of the
full board of directors shall constitute a quorum. However, if after any removal
by Stilwell there were not enough directors remaining to meet these quorum
requirements, Stilwell has the unilateral right to amend Janus' bylaws so that a
smaller number of directors, or even one director, would meet the quorum
requirements and could exercise the full powers of the Board of Directors. See
---
Section 7-110-201 of the Colorado Act. Accordingly, Stilwell could effect the
termination of Mr. Bailey's employment and thus effect the termination of his
board selection rights through Board action as well as shareholder action.
Neither the Stock Purchase Agreement nor the Amendment contain provisions
- -------------------------------------------------------------------------
assuring Mr. Bailey employment or a position as an officer, therefore, he could
- -------------------------------------------------------------------------------
be removed as an officer without breaching either agreement
- -----------------------------------------------------------
It is our understanding that Mr. Bailey has no employment agreement.
Further, nothing in the Stock Purchase Agreement or Amendment assures him of
continued employment. The language of Paragraph 11.01 in fact implies that Mr.
Bailey's employment could be terminated because it says it continues his rights
only so long as he "... continues to be employed ..."
------------------------
Removal of Mr. Bailey by Stilwell would not be inconsistent with Stilwell's
obligation to vote for his nominees to the Janus Board (selected with Stilwell's
consent), because it is clear from the language of the Stock Purchase Agreement
that the purpose for this obligation was to assure Mr. Bailey that, as long as
he continued to be affiliated with Janus as an officer, Stilwell would support
his director nominees (to the extent noted above). This support was assured in
the Stock Purchase Agreement so Mr. Bailey would not be forced by Stilwell to
change his policies regarding management of the assets of Janus' investment
advisory clients. If Mr. Bailey were to cease to be so affiliated, the need for
such protection would end and Stilwell no longer would have any limitation under
the Stock Purchase Agreement on its ability to elect or remove directors of
Janus. Therefore, in our opinion, the removal of Mr. Bailey as President and
Chairman of Janus would terminate his director selection rights, and would not
breach the Stock Purchase Agreement. If Mr. Bailey were to challenge his removal
by instituting litigation, based solely upon the facts set forth herein and our
review of the documents described herein, we believe that Stilwell would prevail
in that litigation.
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 9
Even if Mr. Bailey's removal were a breach of the Stock Purchase Agreement or
- -----------------------------------------------------------------------------
the Amendment, he would not be entitled to reinstatement through equitable
- --------------------------------------------------------------------------
relief
- ------
It is also our opinion that even if the removal of Mr. Bailey were found by
a Colorado court to be a breach of the Stock Purchase Agreement, we believe
that, as a matter of Colorado corporate law, Mr. Bailey would not be entitled to
reinstatement through injunctive or other equitable relief. The power of removal
of officers granted to directors and shareholders by statute is absolute. See
---
Section 7-108-303(4) of the Colorado Act. Officers of a corporation, as a matter
of corporate law, serve at the pleasure of the directors and shareholders. While
there are no cases in Colorado dealing with the shareholders' power to remove
officers, the statute is unambiguous. Moreover, guidance as to this matter is
contained in the Official Comments to the Model Business Corporation Act
Annotated relating to Section 8.43 regarding removal of officers and Section
8.44 regarding contract rights of officers, (Colorado courts have looked to the
Model Business Corporation Act when Colorado law was lacking. See Bowers
------
Building Company v. Altura Glass Co., 694 P.2d 876 (Colo. 1984)). The Official
- ------------------------------------
Comment to Section 8.43 reads in pertinent part:
In part because of the unlimited power of removal, . . ., a board of
------------------------------
directors may grant an officer an employment contract that extends beyond
the term of the board of directors. This type of contract is binding on the
corporation even if the articles of incorporation or bylaws provide that
officers are appointed for terms shorter than the period of the employment
contract. If the later board refuses to reappoint that person as an
officer, he has the right to sue for damages but not for specific
--------------------------------------------------------
performance of his employment contract. (Emphasis added.)
--------------------------------------
While the comment to the Model Act refers to Board removal, there is no
reason why shareholder removal would be treated differently. Presumably the
reason the comment refers to only board removal is that there is no provision
for shareholder removal under the Model Act. The reasons behind the comment are
no different for shareholder removal than for board removal. The point is that
under corporate law, the rights of the Board and shareholders are superior to
the rights of officers who serve at the pleasure of the Board and shareholders.
Mr. Bailey has been given certain rights to select directors of Janus only
so long as he is employed as Chairman or President. As noted above, he has no
contract with respect to such employment. To reinstate him as Chairman or
President or to reinstate his Paragraph 11.01 rights following his removal, the
Colorado courts would have to violate their rule as set forth by the Colorado
Supreme Court in Bellow v. Fico Insurance Company, 878 P.2d 672 (1994). In that
--------------------------------
case, the court held
"Specific performance can only be accomplished according to the terms
of the party's contract. The court may not make a contract for the party
and then order it to be specifically performed."
Thus, even if Colorado corporate law did not provide, as we believe it
does, that a removed officer has no right to reinstatement through injunctive
relief or other equitable remedy, we believe that reinstatement would not be an
available remedy to Mr. Bailey under Colorado contract law.
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 10
We do not believe that Mr. Bailey could obtain a temporary injunction to stop
- -----------------------------------------------------------------------------
his removal if it were threatened
- ---------------------------------
In addition, we do not believe that a temporary injunction would be an
available remedy for Mr. Bailey to stop his removal as Chairman and President if
such removal were threatened. The granting of a preliminary injunction is an
extraordinary remedy, and is considered the exception rather than the rule. See
---
Sportsmen's Wildlife Defense Fund v. Western Slope Environmental Resource
- -------------------------------------------------------------------------
Council, 949 F. Supp. 1510, 1522 (D. Colo. 1996). Therefore, the right to
- -------
relief must be clear and unequivocal. Id. A party seeking injunctive relief
--
must establish each of the following four factors: (1) a substantial
likelihood of success on the merits; (2) that the movant will suffer irreparable
injury unless the injunction issues; (3) that the threatened injury to the
movant substantially outweighs whatever damages the proposed injunction may
cause the opposing party; and (4) that the injunction would not be adverse to
the public interest. See Libertarian Party of Colorado v. Buckley, 938 F. Supp.
--- ----------------------------------------
687, 690 (D. Colo. 1996). We believe it is very unlikely that Mr. Bailey will
be able to establish all four of these factors. First, as discussed herein we
are of the opinion that Mr. Bailey would not succeed on the merits. Therefore,
we do not believe he could satisfy factor 1 which requires that he be able to
establish a "substantial" likelihood that he would succeed on the merits.
Second, the courts have also found that the removal of management of a
corporation did not constitute irreparable harm to the members so removed
because they could later be reinstated if they succeeded on the merits. See
---
Crown Resource Corp. v. Gold Capital Corp., 650 F. Supp. 985, 988 (D. Colo.
- ------------------------------------------
1987)(denying motion for preliminary injunction brought by incumbent management
of corporation to hold election results in abeyance because incumbent management
could not demonstrate element of irreparable harm). Therefore, Mr. Bailey would
have great difficulty satisfying factor 2.
We do not believe that Mr. Bailey could obtain any equitable relief to enforce
- ------------------------------------------------------------------------------
his board selection rights if he was removed as an officer
- ----------------------------------------------------------
For the reason discussed throughout this opinion; i.e., that those rights
are contingent upon several conditions including his continued employment as
President or Chairman of Janus, we do not believe that a Colorado court would
issue any sort of equitable relief to enforce Mr. Bailey's board selection
rights if he was removed as Chairman and President. To do so would be to rewrite
the Amendment to take away the conditions precedent to Mr. Bailey's having the
board selection rights, and, as noted above, Colorado courts will not rewrite
and then enforce a contract. Accordingly, while Colorado law does allow for the
specific enforcement of voting agreements/2/, a voting agreement would be
enforced only as written, and the voting agreement no longer exists if Mr.
Bailey is not employed as President or Chairman of Janus. It is our opinion that
a Colorado court would not enforce those voting rights once the conditions
precedent to those rights were no longer satisfied.
___________________________________
/2/ See Colo. Rev. Stat. Section 7-107-302.
---
<PAGE>
Stilwell Financial, Inc.
May 25, 2000
Page 11
Finally, with respect to Janus' obtaining a temporary injunction, given
that Janus is not a party to the Stock Purchase Agreement nor to the Amendment,
Janus has no right under the Amendment to have Mr. Bailey serve as an officer.
QUALIFICATIONS AND LIMITATIONS
Our opinions as herein expressed are subject to the following
qualifications and limitations:
<PAGE>
(a) We express no opinion as to the laws of any jurisdiction other than
Colorado;
(b) Our opinion is limited to the specific issues expressly set forth
herein and no other opinion may be inferred or implied beyond the
matters expressly stated in this letter;
(c) Our opinion is rendered on the date hereof and we have no continuing
obligation hereunder to inform you of changes of law or fact
subsequent to the date hereof or facts of which we have become aware
after the date hereof; and
This opinion is solely for your benefit for the purpose of a determination
by you and your accountants as to the appropriateness of filing consolidated
financial statements for KCSI, Stilwell and Janus and may not be furnished to,
or relied upon by, any other person or entity without the express written
consent of the undersigned, except that we hereby consent to your furnishing a
copy of this opinion to your accountants, PricewaterhouseCoopers, and to their
reliance hereon and to the filing of our opinion with the Securities and
Exchange Commission as an exhibit to the 1999 Form 10-K of Kansas City Southern
Industries, Inc. and the Form 10 Registration Statement of Stilwell.
Very truly yours,
ROTHGERBER JOHNSON & LYONS LLP
/s/ Rothgerber Johnson & Lyons LLP
