UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
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.)
114 WEST 11TH STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices)
816-983-1237
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
---------------------- ------------------------------
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
<PAGE>
EXPLANATORY NOTE
This Amendment No. 3 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.)
<PAGE>
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
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).
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.
/s/ Landon H. Rowland
January 14, 2000 By: ------------------------------------
Name: Landon H. Rowland
Title: Chairman of the Board, President
and Chief Executive Officer
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
amended (Commission file no. 33-96526), is hereby incorporated by
reference as Exhibit 10.5.1. This Agreement has been assigned
pursuant to an Assignment, Consent and Acceptance Agreement,
dated August 10, 1999.
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. This Amendment
has been assigned pursuant to an Assignment, Consent and
Acceptance Agreement, dated August 10, 1999.
10.6.1 * 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 * 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 * 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 * 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
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.
21 * List of Stilwell Financial, Inc. Subsidiaries is attached as
Exhibit 21.
27 * Financial Data Schedule is attached as Exhibit 27.
99.1 Stilwell Financial, Inc. Information Statement, as amended, dated
January 19, 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, 1996,
1997 and 1998, which are included in the DST Systems, Inc. Annual
Report on Form 10-K for the year ended December 31, 1998
(Commission File No. 1-14036) are incorporated by reference in
this Information Statement.
* Previously filed.
@ To be filed by amendment
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
STILWELL FINANCIAL, INC.
The undersigned, Stilwell Financial, Inc., a Delaware corporation (the
"Corporation"), for the purpose of amending and restating the Certificate of
Incorporation of the Corporation originally filed January 23, 1998, in
accordance with the General Corporation Law of Delaware ("Delaware
Corporation Law"), does hereby make and execute this Amended and Restated
Certificate of Incorporation and does hereby certify that it was duly adopted
in accordance with Sections 242 and 245 of the Delaware Corporation Law.
FIRST. The name of the Corporation is Stilwell Financial Inc.
SECOND. The address of its registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is
The Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the Delaware Corporation Law.
FOURTH. The total number of shares of stock which the Corporation has
authority to issue is 1,010,000,000 shares, divided into classes and with par
values as follows:
Number of Shares Par Value
Class in Class Per Share
----- ---------------- ---------
Common Stock 1,000,000,000 $ .01
Preferred Stock 10,000,000 $1.00
A. The powers, preferences and rights, and the qualifications,
limitations and restrictions thereof, of the shares of Common Stock are as
follows:
1. VOTING RIGHTS. At all elections of directors of the
Corporation and for the purposes of all other matters upon which stockholders
are entitled to vote, the holders of the Common Stock shall be entitled to
vote on the basis of one vote for each share held.
B. The Board of Directors is hereby authorized, subject to any
limitations prescribed by law, to provide for the issuance from time to time
of shares of Preferred Stock in one or more series, and by filing a
certificate pursuant to the Delaware Corporation Law (a "Certificate of
Designation"), to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, including without
limitation the dividend rights, dividend rate, conversion rights, voting
rights and the liquidation preferences of any wholly unissued series of
Preferred Stock, and to establish from time to time the number of shares
constituting any such series and the designation thereof, or any of them.
The number of shares of any series subsequent to the issuance of shares of
that series may be increased or decreased (but not below the number of shares
of such series then outstanding) pursuant to a resolution adopted by a
majority of the entire Board of Directors (the "Whole Board"), without the
vote of the holders of the Common Stock or the holders of the Preferred
Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Certificate of Designation. In case
the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
FIFTH. The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by a
Board of Directors consisting of not less than three (3) nor more than
eighteen (18) persons. The exact number of directors within the minimum and
maximum limitations specified in the preceding sentence shall be fixed
exclusively from time to time by the Board of Directors pursuant to a
resolution adopted by a majority of the Whole Board. The directors, other
than those who may be elected by the holders of any class or series of
Preferred Stock, shall be divided into three classes as nearly equal in
number as possible, with the term of office of the first class to expire at
the conclusion of the 2000 annual meeting of stockholders, the term of office
of the second class to expire at the conclusion of the 2001 annual meeting of
stockholders and the term of office of the third class to expire at the
conclusion of the 2002 annual meeting of stockholders. At each annual meeting
of stockholders, successors to directors of the class whose terms then expire
shall be elected to hold office for a term expiring at the third succeeding
annual meeting of stockholders. Each director shall hold office until his or
her successor shall have been duly elected and qualified. If the number of
directors is changed, any increase or decrease shall be so apportioned among
the classes as to make all classes as nearly equal in number as possible.
B. Subject to the rights of any holder of any class or series of
Preferred Stock then outstanding, any vacancy on the Board of Directors
(whether because of death, resignation, retirement, removal, an increase in
the number of directors, or any other cause) shall be filled exclusively by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and any director so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term of
office of the class to which he or she has been elected expires, and until
his or her successor is duly elected and shall qualify, or until his or her
earlier resignation or removal. No decrease in the number of directors shall
shorten the term of any incumbent director.
C. Subject to the rights of holders of any class or series of Preferred
Stock then outstanding, any director, or the Whole Board, may be removed from
office by the stockholders only for cause and such removal shall require the
affirmative vote of the majority of the then-outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election
of directors (the "Voting Stock"); PROVIDED, HOWEVER, that on and after the
Trigger Date (as hereinafter defined in this Article FIFTH, Section D.2), a
director may be removed from office for cause only by the affirmative vote of
the holders of at least seventy percent (70%) of the Voting Stock.
D. For purposes of this Article FIFTH, and Articles SIXTH, SEVENTH,
ELEVENTH and TWELFTH hereof:
1. "KCSI" shall mean Kansas City Southern Industries, Inc., a
Delaware corporation.
2. "Trigger Date" shall mean the first date on which any Person
becomes an Interested Stockholder (as hereinafter defined in this Article
FIFTH, Section D.4).
3. A "Person" shall include an individual, a group acting in
concert, a corporation, a partnership, a limited liability company, a limited
liability partnership, an association, a joint venture, a pool, a joint stock
company, a trust, an unincorporated organization or similar company, any
other entity, or syndicate or any group formed for the purpose of acquiring,
holding or disposing of securities.
4. "Interested Stockholder" shall mean any Person (other than the
Corporation, any Holding Company (as hereinafter defined in this Article
FIFTH, Section D.9) or Subsidiary (as hereinafter defined in this Article
FIFTH, Section D.8) thereof or KCSI (as defined in this Article FIFTH,
Section D.1), but KCSI shall be so excluded only until the distribution by
KCSI of the shares of Common Stock of the Corporation held by KCSI to KCSI's
holders of record of common stock) who or which:
(a) is the Beneficial Owner (as hereinafter defined in this
Article FIFTH, Section D.5), directly or indirectly, of more than twenty
percent (20%) of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate (as hereinafter defined in this Article
FIFTH Section D.7) of the Corporation and at any time within the two-
year period immediately prior to the date in question was the Beneficial
Owner, directly or indirectly, of twenty (20%) or more of the voting
power of the then-outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
A Person shall not be deemed an Interested Stockholder if such
Person would become an Interested Stockholder solely as a result of a
reduction of the number of shares of Common Stock of the Corporation
outstanding, including repurchases of outstanding shares of Common Stock of
the Corporation by the Corporation, which reduction increases the percentage
of outstanding shares of Common Stock of the Corporation of which such Person
is the Beneficial Owner, until such Person shall thereafter become the
Beneficial Owner of any additional shares of Common Stock.
5. A Person shall be a "Beneficial Owner" of any Voting Stock:
(a) which such Person or any of its Affiliates or Associates
(as hereinafter defined in this Article FIFTH, Section D.7) beneficially
owns, directly or indirectly within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as in effect on July 15, 1999; or
(b) which such Person or any of its Affiliates or Associates
has (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (ii) the right to vote pursuant to any agreement, arrangement or
understanding (but neither such Person nor any such Affiliate or
Associate shall be deemed to be the beneficial owner of any shares of
Voting Stock solely by reason of a revocable proxy granted for a
particular meeting of stockholders, pursuant to a public solicitation of
proxies for such meeting, and with respect to which shares neither such
Person nor any such Affiliate or Associate is otherwise deemed the
Beneficial Owner); or
(c) which is beneficially owned, directly or indirectly
within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934, as in effect on July 15, 1999, by any other Person with which such
Person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purposes of acquiring, holding,
voting (other than solely by reason of a revocable proxy as described in
Subparagraph (b) of this Paragraph 5) or in disposing of any shares of
Voting Stock; PROVIDED, HOWEVER, that (1) no director or officer of the
Corporation (or any Affiliate of any such director or officer) shall,
solely by reason of any or all of such directors or officers acting in
their capacities as such, be deemed, for any purposes hereof, to own
beneficially any Common Stock beneficially owned by any other such
director or officer (or any Affiliate thereof), and (2) neither any
employee stock ownership, retirement or similar plan of the Corporation
or any Subsidiary of the Corporation nor any trustee with respect
thereto (or any Affiliate of such trustee) shall, solely by reason of
such capacity of such trustee, be deemed, for any purposes hereof, to
own beneficially any Common Stock held under any such plan.
6. For purposes of computing the percentage of beneficial
ownership of Common Stock of a Person, the outstanding Common Stock shall
include shares deemed owned by such Person through application of Paragraph 5
of Section D of this Article FIFTH but shall not include any other Common
Stock which may be issuable by the Corporation pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise. For
all other purposes, the outstanding Common Stock shall include only Common
Stock then outstanding and shall not include any Common Stock which may be
issuable by the Corporation pursuant to any agreement, or upon the exercise
of conversion rights, warrants or options, or otherwise.
7. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on July 15, 1999.
8. "Subsidiary" means any corporation or other entity of which a
majority of any class of Equity Security (as that term is defined in Section
3(a)(11) of the Securities Exchange Act of 1934, as in effect on July 15,
1999) is owned, directly or indirectly, by the Corporation; PROVIDED,
HOWEVER, that for the purposes of the definition of Interested Stockholder
set forth in Paragraph 4 of Section D of this Article FIFTH, the term
"Subsidiary" shall mean only a corporation or other entity of which a
majority of each class of Equity Security is owned, directly or indirectly,
by the Corporation.
9. "Holding Company" shall mean any Person that directly or
indirectly owns eighty percent (80%) or more of the Corporation's Voting
Stock.
E. Special meetings of stockholders of the Corporation may be called
only by the Chief Executive Officer of the Corporation and shall be called by
the Chief Executive Officer at the request in writing by the Board of
Directors pursuant to a resolution approved by a majority of the Whole Board,
upon not less than ten (10) nor more than sixty (60) days' written notice.
Such notice shall state the purpose or purposes of the proposed meeting and
the business transacted at any special meeting shall be limited to the
purpose or purposes stated in the notice.
F. Stockholder nominations for the election of directors and business
to be brought by stockholders of the Corporation shall be given or brought,
as the case may be, only in the manner provided in the Bylaws of the
Corporation.
SIXTH. The Board of Directors, pursuant to a resolution approved by a
majority of the Whole Board, may adopt, amend or repeal the Bylaws of the
Corporation. The stockholders shall also have the power to adopt, amend or
repeal the Bylaws of the Corporation; PROVIDED, HOWEVER, that on and after
the Trigger Date, the affirmative vote of the holders of at least seventy
percent (70%) of the Voting Stock shall be required to adopt, amend or
repeal, by stockholder action, any provisions of the Bylaws of the
Corporation.
SEVENTH.
A. Except as otherwise expressly provided in this Section, the
affirmative vote of the holders of at least seventy percent (70%) of the
Voting Stock, voting together as a single class, shall be required to
approve:
1. any merger or consolidation of the Corporation or any
Subsidiary with (i) any Interested Stockholder or (ii) any other corporation
or other entity (whether or not itself an Interested Stockholder) which is,
or after such merger or consolidation would be, an Affiliate of an Interested
Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder, or any Affiliate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value (as hereinafter defined in this Article SEVENTH, Section C.2)
equaling or exceeding twenty-five percent (25%) of the Fair Market Value of
the combined assets immediately prior to such transfer of the Corporation and
its Subsidiaries; or
3. the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) to any Interested
Stockholder or any Affiliate of any Interested Stockholder in exchange for
cash, securities or other property (or a combination thereof), of any
securities of the Corporation or any Subsidiary having an aggregate Fair
Market Value equaling or exceeding twenty-five percent (25%) of the Fair
Market Value of the combined assets immediately prior to such transfer of the
Corporation and its Subsidiaries except pursuant to an employee benefit plan
of the Corporation or any Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or any Affiliate of any Interested Stockholder; or
5. any reclassification of securities (including any reverse stock
split), recapitalization of the Corporation, merger or consolidation of the
Corporation with any of its Subsidiaries or other transaction (whether or not
with or into or otherwise involving an Interested Stockholder), which has the
effect, directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by any
Interested Stockholder or any Affiliate of any Interested Stockholder (a
"Disproportionate Transaction"); PROVIDED, HOWEVER, that no such transaction
shall be deemed a Disproportionate Transaction if the increase in the
proportionate ownership of the Interested Stockholder or Affiliate as a
result of such transaction is no greater than the increase experienced by the
other stockholders generally.
The term "Business Combination" as used in this Article SEVENTH shall
mean any transaction which is referred to in any one or more of paragraphs 1
through 5 of Section A of this Article SEVENTH.
B. The provisions of Section A of this Article SEVENTH requiring the
affirmative vote of the holders of at least seventy percent (70%) of the
Voting Stock, voting together as a single class, shall not be applicable to
any particular Business Combination, and such Business Combination shall
require only such vote as is required by law or by this Amended and Restated
Certificate of Incorporation (other than Article SEVENTH Section A),
whichever is greater, if the Business Combination shall have been approved by
a majority of the Disinterested Directors (as hereinafter defined in this
Article SEVENTH, Section C.1).
C. For the purposes of this Article SEVENTH:
1. "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested Stockholder and who was a
member of the Board of Directors prior to the time that the Interested
Stockholder became an Interested Stockholder, and any director who is
thereafter chosen to fill any vacancy on the Board of Directors or who is
elected and who, in either event, is unaffiliated with the Interested
Stockholder, and in connection with his or her initial assumption of office
is recommended for appointment or election by a majority of Disinterested
Directors then on the Board of Directors.
2. "Fair Market Value" means: (a) in the case of stock, the
highest closing sale price of the stock during the 30-day period immediately
preceding the date in question of a share of such stock admitted to trading
on a principal United States securities exchange registered under the
Securities Exchange Act of 1934, or if such stock is admitted to trading on
the National Association of Securities Dealers Automated Quotations
("NASDAQ") System or any system then in use, the Fair Market Value shall be
the highest closing sale price reported during the 30-day period preceding
the date in question, or, if no such quotations are available, the Fair
Market Value on the date in question of a share of such stock as determined
by the Board of Directors in good faith, in each case with respect to any
class of stock, appropriately adjusted for any dividend or distribution in
shares of such stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such stock, and (b)
in the case of property other than cash or stock, the Fair Market Value of
such property on the date in question as determined by the Board of Directors
in good faith.
D. A majority of the Disinterested Directors of the Corporation shall
have the power and duty to determine for the purposes of this Article
SEVENTH, on the basis of information known to them after reasonable inquiry,
(a) whether a Person is an Interested Stockholder; (b) the number of shares
of Voting Stock of which any Person is the Beneficial Owner; (c) whether a
Person is an Affiliate or Associate of another; and (d) whether the assets
which are the subject of any Business Combination have, or the consideration
to be received for the issuance or transfer of securities by the Corporation
or any Subsidiary in any Business Combination has an aggregate Fair Market
Value equaling or exceeding twenty-five percent (25%) of the Fair Market
Value of the combined assets immediately prior to such transfer of the
Corporation and its Subsidiaries. A majority of the Disinterested Directors
shall have the further power to interpret all of the terms and provisions of
this Article SEVENTH.
E. Nothing contained in this Article SEVENTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
EIGHTH. The Board of Directors of the Corporation, when evaluating any
offer of another Person (as defined in Article FIFTH, Section D.3 hereof) to
(A) make a tender or exchange offer for any Equity Security (as that term is
defined in Section 3(a)(11) of the Securities Exchange Act of 1934, as in
effect on July 15, 1999) of the Corporation, (B) merge or consolidate the
Corporation with another corporation or other entity or (C) purchase or
otherwise acquire all or substantially all of the properties and assets of
the Corporation, may in consideration with the exercise of its judgment in
determining what is in the best interests of the Corporation and its
stockholders, give due consideration to all relevant factors, including
without limitation: (i) the social and economic effect of acceptance of such
offer on the Corporation's present and future customers and employees and
those of its Subsidiaries (as defined in Article FIFTH, Section D.8 hereof),
including the impact on investment companies advised or managed by any of the
Corporation's Subsidiaries, (ii) the social and economic effect on the
communities in which the Corporation and its Subsidiaries operate or are
located, (iii) the ability of the Corporation to fulfill its corporate
objectives and (iv) the consideration being offered in relation to the then
current market price for the Corporation's outstanding shares of capital
stock, in relation to the then current value of the Corporation in a freely
negotiated transaction and in relation to the Board of Directors' estimate of
the future value of the Corporation (including the unrealized value of its
properties and assets) as an independent going concern.
NINTH.
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "Proceeding"), by reason
of the fact that he or she is or was a director, officer, employee, agent,
trustee, committee member or representative of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee,
agent, trustee, committee member or representative of another corporation or
other entity, including, without limitation, any Subsidiary (as defined in
Article FIFTH, Section D.8 hereof), partnership, joint venture, limited
liability company, limited liability partnership, unincorporated organization
or similar company, trust or other enterprise, including service with respect
to any employee benefit plan (such person an "Indemnitee"), whether the basis
of such Proceeding is alleged action in an official capacity or in any other
capacity while serving as a director, officer, employee, agent, trustee,
committee member or representative, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by reason of such Indemnitee acting in any such capacity; PROVIDED,
HOWEVER, that with respect to Proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a Proceeding (or part thereof) initiated by such Indemnitee
only if such Proceeding (or part thereof) is conducted as provided in Section
C of this Article NINTH or if such Proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
NINTH shall include the right to have the Corporation pay the expenses
incurred in defending any such Proceeding in advance of its final disposition
(an "Advancement of Expenses"); PROVIDED, HOWEVER, that, if the Delaware
Corporation Law so requires, an Advancement of Expenses incurred by an
Indemnitee shall be made only upon delivery to the Corporation of an
undertaking (an "Undertaking"), by or on behalf of such Indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (a "Final
Adjudication"), that such Indemnitee is not entitled to be indemnified for
such expenses under this Section or otherwise. The rights to indemnification
and to the Advancement of Expenses conferred in Sections A and B of this
Article NINTH shall be contract rights and such rights shall continue as to
an Indemnitee who has ceased to be a director, officer, employee, agent,
trustee, committee member or representative and shall inure to the benefit of
the Indemnitee's heirs, executors and administrators.
C. If a claim under Section A this Article NINTH is not paid in full by
the Corporation within sixty (60) days after a written claim has been
received by the Corporation, or a claim under Section B of this Article NINTH
for an Advancement of Expenses is not paid in full by the Corporation within
twenty (20) days after a written claim has been received by the Corporation,
the Indemnitee may at any time thereafter bring suit against the Corporation
to recover the unpaid amount of the claim. If successful in whole or in part
in any such suit, or in a suit brought by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the
Indemnitee shall also be entitled to be paid the expense of prosecuting or
defending such suit, including any reasonable attorneys' fees. In any suit
by the Corporation to recover an Advancement of Expenses pursuant to the
terms of an Undertaking, the Corporation shall be entitled to recover such
expenses upon a Final Adjudication that the Indemnitee has not met any
applicable standard for indemnification set forth in the Delaware Corporation
Law as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment). Neither the failure of
the Corporation (including its Board of Directors, independent legal counsel
or its stockholders) to have made a determination prior to the commencement
of such suit that indemnification of the Indemnitee is proper in the
circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the Indemnitee has not
met such applicable standard of conduct, shall create a presumption that the
Indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the Indemnitee, be a defense to such suit. In any
suit brought by the Indemnitee to enforce a right to indemnification or to an
Advancement of Expenses hereunder, or by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the burden
of proving that the Indemnitee is not entitled to be indemnified, or to such
Advancement of Expenses, under this Article or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the Advancement of Expenses
conferred in this Article NINTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Amended and Restated Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or Disinterested Directors (as defined in
Article SEVENTH, Section C.1 hereof) or otherwise.
E. The Corporation may maintain insurance, at its own expense, to
protect itself and any director, officer, employee, agent, trustee, committee
member or representative of the Corporation or another corporation,
partnership, joint venture, limited liability company, limited liability
partnership, unincorporated organization or similar company, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under this Amended and Restated Certificate of
Incorporation or the Delaware Corporation Law.
TENTH. A director shall not be personally liable to the Corporation 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 the Corporation 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 Delaware Corporation Law or
(iv) for any transaction for which the director derived an improper personal
benefit. If the Delaware Corporation Law is hereafter amended after July 15,
1999 to eliminate or limit further the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited
to the furthest extent permitted by the Delaware Corporation Law, as so
amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
ELEVENTH. Pursuant to Section 228 of the Delaware Corporation Law, any
action required or permitted to be taken by the stockholders of the
Corporation may be effected only at a duly called annual or special meeting
of such stockholders and may not be effected by a consent in writing by such
stockholders in lieu of a meeting. At any annual meeting or special meeting
of stockholders of the Corporation, only such business shall be conducted as
shall have been brought before such meeting in the manner provided in this
Amended and Restated Certificate of Incorporation and the Bylaws of the
Corporation.
TWELFTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed by the Delaware
Corporation Law and all rights conferred on the stockholders are granted
subject to this reservation; PROVIDED, HOWEVER, that:
A. Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation or any other provision of law which might permit
a lesser or no vote, but in addition to any vote of the holders of any class
or series of stock of the Corporation required by law or by this Amended and
Restated Certificate of Incorporation, the affirmative vote of the holders of
at least seventy percent (70%) of the Voting Stock, voting together as a
single class, shall be required to amend, alter, change or repeal Article
FIFTH, Article ELEVENTH and this Article TWELFTH; and FURTHER PROVIDED,
HOWEVER, that
B. On and after the Trigger Date, notwithstanding any other provision
of this Amended and Restated Certificate of Incorporation or any other
provision of law which might permit a lesser or no vote, but in addition to
any vote of the holders of any class or series of stock of the Corporation
required by law or by this Amended and Restated Certificate of Incorporation,
the affirmative vote of the holders of at least seventy percent (70%) of the
Voting Stock, voting together as a single class, shall be required to amend,
alter, change or repeal Articles FOURTH, SIXTH, SEVENTH, EIGHTH, NINTH
and TENTH.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed on behalf of the Corporation by its President
and attested by its Secretary as of January ____, 2000, and each of them does
hereby affirm and acknowledge that this Amended and Restated Certificate of
Incorporation is the act and deed of the Corporation and that the facts
stated herein are true.
STILWELL FINANCIAL, INC.
-----------------------------------------
By: Landon H. Rowland
Its: President
ATTEST:
- --------------------------------
By: Danny R. Carpenter
Its: Secretary
FORM OF
AMENDED AND RESTATED BYLAWS
OF
STILWELL FINANCIAL, INC.
ARTICLE I
---------
Offices
-------
Section 1. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be at such location within the State of
Delaware as shall from time to time be determined by the Board of Directors.
Section 2. OTHER OFFICES. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
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Stockholders
------------
Section 1. PLACE OF MEETINGS. All meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. ANNUAL MEETINGS. The annual meeting of stockholders shall
be held on such day of such month of each year (other than a Saturday, Sunday
or holiday) as shall be determined by the Board of Directors or, if the Board
shall fail to act, by the President. At the annual meeting the stockholders,
voting as provided in the Certificate of Incorporation, shall elect directors
and transact such other business as may be properly brought before the
meeting.
Section 3. ADVANCE NOTICE OF STOCKHOLDER PROPOSED BUSINESS. At an
annual meeting of the stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before an annual meeting, business must be either (i) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the
Board of Directors, (ii) otherwise properly brought before the meeting by or
at the direction of the Board of Directors or (iii) otherwise properly
brought before the meeting by a stockholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation, 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 of the date of the meeting 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.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting,
(ii) the name and record address of the stockholder proposing such business,
(iii) the class and number of shares of capital stock of the Corporation
which are beneficially owned by such stockholder, and (iv) any material
interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 3 of Article II; PROVIDED, HOWEVER, that
nothing in this Section 3 of Article II shall be deemed to preclude
discussion by any stockholder of any business properly brought before the
annual meeting in accordance with such procedures.
The Chairman of the annual meeting shall, in his or her discretion,
determine whether or not business is properly brought before the meeting in
accordance with the provisions of Section 3.
Section 4. NOTICES OF ANNUAL MEETINGS. Written notice of each annual
meeting of stockholders stating the place, date and hour of the meeting shall
be given to each stockholder entitled to vote at such meeting not less than
10 nor more than 60 days before the date of the meeting. Notice of any
meeting of stockholders shall not be required to be given to any stockholder
who shall attend such meeting in person or by proxy, except that such notice
shall be required for any stockholder who shall attend such meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. Except as otherwise required by law, notice of any meeting of
stockholders following an adjournment shall not be required to be given if
the time and place thereof are announced at the meeting which is adjourned.
Section 5. VOTING LISTS. The officer who has charge of the stock
ledger of the Corporation shall prepare and make or cause to be prepared and
made through a transfer agent appointed by the Board of Directors, at least
10 days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
Section 6. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, may be called only in accordance with the
Certificate of Incorporation of the Corporation.
Section 7. QUORUM. The holders of a majority of the stock issued and
outstanding which are entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute, by the Certificate of Incorporation or by these Bylaws. If,
however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented any business may be transacted which
might have been transacted at the meeting as originally notified. If the
adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the
question is one upon which by express provision of the statutes, the
Certificate of Incorporation or these Bylaws, a different vote is required in
which case such express provision shall govern and control the decision of
such question.
Section 8. VOTING OF SHARES. The holders of Common Stock shall have
such voting rights as are provided in the Certificate of Incorporation. The
holders of Preferred Stock shall have such voting rights as may be provided
in applicable Certificates of Designation.
Section 9. PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize, either in writing or by electronic
transmission, another person or persons to act for him or her by proxy, but
no proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period.
Section 10. STOCK LEDGER. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 5 of this Article II or the books
of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 11. CONDUCT OF MEETING. The Chairman of the Board, or, if none
or in his or her absence, the Chief Executive Officer, the President or one
of the Vice Presidents, shall call meetings of the stockholders to order and
act as Chairman of such meeting. In the absence of all these officers, the
Board of Directors may appoint a Chairman of the meeting. The Secretary of
the Corporation, or in his or her absence, an Assistant Secretary, if any,
or, in the absence of both the Secretary and Assistant Secretaries, any
person whom the Chairman shall appoint, shall act as secretary of the meeting
of the stockholders. The conduct of any meeting of the Stockholders shall be
governed by such rules, regulations and procedures as the Chairman of the
meeting, in his or her sole and exclusive discretion shall determine.
Section 12. INSPECTORS OF ELECTION. For each meeting of stockholders
there shall be appointed by the Board of Directors or by the Chairman of the
meeting three (3) inspectors of election. If any inspector shall fail or be
unable to serve as inspector or for any reason be unable to complete his or
her duties, an alternate inspector shall be appointed by the Board of
Directors or the Chairman of the meeting. The inspectors of election shall
examine and canvass the proxies and ballots, and make and submit a signed
report of the votes cast at the meeting, which shall be entered at large upon
the records.
Section 13. INSPECTORS' OATH. An inspector, before he enters into the
duties of his or her office, shall take and subscribe an oath substantially
in the following form before any officer authorized by law to administer
oaths:
"I do solemnly swear that I will execute the duties of
an inspector of the election now to be held with
strict impartiality and according to the best of my
ability."
ARTICLE III
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Directors
---------
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The number of directors
which shall constitute the whole board shall be as set forth in the
Certificate of Incorporation. Directors need not be stockholders.
The Board of Directors shall be divided into three classes as nearly
equal in number as reasonably possible. At each annual meeting of
stockholders, successors to directors of the class whose terms then expire
shall be elected to hold office for a term expiring at the third succeeding
annual meeting of stockholders. If the number of directors is changed, any
newly created directorships or any decrease in directorships shall be so
apportioned among the classes as to make all classes as nearly equal in
number as possible. Any additional director of any class elected to fill a
vacancy resulting from an increase in such class shall hold office for a term
that shall coincide with the remaining term of the class.
Section 2. NOMINATION OF DIRECTORS. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors at a meeting of stockholders. Nominations of persons for election
to the Board of Directors may be made at a meeting of stockholders, by the
Board of Directors or by any nominating committee or person appointed by the
Board of Directors or by any stockholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 2. Nominations by stockholders shall be
made pursuant to timely written notice to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation, if more than
30 days' notice is given to the 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 of the date of the meeting was
made, whichever first occurs, and if less than 30 days' notice is given to
the 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 stockholder's notice to the Secretary shall set forth
(a) as to each person whom the stockholder proposes to nominate for election
or re-election as a director, (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment
of the person, (iii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the person and (iv) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving the notice (i) the name and record address of the
stockholder and (ii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder. The
Stockholder's Notice shall include a signed consent of each such nominee to
serve as a director of the Corporation, if elected. The Corporation may
require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of
such proposed nominee to serve as a director. No person shall be eligible
for election as a director by the stockholders unless nominated in accordance
with the procedures set forth herein.
The Chairman of the meeting shall, in his or her discretion, determine
whether or not a nomination was made in accordance with the foregoing
procedure, and if the Chairman should determine that the nomination was not
made in accordance with the foregoing procedure, the Chairman shall so
declare to the stockholders present at the meeting and the defective
nomination shall be disregarded. In addition to the foregoing provisions of
this Bylaw, a stockholder shall also comply with all applicable requirements
of the Securities Exchange Act, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Bylaw.
Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Newly created
directorships and vacancies which shall occur in the Board of Directors
because of death, resignation, disqualification, any increase in the number
of directors or any other cause, may be filled by a majority of the directors
then in office, though less than a quorum, pursuant to Section 223 of the
General Corporation Law of Delaware and the Corporation's Certificate of
Incorporation. Such directors may, by resolution, eliminate any vacant
directorship thereby reducing the size of the whole Board of Directors but in
no event shall the size of the Board of Directors be reduced to less than
three directors. No decrease in the Board of Directors shall shorten the
term of any incumbent directors.
Section 4. GENERAL POWERS. The business of the Corporation shall be
managed under the direction of its Board of Directors which may exercise all
such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 5. MEETINGS. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State
of Delaware.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as shall
from time to time be determined by the Board of Directors.
Section 7. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at the request of the Chairman of the Board, the
Executive Committee, the President, or any three members of the Board of
Directors. Notice of the time and place of such meeting shall be given to
each director by mail not less than three (3) days before the meeting or
personally, by courier, telephone, facsimile, telecopy or by other electronic
means to each director not less than twelve (12) hours before such meeting.
Section 8. QUORUM. At all meetings of the Board of Directors a
majority of the directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation or by these Bylaws. If a quorum shall not be present at any
meeting of the Board of Directors the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 9. ORGANIZATION. At each meeting of the Board of Directors,
the Chairman of the Board, or in his or her absence, the President of the
Corporation, or in his or her absence, a Vice Chairman, or in the absence of
all of said officers, a Chairman chosen by a majority of the directors
present, shall preside. The Secretary of the Corporation, or in his or her
absence, an Assistant Secretary, if any, or, in the absence of both the
Secretary and Assistant Secretaries, any person whom the Chairman shall
appoint, shall act as secretary of the meeting.
Section 10. INFORMAL ACTION BY DIRECTORS. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee.
Section 11. PARTICIPATION BY CONFERENCE TELEPHONE. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, members of
the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting of the Board or such committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this Section shall constitute presence
in person at such meeting.
Section 12. COMPENSATION. The directors may receive reasonable fees to
be determined from time to time by the Board of Directors for services
actually performed in attending meetings and for other services actually
performed and the expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board of Directors. A
director who is, at the same time, an officer or employee of the Corporation
or an officer or employee of a subsidiary or affiliate more than 50% owned by
the Corporation, shall not be entitled to receive any compensation or fee for
service as a director or as a member of any committee of the Board of
Directors.
ARTICLE IV
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Committees
----------
Section 1. EXECUTIVE COMMITTEE; ORGANIZATION AND POWERS. There may be
an Executive Committee to consist of two or more directors. The Board of
Directors shall elect the members of the Executive Committee by vote of a
majority of the whole Board of Directors and one member of the Executive
Committee shall be elected as Chairman by the vote of a majority of the whole
Board of Directors. The members of the Executive Committee shall be elected
annually at the Board's organizational meeting or as soon thereafter as
possible.
When the Board of Directors is not in session, the Executive Committee
shall have and may exercise all the powers of the Board of Directors in the
management of the business and affairs of the Corporation as permitted by
Delaware law in all cases in which specific directions shall not have been
given by the Board of Directors including, but not limited to, the power to
declare dividends on the common and preferred stock of the Corporation, and
to authorize the seal of the Corporation to be affixed to all papers which
may require it. The members of the Executive Committee shall act only as a
Committee and individual members shall have no power as such.
The Executive Committee shall have full power to act as the Nominating
Committee, which, when acting as such, shall have the power and duty to make
recommendations to the Board of Directors as to suitable nominees for
election to the Board of Directors by the stockholders or by the remaining
members of the Board of Directors, to fill newly created directorships and to
fill any vacancies which shall occur.
When acting as the Nominating Committee, it shall have the power to meet
with and consider suggestions from such other members of the Board of
Directors, stockholders, members of management, consultants and other
persons, firms or corporations as they deem necessary or advisable in the
premises to assist them in making such recommendations.
Section 2. COMPENSATION COMMITTEE; ORGANIZATION AND POWERS. There shall
be a Compensation Committee to consist of two or more directors who are not
officers or employees of the Corporation, each of whom shall be a "non-
employee director" within the meaning ascribed thereto under Rule 16b-3
promulgated under the Securities Exchange Act of 1934 as amended from time to
time and interpreted by the Securities and Exchange Commission and an
"outside director" within the meaning ascribed thereto under 162(m) of the
Internal Revenue Code as amended from time to time and interpreted by the
Internal Revenue Service. The Board of Directors shall elect the members of
the Compensation Committee by vote of a majority of the whole Board of
Directors, and one member of the Compensation Committee shall be elected its
Chairman by the vote of a majority of the whole Board of Directors. The
members of the Compensation Committee shall be elected annually at the
Board's organizational meeting or as soon thereafter as possible.
The Compensation Committee shall have the power: to authorize and
determine all salaries for the officers and supervisory employees of the
Corporation; to administer the incentive compensation plans of the
Corporation in accordance with the powers and authority granted in such
plans; to determine any incentive allowances to be made to officers and staff
of the Corporation; to administer all stock option plans, stock purchase
plans and other equity ownership, compensation, retirement and benefit plans
of the Corporation; to approve the performance based compensation of
individuals pursuant to 162(m) of the Internal Revenue Code; and to authorize
and determine all other matters relating to the compensation or benefits of
the Corporation.
Section 3. AUDIT COMMITTEE; ORGANIZATION AND POWERS. There shall be an
Audit Committee to consist of three or more directors who are not officers or
employees of the Corporation. The Board of Directors shall elect the members
of the Audit Committee by vote of a majority of the whole Board of Directors
and one member of the Audit Committee shall be elected as Chairman by a vote
of a majority of the whole Board of Directors. The members of the Audit
Committee shall be appointed by the Board of Directors to serve staggered
three-year terms.
The Audit Committee shall have the power and the duty to meet with and
consider suggestions from members of management and of the Corporation's
internal audit staff, as well as with the Corporation's independent
accountants, concerning the financial operations of the Corporation. The
Audit Committee shall additionally have the power to review audited financial
statements of the Corporation and consider and recommend the employment of,
and approve the fee arrangement with, independent accountants for both audit
functions and for advisory and other consulting services.
Section 4. RULES, RECORDS AND REPORTS. Each Committee may make and
adopt such rules and regulations governing their proceedings as they may deem
proper and which are consistent with the statutes of the State of Delaware,
the Certificate of Incorporation and these Bylaws. Each Committee shall keep
a full and accurate record of all their acts and proceedings and report the
same from time to time to the Board of Directors.
Section 5. MEETINGS. Regular meetings of the Committees shall be held
at such times and at such places as from time to time may be fixed by the
Committees. Special meetings of the Committees may be held at such other
times as may in the judgment of the Chairman or, he being absent, in the
judgment of a Committee member, be necessary. Notice of regular meetings need
not be given. Notice of special meetings shall be given to each member by
mail not less than three (3) days before the meeting or personally, by
courier, telephone, facsimile, telecopy or by other electronic means to each
member not less than twelve (12) hours before the meeting, unless the
Chairman of the Committee, or a member acting in that capacity in his or her
absence, shall deem a shorter notice expedient.
Section 6. QUORUM. A majority of members of a Committee shall
constitute a quorum for the transaction of business and the act of a majority
of those present shall be the act of the Committee.
Section 7. SUBCOMMITTEES. A Committee may appoint such subcommittees
as it shall deem necessary.
Section 8. VACANCIES. Any vacancy in a Committee shall be filled by a
majority of the whole Board of Directors.
Section 9. SUBSTITUTE MEMBERS. Whenever at any time a member of any
Committee shall be absent from a meeting of that Committee and it shall be
necessary in order to constitute a quorum or, for any other reason, it may be
deemed expedient or desirable, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously designate a director (subject to the
eligibility requirements set forth in Sections 2 and 3 of this Article IV) to
serve and act in his or her stead; and in the event that the absence of a
Committee member shall be prolonged, such substitute member may, subject to
the approval of the Committee, continue to act for the term of its duration.
A director so designated shall rank as a duly qualified member of the
Committee during incumbency, and shall be entitled to participate in its
deliberations with the same force and effect as if elected in the manner
herein elsewhere provided.
Section 10. COMPENSATION. Subject to the provisions of Section 13 of
Article III of these Bylaws, each member of any Committee may receive a
reasonable fee to be fixed by the Board of Directors for services actually
performed in attending meetings, and for other services actually performed,
and shall receive expenses of attendance, if any actually incurred by him for
attendance at any meeting of the Committee.
ARTICLE V
---------
Notices
-------
Section 1. WRITTEN NOTICE. Whenever, under the provisions of the
statutes or of the Certificate of Incorporation or of these Bylaws, notice is
required to be given to any director or stockholder, such notice shall be in
writing and shall be given in person or by mail to such director or
stockholder, except that notice to directors may also be given personally by
courier, telephone, facsimile, telecopy or by other electronic means. If
mailed, notice shall be addressed to such director or stockholder at his or
her address as it appears on the records of the Corporation, with postage
thereon prepaid, and shall be deemed to be given at the time when the same
shall be deposited in the United States mail.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VI
----------
Officers
--------
Section 1. NUMBER. The officers of the Corporation shall be chosen by
the Board of Directors and shall include a President, a Treasurer and a
Secretary. The Board of Directors, in its discretion, may also choose a
Chairman of the Board and one or more Vice Chairmen of the Board from among
their members, one or more Executive Vice Presidents and one or more
additional Vice Presidents, and one or more Assistant Treasurers and
Assistant Secretaries. The Board of Directors may also elect a Chief
Executive Officer, a Chief Financial Officer and a Chief Operating Officer.
The Board of Directors may appoint such other officers and agents as it shall
deem desirable who shall hold their offices for such terms and shall exercise
such powers and responsibilities and perform such duties as shall be
specified and from time to time modified or changed by the Board of
Directors. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these Bylaws otherwise provide. The officers
of the Corporation need not be stockholders of the Corporation.
Section 2. ELECTION AND TERM OF OFFICE. The Board of Directors at its
first meeting after each annual meeting of stockholders shall elect the
officers of the Corporation. The officers of the Corporation shall hold
office until their successors shall have been duly elected or appointed and
qualified, or until they shall become disabled, die, retire, resign or be
removed.
Section 3. REMOVAL. Any officer or agent elected or appointed by the
Board of Directors may be removed, with or without cause, at any time by the
affirmative vote of a majority of the Board of Directors present at any
meeting or by any committee or superior officer upon whom such power of
removal may be conferred by the Board of Directors. All officers and
employees not appointed by the Board of Directors shall hold their offices at
the discretion of the Executive Committee or of the officer appointing them.
Section 4. VACANCIES. The Board of Directors shall, as soon as
practicable, fill any vacancy in the office of President. Any vacancy in any
other office may be filled temporarily by the Chairman of the Board, or
President. In case of temporary incapacity or absence of any of the
officers, the Chairman of the Board, or the President, may make an
appointment pro tem and confer on such appointee full power and authority to
act in place of any of said officers or appointees so temporarily
incapacitated or absent; but such appointment shall be subject to change by
the Board of Directors or by the Executive Committee at any regular or
special meeting.
Section 5. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Corporation. Such resignation shall take effect at the
date of the receipt of such notice, or at any later time specified therein
and, unless otherwise provided therein, the acceptance of such resignation
shall not be necessary to make it effective.
CHAIRMAN OF THE BOARD
Section 6. DUTIES. The Chairman of the Board, if one is elected, shall
preside, if present, at all meetings of the Board of Directors. The Chairman
of the Board shall also perform such other duties and he or she may exercise
such other powers as from time to time may be prescribed by these Bylaws or
by the Board of Directors. In his or her absence, the President shall
discharge the duties of the Chairman of the Board.
VICE CHAIRMEN OF THE BOARD
Section 7. DUTIES. The Vice Chairmen of the Board, if any, shall
perform such duties and may exercise such powers as from time to time may be
prescribed by the Board of Directors.
CHAIRMAN OF THE EXECUTIVE COMMITTEE
Section 8. DUTIES. The Chairman of the Executive Committee shall
preside at all meetings of the Executive Committee. In the absence of the
Chairman of the Executive Committee, his or her duties shall be discharged by
the President.
PRESIDENT
Section 9. GENERAL POWERS AND DUTIES. The President shall have the
general care, supervision and control of the Corporation's business and
operations. The President shall have such other powers and perform such
other duties as the Board of Directors may from time to time prescribe and
shall perform such other duties as are incidental to the office of President.
In the event there is no Chairman of the Board or in the absence or
incapacity of the Chairman of the Board, he shall preside at all meetings of
the Board of Directors and stockholders.
Section 10. APPOINTMENTS. Except as otherwise provided by statute, the
Certificate of Incorporation, or these Bylaws, the President may employ such
persons as he shall deem necessary for the proper management of the business
and property of the Corporation.
VICE PRESIDENTS
Section 11. POWERS AND DUTIES. The Vice Presidents shall have such
designations or titles and powers and perform such duties as shall from time
to time be conferred and prescribed by the Board of Directors, the Executive
Committee, the Chairman of the Board or the President.
SECRETARY
Section 12. DUTIES. The Secretary, or, in his or her absence, an
Assistant Secretary, shall attend all meetings of the stockholders, of the
Board of Directors and of the Committees of the Board of Directors.
Section 13. NOTICE OF MEETINGS. The Secretary, or any Assistant
Secretary, shall give due notice of all meetings of the stockholders and of
the Board of Directors and of the Executive Committee, where such notice is
required by law, by the Certificate of Incorporation, by these Bylaws, by the
Board of Directors or by the Executive Committee.
Section 14. CUSTODY OF SEAL. The Secretary shall be custodian of the
seal of the Corporation, of its records, and of such papers and documents as
may be committed to his or her care by the Board of Directors or of the
Executive Committee. He shall have power to affix the seal of the
Corporation to instruments to which the same is authorized to be affixed by
the Board of Directors or by the Executive Committee, and shall have power to
attest the same. He shall perform such other duties as may be assigned to
him by the Chairman of the Board (if any), the President, the Board of
Directors or the Executive Committee, or as may be prescribed in the rules or
regulations to be adopted by the Board of Directors.
Section 15. DUTIES OF ASSISTANT SECRETARIES. The Assistant Secretary
or Secretaries shall perform the duties of the Secretary in his or her
absence and such duties as may be assigned to him or them by the Board of
Directors, the Executive Committee, the Chairman of the Board, or the
President, or as may be prescribed in the rules or regulations to be adopted
by the Board of Directors or the Executive Committee; and, he or they shall
have the power to affix the corporate seal to instruments and to attest the
same and to sign the certificates of stock of the Corporation.
OTHER OFFICERS
Section 16. OTHER OFFICERS. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the President or the Board of
Directors. The Board of Directors may delegate to any officer of the
Corporation the power to choose such other officers and to prescribe their
respective duties and powers.
Section 17. OTHER POSITIONS. The President may authorize the use of
titles, including the titles of chairman, president and vice president, by
individuals who hold management positions with the business groups, divisions
or other operational units of the Corporation, but who are not and shall not
be deemed officers of the Corporation. Individuals in such positions shall
hold such titles at the discretion of the appointing officer, who shall be
the President or any officer to whom the President delegates such appointing
authority, and shall have such powers and perform such duties as such
appointing officer may from time to time determine.
ARTICLE VII
-----------
Certificates of Stock and Their Transfer
----------------------------------------
Section 1. CERTIFICATES OF STOCK. Every holder of stock in the
Corporation shall be entitled to have a certificate, in such form as the
Board of Directors shall prescribe, signed in the name of the Corporation by
(i) the Chairman of the Board, President or a Vice President and (ii) by the
Chief Financial Officer or an Assistant Chief Financial Officer or the
Secretary or an Assistant Secretary of the Corporation, certifying the number
and class of shares owned by him or her in the Corporation. Any of or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent, transfer clerk or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were
such officer, transfer agent or registrar at the date of issue.
Section 2. RECORDS OF CERTIFICATES. A record shall be kept of the name
of the person, firm or corporation of record holding the stock represented by
such certificates, respectively, and the respective dates thereof, and in
case of cancellation, the respective dates of cancellation. Every
certificate surrendered to the Corporation for exchange or transfer shall be
cancelled and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been
so cancelled, except in cases provided for in Section 3 of this Article VII.
Section 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the Board
of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his or her legal representative, to give the
Corporation a bond in such sum as it may direct and/or do such other act as
the Board of Directors shall determine is required as indemnity to protect
against any claim that may be made against the Corporation with respect to
the certificate alleged to have been lost, stolen or destroyed.
Section 4. TRANSFERS OF STOCK. Transfer of the capital stock of the
Corporation shall be made only on the books of the Corporation by the holder
thereof, or by his or her attorney thereunto authorized by a power of
attorney duly executed and filed with the transfer agent of the Corporation,
and on surrender for cancellation of the certificate or certificates for such
shares. A person in whose name shares of stock stand on the books of the
Corporation and no one else shall be deemed the owner thereof as regards the
Corporation.
Section 5. TRANSFER AND REGISTRY AGENTS. The Corporation may maintain
a transfer office or agency where its stock shall be directly transferable
and a registry office, which may be identical with the transfer or agency,
where its stock shall be registered; and the Corporation may, from time to
time, maintain one or more other transfer offices or agencies, and registry
offices; and the Board of Directors may from time to time, define the duties
of such transfer agents and registrars and make such rules and regulations as
it may deem expedient, not inconsistent with these Bylaws, concerning the
issue, transfer and registration of certificates for shares of the capital
stock of the Corporation.
Section 6. CLOSING OF TRANSFER BOOKS; RECORD DATE. The Board of
Directors may close the stock transfer books of the Corporation for a period
of not more than sixty (60) days nor less than ten (10) days preceding the
date of any meeting of stockholders or the date for payment of any dividend
or the date for the allotment of rights or the date when any change or
conversion or exchange of capital stock shall go into effect. In lieu of
closing the stock transfer books as aforesaid, the Board of Directors may fix
in advance a date, not more than sixty (60) days nor less than ten (10) days
preceding the date of any meeting of stockholders, or the date for the
payment of any dividend, or the date for the allotment of rights, or the date
when any change or conversion or exchange of capital stock shall go into
effect, as a record date for the determination of the stockholders entitled
to notice of, and to vote at, any such meeting, and any adjournment thereof,
or entitled to receive payment of any such dividend, or to any such allotment
of rights, or to exercise the rights in respect of any such change,
conversion or exchange of capital stock and, in such case, such stockholders
and only such stockholders as shall be stockholders of record on the date so
fixed shall be entitled to such notice of, and to vote at, such meeting and
any adjournment thereof, or to receive payment of such dividend, or to
receive such allotment of rights, or to exercise such rights, as the case may
be notwithstanding any transfer of any stock on the books of the Corporation
after any such record date fixed as aforesaid.
Section 7. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VIII
------------
Amendments and General Provisions
---------------------------------
Section 1. AMENDMENTS. These Bylaws may only be altered, amended or
repealed in accordance with the Corporation's Certificate of Incorporation.
Section 2. PROXIES. Unless otherwise provided by resolution of the
Board of Directors, the President or any Vice President, from time to time in
the name and on behalf of the Corporation may: (i) himself cast the votes
which the Corporation may be entitled to cast as a stockholder or otherwise
in any other corporation any of whose stock or other securities may be held
by the Corporation, at meetings of the holders of the stock or other
securities of such other corporations or consent in writing to any action by
such other corporation; (ii) appoint an attorney or attorneys, agent or
agents of the Corporation, in the name and on behalf of the Corporation, to
cast the votes which the Corporation may be entitled to cast as a stockholder
or otherwise in any other corporation any of whose stock or other securities
may be held by the Corporation, at meetings of the holders of the stock or
other securities of such other corporations or to consent in writing to any
action by such other corporation, may instruct the person or persons so
appointed as to the manner of casting such votes or giving such consent and
may execute or cause to be executed in the name or on behalf of the
Corporation and under its corporate seal all such written proxies or other
instruments as may be necessary or proper to evidence the appointment of such
attorneys and agents.
Section 3. FISCAL YEAR. The fiscal year of the Corporation shall end
on the last day of December in each year.
Internal Revenue Service Department of the Treasury
Index Number: 355.03-00; 355.03-01; Washington, DC 20224
83.01-00; 162.07-29
Danny R. Carpenter
Kansas City Southern Industries, Inc.
114 W. 11th Street
Kansas City, MO 64105
Date:
July 9, 1999
Legend
Distributing = Kansas City Southern Industries, Inc.
EIN: 44-0663509
Controlled = FAM Holdings, Inc.
EIN: 43-1804048
Subsidiary 1 = Kansas City Southern Lines, Inc.
EIN: 43-1792510
Subsidiary 2 = The Kansas City Southern Railway Corporation
EIN: 44-6000758
Subsidiary 3 = Janus Capital Corporation
EIN: 84-0765359
Subsidiary 4 = Berger Associates, Inc.
EIN: 13-2750052
LLC = Berger Associates LLC
EIN: to be applied for
Corporation = DST Systems, Inc.
EIN: 43-1581814
State A = Delaware
State B = Missouri
State C = Colorado
Investment Banker = Merrill Lynch
Individual = Landon Rowland
Business A = Railroad Transportation
Business B = Financial Asset Management
O% = 2.74%
P% = .36%
Q% = 3.1%
X% = 49.63%
Y% = 82%
Z% = 32%
Date 1 = October 14, 1994
Date 2 = December 31, 1998
Date 3 = May 26, 1999
Date 4 = July 8, 1999
T = 9,427,942
- -
U = 132,050
- -
Dear Mr. Carpenter:
This letter responds to your letter dated January 26, 1999, in which
you requested rulings as to the federal income tax consequences of a proposed
transaction. Specifically, you requested rulings under sections 355 and 83
of the Internal Revenue Code. Additional information was submitted in
letters dated February 26, 1999, May 13, 1999, May 25, 1999, May 28, 1999,
June 3, 1999, June 11, 1999, June 23, 1999, and July 9, 1999. The
information submitted for consideration is summarized below.
Distributing is a publicly held holding company organized under the
laws of State A and is the common parent of an affiliated group of
corporations which file a consolidated federal income tax return.
Distributing's capital structure consists of common, preferred, and "blank"
series preferred stock of which only common and preferred stock are
outstanding. As of Date 2, Distributing had outstanding nonqualified stock
options issued to its employees and directors to buy T shares of Distributing
common stock (Old Options). Distributing is indirectly engaged in Business A
and Business B through its subsidiaries as described below.
Controlled is a newly formed wholly-owned subsidiary of Distributing
organized under the laws of State A. Currently, Controlled is not engaged in
any activities, however, after the distribution described below, Controlled
will be indirectly engaged in Business B. Controlled is authorized to issue
common and "blank" series preferred stock, however, only common stock is
currently outstanding.
Subsidiary 1 is a holding company organized under the laws of State A
which is wholly owned by Distributing. Subsidiary 1 is indirectly engaged in
Business A through its subsidiaries.
Subsidiary 2 is a State B company wholly owned by Subsidiary 1 that is
directly engaged in Business A.
Subsidiary 3 is a State C corporation that is directly engaged in
Business B. Distributing owns Y% of subsidiary 3.
Subsidiary 4 is a State A corporation wholly-owned by Distributing that
is directly engaged in Business B. As of Date 3, Subsidiary 4 employees held
options to purchase T shares of Subsidiary 4's common stock. Distributing
acquired control of Subsidiary 4 less than 5 years ago on Date 1. However,
at the time of the distribution, Distributing will have owned Subsidiary 4
for at least five years.
Corporation is a publicly traded company organized under the laws of
State A and is directly engaged in a business related to Business B.
Distributing owns Z% of Corporation.
Business A and Business B are widely different businesses, the
combination of which produces no significant synergies. The operation of
these businesses within the same affiliated group creates managerial,
systemic, competitive and economic problems and issues. Management has
determined, based on the advice of Investment Banker and internal documents,
that the separation of these businesses will permit the management of each
business to focus exclusively on their respective industry with respect to
carrying out its primary objectives and to allow each management team to
carry out corporate directives without concern of the directives adversely
affecting the other business segment.
In order to separate Business A and Business B, the following steps
have been completed or will be completed (the Transaction):
1) Distributing will contribute to Subsidiary 1 certain intercompany
accounts receivable which consist of debt and accrued interest due from
Subsidiary 2 and another wholly owned subsidiary of Distributing.
Subsidiary 1 will in turn contribute these accounts receivable to
Subsidiary 2. Distributing will also contribute the stock of some
directly owned subsidiaries to Subsidiary 1, and Subsidiary 1 will
contribute such stock to Subsidiary 2.
2) Distributing formed Controlled and certain employees of Distributing
who held Old Options became employees of Controlled.
3) Distributing will contribute all of the stock it owns in
Corporation, Subsidiary 3, Subsidiary 4, and certain other companies to
Controlled. Additionally, Controlled may assume a certain amount of
Distributing's liabilities.
4) Prior to the distribution, Distributing may do an equity offering
(Equity Offering) of not more than X%.
5) Subsidiary 4 will form a limited liability corporation (LLC) under
the laws of State A and transfer all its operating assets to LLC in
exchange for Class B stock and preferred stock of LLC. Pursuant to the
LLC agreement, Subsidiary 4 will transfer all of its operating
employees to LLC and will retain the Subsidiary 4 executive officers as
officers and employees.
6) LLC will elect to be taxed as a partnership under section 7701 of
the Code.
7) The Subsidiary 4 employees who held Subsidiary 4 stock options will
surrender their stock options in exchange for cash. Thereafter, certain
employees of Subsidiary 4 and LLC (including employees who did not hold
Subsidiary 4 stock options) will receive Class A stock from LLC. The
Class A stock is structured to be a partnership profits interest as
defined under Rev. Proc. 93-27, 1993-2 C.B. 343.
8) Controlled will transfer all of the stock it holds in Corporation
to Subsidiary 4.
9) All of the stock of Controlled will be distributed pro rata to the
stockholders of Distributing, in the proportion of two or more shares
of Controlled distributed for each one share of Distributing stock
held.
10) Old Options of Distributing held by current and former employees
and directors of Distributing or its subsidiaries will be exchanged for
new options of Distributing stock and new options of Controlled stock
(Substituted Options).
11) Controlled and its subsidiaries will apply to file a consolidated
federal income tax return.
Under the terms of Distributing's stock option plan, Old Options and
Substituted Options are not transferable. An employee may, however, apply to
the plan committee for permission to transfer options to certain members of
the employees immediate family (or entities owned by or for the employee or
such family members). If the plan committee agrees in its sole discretion to
grant the application, the option agreement is amended to permit the
transfer. To date, no such application has been granted by Distributing's
plan committee.
When the Old Options were granted, they had no "readily ascertainable
fair market value" for purposes of section 83 of the Code and their exercise
price equaled the fair market value of Distributing stock. To the extent
that the Old Options remain unvested, the Substituted Options, when granted,
will vest on the same dates that the Old Options would have vested. An
employee's Substituted Options will have the same aggregate exercise price
that existed for his or her Old Options. However, the exercise price that
existed for his or her Old Options will be allocated between the Substituted
Distributing Options and the Controlled options in proportion to the relative
fair market values of Distributing's shares and Controlled's shares at the
time of the exchange of options. When granted, the Substituted Options will
have no "readily ascertainable fair market value" for purposes of section 83
of the Code.
Pursuant to the LLC agreement, Subsidiary 4 will be the sole member-
manager of LLC and will perform all active and substantial management
functions with respect to LLC's activities, including the decision making
regarding significant business decisions of LLC, and the regular
participation in the overall supervision, direction, and control of the LLC
employees. See Rev. Rul. 92-17, 1992-1 C.B. 142.
After the contribution of Corporation by Controlled to Subsidiary 4,
the gross assets of the active trades or business of Subsidiary 4 will have a
fair market value that is 5% or more of the total fair market value of its
gross assets based on market values on Date 4. However, the value of
Corporation's stock is very volatile and it is unforeseen whether the value
of the stock will increase or decrease. An increase in value of
Corporation's stock may cause the relative value of Subsidiary 4's active
assets to fall below 5%. Nevertheless, Subsidiary 4 has provided sufficient
information which proves that even if the relative value of its active assets
falls below 5%, Subsidiary 4's active business is not de minimis compared
with the other assets or activities of Subsidiary 4 and its subsidiaries.
After the Transaction is completed, Individual, who is currently the
Chairman of the Board for Distributing, will be shared by both Distributing
and Controlled by also becoming the Chairman of the Board of Controlled.
However, Individual will remain as Chairman of the Board of Distributing for
a transitional period in order to use his good will and influence concerning
transitional matters including an ongoing acquisition. As Chairman of the
Board of Distributing, Individual's role is that of oversight and not
management of operations. Additionally, the Chairman is to preside at all
meetings of the stockholders and the Board of directors, and perform, all
other duties as the Board of directors may prescribe.
Distributing has issued approximately Q% of its stock within the two
year period prior to the date of distribution. However, of the Q% issued, O%
consists of stock issued pursuant to the exercise of Old Options and P%
consists of stock issued in two corporate acquisitions (Acquisitions).
The following representations have been made in connection with the
proposed transaction:
(a) Distributing, Controlled, and the stockholders of Distributing will
each pay their own expenses, if any, incurred in connection with the
distribution.
(b) No part of the consideration distributed by Distributing is being
received by a stockholder of Distributing as a creditor, employee, or
in any capacity other than that of a stockholder of Distributing.
(c) Immediately before the distribution, items of income, gain, loss,
deduction, and credit will be taken into account as required by the
applicable intercompany transaction regulations. Further,
Distributing's excess loss account (if any) with respect to the
Controlled stock will be included in income immediately before the
distribution.
(d) The income tax liability for the taxable year in which investment
credit property (including any building to which Section 47(d)
applies), if any, is transferred will be adjusted pursuant to Section
50(a)(1) or (a)(2) (or Section 47, as in effect before amendment by
Public Law 101-508, Title 11, 104 Stat. 1388, 536 (1990), if
applicable) to reflect an early disposition of the property.
(e) No intercorporate debt will exist between Distributing and
Controlled at the time of, or subsequent to, the distribution.
(f) The distribution will be carried out for the following corporate
business purpose: fit and focus. The distribution is motivated, in
whole or substantial part, by this corporate business purpose.
(g) Neither Distributing nor Controlled is an investment company as
defined in Sections 368(a)(2)(F)(iii) and (iv).
(h) The five years of financial information submitted on behalf of
Distributing, Subsidiary 2, Subsidiary 3 and Subsidiary 4 is
representative of each corporation's present operations, and, with
regard to each corporation, there have been no substantial operational
changes since the date of the last financial statements submitted.
(i) Neither Distributing nor Controlled accumulated their receivables
or made extraordinary payment of their payables in anticipation of the
distribution.
(j) There is no plan or intention to liquidate either Distributing or
Controlled or any of their respective subsidiaries, to merge any of
these corporations with any other corporation, or to sell or otherwise
dispose of the assets of either corporation subsequent to the
transaction, except in the ordinary course of business.
(k) The distribution is not part of a plan or series of related
transactions (within the meaning of section 355(e)) pursuant to which
one or more persons will acquire directly or indirectly stock
possessing 50 percent or more of the total combined voting power of all
classes of stock of either Distributing or Controlled, or stock
possessing 50 percent or more of the total value of all classes of
stock of either Distributing or Controlled. Transactions that must be
taken into account in assessing the correctness of this representation
include, but are not necessarily limited to, the Acquisitions and the
Equity Offering. The Old Options and the Substituted Options and any
stock issued upon the exercise of the Old Options and Substituted
Options will not be taken into account.
(l) Neither Distributing nor Controlled will issue stock possessing,
within the four year period described in section 355(e) (two years
backwards and two years forward from the date of the distribution), in
the aggregate, 50% or more of the combined voting power of all classes
of stock of either Distributing or Controlled, or stock possessing 50%
or more of the total value of all classes of stock of either
Distributing or Controlled. Transactions that must be taken into
account in assessing the correctness of this representation include,
but are not necessarily limited to, the Acquisitions and the Equity
Offering. The Old Options and Substituted Options and any stock issued
upon the exercise of the Old Options and Substituted Options will not
be taken into account.
(m) No Distributing shareholder or shareholders will hold immediately
after the distribution disqualified stock within the meaning of Section
355(d)(3) which constitutes a 50% or greater interest in Distributing
or Controlled.
(n) There is no plan or intention by any shareholder who owns 5% or
more of the stock of Distributing, and the management of Distributing,
to its best knowledge, is not aware of any plan or intention on the
part of any particular remaining shareholder or security holder of
Distributing to sell, exchange, transfer by gift, or otherwise dispose
of any of their stock in, or securities of, either Distributing or
Controlled after the distribution.
(o) Payments made in connection with all continuing transactions
between Distributing and Controlled will be for fair market value based
on terms and conditions arrived at by the parties bargaining at arm's
length.
(p) The total adjusted bases and the fair market value of the assets to
be transferred to Controlled by Distributing will each equal or exceed
the sum of the liabilities assumed by Controlled plus any liabilities
to which the transferred assets are subject.
(q) The liabilities assumed in the transaction and the liabilities to
which the transferred assets are subject were incurred in the ordinary
course of business and are associated with the assets being
transferred.
(r) The gross assets of the trades or businesses of each of the
corporations relied upon to satisfy the active trade or business
requirement of Section 355(b), Subsidiary 2, Subsidiary 3. and
Subsidiary 4, will have a fair market value that is 5% or more of the
total fair market value of the gross assets of the corporation directly
conducting the trade or business or at least not de minimis when
compared with the other assets and activities of such corporation. For
purposes of this representation, the active business assets of
Subsidiary 4 include Subsidiary 4's interests in LLC (see Rev. Rul. 92-
17).
(s) Immediately after the distribution, at least 90% of the fair market
value of the gross assets of Controlled will consist of the stock and
securities of Subsidiary 3 and Subsidiary 4.
(t) Immediately after the distribution, at least 90% of the fair market
value of the gross assets of Subsidiary 1 will consist of the stock and
securities of Subsidiary 2, a corporation engaged in the active conduct
of a trade or business as defined in Section 355(b)(2).
(u) Immediately after the distribution, at least 90% of the fair market
value of the gross assets of Distributing will consist of the stock and
securities of Subsidiary 1, a corporation engaged in the active conduct
of a trade or business as defined in Section 355(b)(2).
(v) Following the transaction, Distributing and Controlled (through
their subsidiaries) will each continue the active conduct of their
respective businesses independently and with their own separate
employees.
(w) There is no plan or intention by either Distributing or Controlled,
directly or through any subsidiary corporation, to purchase any of its
outstanding stock after the transaction, other than through stock
purchases meeting the requirements of section 4.05(1)(b) of Rev. Proc.
96-30.
(x) The transfer of the stock of Subsidiary 3, Subsidiary 4,
Corporation and certain other companies to Controlled in exchange for
all of the stock of Controlled, as described above, will not result in
the recognition of gain by Distributing pursuant to Section 351 or
Section 361, or both.
(y) There is no plan or intention by Subsidiary 4 or LLC to amend the
provisions of the LLC Agreement that establish Subsidiary 4's right and
responsibility to direct LLC's business.
(z) The Old Options (as well as the Substituted Options to be issued)
are options to acquire stock in a corporation with customary terms and
conditions provided to employees, and directors in connection with the
performance of services for the corporation or a person related to it
under section 355(d)(7)(A) (and such options are not excessive by
reference to the services performed) and these options immediately
after the distribution are nontransferable and will continue to be
nontransferable for no less than 6 months thereafter within the meaning
of section 1.83-3(d) (disregarding transfers to family members and family-
owned entities, if authorized by Distributing's plan committee) and do
not have a readily ascertainable fair market value as defined in section
1.83-7(b). There is currently, no plan or intention to change the non-
transferability of these options. To date no transfers have been
authorized.
(aa) Distributing and Subsidiary 4 have no plan or intention of taking
action prior to and after the spinoff to affect materially the value of
the stock of Corporation.
Based solely on the facts submitted and the representations made above,
it is held as follows:
(1) No gain or loss will be recognized to Distributing upon the
distribution of all the Controlled stock to its shareholders. Section
355(c).
(2) No gain or loss will be recognized to (and no amount will be
included in the income of) the stockholders of Distributing upon the
receipt of the Controlled stock distributed to them (including any
fractional share interests of Controlled stuck to which they may be
entitled) in the distribution. Section 355(a)(1).
(3) The aggregate basis of the stock of Distributing and Controlled in
the hands of each Distributing stockholder (including any fractional
share interests of Controlled stock to which they may be entitled)
after the distribution will, in each instance, be the same as the basis
of the Distributing stock held by such stockholder immediately before
the distribution, allocated in proportion to the fair market value of
each in accordance with Regulation Section 1.358-2(a). Sections
358(b)(1) and (2).
(4) The holding period of the Controlled stock which each Distributing
stockholder receives (including any fractional share interests of
Controlled stock to which they may be entitled) will include the
holding period of the Distributing common stock with respect to which
the distribution will be made, provided the Distributing stock is held
as a capital asset by such stockholder on the date of the distribution.
Section 1223(l).
(5) Proper allocation of earnings and profits among Distributing and
Controlled will be made pursuant to Regulation Section 1.312-10(a).
Section 312(h).
(6) Following the distribution, Controlled and its direct and indirect
subsidiaries that are "includible corporations" (under Section 1504(b))
and satisfy the ownership requirements of Section 1504(a)(2) will be an
affiliated group of corporations entitled to file consolidated federal
income tax returns with Controlled as the common parent.
(7) No income, gain, or loss will be realized by holders of Old Options
when those options are exchanged for Substituted Options.
(8) Neither Distributing nor Controlled will recognize income, gain or
loss upon the granting of Substituted Options in replacement of the Old
Options.
(9) No gain or loss will be recognized by Distributing or Controlled
upon the exercise of a Substituted Option.
(10) Upon the exercise of a Substituted Option, the optionee will
recognize compensation income equal to the excess of the fair market
value of the shares acquired over the amount paid for such shares.
(11) The compensation income recognized by the optionee (other than a
director) on the exercise of a Substituted Option is "wages" subject to
withholding under Code Section 3402. However, if a Substituted Option
is exercised after the Optionee's death, then no withholding of income
tax will be required.
(12) Amounts includible in the gross income of any holder of a
Substituted Option as a result of the exercise thereof will be treated
as a compensation expense and deductible under the rules of Section
83(h) of the Code and Section 1.83-6 of the regulations, provided that
the deduction otherwise meets the requirements of Section 162 of the
Code. Additionally, to the extent that compensation expense deductions
are so allowable, they shall be allowed as follows:
(a) If the optionee was an employee of an existing subsidiary of
Distributing prior to the substitution and continued to be an
employee of that subsidiary after the substitution, then that
subsidiary will be allowed the deduction.
(b) If the optionee was an employee of Distributing prior to the
substitution and continued to be an employee of Distributing
after the substitution, then the issuer of the optioned shares
will be allowed the deduction.
(c) If the optionee was an employee of an existing subsidiary of
Distributing prior to the substitution but was an employee of
Subsidiary 1 or Controlled after the substitution, then, if the
employee's Substituted Options were vested when received, the
subsidiary employing the optionee prior to the substitution will
be allowed the deduction.
(d) If, however, the Substituted Options were not vested when
received, then the subsidiary employing the optionee prior to the
substitution may only deduct the compensation attributable to the
options for Distributing shares, and Controlled may deduct the
compensation attributable to the options for its shares.
(e) If the optionee was an employee of Distributing prior to the
substitution but was an employee of Subsidiary 1 or Controlled
after the substitution, then the issuer of the optioned shares
will be allowed the deduction.
No opinion is expressed with respect to the tax treatment of the
proposed transaction under other provisions of the Code and regulations or
with respect to the tax treatment of any conditions existing at the time of,
or effects resulting from, the proposed transaction that are not directly
covered by the above rulings. We specifically express no opinion regarding
application of the rules of Section 482 of the Code to the deductions that
are the subject of ruling (12) above.
This ruling letter is directed only to the taxpayers who requested it.
Section 6110 (j) (3) of the Code provides that it may not be used or cited as
precedent.
A copy of this letter should be attached to the federal income tax
returns of the taxpayers involved for the taxable year in which the
transaction covered by this ruling letter is consummated.
In accordance with the power of attorney on file in this office, copies
of this letter are being sent to your authorized representatives.
Sincerely,
Assistant Chief Counsel (Corporate)
By: /s/ Alfred Bishop
-------------------------
Alfred Bishop
Chief Branch 1
PRELIMINARY COPY
SUBJECT TO COMPLETION OR AMENDMENT, DATED JANUARY 19, 2000
INFORMATION STATEMENT
STILWELL FINANCIAL, INC.
Common Stock, par value $.01 per share
This information statement (the "Information Statement") is being
furnished by Kansas City Southern Industries, Inc., a Delaware corporation
("KCSI"), in connection with the distribution (the "Distribution") to holders
of record of common stock of KCSI ("KCSI Common Stock"), on [________], 2000
(the "Record Date") of two shares of common stock, par value $.01 per share,
including certain attached preferred stock purchase rights (collectively, the
"Stilwell Common Stock"), 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. Stilwell was formed recently 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
("Janus"), an investment advisory company, which represented approximately 95%
of the revenues and approximately 88% of the net income of KCSI's financial
services segment for the nine months ended September 30, 1999. The following
table, which presents summary financial information for KCSI (excluding
Stilwell) and Stilwell as of, and for the nine months ended September 30, 1999,
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 set forth
below does not necessarily reflect the financial position and results of
operations of the two companies if they had been operated as separate stand-
alone entities during the period presented.
STOCKHOLDERS' OPERATING NET
EQUITY ASSETS REVENUES INCOME INCOME
----------- ------ -------- --------- ------
(In Millions)
KCSI $ 478.8 $ 1,887.5 $ 449.7 $ 58.7 $ 17.4
Stilwell 681.9 1,016.1 826.7 345.5 214.6
-----------------------------------------------------------------
Total $ 1,160.7 $ 2,903.6 $ 1,276.4 $ 404.2 $ 232.0
===================================================================
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-Stilwell Financial, Inc.-Background." 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 to purchase the interests in Janus owned by
certain minority stockholders at the option of those holders at a 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 at a
purchase price 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 September 30, 1999, it would have been required to pay
approximately $481 million. Stilwell is also required under certain agreements
to purchase the interests in Janus owned by other minority stockholders at the
option of those holders upon the occurrence of certain changes in ownership of
KCSI or Stilwell at a 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 September 30, 1999, it
would have been required to pay approximately $692 million. Stilwell might
require additional financing if these options were exercised. 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 will be effective on [________, 2000], (the "Distribution
Date"), and it is expected that certificates representing Stilwell Common Stock
will be mailed within [____] days following the Distribution Date (the "Mailing
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 17.
____________________
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.
____________________
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.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Overview of the Distribution . . . . . . . . . . . . . . . . . . . . . 6
Overview of Stilwell's Business and Strategy . . . . . . . . . . . . . 10
Summary Financial and Operating Data . . . . . . . . . . . . . . . . 15
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
THE DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Background and Reasons for the Distribution. . . . . . . . . . . . . . 31
Manner of Effecting the Distribution . . . . . . . . . . . . . . . . . 34
Results of the Distribution. . . . . . . . . . . . . . . . . . . . . . 35
Differences in Rights of Stockholders Arising from Differences
Between the Certificates and Bylaws of Stilwell and KCSI. . . . . 35
Material Federal Income Tax Consequences . . . . . . . . . . . . . . . 36
Trading of Stilwell Common Stock . . . . . . . . . . . . . . . . . . . 38
Modification or Abandonment of the Distribution. . . . . . . . . . . . 39
Solvency and Surplus Opinion of Financial Advisor. . . . . . . . . . . 39
RELATIONSHIP BETWEEN KCSI AND STILWELL AFTER THE DISTRIBUTION . . . . . . 44
Intercompany Agreement . . . . . . . . . . . . . . . . . . . . . . . . 44
Tax Disaffiliation Agreement . . . . . . . . . . . . . . . . . . . . . 44
Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Description of the Credit Facilities . . . . . . . . . . . . . . . . 48
Need for Additional Financing. . . . . . . . . . . . . . . . . . . . . 49
CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SELECTED FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . . . . . . 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 55
BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Stilwell Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . 82
Stilwell's Principal Subsidiaries and Equity Investments . . . . . . . 82
Janus Capital Corporation . . . . . . . . . . . . . . . . . . . 82
Berger LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Nelson Money Managers Plc . . . . . . . . . . . . . . . . . . . 97
DST Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . 98
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Stilwell Business Strategy . . . . . . . . . . . . . . . . . . . . . . 100
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . 103
Composition of Stilwell's Board of Directors . . . . . . . . . . . . . 105
Committees of Stilwell's Board of Directors. . . . . . . . . . . . . . 105
Compensation of Stilwell's Directors . . . . . . . . . . . . . . . . . 106
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 106
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . 107
1998 Option/SAR Grants In Last Fiscal Year . . . . . . . . . . . . . . 110
1998 Aggregate Option Exercises and Year-End Option
Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Employment Agreements with the Named Executive Officers. . . . . . . . 113
Indemnification Agreements . . . . . . . . . . . . . . . . . . . . . . 116
Other Compensatory Plans and Arrangements. . . . . . . . . . . . . . . 117
PRINCIPAL STOCKHOLDERS AND STOCK OWNED BENEFICIALLY
BY STILWELL'S DIRECTORS AND CERTAIN EXECUTIVE OFFICERS. . . . . . . . . 121
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . 123
DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . 124
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Certain Antitakeover Effects . . . . . . . . . . . . . . . . . . . . . 125
Stockholders' Rights Plan. . . . . . . . . . . . . . . . . . . . . . . 129
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 130
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . F-1
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS 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, 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 plans to rebuild and
operate 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. To 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,
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 Stilwell Common Stock, including
Stilwell Common Stock certain attached preferred stock purchase
To Be Received By Each rights, for every one share of KCSI Common Stock
KCSI Stockholder 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 in order
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 September 30, 1999,
approximately 221,000,000 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
to Modify or Abandon or abandoned at any time prior to the Record
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
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."
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.
Date Certificates are to
Be Mailed Certificates representing the shares of
Stilwell 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
Distribution Will B Ruling") from the Internal Revenue Service (the
Tax-Free "IRS") to the effect that for United States
federal income tax purposes, the Distribution
qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of
1986, as amended (the "Code") and thus no gain
or loss will be recognized by KCSI or Stilwell
from the Distribution or by the holders of KCSI
Common Stock upon receipt of the Stilwell Common
Stock in the Distribution. See "Risk Factors-
Material Inaccuracy of Representations or
Assumptions Underlying the Tax Ruling Could
Cause the Distribution not to be Tax-Free,
Resulting in Substantial Corporate Taxable Gain,
and Certain Post-Distribution Transactions Could
Subject KCSI or Stilwell to Substantial Tax and
Indemnification Obligations" and "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. The
payment of dividends by Janus is subject to the
discretion of its Board of Directors and
although Stilwell has a contractual obligation
to cause such payment, another party has the
right to nominate a majority of that Board. See
"Risk Factors-Various Factors May Hinder the
Declaration and Payment of Dividends by Stilwell
Following the Distribution" and "Dividend
Policy."
Risk Factors To Be Stockholders should carefully consider the
Considered matters discussed in the section entitled "Risk
Factors" for a complete discussion of the
matters that should be considered in owning
Stilwell Common Stock.
Provisions Which May Have
Antitakeover Effects Provisions of Stilwell's certificate of
incorporation (the "Certificate") and bylaws
(the "Bylaws"), certain agreements, Stilwell's
Stockholders' Rights Plan (the "Rights Plan"),
and provisions of the Delaware General
Corporation Law and 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."
* * *
<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 82% owned
subsidiary; Berger LLC ("Berger"), of which Stilwell 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 KCSI 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 96% of assets under
management at September 30, 1999 and 95% of revenues and 88% of net
income for the nine months ended September 30, 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 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 investments 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.
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"), 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) there was a lack of certainty
that a favorable tax ruling could be obtained in a timely manner, or 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. For the year 2000, a grant to Janus
employees of 30,182 shares of Janus common stock has been approved, 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."
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'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 and Janus World Funds plc
(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 September 30, 1999, Janus had
total assets under management of $165.0 billion, of which $132.8
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 September 30,
1999. At that date, funds advised by Janus had more than 3.7 million
shareowner accounts. For the five-year period ended September 30,
1999, Janus' total assets under management increased 629 percent. See
"Business-Stilwell's Principal Subsidiaries and Equity Investments-
Janus Capital Corporation."
BERGER LLC
----------
Berger is the successor 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-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 (as defined in "Business--Stilwell's
Principal Subsidiaries and Equity Investments-Berger LLC"). In addition,
Berger owns 50% of BBOI Worldwide LLC, a Delaware limited liability
company ("BBOI"), a joint venture with the Bank of Ireland Asset
Management (U.S.) Limited ("BIAM"). Berger and BIAM are currently
negotiating the sale of Berger's interest in BBOI to BIAM and,
alternatively, the dissolution of BBOI. BBOI serves as the investment
adviser and sub-administrator to the Berger/BIAM Funds (as defined in
"Business--Stilwell's Principal Subsidiaries and Equity Investments-
Berger LLC"). Moreover, BBOI acts as investment adviser to certain
separate accounts (the "BBOI Sub-Advised Funds"). 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 September 30, 1999, the Berger
Complex (as defined in "Business--Stilwell's Principal Subsidiaries and
Equity Investments-Berger LLC") had total assets under management of $4.9
billion. Of this amount, Berger managed $3.8 billion in the Berger
Advised Funds and $0.4 billion in the Berger Sub-Advised Funds; BBOI
managed $0.3 billion in the Berger/BIAM Funds and $0.4 billion in the
BBOI Sub-Advised Funds; and B/B Isle managed less than $0.1 billion in
the B/B Isle Separate Accounts. As of September 30, 1999, funds included
in the Berger Complex had more than 243,000 shareowner accounts. For the
five-year period ended September 30, 1999, assets under management in the
Berger Complex increased by 68 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 September 30, 1999, Nelson
employed approximately 40 investment advisers and managed approximately
$1.2 billion ((Pound)750 million) in assets. At September 30, 1999,
Nelson managed assets for more than 13,000 individuals. For the five-
year period ended September 30, 1999, Nelson's total assets under
management increased by 105 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 and
other financial services organizations. DST's Customer Management
segment provides services and products to cable television, direct
broadcast satellite, wireless and wire-line telephony, utility and multi-
service providers. 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
requirements regarding separation of investment decisions and maintain
compliance with certain minority stockholder agreements.
ORGANIZATIONAL STRUCTURE
The following chart shows the organizational structure of Stilwell's
principal subsidiaries and equity investments.
[Organizational Chart Inserted Here]
<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, 1998 was
derived from the audited consolidated financial statements of Stilwell. The
summary financial data as of and for the nine months ended September 30, 1998
and 1999 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 September 30, 1999 (1,000 shares outstanding), pro forma
earnings per share information is presented for the year ended December 31,
1998 and for the nine months ended September 30, 1998 and 1999. 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 September 30, 1999.
In addition, dilutive options were included based on the number of dilutive
KCSI stock options assumed to be exercised as of September 30, 1999 in
connection with the determination of KCSI's diluted earnings per share
computations. Pro forma basic and diluted earnings per share 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, 1998 and 1999,
respectively. See "Financing--Description of the Credit Facilities." The
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results for the full fiscal year.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
-------------------------------------------------- ----------------
1994(i) 1995(ii) 1996(iii) 1997 1998(iv) 1998 1999
---- ---- ---- ---- ---- ---- ----
(Dollars in Millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
- --------------
INCOME STATEMENT
DATA:
Revenues $583.8 $236.7 $329.6 $485.1 $670.8 $490.1 $826.7
Operating expenses 515.2 156.5 197.8 285.9 390.2 280.1 481.2
------ ------ ------ ------ ------ ------ ------
Operating Income 68.6 80.2 131.8 199.2 280.6 210.0 345.5
Equity in earnings
of unconsolidated
affiliates 24.8 29.6 68.6 24.9 25.8 23.8 34.1
Reduction in
ownership of DST -- -- -- -- (29.7) -- --
Gain on sale
of DST -- 296.3 -- -- -- -- --
Other, net 0.4 3.7 8.2 5.8 12.6 10.5 16.1
------ ------ ------ ------ ------ ----- -----
Pretax Income 93.8 409.8 208.6 229.9 289.3 244.3 395.7
Income tax
provision 31.4 181.3 58.2 87.0 103.7 88.6 142.5
Minority interest 5.3 10.5 15.8 24.9 33.4 25.8 38.6
------ ------ ------ ------ ------ ----- -----
Net Income $ 57.1 $218.0 $134.6 $118.0 $152.2 $129.9 $214.6
====== ====== ====== ====== ====== ===== ======
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 $57,100 $218,000 $134,600 $118,000 $152,200 $129,900 $214,600
Diluted Earnings
per share 57,100 218,000 134,000 117,400 149,900 128,900 211,200
Pro Forma
Per Share Data:
Common shares
outstanding (in
thousands) 221,038 221,038 221,038
Basic Earnings per share $ 0.67 $ 0.57 $ 0.95
Diluted Common
shares outstanding
(in thousands) 228,585 228,585 228,585
Diluted Earnings per share $ 0.63 $ 0.55 $ 0.91
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $672.4 $475.2 $548.2 $672.6 $822.9 $799.2 $1,016.1
Long term obligations:
Third Parties 38.5 0.4 0.1 -- -- -- --
KCSI 223.1 -- 117.3 84.1 16.6 19.7 --
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) 25.9 $ 34.5 $ 50.3 $ 71.6 $113.5 $ 88.5 $171.1
Total Shareowner
Accounts
(in millions) 2.4 2.5 2.5 2.7 3.0 3.0 4.0
<FN>
<F1>
(i) Reflects DST as a consolidated subsidiary. See (ii) below for discussion of DST
public offering in 1995.
<F2>
(ii) 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.
<F3>
(iii) 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.
<F4>
(iv) 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.
</FN>
</TABLE>
<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 investments 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 [January _____, 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.
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 only recently 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 such traders to a risk of loss if the Distribution does not occur. See
"The Distribution-Trading of Stilwell Common Stock." 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."
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."
MATERIAL INACCURACY OF REPRESENTATIONS OR ASSUMPTIONS UNDERLYING THE TAX RULING
COULD CAUSE THE DISTRIBUTION NOT TO BE TAX-FREE, RESULTING IN SUBSTANTIAL
CORPORATE TAXABLE GAIN, AND CERTAIN POST-DISTRIBUTION TRANSACTIONS COULD
SUBJECT KCSI OR STILWELL TO SUBSTANTIAL TAX AND INDEMNIFICATION OBLIGATIONS
The Tax Ruling is based on factual representations and assumptions
provided by KCSI. If these factual representations or assumptions were
incorrect in any material respect, the ability of KCSI and Stilwell to rely on
the Tax Ruling would be jeopardized. Neither KCSI nor Stilwell is aware of any
facts or circumstances which should cause such representations and assumptions
to be untrue.
If the Distribution were not to qualify as a tax-free distribution within
the meaning of Section 355 of the Code, KCSI would recognize taxable gain equal
to the excess of the fair market value of the Stilwell Common Stock distributed
to KCSI's stockholders over KCSI's tax basis in the Stilwell Common Stock.
Such corporate taxable gain could amount to $4-5 billion or more. In addition,
each KCSI stockholder who receives the Stilwell Common Stock in the
Distribution would generally be treated as receiving a taxable distribution in
an amount equal to the fair market value of the Stilwell Common Stock.
If the Distribution qualified under Section 355 of the Code but was
disqualified as tax-free to KCSI because of certain post-Distribution
circumstances, such as an acquisition of Stilwell or of KCSI under certain
circumstances within two years after the Distribution, KCSI would recognize
taxable gain. Such corporate taxable gain to KCSI could amount to $4-5 billion
or more.
In the Tax Disaffiliation Agreement, KCSI and Stilwell each agreed 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. In addition, KCSI and Stilwell are each required to indemnify the
other for any taxes resulting from any changes in their respective ownership.
See "Relationship Between KCSI and Stilwell After the Distribution-Tax
Disaffiliation Agreement."
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 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."
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.
PROVISIONS OF STILWELL'S GOVERNING DOCUMENTS, ITS RIGHTS PLAN AND RESTRICTIONS
RELATING TO THE TAX RULING COULD HAVE THE EFFECT OF DELAYING OR PREVENTING A
CHANGE IN CONTROL OF STILWELL, WHICH MAY HAVE AN ADVERSE EFFECT ON THE MARKET
PRICE OF STILWELL COMMON STOCK
Some provisions of Stilwell's Certificate and Bylaws, the Rights Plan and
restrictions relating to the Tax Ruling may delay or make more difficult
acquisitions or changes in control of Stilwell, which may have an adverse
effect on 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."
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 221,000,000 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. The payment of dividends by Janus is subject to the discretion of its
Board of Directors and although Stilwell has a contractual obligation to cause
such payment, another party has the right to nominate a majority of that
Board. See "Dividend Policy."
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."
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 "Stilwell's Inability to Attract and Retain Key
Personnel Could Have a Material Adverse Effect on Its Future Success."
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 purchase price
equal to fifteen times the net after-tax earnings over a specified period, or
in some circumstances at a purchase price determined by an independent
appraisal. 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 September 30, 1999, Stilwell would have been required to pay
approximately $481 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 September 30, 1999, Stilwell would have
been required to pay approximately $692 million. Stilwell could require
additional financing to make these purchases. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Minority Purchase
Agreements." If such purchases included a reduction in ownership of Janus
common stock held by its Chief Executive Officer, to below 5%, this could be
deemed to constitute a change of control which may 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 a stock purchase agreement with Thomas H. Bailey, Janus' Chairman,
President and Chief Executive Officer, and another Janus stockholder (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
purchase price equal to fifteen times the net after-tax earnings over the
period indicated in the relevant agreement, or in some circumstances at a
purchase price 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 in either instance 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 (2) 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
many of these other agreements have been assigned to Stilwell, but some of the
agreements have not yet 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."
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, failure of the securities markets to sustain their
recent levels of growth, or short-term volatility in the securities markets
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
of the Securities and Exchange Commission would not constitute such an
assignment. However, a material reduction in the ownership of Janus common
stock by its chief executive officer may result in an assignment by virtue of
certain provisions in an agreement with him. 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 ("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-
Stilwell Financial, Inc. - Background" 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
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"
and "Management."
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
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.
Stilwell intends to seek to obtain any additional financing for general
corporate purposes on substantially the same terms and conditions as its
existing credit facilities. 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 "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
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 Thomas H. Bailey ("Mr. Bailey"),
Chairman, President and Chief Executive Officer of Janus and 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
of Janus, 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 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 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.
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.
IF STILWELL HAS NOT FULLY RESOLVED ITS YEAR 2000 ISSUES, STILWELL'S RESULTS OF
OPERATIONS, FINANCIAL POSITION AND CASH FLOWS COULD BE ADVERSELY AFFECTED
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. It is too soon to determine if Stilwell will experience any
material adverse consequences as a result of the Year 2000 problem. The Year
2000 problem could result in significant difficulties in processing and
completing fundamental transactions. In such event, Stilwell's results of
operations, financial position and cash flows could be materially adversely
affected. Stilwell has been working with project teams comprised of employees
and third party consultants to identify and resolve the numerous issues
surrounding the Year 2000 with respect to Stilwell.
These Year 2000 related issues are of particular importance to Stilwell.
Stilwell depends upon its computer and other systems and the computers and
other systems of third parties (including DST) to conduct and manage its
business. 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, 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 it could be
substantial.
Areas that could be affected include, but are not limited to, the
ability to accurately track pricing and trading information, obtain, process
and complete 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 result of Year 2000 related issues. Stilwell has no
basis to form an estimate of possible costs or lost revenues at this time.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
* * *
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.
<PAGE>
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 an
approximately 82% 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 qualifies 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 completing the
Distribution. No further stockholder vote is required in connection with the
Distribution.
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) there was a lack of certainty that a favorable tax ruling could be
obtained in a timely manner, or at all, with respect to the alternative
proposal, and (iv) the Distribution was more consistent with the strategic
direction of Stilwell.
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.
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. For the year 2000, a grant
to Janus employees of 30,182 shares of Janus common stock has been approved,
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 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
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. 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.
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 September
30, 1999 and the number of stockholders as of September 30, 1999, approximately
221,000,000 shares of Stilwell Common Stock will be distributed to
approximately 5,500 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) stockholder nominations of directors and
business to be brought by stockholders, (f) prohibiting stockholder action by
written consent in lieu of a meeting and (g) 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, or (iii) 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) amending the Stilwell Bylaws, (c) approving
Certain Transactions with a person or entity (or affiliate thereof) holding
more than 20% of the Voting Stock, (d) 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, (e)
indemnification of officers, directors and others and (f) 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
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
KCSI received the Tax Ruling to the effect that for United States federal
income tax purposes, the Distribution qualifies as a tax-free distribution
under Code Section 355 and thus no gain or loss will be recognized by KCSI or
Stilwell 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. 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 for any reason, including inaccuracy in the factual
representations and assumptions in the Tax Ruling. See "Risk Factors-Material
Inaccuracy of Representations or Assumptions Underlying the Tax Ruling Could
Cause the Distribution not to be Tax-Free, Resulting in Substantial Corporate
Taxable Gain, and Certain Post-Distribution Transactions Could Subject KCSI
or Stilwell to Substantial Tax and Indemnification Obligations." 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.
(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 (but
including transactions up to 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
Common Stock. 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-
Provisions of Stilwell's Governing Documents, its Rights Plan and Restrictions
Relating to the Tax Ruling could have the Effect of Delaying or Preventing a
Change in Control of Stilwell which may have an Adverse Effect on 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
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.
- -----------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------
Market Cap.(1) LTM Revenues LTM Revenue LTM EBITDA
Company (millions) (millions) Growth Margin,
Adj.(2)
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------
Enterprise Value as a Multiple of Adj. Ent. Val./
Company LTM Projected LTM Adj. LTM
EBITDA EBITDA Revenues EBITDA(1)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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.
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.
<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 that date. 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, KCSI
shall provide Stilwell with inquiry-only access to its computer system and data
available regarding Stilwell on that system for a transitional period after the
Distribution Date. In addition, for a limited time, KCSI will provide Stilwell
with certain office space and make normal office services (including fax,
photocopy, telephone, computers, maintenance and cleaning) available during the
time Stilwell occupies any of KCSI's office space. The cost associated with the
services and facilities to be provided by KCSI will be a fixed dollar amount or
percentage based on the estimated cost to KCSI of providing such services and
facilities. 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 or facilities will not exceed the amounts that would have to be paid
if such services and facilities 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
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
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 17,000,000 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 1998 Amended and Restated Long Term Incentive Stock Plan
("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.
- - 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.
<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.
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.
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% 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.
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. 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."
<PAGE>
CAPITALIZATION
Set forth below is the capitalization of Stilwell as of September 30, 1999
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.
September 30, 1999
Actual Pro Forma
------ ---------
(in millions)
Debt obligations(1) $ -- $ 125.0
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;
(221,037,978 issued and outstanding,
as adjusted) (2) -- 2.2
Net investment by KCSI 106.8 0
Retained Earnings 499.9 374.9
Accumulated other comprehensive income 75.2 75.2
Additional paid-in capital -- 104.6
------ ------
Total Equity 681.9 556.9
------ ------
Total Capitalization $ 681.9 $681.9
======= ======
(1) KCSI has arranged a new $200 million 364-Day Senior Unsecured
Competitive Advance/Revolving Credit Facility which has been assumed by
Stilwell. Approximately $125 million was outstanding upon assumption of
the New Credit Facility. See "Financing-Description of the Credit
Facilities."
(2) Based on an assumed two shares of Stilwell Common Stock for every one
share of KCSI Common Stock. There were 110,518,989 shares of KCSI
Common Stock issued and outstanding at September 30, 1999. Excludes an
estimated 17,240,864 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).
<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. The
payment of dividends by Janus is subject to the discretion of its Board of
Directors and although Stilwell has a contractual obligation to cause such
payment, another party has the right to nominate a majority of that Board. See
"Risk Factors-Various Factors May Hinder the Declaration and Payment of
Dividends by Stilwell Following the Distribution."
<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, 1998 was
derived from the audited consolidated financial statements of Stilwell. The
selected financial data as of and for the nine months ended September 30, 1998
and 1999 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 September 30, 1999 (1,000 shares outstanding), pro forma earnings per
share information is presented for the year ended December 31, 1998 and for
the nine months ended September 30, 1998 and 1999. 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 September 30, 1999. In
addition, dilutive options were included based on the number of dilutive KCSI
stock options assumed to be exercised as of September 30, 1999 in connection
with the determination of KCSI's diluted earnings per share computations.
Pro forma basic and diluted earnings per share 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, 1998 and 1999, respectively. See "Financing-
Description of the Credit Facilities." The results for the nine months ended
September 30, 1999 are not necessarily an indication of the results for the
full fiscal year.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
----------------------------------------------------- --------------
1994 (i) 1995 (ii) 1996 (iii) 1997 1998 (iv) 1998 1999
---- ---- ---- ---- ---- ---- ----
(Dollars in Millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
- --------------
INCOME STATEMENT
DATA:
Revenues $583.8 $236.7 $329.6 $485.1 $670.8 $490.1 $826.7
Operating expenses 515.2 156.5 197.8 285.9 390.2 280.1 481.2
------ ------ ------ ------ ------ ------ ------
Operating Income 68.6 80.2 131.8 199.2 280.6 210.0 345.5
Equity in earnings
of unconsolidated
affiliates 24.8 29.6 68.6 24.9 25.8 23.8 34.1
Reduction in
ownership of DST -- -- -- -- (29.7) -- --
Gain on sale
of DST -- 296.3 -- -- -- -- --
Other, net 0.4 3.7 8.2 5.8 12.6 10.5 16.1
------ ------ ------ ------ ------ ----- -----
Pretax Income 93.8 409.8 208.6 229.9 289.3 244.3 395.7
Income tax
provision 31.4 181.3 58.2 87.0 103.7 88.6 142.5
Minority interest 5.3 10.5 15.8 24.9 33.4 25.8 38.6
------ ------ ------ ------ ------ ----- -----
Net Income $ 57.1 $218.0 $134.6 $118.0 $152.2 $129.9 $214.6
====== ====== ====== ====== ====== ===== ======
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 $57,100 $218,000 $134,600 $118,000 $152,200 $129,900 $214,600
Diluted Earnings
per share 57,100 218,000 134,000 117,400 149,900 128,900 211,200
Pro Forma
Per Share Data:
Common shares
outstanding (in
thousands) 221,038 221,038 221,038
Basic Earnings per share $ 0.67 $ 0.57 $ 0.95
Diluted Common
shares outstanding
(in thousands) 228,585 228,585 228,585
Diluted Earnings per share $ 0.63 $ 0.55 $ 0.91
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets $672.4 $475.2 $548.2 $672.6 $822.9 $799.2 $1,016.1
Long term obligations:
Third Parties 38.5 0.4 0.1 -- -- -- --
KCSI 223.1 -- 117.3 84.1 16.6 19.7 --
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) $ 25.9 $ 34.5 $ 50.3 $ 71.6 $113.5 $ 88.5 $171.1
Total Shareowner
Accounts
(in millions) 2.4 2.5 2.5 2.7 3.0 3.0 4.0
<FN>
<F1>
(i) Reflects DST as a consolidated subsidiary. See (ii) below for discussion of DST
public offering in 1995.
<F2>
(ii) 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.
<F3>
(iii) 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 Continuum, formerly a DST equity affiliate, with CSC in a tax-free share
exchange.
<F4>
(iv) 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 fourth quarter merger-related costs.
</FN>
</TABLE>
<PAGE>
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.
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.
RESULTS OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
Consolidated operating results from 1996 to September 30, 1999 were
affected by the following significant developments.
BERGER MANAGEMENT REALIGNMENT. In second quarter 1999, Berger appointed a
new president and chief executive officer and realigned the management of
several of its advised funds. Two existing Berger portfolio managers assumed
the responsibility for Berger's largest fund, the Berger One Hundred Fund which
had $1.3 billion of assets under management at September 30, 1999.
Additionally, changes in portfolio management were made for the Berger Balanced
Fund and the Berger Select Fund.
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.
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 $1.2 billion
((Pound)696 million) in assets as of December 31, 1998. The acquisition,
which was accounted for as a purchase, was completed using a combination of
cash, KCSI Common Stock and notes payable. The KCSI Common Stock issued in
connection with the transaction has been reflected as a contribution from
KCSI to Stilwell in the consolidated financial statements. The total
purchase price was approximately $33 million, and the amount in excess of the
fair market value of the net tangible and identifiable intangible assets
received was recorded as goodwill, to be amortized over a period of 20 years.
If the acquisition of Nelson had been completed January 1, 1998, inclusion of
Nelson's results on a pro forma basis would not have been material to
Stilwell's consolidated results of operations for the year ended December 31,
1998.
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.
BERGER OWNERSHIP INTEREST. In January and December 1997, Berger purchased,
for treasury, the common stock of minority stockholders. In December 1997,
Stilwell also acquired additional Berger shares from a minority stockholder
through the issuance of shares of KCSI Common Stock. The shares of KCSI Common
Stock are reflected as a contribution from KCSI to Stilwell in the financial
statements of Stilwell. As a result of such transactions, Stilwell increased
its ownership in Berger to 100% from approximately 80% at December 31, 1996.
The various 1997 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 "Asset Impairment Charges" above.
Stilwell's acquisition of a 100% interest in Berger included several
transactions under a stock purchase agreement (the "Berger SPA") covering a
period ending no later than October 1999. Pursuant to the Berger SPA, Stilwell
made additional purchase price payments of $3.0 million during third quarter
1999. No additional payments will be made thereafter. In 1996 and 1997,
Stilwell made additional purchase price payments of $23.9 and $3.1 million,
respectively. Stilwell made no payments under the Berger SPA during 1998.
These goodwill amounts are being amortized over 15 years.
DST'S INVESTMENT IN CONTINUUM. On August 1, 1996, Continuum, formerly
an approximately 23% owned DST equity affiliate, merged with CSC in a tax-
free share exchange. In exchange for its ownership interest in Continuum,
DST received common stock in CSC, which DST accounts for as "available for
sale" securities as defined in Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
("FAS 115").
As a result of the transaction, Stilwell's earnings for the year ended
December 31, 1996 include Stilwell's $47.7 million after-tax share of the
one-time gain recognized by DST in connection with the merger. Continuum
ceased to be an equity affiliate of DST, thereby eliminating any future
equity earnings or losses from Continuum.
See also "The Distribution - Background and Reasons for the
Distribution" and "Business - Berger LLC."
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 82% owned subsidiary; Berger, of which Stilwell 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 KCSI holds an
approximate 32% interest; and the Miscellaneous Corporations. KCSI
transferred to Stilwell KCSI's investments 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
Stilwell's revenues, operating income and net income (including amortization
and interest costs attributed to the respective subsidiary) were as follows
(in millions):
Nine Months
Ended September 30,
-----------------------
1998 1999
---- ----
Revenues
Janus $ 457.0 $ 786.6
Berger 25.8 27.9
Other 7.3 12.2
-------- --------
Total $ 490.1 $ 826.7
======== ========
Operating income (loss):
Janus $ 220.1 $ 360.3
Berger 0.5 (3.2)
Other (10.6) (11.6)
-------- --------
Total $ 210.0 $ 345.5
======== ========
Net income (loss):
Janus $ 119.5 $ 188.3
Berger (2.6) (0.9)
Other 13.0 27.2
-------- --------
Total $ 129.9 $ 214.6
======== ========
Assets under management as of September 30, 1998 and 1999 were as follows (in
billions):
September 30,
-----------------------
1998 1999
---- ----
JANUS
Janus Advised Funds:
Janus Investment Funds (i) $60.0 $114.6
Janus Aspen Series (ii) 4.7 10.9
Janus Money Market Funds 3.5 6.5
Janus World Funds (iii) -- 0.8
------- ------
Total Janus Advised Funds 68.2 132.8
Janus Sub-Advised Funds
and Private Accounts 15.8 32.2
------- ------
Total Janus 84.0 165.0
------- ------
BERGER
Berger Advised Funds 2.6 3.8
Berger/BIAM Funds 0.2 0.3
Berger and BBOI Sub-Advised Funds 0.6 0.8
------- ------
Total Berger 3.4 4.9
------- ------
NELSON 1.1 1.2
------- ------
Total Assets Under Management $88.5 $171.1
======= ======
(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 are a group of Ireland-domiciled funds introduced
in December 1998.
For the nine months ended September 30, 1999, Stilwell reported
consolidated earnings of $214.6 million, an $84.7 million increase over
comparable 1998. Exclusive of an after-tax $4.4 million gain resulting from
Janus' sale of IDEX Management, Inc. ("IDEX") in second quarter 1998,
earnings improved 71% period to period. Stilwell consolidated revenues
reached $826.7 million, an increase of 69% over prior year, fueling a 65%
increase in operating income (to $345.5 million).
Net sales of $34.8 billion and appreciation of $22.8 billion resulted in
a 51% increase in assets under management during the nine months ended
September 30, 1999. Average assets under management for the current nine
month period were 74% higher than the same period in 1998. In addition,
shareowner accounts grew more than 33% during the nine months ended
September 30, 1999, surpassing 4.0 million as of period end.
A 72% increase in operating expenses through September 30, 1999 compared
to 1998 resulted in slightly lower operating margins period to period (from
42.8% to 41.8%). The increase in expenses reflects higher costs associated
with the significant growth in revenues, as well as an increase in
discretionary expenses.
Higher expenses occurred in the following key areas: i) salaries and
wages, resulting from investment performance-based incentive compensation, an
increase in the number of employees and associated training, and a one-time
noncash compensation charge resulting from the formation of Berger, LLC; ii)
marketing and promotion, resulting from efforts to strengthen brand names and
to capitalize on favorable investment performance; and iii) alliance fees
under mutual fund "supermarket" distribution arrangements, resulting from an
increase in average assets under management through these channels period to
period. These three expense components were approximately 44% of total
Stilwell revenues during the nine months ended September 30, 1999 versus
approximately 42% in 1998 and 44% through June 30, 1999. Additionally,
infrastructure initiatives throughout 1998 and 1999 to ensure the ongoing
quality and reliability of customer service resulted in higher depreciation
and various other expenses.
Year to date 1999 equity earnings from DST totaled $32.4 million, a 43%
increase over the same period in 1998. This growth was driven by increased
operating earnings in DST's financial services and output solutions segments
(partly due to revenue growth of 11% and 17%, respectively), required
capitalization of software development costs, higher equity earnings of
unconsolidated DST affiliates and improved operating margins. Consolidated
DST revenues through September 30, 1999 increased 11% compared to the prior
year as a result of a higher number of shareowner accounts processed (54.8
million at September 30, 1999 versus 49.8 million at December 31, 1998),
images produced and statements mailed.
The 16% increase in Other, net is attributable to 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; and iii) gains
resulting from the issuance of Janus shares to certain of its employees,
which reduced Stilwell's ownership of Janus. Year to date 1998 includes the
gain resulting from Janus' sale of IDEX during second quarter 1998.
Year to date 1999 interest expense declined $3.0 million from the same
1998 period due to lower average debt balances.
A brief discussion of significant Janus, Berger and Nelson items during
the nine months ended September 30, 1999 follows:
Janus
-----
Janus assets under management increased $56.7 billion (52%) during the
nine months ended September 30, 1999. Since September 30, 1998, Janus
assets under management have nearly doubled and shareowner accounts
have grown by more than 40%, reflecting ongoing favorable investment
performance by the various funds/portfolios within the Janus group of
mutual funds, continued growth through net sales and competitive levels
of expenses and fees compared to industry standards.
Berger
------
Berger assets under management increased 23% (to $4.9 billion) during
the nine months ended September 30, 1999, and 44% compared to the $3.4
billion assets under management at September 30, 1998. Shareowner
accounts declined approximately 12% (primarily in the Berger One
Hundred Fund) during the nine months ended September 30, 1999; however,
net sales of $163 million - primarily in Berger's newer fund offerings
- offset the cash outflows that accompanied shareowner departures. In
connection with efforts to revitalize the core Berger funds (e.g.,
those introduced prior to 1997), certain senior management personnel
changes were undertaken during second quarter 1999, resulting in one-
time severance costs.
Nelson
------
Stilwell acquired Nelson in April 1998. Accordingly, results for 1998
include only six months of activity compared to the nine month period
ended September 30, 1999. Nelson's assets under management increased
8% to (Pound) 750 million as of September 30, 1999 from (Pound) 696
million at December 31, 1998. Beginning in late first quarter 1999,
Nelson initiated expansion efforts throughout the United Kingdom. This
project will be ongoing 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 material impact on Stilwell's
results of operations or financial position.
YEAR TO YEAR COMPARISONS
Stilwell's revenues, operating income and net income (including
amortization and interest costs attributed to the respective subsidiary) were
as follows (in millions):
December 31,
1996 (i) 1997 1998 (ii)
------- ---- ---------
REVENUES:
Janus $295.3 $450.1 $626.2
Berger 34.6 34.9 33.5
Other (0.3) 0.1 11.1
------ ------ ------
Total $329.6 $485.1 $670.8
====== ====== ======
OPERATING INCOME (LOSS):
Janus $136.6 $224.4 $294.1
Berger 5.7 (14.3) 0.4
Other (10.5) (10.9) (13.9)
------ ------ ------
Total $131.8 $199.2 $280.6
====== ====== ======
NET INCOME (LOSS):
Janus $ 70.3 $117.7 $161.4
Berger (1.2) (17.8) (3.2)
Other 65.5 18.1 (6.0)
------ ------ ------
Total $134.6 $118.0 $152.2
====== ====== ======
(i) Includes a one-time after-tax gain of $47.7 million representing
Stilwell's proportionate share of the one-time gain recognized by DST in
connection with the merger of Continuum with CSC in a tax-free share
exchange.
(ii) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax) resulting from the merger of a wholly-owned subsidiary of DST
with USCS. 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,
1996 1997 1998
---- ---- ----
JANUS
Janus Advised Funds
Janus Investment Funds $33.2 $47.5 $ 75.9
Janus Aspen Series 1.4 3.3 6.2
Janus Money Market Funds 2.5 3.8 4.8
Janus World Funds plc -- -- 0.1
----- ----- -----
Total Janus Advised Funds 37.1 54.6 87.0
Janus Sub-Advised Funds
and Private Accounts 9.6 13.2 21.3
----- ----- -----
Total Janus 46.7 67.8 108.3
----- ----- -----
BERGER
Berger Advised Funds 3.3 3.2 3.3
Berger/BIAM Funds -- 0.1 0.2
Berger and BBOI Sub-Advised
Funds 0.3 0.5 0.5
----- ----- ------
Total Berger 3.6 3.8 4.0
----- ----- -----
NELSON -- -- 1.2
----- ----- -----
Total Assets Under Management $50.3 $71.6 $113.5
===== ===== ======
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
$38.4 million, or 29%, 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 $41.9 billion, or 59%, during 1998,
reaching $113.5 billion at December 31, 1998. Total shareowner accounts
exceeded three million as of December 31, 1998, a 12% increase over 1997.
Stilwell earned $118.0 million in 1997, a $16.6 million decline from
1996. Exclusive of certain one-time items in 1997 and 1996 as discussed in
"Significant Developments" above, earnings improved 53%. Revenues increased
$155.5 million over 1996, leading to higher operating income and improved
operating margins. Operating margins increased from 40% for the year ended
December 31, 1996 to 44% for 1997 (exclusive of one-time charges). Assets
under management increased 42% during 1997, reaching $71.6 billion at
December 31, 1997. Further, shareowner accounts grew to approximately 2.7
million as of December 31, 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.
Following is a detailed discussion of the operating results of the
primary subsidiaries of Stilwell.
JANUS CAPITAL CORPORATION
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, derived largely from fees based upon a percent of
assets under management, 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 $2.7 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 $329.4 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.
- - 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.
1997
Assets under management increased 45% during 1997 to $67.8 billion as a
result of net fund sales of $10.7 billion and market appreciation of $10.4
billion. Approximately $54.6 billion was invested in the Janus Advised Funds
with the remainder held by Janus Sub-Advised Funds and Private Accounts.
Equity portfolios comprised 92% of total assets under management at December
31, 1997. Total shareowner accounts grew 10% during 1997 to 2.4 million.
Driven by the increase in assets under management from 1996 to 1997,
Janus revenues improved 52% during 1997. Additionally, as a result of a
slower rate of growth in expenses compared to revenues during 1997, operating
margins improved to 50% versus 46% in 1996. Approximately 43% of Janus' 1997
operating expenses consisted of variable costs, 18% were discretionary and
the remainder represented fixed costs. The following discussion highlights
changes in key expense categories.
- - Salaries and wages increased year to year, primarily from a higher number
of employees in 1997 compared to 1996 and variable compensation tied to
investment and financial performance.
- - Alliance and mutual fund supermarket fees were higher in 1997 as a result
of a greater amount of assets being distributed through these channels -
approximately 28% of Janus' December 31, 1997 assets under management
were generated through these distribution arrangements compared to 23% as
of December 31, 1996.
GENERAL
The 60% and 45% increases in assets under management in 1998 and 1997,
respectively, are attributable to several factors including, among others:
(i) strong securities markets, particularly equities; (ii) strong investment
performance across all of Janus' products; (iii) strategic marketing and
public relations; (iv) effective use of third party distribution channels for
both retail and sub-advised products; and (v) a strong brand awareness.
During December 1998, Janus introduced the Janus World Funds, a group of
offshore multiclass funds modeled after certain of the Janus Investment Funds
and domiciled in Dublin, Ireland. There are currently seven investment
portfolios offered for sale, including two equity portfolios, three fixed
income portfolios, a balanced portfolio and a money market portfolio. Total
assets at December 31, 1998 were $66 million. More than 80% of sales were
made into the funds' class B shares, which require Janus to advance sales
commissions to various financial intermediaries. Payment of these
commissions, although minor as of December 31, 1998 in relation to Janus'
investment holdings, may impact future liquidity and cash resources. See
"Liquidity" and "Capital Structure."
Janus introduced the following domestic funds during the three year
period ended December 31, 1998:
- - 1998 - Janus Global Technology Fund; Janus Global Life Sciences Fund;
Janus Aspen Growth and Income Portfolio
- - 1997 - Janus Aspen Capital Appreciation Portfolio; Janus Aspen Equity
Income Portfolio
- - 1996 - Janus Aspen High Yield Portfolio; Janus Equity Income Fund; Janus
Special Situations Fund
In 1997 and 1998, Janus spent $11 and $41 million, respectively, on its
infrastructure 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. These efforts produced, among other things:
- - 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 personal Janus home page 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.
BERGER
1998
Berger reported 1998 net earnings of $3.9 million compared to $2.7 million
in 1997, exclusive of interest and amortization charges attributed to Berger in
both years and the 1997 one-time charges discussed in "Significant
Developments" above. Including the interest and amortization charges in both
years, Berger reported a net loss of $3.2 million in 1998 versus a loss of $5.1
million in 1997 (exclusive of the 1997 one-time charges). Total assets under
management held by the Berger Complex increased to $4.0 billion as of December
31, 1998, a 5% increase over comparable 1997. This increase was attributable
to market appreciation of $0.9 billion, largely offset by net redemptions of
$0.7 billion. While total Berger shareowner accounts decreased approximately
13% during 1998, primarily within the Berger One Hundred 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 $522 million at December 31, 1998 versus $161 million
at December 31, 1997.
1997
Berger reported net earnings of $2.7 million in 1997 compared to $5.2
million in 1996, excluding interest and amortization charges attributed to
Berger in both years and the one-time 1997 charges. Including interest and
amortization, Berger reported net losses of $5.1 and $1.2 million in 1997 and
1996, respectively. Assets under management increased to $3.8 billion at
December 31, 1997 from $3.6 billion at December 31, 1996. Shareowner accounts
declined 16% from 1996, totaling 317,400 at December 31, 1997. This decrease
generally reflects shareowner reaction to below-peer performance by certain of
the larger funds.
Due to higher average assets under management during 1997, Berger
experienced a slight increase in revenues year to year. Operating costs,
however, increased more than revenues, resulting in a higher net loss than the
prior year. Higher expenses (e.g., consulting fees and advertising) reflected
Berger's efforts to enhance product awareness and acceptance. Additionally,
during 1997, Stilwell increased its ownership in Berger to 100% through several
transactions by Berger and Stilwell. Stilwell recorded approximately $17.8
million in goodwill as a result of these transactions. Accordingly,
amortization expense was higher in 1997 than in 1996.
In connection with Stilwell's review of the recoverability of its assets,
Stilwell determined that $12.7 million of goodwill associated with its Berger
investment was not recoverable as of December 31, 1997, primarily due to below-
peer performance and growth of the core Berger funds. Accordingly, a portion
of the goodwill recorded in connection with the repurchase of Berger minority
interest was charged to expense.
GENERAL
During 1998 and 1997, Berger introduced five 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; and the Berger Select Fund. These funds held
approximately $493 million of assets under management at December 31, 1998,
more than three times the $155 million at December 31, 1997.
While the core Berger Funds (i.e., those introduced prior to 1997)
experienced declines in assets under management during 1998 and 1997, the newer
Berger offerings, as noted above, reported a growth in assets. Berger made
certain changes in the portfolio management of these core equity funds during
1998 and 1997 and believes these changes improve Berger's opportunity for
growth in the future.
At December 31, 1997 and 1998, approximately 26.3% and 27.6%,
respectively, of Berger's total assets under management were generated through
mutual fund "supermarkets."
OTHER SUBSIDIARIES / AFFILIATES AND HOLDING COMPANY COMPONENTS
NELSON MONEY MANAGERS PLC
As noted in the "Significant Developments" section above, Stilwell
acquired Nelson in April 1998. Nelson contributed $0.6 million to
consolidated earnings in 1998, exclusive of charges attributed to Nelson
relating to the amortization of intangibles recorded in connection with the
acquisition. Including the amortization costs, Nelson reported a net loss of
$0.7 million for the period from acquisition to December 31, 1998. Nelson
revenues - $11.1 million for the period from acquisition to year end 1998 -
were earned based on a percentage of funds under management for ongoing
management and administration of each client's portfolio, together with a fee
on the client's initial investment. 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
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).
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.
Equity in net earnings of DST for the year ended December 31, 1997 totaled
$24.3 million. Exclusive of the 1996 one-time gain on the Continuum merger
discussed in "Significant Developments" above, equity earnings from DST
increased 48% year to year. This increase in DST earnings reflects an increase
in 1997 DST revenues compared to 1996 (improvements in both domestic and
international revenues) and improved operating margins in 1997 (14.2% versus
9.8% in 1996).
INTEREST EXPENSE AND OTHER, NET
Fluctuations in interest expense from 1996 through 1998 reflect changes in
the average debt balances during the respective years. In 1998, average debt
balances were lower than 1997 as repayments reduced outstanding balances early
in 1998; accordingly, 1998 interest expense declined from 1997. Interest
expense in 1997 was higher than 1996 as a result of borrowings in connection
with KCSI's Common Stock repurchase program.
Other, net increased in 1998 versus 1997 as a result of an $8.8 million
(pretax) gain on the sale of Janus' 50% interest in IDEX. Janus continues as
sub-adviser to the five portfolios in the IDEX group of mutual funds it
served prior to the sale. This gain was partially offset by reduced 1998
other income recorded at Stilwell Financial, Inc. relating to a sales
agreement with a former affiliate. The change in other, net between 1997 and
1996 was not material.
TRENDS AND OUTLOOK
Future growth of Stilwell's revenues and operating income will be
largely dependent on prevailing financial market conditions, relative
performance of Janus, Berger and Nelson products, introduction and market
reception of new products, as well as other factors, including changes in the
stock and bond markets, increases in the rate of return of alternative
investments, 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. Additionally, a higher rate of growth in
costs compared to revenues is expected in connection with Nelson's efforts to
expand its operations.
Stilwell expects to continue to participate in the earnings or losses from
its DST investment.
LIQUIDITY
Summary cash flow data is as follows (in millions):
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
1996 1997 1998 1998 1999
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used for):
Operating activities $41.0 $147.0 $176.0 $136.4 $240.6
Investing activities (56.1) (45.0) (92.8) (67.9) (35.6)
Financing activities 8.9 (91.1) (95.3) (86.8) (123.3)
----- ----- ------ ----- -----
Net increase (decrease) in cash
and cash equivalents (6.2) 10.9 (12.1) (18.3) 81.7
Cash and cash equivalents at beginning
of period 29.0 22.8 33.7 33.7 21.6
----- ----- ----- ----- -----
Cash and cash equivalents at end
of period $22.8 $33.7 $21.6 $15.4 $ 103.3
===== ===== ===== ===== =====
</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):
Nine Months
Year Ended December 31, Ended September 30,
1996 1997 1998 1998 1999
------ ------- ------ ---- ----
<S> <C> <C> <C> <C> <C>
Net income $ 134.6 $ 118.0 $ 152.2 $129.9 $ 214.6
Depreciation and amortization 12.9 13.1 16.8 10.9 24.7
Equity in undistributed earnings (64.9) (24.7) (24.7) (23.1) (33.8)
Reduction in ownership of DST -- -- 29.7 -- --
Asset impairment charges -- 15.7 -- -- --
Employee deferred compensation 18.3 8.7 3.8 (2.8) 1.9
Deferred income taxes 3.0 (4.4) (12.4) 5.0 10.8
Minority interest in consolidate
earnings 15.8 24.9 33.4 25.8 38.6
Change in working capital items (71.1) (4.2) (12.3) 0.2 11.2
Prepaid Commissions -- -- -- -- (22.9)
Other (7.6) (0.1) (10.5) (9.5) (4.5)
------ ------ ----- ----- ----
Net operating cash flow $ 41.0 $ 147.0 $ 176.0 $136.4 $240.6
====== ====== ====== ==== =====
</TABLE>
Operating cash flow for the nine months ended September 30, 1999
increased by $104.2 million from September 30, 1998. This increase is
attributable to higher earnings driven by revenue growth, offset partially by
payments of prepaid commissions in connection with the Janus World Funds B
shares arrangement. 1998 operating cash flows increased by approximately
$29.0 million from 1997. This increase was primarily due to higher ongoing
earnings in 1998, partially offset by various changes in working capital
items.
Operating cash flows for the year ended December 31, 1997 exceeded 1996
by nearly $106 million, largely because of the 1996 payment of approximately
$74 million in federal and state income taxes resulting from the taxable
gains associated with the DST public stock offering and associated
transactions completed in November 1995. Also, ongoing earnings were
approximately $45.7 million higher in 1997 than in 1996.
INVESTING CASH FLOWS. Due to timing of operational needs and Janus
quarterly dividends, net sales of investments in advised funds of $3.8
million occurred for the nine months ended September 30, 1999 (compared to
net investment of $26.5 million through September 30, 1998). Due to growth
in operating cash flows throughout the 1996 to 1998 period (largely due to
increasing ongoing earnings), Janus and Berger had invested an additional
$40, $31 and $43 million in investments in advised funds at December 31,
1996, 1997 and 1998, respectively.
Cash was used for property acquisitions of $1.4, $5.8, and $35.0 million
in 1996, 1997, and 1998, respectively, and $28.3 and $28.6 million for the
nine months ended September 30, 1998 and 1999, respectively. The significant
increase in property acquisitions in 1998 and 1999 reflects the
infrastructure enhancements at Janus.
Cash was also used for investments in and loans with affiliates of $27.2
million in 1996 (primarily the additional payment to Berger under the Berger
SPA), $12.0 million in 1997, and $24.3 million in 1998 as a result of the
acquisition of Nelson. Approximately $21.1 and $17.2 million of cash was
used for investments in and loans with affiliates through September 30, 1998
and 1999, respectively, primarily relating to the 1998 investment in Nelson
and 1999 Janus treasury stock transactions.
FINANCING CASH FLOWS. For the period ending September 30, 1999, the net
activity with KCSI (which includes the change in long-term debt and note
receivable together with the amounts treated as net transfers from and
dividends to KCSI) resulted in cash to KCSI of $89.8 million. This cash
outflow represents dividends received by Stilwell (from Janus) that were
treated as passed through to KCSI (to the extent that Stilwell did not
require use of the cash for operational or strategic needs), as well as
repayment of indebtedness owed to KCSI. For the comparable 1998 period, the
net activity with KCSI was an outflow of $52.5 million reflecting the
repayment of indebtedness to KCSI, partially offset by amounts treated as
transfers to Stilwell from KCSI. These transfers were used, among other
things, in connection with the 1998 acquisition of 80% of Nelson.
For the year ended December 31, 1998, the net activity with KCSI
resulted in cash to KCSI of $55.1 million. This outflow was attributable to
repayment of indebtedness to KCSI, offset partially by amounts treated as
transfers to Stilwell from KCSI. These transfers were used primarily in
connection with the 1998 acquisition of 80% of Nelson.
In 1997, the net cash outflow to KCSI was $73.7 million, reflecting
dividends received by Stilwell from Janus and Berger treated as passed
through to KCSI (after satisfaction of ongoing Stilwell operational
obligations), as well as partial repayment of indebtedness to KCSI.
The net activity with KCSI for the year ended December 31, 1996 resulted
in a net inflow to Stilwell of $19.1 million. This net inflow was
attributable to: (i) repayment by KCSI of $70.4 million owed to Stilwell;
and (ii) borrowing by Stilwell from KCSI in connection with KCSI's Common
Stock repurchase program and for additional investment in Berger. Those net
inflows were largely offset by dividends received by Stilwell from Janus and
Berger that were treated as passed through to KCSI.
During the period from 1996 through September 30, 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.
CAPITAL STRUCTURE
CAPITAL REQUIREMENTS. Capital requirements, when necessary, for Janus,
Berger, Nelson and other subsidiaries have been funded with cash flows from
operations and negotiated term financing.
During 1998, Janus opened a new facility in Austin, Texas as an investor
service and data center for transfer agent operations, allowing for
continuous service in the event the Denver facility is unavailable. Also,
throughout the period from 1996 to September 30, 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, September 30,
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Debt due within one year $ 0.3 $ 0.1 $ -- $ --
Long-term debt (third parties and KCSI) 117.4 84.1 16.6 --
------ ----- ----- -----
Total debt (third parties and KCSI) 117.7 84.2 16.6
Stockholder's equity 234.8 348.3 540.2 681.9
------ ------ ------ -----
Total debt plus equity $352.5 $432.5 $556.8 $681.9
====== ====== ====== =====
Total debt as a percent of
total debt plus equity 33.3% 19.5% 3.0% 0.0%
====== ====== ====== =====
</TABLE>
During the period from December 31, 1996 to 1998, 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 by Stilwell and
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.
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 September 30, 1999, the full $100 million was available under the
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.
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 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 September 30, 1999. Because of certain financial
covenants contained in the credit facilities, however, maximum utilization of
Stilwell's lines of credit may be restricted.
MINORITY PURCHASE AGREEMENTS. The Janus Stock Purchase Agreement and
certain restriction agreements with other Janus minority stockholders
contain, among other provisions, mandatory put rights whereby at the election
of such minority stockholders, KCSI or Stilwell would be required to purchase
the minority interests of such Janus minority stockholders at a purchase
price equal to fifteen times the net after-tax earnings over the period
indicated in the relevant agreement, or in some circumstances at a purchase
price as determined by an independent appraisal. These agreements have been
assigned to Stilwell. If all of the puts under such Janus minority
stockholder agreements were exercised, Stilwell would have been required to
pay approximately $481 million as of September 30, 1999, compared to (in
millions) $220, $337 and $456 at December 31, 1996, 1997 and 1998,
respectively. Payment for the purchase of the respective minority interests
is to be made under the Janus Stock Purchase Agreement 30 days after
receiving notification of exercise of the put rights. Under the restriction
agreements, payment for the purchase of the respective minority interests is
to be made 30 days after the later to occur of (i) receiving notification of
exercise of the put rights or (ii) determination of the purchase price
through the independent appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements
and restriction agreements with other minority stockholders also contain
provisions whereby upon the occurrence of a Change in Ownership (as defined
in such agreements) of Stilwell (as to the Janus Stock Purchase Agreement) or
(as to the other agreements) KCSI (which will not be affiliated with Stilwell
following the Distribution), Stilwell may be required to purchase such
holders' Janus stock or, as to the stockholders that are parties to the Janus
Stock Purchase Agreement, at such holders' option, to sell its stock of Janus
to such minority stockholders. The purchase price for such minority holders'
Janus stock would be equal to fifteen times the net after-tax earnings over
the period indicated in the relevant agreement, or in some circumstances at a
purchase price as determined by Janus' Stock Option Committee. If Stilwell
were required to purchase the holders' Janus stock, Stilwell would have been
required to pay approximately $692 million as of September 30, 1999.
Management is currently exploring various financing alternatives for,
among other things, the payment of the purchase price if Stilwell were to
purchase the holders' Janus stock, including the use of existing cash and
holding company short-term investments, borrowings under the Credit Facility,
and financing opportunities utilizing the relative strength of Stilwell's
balance sheet.
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
this cash in a money market or similar account.
Pursuant to a contractual 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 have
included, among others, repayment of indebtedness to KCSI, funding in
connection with KCSI's Common Stock repurchase program, and investments in
affiliates.
Purchases of class B shares in the Janus World Funds require a
commission to be advanced by Janus. Prepaid commissions were not material to
the December 31, 1998 consolidated financial statements. Funding during the
nine months ended September 30, 1999 totaled $22.9 million. As funding
requirements grow in future years, Janus expects to obtain a credit line
either through assignment of the 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.
OTHER
Year 2000.
GENERAL. 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.
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, 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.
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 company).
These Year 2000 related issues are of particular importance to Stilwell.
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.
In 1997, Stilwell and its key subsidiaries formed project teams
comprised of employees and third party consultants to identify and resolve
the numerous issues surrounding the Year 2000. The project teams, which are
supervised by members of senior management, regularly report their progress
toward remediating Year 2000 issues to management and appropriate boards of
directors and committees of such boards. The areas in which the project
teams focused most of their efforts include information technology ("IT")
systems, non-IT systems and third party issues.
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
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.
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 September 30, 1999, Stilwell has spent
approximately $12 million in connection with ensuring that all computer
programs are compatible with Year 2000 requirements. In addition, Stilwell
anticipates future spending of approximately $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, 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 follows the
requirements outlined in Statement of Financial Accounting Standards No. 52
"Foreign Currency Translation", and related authoritative guidance.
Nelson'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 Nelson. The translation
of Nelson's 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 September 30, 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 September
30, 1999, Stilwell had no 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.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. Statement of Financial
Accounting Standards No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits -- an amendment of FASB Statements No. 87, 88, and
106" ("FAS 132") was adopted by Stilwell in 1998. FAS 132 establishes
standardized disclosure requirements for pension and other postretirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain
disclosures that are no longer useful. The standard does not change the
measurement or recognition of pension or postretirement benefit plans. The
adoption of FAS 132 did not have a material impact on Stilwell's disclosures.
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 $30.1, $42.6 and $40.3 million ($18.5, $25.9 and $24.1 million, net
of deferred income taxes) for the years ended December 31, 1996, 1997 and
1998, respectively, and $24.1 and $6.0 million ($15.9 and $3.6 million, net
of deferred income taxes) for the nine months ended September 30, 1998 and
1999, respectively.
MINORITY RIGHTS. In Issue No. 96-16, the Emerging Issues Task Force
("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. Management evaluated the rights of the
minority stockholders of its consolidated subsidiaries and concluded that
application of EITF 96-16 did not affect Stilwell's consolidated financial
statements.
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
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"), 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 September 30, 1999, Stilwell
had no indebtedness outstanding under any line of credit.
FOREIGN EXCHANGE SENSITIVITY
Stilwell owns 80% of Nelson, a United Kingdom based financial services
corporation. In connection with this investment, 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 Nelson 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 has earnings
of $1,000 and using its ownership interest at December 31, 1998. The British
pound is Nelson's functional currency.
Assumed Nelson Earnings (Pound) 1,000
Exchange Rate (to U.S. $) 0.5 to 1
---------
Converted U.S. Dollars $2,000
Stilwell Ownership Percentage of Nelson 80%
---------
Assumed Earnings $1,600
Assumed 10% increase in Exchange Rate 0.55 to 1
---------
Converted to U.S. Dollars $1,818
Stilwell Ownership Percentage of Nelson 80%
---------
Assumed Earnings $1,454
-------
Effect of 10% increase in
Exchange Rate $ (146)
=======
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 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
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 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.
<PAGE>
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 82% owned subsidiary;
Berger LLC ("Berger"), of which Stilwell 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 KCSI holds an approximately 32% interest, and the
Miscellaneous Corporations. Janus is the principal business of the financial
services segment of KCSI, representing 96% of assets under management at
September 30, 1999 and 95% of revenues and 88% of net income for the nine
months ended September 30, 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
investments 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'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 September 30, 1999, Janus had total assets under management of
$165.0 billion, of which $132.8 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 September
30, 1999. At that date, funds advised by Janus had more than 4.0 million
shareowner accounts. For the five-year period ended September 30, 1999, Janus'
total assets under management increased 629 percent.
Janus Management Corporation was formed in 1969 by Thomas H. 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 September 30, 1999.
Janus has three wholly-owned 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.
The other wholly-owned subsidiary, Janus Capital International, Ltd. ("Janus
International"), executes securities trades from London and is a registered
company with IMRO.
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.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Janus Advised Funds:
Beginning Assets $17,739.5 $18,013.2 $24,633.7 $37,123.0 $54,572.2 $54,572.2 $86,983.3
Net Sales 438.4 1,487.8 7,487.0 9,141.6 11,848.0 9,052.7 28,630.7
Appreciation
(depreciation) (164.7) 5,132.7 5,002.3 8,307.6 20,563.1 4,574.2 17,170.8
-------- --------- --------- --------- -------- -------- --------
Ending Assets 18,013.2 24,633.7 37,123.0 54,572.2 86,983.3 68,199.1 132,784.8
-------- --------- --------- --------- -------- -------- --------
Janus Sub-Advised Funds
and Private Accounts:
Beginning Assets 4,434.1 4,848.2 6,495.3 9,551.2 13,224.6 13,224.6 21,274.3
Net Sales (redemptions) 667.8 (148.0) 1,812.4 1,576.1 1,529.3 523.1 6,013.5
Appreciation
(depreciation) (253.7) 1,795.1 1,243.5 2,097.3 6,520.4 2,084.5 4,850.0
-------- ------- ------- -------- --------- -------- --------
Ending Assets 4,848.2 6,495.3 9,551.2 13,224.6 21,274.3 15,832.2 32,137.8
-------- ------- ------- -------- --------- -------- --------
Total assets
under management $22,861.4 $31,129.0 $46,674.2 $67,796.8 $108,257.6 $84,031.3 $164,922.6
========= ========= ========= ========= ========== ========= ==========
</TABLE>
<PAGE>
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, 1998,
Janus derived approximately $508 million in revenue from investment advisory
services, representing approximately 81% 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 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
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.
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, 1997 and 1998, approximately 28% and 30%, 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
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 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
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 propriety work of Janus' own analysts, more than 90% of
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 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 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
(collectively, the "Berger Sub-Advised Funds"). Berger owns 50% of BBOI in a
joint venture with BIAM. Berger and BIAM are currently negotiating the sale of
Berger's interest in BBOI to BIAM and, alternatively, the dissolution of BBOI.
BBOI serves as the investment adviser and sub-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"). Moreover, BBOI acts as investment
adviser to the BBOI Sub-Advised Funds. 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 are collectively referred to as the
"Berger Funds." The Berger Advised Funds, Berger Sub-Advised Funds,
Berger/BIAM Funds, BBOI Sub-Advised Funds and B/B Isle Separate Accounts are
collectively referred to as the "Berger Complex." As of September 30, 1999,
the Berger Complex (as defined in "Business--Stilwell's Principal Subsidiaries
and Equity Investments-Berger LLC") had total assets under management of $4.9
billion. Of this amount, Berger managed $3.8 billion in the Berger Advised
Funds and $0.4 billion in the Berger Sub-Advised Funds; BBOI managed $0.3
billion in the Berger/BIAM Funds and $0.4 billion in the BBOI Sub-Advised
Funds; and B/B Isle managed less than $0.1 billion in the B/B Isle Separate
Accounts. As of September 30, 1999, funds included in the Berger Complex had
more than 243,000 shareowner accounts. For the five-year period ended
September 30, 1999, assets under management in the Berger Complex increased by
68%. 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 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 its subsidiary, Berger LLC,
and then changed its name to Stilwell Management, Inc. Stilwell Management,
Inc. 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 Stilwell Management, Inc. and Berger LLC employees,
resulting in a noncash compensation charge. Stilwell Management, Inc. 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.
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, the Berger Sub-Advised Funds and BBOI Sub-Advised
Funds.
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Berger Advised Funds:
Beginning assets $3,062.7 (a) $2,870.6 $3,134.1 $3,272.7 $3,178.8 $3,178.8 $3,274.0
Net sales (redemptions) (22.7) (340.3) (225.4) (559.9) (284.8) (262.8) 80.6
Appreciation (depreciation)(169.4) 603.8 364.0 466.0 380.0 (292.3) 483.1
------- ------- ------- ------- ------- ------- -------
Ending assets 2,870.6 3,134.1 3,272.7 3,178.8 3,274.0 2,623.7 3,837.7
------- ------- ------- ------- ------- ------- -------
Berger/BIAM Funds:
Beginning assets -- -- -- 38.6 127.4 127.4 209.8
Net sales -- -- 36.7 87.1 57.8 59.7 32.0
Appreciation -- -- 1.9 1.7 24.6 (9.6) 19.7
------- ------- ------- ------- ------- ------- -------
Ending assets -- -- 38.6 127.4 209.8 177.5 261.5
------- ------- ------- ------- ------- ------- -------
Berger and BBOI Sub-Advised Funds:
Beginning assets 113.7 (a) 118.9 188.0 342.2 487.4 487.4 507.3
Net sales (redemptions) 13.4 53.6 119.1 31.0 (444.4) (208.9) 60.4
Appreciation
(depreciation) (8.2) 15.5 35.1 114.2 464.3 333.1 279.2
------- ------- ------- ------- ------- ------- -------
Ending assets 118.9 188.0 342.2 487.4 507.3 611.6 846.9
------- ------- ------- ------- ------- ------- -------
Total assets under
management $2,989.5 $3,322.1 $3,653.5 $3,793.6 $3,991.1 $3,412.8 $4,946.1
======== ======== ======== ======== ======== ======== ========
<FN>
<F1>
(a) Balance as of 10/31/94 as KCSI acquired controlling interest in Berger
on 10/14/94
</FN>
</TABLE>
<PAGE>
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, 1998, Berger derived
approximately $26.7 million in revenue from investment advisory services
provided to the Berger Advised Funds, representing approximately 80% of total
revenue of Berger. For the year ended December 31, 1998, BBOI derived
approximately $2.7 million in revenue from investment advisory services
provided to the Berger/BIAM Funds, representing approximately 90% of total
revenue of BBOI. 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.
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 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 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. BBOI is
responsible, at its expense, for furnishing (or procuring other parties to
furnish) all administrative services reasonably necessary for the operation
of the Berger/BIAM Funds, including but not limited to recordkeeping and
pricing services, custodian services and transfer agency and dividend
disbursing services. 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 and to procure, at BBOI's expense, third parties to provide the
services not provided by Berger. Under the sub-administration agreement,
Berger is paid certain fees by BBOI for its services. During certain
periods, Berger may voluntarily waive all or a portion of its fee from BBOI,
which will not affect the fee paid by the Berger/BIAM Funds to BBOI under the
administrative services agreement. 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.
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, 1997 and 1998, approximately 26% and 28%, respectively, 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.
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.
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
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.
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.
<PAGE>
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
September 30, 1999, Nelson employed approximately 40 investment advisers and
managed approximately $1.2 billion ((Pound)750 million) in assets. At
September 30, 1999, Nelson managed assets for more than 13,000 individuals.
For the five-year period ended September 30, 1999, Nelson's total assets
under management increased by 105 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
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
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 cable
television, direct broadcast satellite, wireless and wire-line telephony,
utilities and multi-service providers. 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 $1.0 billion at December 31, 1998, including
approximately 8.6 million shares of CSC, with a market value of $554.6
million, and 6.0 million shares of State Street Corporation, with a market
value of $420.9 million.
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 approximately 340,000 square feet of office space in three
facilities for investment, administrative, marketing, information technology,
and shareowner processing operations, and approximately 33,500 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 a 51,500 square foot investor service and data
center in Austin, Texas. Janus also leases 2,800 square feet of office space
in Westport, Connecticut for development of the Janus World Funds and 1,500
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 8,000 square feet of office space in Chester, England, the
location of its corporate headquarters, investment operations and one of 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
8,500 square feet in the following locations in England: London, Lichfield,
Bath, York and Durham as well as a location in Stirling, Scotland.
EMPLOYEES
As of September 30, 1999, Janus had approximately 2,050 employees,
Berger had approximately 75 employees, Nelson had approximately 180 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
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.
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,
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.
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.
<PAGE>
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 2000 annual meeting of
stockholders, the initial term of the second class of directors ("Class II
Directors") will expire at the conclusion of the 2001 annual meeting of
stockholders and the initial term of the third class of directors ("Class III
Directors") will expire at the conclusion of the 2002 annual meeting of
stockholders. Commencing with the 2000 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 62 Director; Chairman of the Board, President
and Chief Executive Officer
Joseph D. Monello 54 Executive Vice President
Danny R. Carpenter 53 Vice President and Secretary
Anthony P. McCarthy 53 Vice President and Treasurer
Morton I. Sosland 74 Director
James E. Barnes 65 Director
A. Edward Allinson 64 Director
Gwen E. Royle 39 Vice President and Tax Counsel
Douglas E. Nickerson 34 Vice President and Comptroller
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. From October 1992 to March 1994,
he served as Vice President-Finance. 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
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.
A. EDWARD ALLINSON (Class II Director) has been a director of KCSI since
1990. He has been an Executive Vice President of State Street Bank and Trust
Company, Chairman of the Board of Directors of Boston Financial Data
Services, Inc. ("BFDS") and Executive Vice President of State Street
Corporation since March 1990. BFDS provides full service shareowner
accounting and recordkeeping services to mutual funds, selected services to
certain retirement plans and certain securities transfer services. DST owns
50% of BFDS. Mr. Allinson is also a director of DST.
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. From May 1992 to January
1995, he was a marketing representative with Hoffmann-LaRoche, which is an
international manufacturer and distributor of pharmaceuticals.
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.
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 2000 annual meeting of stockholders,
the initial term of the second class expires at the conclusion of the 2001
annual meeting of stockholders and the initial term of the third class
expires at the conclusion of the 2002 annual meeting of stockholders.
Commencing with the 2000 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 2000
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.
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
approve the fee arrangement with, independent accountants for both audit
functions and for advisory and other consulting services.
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.
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
$500 for each committee meeting attended. Directors will also receive a
discretionary grant of options to purchase shares of Stilwell Common Stock on
an annual basis immediately following each annual meeting of Stilwell's
stockholders. To date, the Board of Directors of Stilwell has not taken any
action with respect to such discretionary grants of options.
EXECUTIVE COMPENSATION
Although Stilwell has entered into employment agreements with certain of
Stilwell's executive officers effective as of the Distribution Date, to date,
no compensation has been paid pursuant to such agreements and the executive
officers have received compensation pursuant to their existing employment
arrangements with KCSI. The information under this heading therefore
summarizes compensation paid by KCSI to the individual that is Stilwell's
Chief Executive Officer and individuals who, based upon employment and
compensation paid by KCSI during the fiscal year ended December 31, 1998, are
the four individuals initially expected to be the most highly compensated
executive officers of Stilwell. Stilwell expects to review the Stilwell
employment agreements and enter into revised employment agreements in the
year 2000. As a result, the compensation described below does not
necessarily reflect the compensation such executive officers will receive
following the Distribution. The principal positions listed below are those
that will be held by the executive officers in Stilwell following the
Distribution.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE*
Long Term
Annual Compensation Compensation Awards
------------------------------------------ --------------------
Securities
Other Annual Underlying All Other
Name and Principal Compensation Options/ Compensation
Position Year Salary($) Bonus($) ($) SARs(#)<6> ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Landon H. Rowland 1998 750,000 --- 53,877<F1> 6,138 26,632<F1>
Director; Chairman 1997 750,000 --- 57,900 --- 114,801
of the Board, 1996 500,004 --- 52,252 459,000 88,816
President and Chief
Executive Officer
Thomas H. Bailey 1998 900,000 833,000<F2> --- --- 109,000<F2>
Chairman of the 1997 900,000 675,000 --- --- 75,667
Board, President 1996 585,000 400,000 --- --- 74,747
and Chief Executive
Officer of Janus
Joseph D. Monello 1998 250,008 --- --- 65,000 43,754<F3>
Executive Vice 1997 250,008 --- --- --- 62,640
President 1996 250,008 --- --- --- 63,637
Danny R. Carpenter 1998 190,008 --- --- 31,481 16,000<F4>
Vice President 1997 190,008 --- --- --- 43,751
and Secretary 1996 190,008 --- --- --- 48,697
Anthony P. McCarthy 1998 110,004 --- --- 10,000 11,052<F5>
Vice President 1997 110,004 --- --- --- 11,394
and Treasurer 1996 110,004 --- --- --- 10,241
*Reflects compensation paid by KCSI.
<FN>
<F1>
Other Annual Compensation for Mr. Rowland includes premiums on disability insurance policy of $53,877. All
other compensation for Mr. Rowland for 1998 is comprised of: (i) contributions to his account under the
KCSI ESOP of $6,400; (ii) interest on deferred directors' fees of $4,314; (iii) an estimated contribution
to his account under KCSI's 401(k) plan of $4,800; (iv) an estimated contribution to his account under
KCSI's profit sharing plan of $4,800; and (v) premiums on group term life insurance of $6,318. As of
December 31, 1998, Mr. Rowland held no shares of restricted stock.
<F2>
The bonus for Mr. Bailey for 1998 was under a performance based incentive compensation plan approved by
KCSI stockholders in 1997. All other compensation for Mr. Bailey for 1998 is comprised of: (i) directors'
fees in the amount of $27,000 and $66,000, paid to Mr. Bailey in his capacity as director of Janus Capital
Corporation and Janus Investment Fund and the Janus Aspen Series, respectively; (ii) a contribution to his
account under the KCSI ESOP of $6,400; (iii) an estimated contribution to his account under KCSI's 401(k)
plan of $4,800; and (iv) an estimated contribution to his account under Janus' profit sharing plan of
$4,800. As of December 31, 1998, Mr. Bailey held no shares of restricted stock.
<F3>
All other compensation for Mr. Monello for 1998 is comprised of: (i) a contribution to his account under
the KCSI ESOP of $6,400; (ii) an estimated contribution to his account under KCSI's 401(k) plan of $4,800;
(iii) an estimated contribution to his account under KCSI's profit sharing plan of $4,800; and (iv) an
amount estimated to be credited to his account under the KCSI Executive Plan of $27,754. As of December
31, 1998, Mr. Monello held no shares of restricted stock.
<F4>
All other compensation for Mr. Carpenter for 1998 is comprised of: (i) a contribution to his account under
the KCSI ESOP of $6,400; (ii) an estimated contribution to his account under KCSI's 401(k) plan of $4,800;
and (iii) an estimated contribution to his account under KCSI's profit sharing plan of $4,800. As of
December 31, 1998, Mr. Carpenter held no shares of restricted stock.
<F5>
All other compensation for Mr. McCarthy for 1998 is comprised of: (i) a contribution to his account under
the KCSI ESOP of $4,587; (ii) an estimated contribution to his account under KCSI's 401(k) plan of $3,025;
(iii) an estimated contribution to his account under KCSI's profit sharing plan of $3,440. As of December
31, 1998, Mr. McCarthy held no shares of restricted stock.
<F6>
All option award information relates to options to purchase shares of KCSI Common Stock. In connection
with the Distribution, all Options will remain outstanding with an adjusted exercise price and the holders
of the Options will be granted New Stilwell Options. As a result, the value of the options to purchase
Stilwell Common Stock will depend on the future value of Stilwell Common Stock. See "Relationship Between
KCSI and Stilwell After the Distribution-Employee Benefits" and "Management-Other Compensatory Plans and
Arrangements."
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------
Grant Date
Individual Grants Value
(a) (b) (c) (d) (e) (f)
Number of % of Total
Securities Options/SARs Exercise Grant
Underlying Granted to or Base Date
Options/SARs Employees in Price Expiration Present
Name Granted (#)<5> Fiscal Year<2> ($/Sh)<3> Date Value $<4>
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Landon H. Rowland 6,138<1> * 28.4063 01/27/08 45,843
Thomas H. Bailey -- --
Joseph D. Monello 65,000<2> 5.5% 42.3125 11/16/08 896,353
Danny R. Carpenter 1,481<1> * 28.4063 01/27/08 11,061
30,000<2> 2.5% 42.3125 11/16/08 413,701
Anthony P. McCarthy 10,000<2> * 42.3125 11/16/08 137,900
* Less than one percent of the total options granted.
<FN>
<F1>
The options were granted under the KCSI Stock Option Plan in connection with KCSI's
Executive Plan. Under the Executive Plan, the participants may elect to receive their
accumulated balance and annual benefit either in cash or in non-qualified stock options
with an estimated value (using the Black-Scholes' valuation mode) equal to 125 percent of
the annual cash benefit. These options were granted on January 28, 1998 and became
exercisable on January 28, 1999. Limited stock appreciation rights ("LSARs") were
granted in tandem with these options. All of the LSARs are automatically exercised upon
a change in control of KCSI 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. Holders
of options have the right to satisfy the minimum tax withholding requirements in shares
of stock.
<F2>
The options were granted under the KCSI Stock Option Plan on November 17, 1998 and become
exercisable on January 1, 2000. If there is a change in control of KCSI that is approved
by the incumbent board of KCSI (as such terms are defined in the 1991 Plan), however, the
options become immediately exercisable. LSARs were granted in tandem with these options.
All of the LSARs 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. Holders of options have the right to
satisfy the minimum tax withholding requirements in shares of stock.
<F3>
Average of the high and low prices of the Common Stock on the date of grant as reported
on the NYSE.
<F4>
Valuation determined using Black-Scholes' option pricing model with the following
assumptions for the grant dates indicated parenthetically: market price of stock is equal
to the exercise price of options; stock volatility (based on 3-year monthly data): 30.37%
and 41.63% (1/28/98 and 11/17/98, respectively); annualized risk-free interest rate:
5.36% and 4.74% (1/28/98 and 11/17/98, respectively); option term (in years) 3; and
stock's dividend yield: 0.56% and 0.38% (1/28/98 and 11/17/98, respectively).
<F5>
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>
</TABLE>
<PAGE>
1998 AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information with respect to the aggregate
option exercises during 1998 by the executive officers and the number and value
of options held by such officers as of December 31, 1998 (the last trading day
of the year).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(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<2> Unexercisable<1>
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Landon H. Rowland 0 N/A 2,763,000/ 114,043,374/
6,138 118,732
Thomas H. Bailey 0 N/A 0/0 N/A
Joseph D. Monello 141,000 5,588,811 330,000/ 10,667,511/
65,000 353,438
Danny R. Carpenter 0 0 261,000/ 8,557,256/
31,481 191,773
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, 1998 (the last
trading day of 1998), respectively, times the number of options exercised or held at
year end.
<F2>
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 Option. 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>
</TABLE>
<PAGE>
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.
Stilwell expects to enter into revised employment agreements with such
executive officers in the year 2000. Such revised employment agreements may
vary significantly from the current Stilwell employment agreements. For
example, Stilwell's Compensation Committee may make significant adjustments
to the salaries of the executive officers based on a study of competitive
executive officer salaries in the mutual fund industry. However, several
terms are expected to be similar to the current Stilwell employment
agreements. For example, it is expected that following the effective date of
the revised employment agreements, the salaries of the executive officers
will not be increased for a certain period and cannot be decreased except in
certain circumstances, the executive officers will not be able to participate
in incentive compensation plans for a period of time and a one-time grant of
stock options will be made as part of the compensation packages pursuant to
the revised employment agreements. 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 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 receives a
fixed annual base salary of $750,000, which 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
was not entitled to participate in any Stilwell incentive compensation plan
during 1999, 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 $875,000 for purposes of cash
compensation based benefit plans.
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 shall 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
receive any benefits under any other employee benefit plan, except he will be
entitled to participate in the Stilwell Profit Sharing Plan, 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 stock options granted in connection with the Distribution
(other than shares transferred to Stilwell to pay the purchase price upon the
exercise of stock options or used to satisfy tax withholding requirements).
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. CARPENTER, MONELLO AND MCCARTHY. Stilwell has entered into
employment agreements with Messrs. Carpenter, Monello and McCarthy effective
as of the Distribution Date. These employment agreements provide,
respectively, for Mr. Carpenter's employment as Vice President and Secretary
of Stilwell, Mr. Monello's employment as Executive Vice President of Stilwell
and Mr. McCarthy's employment as Vice President and Treasurer of Stilwell.
The employment agreements are subject to termination under certain
circumstances.
Pursuant to their employment agreements, Messrs. Carpenter, Monello and
McCarthy receive as compensation for their services an annual base salary at
the rate approved on November 17, 1998. Such salary shall not 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, none of Mr. Carpenter, Mr. Monello nor Mr. McCarthy was entitled
to participate in any Stilwell incentive compensation plan during 1999, but
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. Carpenter's, Monello's, and McCarthy's
annual compensation is fixed at 175%, 167%, and 160%, respectively, of their
annual base salaries for purposes of cash compensation based benefit plans.
In the event of termination without cause by Stilwell, Messrs.
Carpenter, Monello and McCarthy would be entitled to twelve 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. Carpenter,
Monello and McCarthy shall 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 Profit Sharing Plan, 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.
As part of their employment agreements, Messrs. Carpenter, Monello 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.
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. Carpenter,
Monello and McCarthy would receive a discounted cash severance payment equal
to 175% for Mr. Carpenter and 166.67% for Mr. Monello of three times their
annual base salaries, and for Mr. McCarthy 160% 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.
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.
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 17,000,000 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
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
profit sharing 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 compensation 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 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 11 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,
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 has appointed 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.
<PAGE>
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 September 30, 1999, based upon
beneficial ownership of KCSI's Common Stock as of September 30, 1999 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)
- ---- --------- ---------------
UMB Bank, N.A., as trustee 11,063,452(2) 4.85%
of certain fiduciary accounts (2)
Amvescap, Inc. and certain 15,704,570(3) 6.89%
affiliates
A. Edward Allinson 146,936(1)(4) *
Director
Thomas H. Bailey 58,262(4) *
Chairman of the Board,
President and Chief Executive
Officer of Janus
James E. Barnes 180,000(1)(5) *
Director
Danny R. Carpenter 578,460(1)(4) *
Vice President and Secretary
Anthony P. McCarthy 396,254(1)(4) *
Vice President and Treasurer
Joseph D. Monello 815,250(1)(4) *
Executive Vice President
Landon H. Rowland 7,090,598(1)(4) 3.13%
Chairman of the
Board, President and Chief Executive Officer
Morton I. Sosland 472,962(1)(5) *
Director
All Directors and Executive 9,757,418(1)(4) 4.3%
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
September 30, 1999 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. Allinson, 134,800; Mr. Barnes, 162,000; Mr.
Carpenter, 526,922; Mr. McCarthy, 148,500; Mr. Monello, 660,000;
Mr. Rowland 5,538,276; Mr. Sosland, 6,000; and all directors and
executive officers as a group, 7,187,838. Certain directors and
executive officers disclaim beneficial ownership of 355,400 of these
shares.
(2) Based on information reported in Amendment No. 12 to Schedule 13G, dated
February 16, 1999 jointly filed by UMB Financial Corporation ("UMBFC"),
its wholly-owned subsidiary UMB Bank, N.A. and the KCSI ESOP and
subsequent correspondence. UMB Bank, N.A. is the trustee of the KCSI
ESOP and the DST Systems, Inc. Employee Stock Ownership Plan (the "DST
ESOP"), which also holds some KCSI Common Stock. Shares reported as held
by UMB Bank, N.A. include the shares held as trustee of the KCSI ESOP and
DST ESOP. Voting and dispositive power over the shares held by these
ESOPs that are allocated to participant accounts are vested in the ESOP
participants (they have the right to direct the voting of all allocated
shares and the tendering of such shares in response to offers to
purchase). Under the terms of the trust agreement, any unallocated
shares are to be voted by the trustee in the same proportion as the
allocated shares. All shares of Stilwell Common Stock have been
allocated to participants' accounts. Therefore, UMB Bank, N.A., the KCSI
ESOP and the DST ESOP disclaim beneficial ownership of all shares held in
the KCSI ESOP and DST ESOP. The amount shown for UMB Bank, N.A. does not
include 1,136,312 shares held by UMB Bank, N.A. in custody accounts for
which UMB Bank, N.A. does not have voting or dispositive power. UMBFC
reports that it does not beneficially own any shares of KCSI or Stilwell
Common Stock held by UMB Bank, N.A. in various capacities because UMBFC
is prohibited by law from directing voting or disposition of such shares
and therefore excludes the shares held by UMB Bank, N.A. in various
capacities. The address for UMB Bank, N.A. is 1010 Grand Boulevard,
Kansas City, Missouri 64106.
(3) Based upon information in Schedule 13G filed February 12, 1999, the
address for Amvescap, Inc. 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.
(4) 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. Allinson owns 4,800 shares in a Keogh Plan; Mr. Bailey
owns 43,552 shares through the KCSI ESOP; Mr. Carpenter owns 16,904
shares through the KCSI ESOP; Mr. McCarthy owns 54,212 and 7,806 shares
through the KCSI ESOP and KCSI's Profit Sharing Plan, respectively.
Mr. Monello owns 68,378 shares through the KCSI ESOP; Mr. Rowland owns
122,942 and 954 shares through the KCSI ESOP and KCSI's Profit Sharing
Plan, respectively; and all directors and executive officers as a group
own indirectly 677,904 shares.
(5) 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; 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 321,800 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, 217,800 shares held as co-
trustee of certain testamentary trusts, and 32,000 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."
<PAGE>
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 September 30, 1999, it is anticipated that there will be approximately
221,000,000 shares of Stilwell Common Stock, par value $.01 per share, issued
and outstanding, held of record by approximately 5,500 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
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-Provisions of Stilwell's Governing
Documents, its Rights Plan and Restrictions Relating to the Tax Ruling could
have the Effect of Delaying or Preventing a Change in Control of Stilwell which
may have an Adverse Effect on 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
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 Chief Executive
Officer 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 Chief Executive Officer.
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
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
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
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.
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
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.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets as of September 30, 1999 (including
unaudited pro forma balance sheet as of September 30, 1999) (unaudited)
and December 31, 1997 and 1998. . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the nine months ended September 30,
1998 and 1999 (unaudited) and the years ended December 31, 1996,
1997 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows for the nine months ended September
30, 1998 and 1999 (unaudited) and the years ended December 31, 1996,
1997 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-7
Consolidated Statements of Changes in Stockholder's Equity for the
Nine months ended September 30, 1999 (unaudited) and the years ended
December 31, 1996, 1997 and 1998. . . . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements. . . . . . . . . . . .F-11 to F-37
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, together with the
Report of Independent Accountants, of DST Systems, Inc. (an approximately 32%
owned affiliate of Stilwell accounted for under the equity method) for the
years ended December 31, 1996, 1997 and 1998, which are included in the DST
Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 1998
(Commission File No. 1-14036) are incorporated by reference in this
Information Statement.
<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, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. 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 audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards, 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 audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
August 11, 1999
<PAGE>
STILWELL FINANCIAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KANSAS CITY SOUTHERN INDUSTRIES, INC.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
Proforma
December 31, September 30, September 30
-------------- ------------- ------------
1997 1998 1999 1999
(Note 3)
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 33.7 $ 21.6 $103.3 $103.3
Accounts receivable 53.7 76.6 120.3 120.3
Investments in advised funds 100.4 149.1 151.1 151.1
Other current assets 6.4 12.0 16.5 16.5
------- ------- -------- --------
Total current assets 194.2 259.3 391.2 391.2
Investments held for
operating purposes 348.1 379.2 411.2 411.2
Property and equipment, net 9.4 37.4 54.1 54.1
Intangibles and other assets,
net 120.9 147.0 159.6 159.6
------- ------- -------- --------
Total assets $ 672.6 $ 822.9 $1,016.1 $1,016.1
======= ======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Debt due within one year
- third parties $ 0.1 $ -- $ -- $125.0
Accounts and wages payable 48.5 61.7 95.0 95.0
Federal income taxes payable 5.5 3.6 23.4 23.4
Other accrued liabilities 9.3 5.8 8.8 8.8
------- ------- ------- --------
Total current liabilities 63.4 71.1 127.2 252.2
Other liabilities:
Long-term debt - Parent 84.1 16.6 -- --
Deferred income taxes 107.0 118.4 123.5 123.5
Other liabilities 41.6 42.3 39.9 39.9
------- ------- ------- --------
Total liabilities 296.1 248.4 290.6 415.6
------- ------- ------- --------
Commitments and contingencies
(Notes 5, 9, 10, 13, 15) ------- ------- ------- --------
Minority interest in consolidated
subsidiaries 28.2 34.3 43.6 43.6
------- ------ ------- --------
STOCKHOLDER'S EQUITY
Net investment by Parent 91.2 106.8 1O6.8 106.8
Retained earnings 206.3 358.5 499.9 374.9
Accumulated other
comprehensive income 50.8 74.9 75.2 75.2
------- ------ ------- --------
Total stockholder's equity 348.3 540.2 681.9 556.9
------- ------ ------- --------
Total liabilities and
stockholder's equity $672.6 $822.9 $1,016.1 $1,016.1
======= ====== ======== ========
The accompanying notes are an integral part of these financial statements.
<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 year ended For the nine months
December 31, ended September 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
(unaudited)
REVENUES:
Investment management
Fee $ 266.8 $ 389.3 $ 545.1 $ 398.3 $ 675.7
Shareowner servicing
fees 50.0 81.1 108.9 79.9 131.1
Other 12.8 14.7 16.8 11.9 19.9
------- ------- ------- ------- ------
Total 329.6 485.1 670.8 490.1 826.7
------- ------- ------- ------- ------
OPERATING EXPENSES:
Compensation 95.4 118.0 167.8 118.5 218.7
Marketing and promotion 29.9 34.2 50.8 39.9 51.9
Alliance and third party
administrator fees 13.5 38.4 64.0 46.2 96.2
Depreciation and
amortization 12.9 13.1 16.8 10.9 24.7
Other 46.1 82.2 90.8 64.6 89.7
------- ------- ------- ------- ------
Total 197.8 285.9 390.2 280.1 481.2
------- ------- ------- ------- ------
OPERATING INCOME 131.8 199.2 280.6 210.0 345.5
Equity in earnings of
unconsolidated affiliates 68.6 24.9 25.8 23.8 34.1
Interest expense - Parent (6.8) (10.4) (6.5) (5.4) (2.4)
Reduction in ownership of
DST Systems, Inc. (29.7)
Other, net 15.0 16.2 19.1 15.9 18.5
------- ------ ------- ------- ------
Pretax income 208.6 229.9 289.3 244.3 395.7
Income tax provision 58.2 87.0 103.7 88.6 142.5
Minority interest in
consolidated earnings 15.8 24.9 33.4 25.8 38.6
------- ------ ------ ------ ------
NET INCOME $ 134.6 $ 118.0 $ 152.2 $ 129.9 $ 214.6
======= ======= ======= ======= =====
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 $134,600 $118,000 $152,200 $129,900 $214,600
Diluted Earnings
per share 134,000 117,400 149,900 128,900 211,200
Pro Forma Per Share Data
(Unaudited) (Notes 2 and 3):
Common shares outstanding
(in thousands) 221,038 221,038 221,038
Basic Earnings per share $ 0.67 $ 0.57 $ 0.95
Diluted Common shares outstanding
(in thousands) 228,585 228,585 228,585
Diluted Earnings per share $ 0.63 $ 0.55 $ 0.91
The accompanying notes are an integral part of these financial statements.
<PAGE>
STILWELL FINANCIAL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF KANSAS CITY SOUTHERN INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
For the year ended For the nine months
December 31, ended September 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
(unaudited)
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 134.6 $ 118.0 $ 152.2 $ 129.9 $214.6
Adjustments to net income:
Depreciation and
amortization 12.9 13.1 16.8 10.9 24.7
Deferred income taxes 3.0 (4.4) (12.4) 5.0 10.8
Minority interest in
consolidated earnings 15.8 24.9 33.4 25.8 38.6
Equity in undistributed
earnings of unconsolidated
affiliates (64.9) (24.7) (24.7) (23.1) (33.8)
Asset impairment charges 15.7
Gain on sale of equity
investment (2.8) (8.8)
Reduction in ownership of DST
Systems, Inc. 29.7
Employee deferred
compensation 18.3 8.7 3.8 (2.8) 1.9
Changes in working
capital items:
Accounts receivable (11.6) (15.0) (21.3) (13.2) (43.7)
Other current assets (0.3) (3.3) (5.3) (3.1) 2.9
Accounts and wages
payable 10.9 13.4 12.8 4.3 33.4
Federal income taxes
payable and other
accrued liabilities (70.1) 0.7 1.5 12.2 18.6
Prepaid commissions -- (22.9)
Other, net (4.8) (0.1) (1.7) (9.5) (4.5)
------- ------ ------- ------- ------
Net operating 41.0 147.0 176.0 136.4 240.6
------- ------ ------- ------ ------
INVESTING ACTIVITIES:
Property acquisitions (1.4) (5.8) (35.0) (28.3) (28.6)
Investments in and loans
with affiliates (27.2) (12.0) (24.3) (21.1) (17.2)
Sale of investments in
advised funds 165.5 299.5 509.0 385.1 690.9
Purchase of investments
in advised funds (205.6) (330.5) (552.2) (411.6) (687.1)
Other, net 12.6 3.8 9.7 8.0 6.4
------- ------- ------- ------- ------
Net investing (56.1) (45.0) (92.8) (67.9) (35.6)
------- ------- -------- ------- ------
FINANCING ACTIVITIES:
Change in long-term
debt and note
receivable - Parent 187.7 (33.2) (67.5) (64.2) (16.6)
Repayment of long-term
debt - third parties (0.3) (0.3) (6.6) (6.6) --
Amounts treated as
transfers from
(dividends to)
Parent, net (168.6) (40.5) 12.4 11.7 (73.2)
Distributions to
minority interest (10.6) (12.9) (32.8) (27.8) (31.5)
Other, net 0.7 (4.2) (0.8) 0.1 (2.0)
------- ------- ------- ------- ------
Net financing 8.9 (91.1) (95.3) (86.8) 123.3)
-------- ------- ------- ------- ------
CASH AND CASH EQUIVALENTS:
Net increase
(decrease) (6.2) 10.9 (12.1) (18.3) 81.7
At beginning of period 29.0 22.8 33.7 33.7 21.6
------- ------- ------- -------- ------
At end of period $ 22.8 $ 33.7 $ 21.6 $ 15.4 $103.3
======= ======= ======= ======== ======
The accompanying notes are an integral part of these financial statements.
<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)
Accumulated Total
Net other com- stock-
investment Retained prehensive holder's
by Parent earnings income equity
---------- -------- ------------- --------
BALANCE AT DECEMBER 31,
1995 $ 81.1 $ 162.8 $ 6.4 $ 250.3
Comprehensive income:
Net income 134.6
Net unrealized gain on
investments 18.5
COMPREHENSIVE INCOME 153.1
Dividends to Parent, net (168.6) (168.6)
------- ------- ------- -------
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 24.1
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 (unaudited) 214.6
Net unrealized gain on 3.6
investments (unaudited)
Less: reclassification
adjustment for gains
included in net income (3.3)
COMPREHENSIVE INCOME (unaudited) 214.9
Dividends to Parent,
net (unaudited) (73.2) (73.2)
------- -------- -------- -------
BALANCE AT September 30,
1999 (unaudited) $ 106.8 $ 499.9 $ 75.2 $ 681.9
======= ======== ======== =======
The accompanying notes are an integral part of these financial statements.
<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 are: Janus Capital Corporation ("Janus"), an 83%
owned subsidiary (subject to vesting of Janus restricted stock with various
Janus employees which will reduce ownership to 82% - see Note 12); Berger
Associates, Inc. ("Berger"), a wholly-owned subsidiary as of December 31, 1998
(subject to the exercise of management options to acquire approximately 3.9% of
Berger) (see below); Nelson Money Managers Plc ("Nelson"), an 80% owned
subsidiary; DST Systems, Inc. ("DST"), an equity investment in which KCSI holds
an approximately 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 96% of
assets under management at September 30, 1999 and 95% of revenues and 88% of
the net income for the nine months ended September 30, 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 investments 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") to the effect 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.
On September 30, 1999, Berger Associates, Inc. assigned and transferred
its operating assets and business to its subsidiary, Berger LLC, a limited
liability company. In addition, Berger Associates, Inc. changed its name to
Stilwell Management, Inc. ("Stilwell Management"). Stilwell Management owns
100% of the preferred limited liability company interests and approximately
86% of the regular limited liability company interests of Berger. The
remaining 14% of regular limited liability company interests was issued to
key Stilwell Management and Berger LLC 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").
As of September 30, 1999, Stilwell owned 83% of Janus. At September 30, 1999,
Stilwell's ownership in Janus is subject to dilution upon vesting of Janus
restricted stock held by various Janus employees, which would reduce Stilwell's
ownership to 82%.
The revenues and operating income of Janus and Berger LLC 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 directly to
individuals who are retired or are contemplating retirement. As of September
30, 1999, Stilwell owned 80% of Nelson.
Nelson 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,
provides sophisticated information processing 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 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
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 are considered cash equivalents.
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. These investments are generally used to
fund Janus and Berger operations and dividends. Realized gains and losses are
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Ordinary 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's results of
operations, financial position or cash flows.
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.
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. The deferred commission balance at December 31, 1998 and associated
amortization expense for the year then ended 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 Berger goodwill 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 sale of its stock to parties other than
Stilwell is recorded as a gain or loss in Stilwell's statement of income in the
period that the change of interest occurs. A change of interest in a
subsidiary or equity investee resulting from a subsidiary's or equity
investee's purchase of its stock from parties other than Stilwell 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 nine months ended September 30,
1998 and 1999 and for the years ended December 31, 1996 through 1998 were not
material.
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 approximates 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 $16.7,
$18.6 and $20.9 million in 1996, 1997 and 1998, respectively, and $15.5 and
$14.7 million for the nine months ended September 30, 1998 and 1999,
respectively.
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 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.
INTERIM FINANCIAL INFORMATION (UNAUDITED). The interim consolidated
financial statements and related disclosures as of September 30, 1999 and for
the nine months ended September 30, 1998 and 1999 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 September 30, 1999 and its results of operations and cash
flows for the nine months ended September 30, 1998 and 1999. The results of
operations and cash flows for the nine months ended September 30, 1999 are not
necessarily indicative of the results that can be expected for the entire
fiscal year ending December 31, 1999.
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, $0.6 and $2.3 million for the years
ended December 31, 1996, 1997 and 1998, respectively. The adjustments for the
nine months ended September 30, 1998 and 1999 were $1.0 and $3.4 million,
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.
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 Stilwell's and DST's investments which
are classified as "available for sale," and these items are reflected net of
deferred income taxes of $11.6, $16.7 and $16.2 million for 1996, 1997 and
1998, respectively, and $8.2 and $2.4 million for the nine months ended
September 30, 1998 and 1999, respectively. 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. 132. In 1998, Stilwell
adopted Statement of Financial Accounting Standards No. 132 "Employers'
Disclosure about Pensions and Other Postretirement Benefits - an amendment of
FASB Statements No. 87, 88, and 106" ("FAS 132"). FAS 132 establishes
standardized disclosure requirements for pension and other postretirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful. The standard does not change the measurement or
recognition of pension or postretirement benefit plans. The adoption of FAS
132 did not have a material impact on Stilwell's disclosures.
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 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. Management has evaluated the
rights of the minority stockholders of its consolidated subsidiaries and
concluded that application of EITF 96-16 did not affect Stilwell's consolidated
financial statements.
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 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 Stillwell common stock will be
changed to $0.01.
Additionally, 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. See Note 16. Accordingly, for purposes of calculating
pro forma earnings per share, 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, 1998 and January 1,
1999, respectively.
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, 1998 and
the nine month periods ended September 30, 1998 and 1999 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 110.52 million, based upon the total number of outstanding
shares of KCSI common stock as of September 30, 1999, resulting in a pro forma
221.04 million 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 September 30, 1999. These
options to purchase KCSI common stock (3.77 million) were multiplied by two to
derive the options to purchase shares of Stilwell common stock that are assumed
to be exercised (7.54 million).
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
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.
CONTINUUM/CSC. In March 1996, The Continuum Company, Inc. ("Continuum"),
formerly an equity method investment of DST, announced the completion of its
merger with Hogan Systems, Inc., a provider of software to banks and financial
institutions, for shares of Continuum stock (the "Hogan Merger"). As a result
of this transaction, DST's ownership interest in Continuum was reduced to
approximately 23% and Stilwell recorded its proportionate share (approximately
$3.9 million after-tax) of a nonrecurring charge recorded by DST in connection
with the Hogan Merger.
On August 1, 1996, Continuum merged with Computer Sciences Corporation
("CSC") in a tax-free share exchange. In exchange for its ownership interest
in Continuum, DST received shares of common stock in CSC. As a result of the
transaction, Stilwell's earnings for the year ended December 31, 1996 include
Stilwell's $47.7 million after-tax share of the one-time gain recognized by DST
in connection with the merger. Continuum ceased to be an equity affiliate of
DST, thereby eliminating any future Continuum equity earnings or losses. DST
recognized equity losses in Continuum of $4.9 million for the first six months
of 1996.
SUMMARIZED FINANCIAL INFORMATION. Stilwell's investment in DST, together
with certain condensed DST financial information, is summarized as follows.
Note that for the years ended December 31, 1996 and 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 all
years presented 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.
(DOLLARS IN MILLIONS)
December 31, September 30,
--------------------------------- ----------
1996 1997 1998 1999
(unaudited)
Percentage ownership 41% 41% 32% 32%
Carrying value $ 283.5 $ 345.3 $ 376.0 $ 407.9
Equity in DST net
assets 256.7 300.1 376.0 407.9
Fair market value (a) 633.7 865.0 1,156.7 1,153.5
FINANCIAL CONDITION:
Current assets $ 300.2 $ 345.3 $ 375.7 $ 452.9
Non-current assets 1,003.5 1,203.2 1,521.2 1,555.0
-------- -------- -------- -------
Total assets $1,303.7 $1,548.5 $1,896.9 $2,007.9
======== ======== ======== =======
Current liabilities $ 188.9 $ 212.0 $ 268.6 $ 265.3
Non-current liabilities 318.6 405.6 462.1 467.2
Stockholders' equity 796.2 930.9 1,166.2 1,275.4
-------- -------- -------- -------
Total liabilities
and stockholders'
equity $1,303.7 $1,548.5 $1,896.9 $2,007.9
======== ======== ======== ========
For the year For the nine months
ended December 31, ended September 30,
---------------------------- -------------------
1996 1997(b) 1998(c) 1998 1999(d)
(unaudited)
OPERATING RESULTS:
Revenues $844.0 $950.0 $1,096.1 $ 804.6 $ 891.1
Costs and expenses 765.8 823.1 976.6 698.1 741.5
Net income 177.8 79.4 71.6 65.1 100.9
(a) Based upon DST's closing price on the New York Stock Exchange.
(b) Significant decrease in net income in 1997 from 1996 is attributable to
the one-time gain recorded by DST as a result of the 1996 Continuum/CSC
merger discussed above.
(c) Net income includes $19.4 million, after tax, of DST/USCS fourth quarter
merger-related charges.
(d) Effective January 1, 1999, DST adopted SOP 98-1. DST's pre-tax income for
the nine months ended September 30, 1999 was increased by $18.1 million
as a result.
NOTE 5 - OTHER ACQUISITIONS, DISPOSITIONS AND SIGNIFICANT TRANSACTIONS
BERGER. During 1992, Stilwell acquired an 18% interest in Berger for $1.2
million. On October 14, 1994, pursuant to a Stock Purchase Agreement ("Berger
SPA"), Stilwell increased its ownership of Berger to approximately 80%. In
connection with this increase in ownership (which was accounted for as a
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. Pursuant to the Berger SPA, Stilwell
made additional purchase price payments of $3.0 million during third quarter
1999. No additional payments will be made thereafter. Stilwell made additional
purchase price payments of $23.9 and $3.1 million in 1996 and 1997,
respectively. Stilwell made no payments under the Berger SPA during 1998.
These goodwill amounts are being amortized over 15 years.
As a result of various transactions during 1997, Stilwell increased its
ownership in Berger to 100%. In January and December 1997, Berger purchased,
for treasury, the common stock of minority stockholders. In December 1997,
Stilwell also acquired additional Berger shares from a minority stockholder
through the issuance of shares of KCSI common stock. 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, Berger also granted options to acquire
shares of common stock of Berger to certain of its employees.
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 directly to individuals who are retired or contemplating retirement.
Nelson managed approximately (Pound) 696 million ($1.2 billion) in assets as of
December 31, 1998. 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.
JANUS CAPITAL CORPORATION. Stilwell sold to Janus 192,408 shares of Janus
common stock to be available for awards under Janus' recently adopted Long Term
Incentive Plan. Janus has agreed that for as 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. Upon reissuance of these
Janus shares, Stilwell's percentage ownership of Janus will decrease to not
less than 80.1%, depending on the number of Janus shares outstanding.
NOTE 6 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for income taxes and interest is summarized as follows (in millions):
For the year For the nine months
ended December 31, ended September 30,
----------------------------- ------------------------
1996 1997 1998 1998 1999
(unaudited)
Interest $ 4.1 $ 13.7 $ 7.9 $ 5.3 $ 1.1
Income taxes 120.0 64.5 82.0 57.1 81.3
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.
Stilwell subsidiaries and affiliates hold various investments which are
accounted for as "available for sale" securities as defined in FAS 115.
Stilwell records its proportionate share of any unrealized gains or losses
related to these investments, net of deferred income taxes, in accumulated
other comprehensive income. Stockholder's equity increased $18.5, $25.9 and
$24.1 million in 1996, 1997 and 1998, respectively, and $15.9 and $3.6 million
for the nine months ended September 30, 1998 and 1999, respectively, as a
result of unrealized gains related to these investments.
As discussed in Note 5, during 1997, Stilwell purchased a portion of the
Berger minority interest through the issuance of 330,000 shares of KCSI common
stock, valued at $10.1 million. The use of the KCSI shares by Stilwell is
reflected as a capital contribution from KCSI in the accompanying financial
statements.
NOTE 7 - OTHER BALANCE SHEET CAPTIONS
ACCOUNTS RECEIVABLE. Stilwell's accounts receivable balances do not
include any allowance for doubtful accounts nor bad debt expense as of and for
the years ended 1996 through 1998. The majority of the balances are amounts
owed 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,
---------------------
1997 1998
Deferred income taxes $ 1.7 $ 2.1
Other 4.7 9.9
------- -------
Total $ 6.4 $ 12.0
======= =======
INVESTMENTS IN ADVISED FUNDS. Investments in advised funds, principally
in money market mutual funds, are summarized as follows (in millions):
December 31,
----------------------
1997 1998
AVAILABLE FOR SALE:
Cost basis $ 95.6 $ 140.8
Gross unrealized gains 2.0 5.4
-------- --------
97.6 146.2
-------- --------
TRADING:
Cost basis 2.1 3.2
Gross unrealized gains (losses) 0.7 (0.3)
-------- --------
2.8 2.9
-------- --------
Total $ 100.4 $ 149.1
======== =======
Gross realized gains (losses) were not material to Stilwell's consolidated
results of operations for the years ended 1996 through 1998.
Investments in advised funds are generally used by Janus and Berger to fund
operations and dividends. Pursuant to contractual agreements, Janus has
distributed at least 90% of its net earnings to its stockholders each year.
PROPERTY AND EQUIPMENT, NET. Property and equipment are summarized as
follows (in millions):
December 31,
-----------------------
1997 1998
Furniture, fixtures and
equipment $ 32.1 59.2
Buildings and leasehold
improvements 6.5 10.5
-------- -------
Subtotal 38.6 69.7
Less accumulated depreciation
and amortization (29.2) (32.3)
-------- -------
Net property and equipment $ 9.4 $ 37.4
======== =======
The above totals include assets under capital leases with a cost basis of
$1.4 million as of December 31, 1997. Accumulated amortization associated with
these capital leases totaled $1.4 million as of December 31, 1997. There were
no assets under capital lease as of December 31, 1998.
INTANGIBLES AND OTHER ASSETS. Intangibles and other assets are summarized as
follows (in millions):
December 31,
---------------------
1997 1998
Goodwill $ 56.4 $ 93.2
Identifiable intangible assets 58.9 58.9
Accumulated amortization (14.3) (22.9)
------- -------
Net 101.0 129.2
Employee loans 13.8 11.6
Other assets, net 6.1 6.2
------- -------
Total $ 120.9 $ 147.0
======= ========
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 $6.9, $8.1 and $8.8 million in 1996, 1997 and 1998,
respectively.
OTHER LIABILITIES. Other liabilities are summarized as follows (in
millions):
December 31,
-----------------------
1997 1998
Deferred compensation (See Note 12) $ 22.2 $ 20.5
Other 19.4 21.8
------- -------
Total $ 41.6 $ 42.3
======= ======
NOTE 8 - LONG-TERM DEBT - PARENT
Stilwell had $84.1 and $16.6 million of outstanding long-term indebtedness
to KCSI at December 31, 1997 and 1998, respectively. These amounts represent
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
Stilwell's outstanding indebtedness to third parties totaled $0.1 million
at December 31, 1997. All third party indebtedness had been paid in full as of
December 31, 1998.
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 $0.4
million in facility and arrangement fees for the year ended December 31, 1998.
At September 30, 1999, the full $100 million was available under the 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.
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 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 September 30, 1999. 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.
Based upon borrowing rates available to Stilwell and its subsidiaries for
indebtedness with similar terms and average maturities, the fair value of long-
term debt - third parties was approximately $0.1 million as of December 31,
1997.
Stilwell has no future minimum lease payments due under capital lease
obligations.
NOTE 10 - INCOME TAXES
Stilwell's provisions for income taxes are summarized as follows (in millions):
December 31,
----------------------------------
1996 1997 1998
CURRENT:
Federal $ 48.4 $ 79.2 $ 100.2
State and local 6.8 12.2 15.9
------- ------- -------
Total current 55.2 91.4 116.1
------- ------- -------
DEFERRED:
Federal 2.4 (3.8) (10.0)
State and local 0.6 (0.6) (2.4)
------- ------- -------
Total deferred 3.0 (4.4) (12.4)
------- ------- -------
Total income tax expense $ 58.2 $ 87.0 $ 103.7
======= ======= =======
Stilwell's deferred income tax liabilities (assets) are summarized as follows
(in millions):
December 31,
-----------------------
1997 1998
INCOME TAX LIABILITIES:
Unconsolidated affiliates $ 136.0 $ 138.7
Other 6.3 7.0
------- -------
Gross deferred tax
liabilities 142.3 145.7
------- -------
INCOME TAX ASSETS:
Book reserves (9.7) (7.3)
Deferred compensation (15.9) (14.7)
Vacation (1.8) (1.7)
Deferred revenue (5.0) (3.5)
Other (4.6) (2.2)
------- -------
Gross deferred tax assets (37.0) (29.4)
------- -------
Net deferred income tax
liabilities $ 105.3 $ 116.3
======= =======
Stilwell's effective income tax rate differs from the statutory federal income
tax rate as follows (in millions):
December 31,
------------------------------------
1996 1997 1998
Statutory U.S. federal rate $ 73.0 $ 80.5 $ 101.3
State and local income taxes 7.4 11.6 13.5
Non-deductible goodwill 1.7 6.5 2.3
Equity in earnings of
unconsolidated affiliates (19.3) (6.8) (6.8)
Other (4.6) (4.8) (6.6)
------- ------- -------
Total income tax expense $ 58.2 $ 87.0 $ 103.7
======== ======== ========
Effective tax rate 27.9% 37.8% 35.8%
======== ======== ========
Beginning in 1993, 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, 1998, the cumulative amount of unremitted earnings qualifying for
this deduction aggregated $146.6 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 $7.5 and $9.5
million as of December 31, 1997 and 1998, 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
taxing authorities have also completed examinations principally through 1992,
and have proposed additional tax assessments for which Stilwell believes it has
adequate reserves accrued.
Inasmuch 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 operation,
financial position or each flows.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Substantially all full-time employees of Stilwell participate in The
Employee Stock Ownership Plan of KCSI (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 $3.5, $4.6 and $5.7 million in 1996, 1997 and 1998, 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:
Year Ended December 31,
1996 1997 1998
---- ---- ----
Net income (in millions)
As reported $ 134.6 $ 118.0 $ 152.2
Pro forma 133.2 117.0 149.0
Earnings per Basic share:
As reported $ 134,600 $ 118,000 $ 152,200
Pro forma 133,200 117,000 149,000
Earnings per Diluted share:
As reported $ 134,000 $ 117,400 $ 149,900
Pro forma 132,600 116,400 146,700
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, 1996, 1997 and 1998, 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,
1996 through 1998 are not necessarily indicative of the number of options and
associated activity in the future.
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- --------------------
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 6,489,564 $ 7.55 5,645,310 $ 8.87 4,794,527 $ 8.84
Granted 498,870 16.48 46,452 16.80 445,364 35.98
Exercised (1,341,234) 5.30 (882,187) 9.30 (467,257) 9.17
Expired/Canceled (1,890) 14.40 (15,048) 15.62 (4,408) 27.33
---------- --------- ---------
Outstanding at December 31 5,645,310 $ 8.87 4,794,527 $ 8.84 4,768,226 $ 11.33
========= ========= =========
Exercisable 4,724,550 $ 7.49 4,227,212 $ 7.87 4,172,257 $ 8.52
========= ========= =========
Weighted Average Fair
Value of Options granted
during the year $ 4.35 $ 4.18 $ 10.42
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the information about KCSI stock options held by Stilwell employees that were
outstanding at December 31, 1998:
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> <C>
$2 to $10 2,710,315 3.0 years $ 4.86 2,710,315 $ 4.86
$10 to $15 242,210 6.4 12.29 240,605 12.28
$15 to $20 1,374,337 7.2 15.97 1,221,337 15.90
$20 to $48 441,364 10.0 36.05 --
--------- ---------
$2 to $48 4,768,226 5.0 $ 11.33 4,172,257 $ 8.52
========= =========
</TABLE>
<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:
1996 1997 1998
---- ---- ----
Dividend yield .81% to .93% .62% to .82% .34% to .56%
Expected volatility 30% to 32% 24% to 30% 30% to 42%
Risk-free interest rate 5.27% to 6.42% 6.20% to 6.44% 4.74% to 5.64%
Expected life 3 years 3 years 3 to 5 years
KCSI ESPP. KCSI 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 values of the stock
purchase rights granted to Stilwell employees were $3.56 and $10.76 in 1996 and
1998, respectively. KCSI did not sponsor an ESPP grant for 1997.
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:
1996 1998
---- ----
Dividend yield 0.85% 0.95%
Expected volatility 30% 42%
Risk-free interest rate 5.50% 4.63%
Term 1 year 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 normal vesting rate of 10% of the
shares in one year will be accelerated to 20% of the shares in 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 based on attainment of
investment performance goals. In accordance with generally accepted accounting
principles, the impact of the Janus amortization charges in 1999 and beyond
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 normal vesting rate of 10% of the shares in one year will be
accelerated to 20% of the shares in 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, 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.
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
---- ----
Janus Options outstanding at
January 1 -- 22,100
Granted 37,700
Exercised (15,300) (13,800)
Expired/Canceled (300) (200)
------- -------
Janus Options outstanding at
December 31 22,100 8,100
======= =======
During 1999, 8,000 options were exercised and the remaining 100 options
expired. 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.
BERGER STOCK OPTION PLAN. During 1997, Berger adopted a stock option plan
which makes available shares of Berger common stock for the grant of awards to
Berger 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, vest
generally over periods ranging up to 10 years, and are exercisable for a period
of 10 years. Certain grants under the Berger stock option plan also include
accelerated vesting provisions based upon pre-established Berger performance
criteria. Berger options would have affected Stilwell's dilutive EPS
computation (through a reduced ownership percentage of Berger by Stilwell) if
the average fair value of the Berger stock exceeded the option price.
A summary of stock option activity under the Berger stock option plan is
as follows:
1997 1998
---- ----
Berger Options outstanding at
January 1 -- 192,210
Granted 192,210 9,500
Expired/Canceled -- (69,660)
------- -------
Berger Options outstanding at
December 31 192,210 132,050
======= =======
Exercisable at December 31 127,450 89,290
======= =======
In connection with the formation of Berger LLC, 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, 1998, 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, 1998, the
employees participating in the 1997 stock purchases had earned approximately
37% of the potential bonus. Compensation expense related to these two bonus
plans aggregated $18.3, $13.2 and $2.7 million in 1996, 1997 and 1998,
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, 1998, future
minimum rental commitments under non-cancelable operating leases aggregated (in
millions):
1999 $ 15.1
2000 10.2
2001 8.3
2002 7.8
2003 5.7
Thereafter 3.6
------
Total $ 50.7
======
Rent expense aggregated $8.4, $12.6 and $17.5 million in 1996, 1997 and 1998,
respectively.
Stilwell is committed for future telecommunications and data service
with minimum payments of $3.3 and $0.9 million in 1999 and 2000,
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 at the election
of such minority stockholders, KCSI or Stilwell would be required to purchase
the minority interests of such Janus minority stockholders at a purchase
price equal to fifteen times the net after-tax earnings over the period
indicated in the relevant agreement, or in some circumstances at a purchase
price as determined by an independent appraisal. The Janus Stock Purchase
Agreement has been assigned to Stilwell. If all of the puts under such Janus
minority stockholder agreements were exercised, Stilwell would be required to
pay approximately $481 million as of September 30, 1999, compared to (in
millions) $220, $337 and $456 at December 31, 1996, 1997 and 1998,
respectively. Payment for the purchase of the respective minority interests
is to be made under the Janus Stock Purchase Agreement 30 days after
receiving notification of exercise of the put rights. Under the restriction
agreements, payment for the purchase of the respective minority interests is
to be made 30 days after the later to occur of (i) receiving notification of
exercise of the put rights or (ii) determination of the purchase price
through the independent appraisal process.
The Janus Stock Purchase Agreement and certain stock purchase agreements
and restriction agreements with other minority stockholders also contain
provisions whereby upon the occurrence of a Change in Ownership (as defined
in such agreements) of Stilwell (as to the Janus Stock Purchase Agreement),
or (as to the other agreements) KCSI (which will not be affiliated with
Stilwell following the Distribution), Stilwell may be required to purchase
such holders' Janus stock or, as to the stockholders that are parties to the
Janus Stock Purchase Agreement, at such holders' option, to sell its stock of
Janus to such minority stockholders. The purchase price for such minority
holders' Janus stock would be equal to fifteen times the net after-tax
earnings over the period indicated in the relevant agreement, or in some
circumstances at a purchase price as determined by Janus' Stock Option
Committee. If Stilwell were required to purchase the holders' Janus stock,
Stilwell would be required to pay approximately $692 million as of September
30, 1999 (see additional information in Note 15).
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 $5.4, $5.3 and $5.5 million in 1996, 1997 and 1998, respectively.
Stilwell and its subsidiaries earn fees from the various registered
investment companies for which Stilwell and its subsidiaries act as
investment adviser. Accounts receivable include amounts due from these
investment companies. Additionally, Janus earned 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 mutual funds for which it acts as adviser.
The table below summarizes this related party activity as of and for the
years ended December 31 (in millions):
Accounts
Investment receivable
management and Sub-advisery from registered
shareowner fees from investment Berger 12b-1 Plan
servicing fees IDEX companies fees earned
-------------- ------------ ------------ ------------------
1996 $ 261.8 $ 5.9 $ 29.0 $ 8.0
1997 403.0 7.1 41.6 7.6
1998 558.4 8.9 59.1 6.9
Stilwell's retained earnings include equity in the unremitted earnings of
its unconsolidated affiliates of $92.1, $114.8 and $137.1 million as of
December 31, 1996, 1997 and 1998, respectively.
Certain officers and directors of Janus and Berger are also officers,
directors and/or trustees for the various registered investment companies for
which Janus and Berger act as investment adviser.
NOTE 15 - CONTROL
SUBSIDIARIES AND AFFILIATES. Stilwell has entered into the Janus Stock
Purchase Agreement with Mr. Bailey, the holder of 12% of Janus common stock,
which 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 of Janus, Mr. Bailey
shall continue to establish and implement policy with respect to the investment
advisory and portfolio management activity of Janus. In furtherance of such
objective, such agreement provides that 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.
Under the Janus Stock Purchase Agreement, upon the occurrence of a "Change
in Ownership" of Stilwell, as defined in such agreement, 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 purchase price equal to fifteen times the net after-tax
earnings over the period indicated in the relevant agreement, or in some
circumstances at a purchase price as determined by Janus' Stock Option
Committee.
Most of the revenues of Janus and Berger are derived pursuant to
investment advisory agreements with their respectively managed Funds. 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
of the Securities and Exchange Commission would not constitute such an
assignment. However, a material reduction in the ownership of Janus common
stock by its chief executive officer 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
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.
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.
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.
--------
[Duff & Phelps, LLC letterhead]
January 10, 2000
CONFIDENTIAL
- ------------
Board of Directors
Kansas City Southern Industries, Inc.
114 West 11th Street
Kansas City, MO 64105-1804
Dear Board of Directors:
You have retained Duff & Phelps, LLC as independent financial and investment
analysts to provide an opinion as to the solvency and capitalization of
Kansas City Southern Industries, Inc. ("KCSI" or the "Company") following
the spin-off of Stilwell Financial, Inc. ("the Spin-off").
Certain terms used herein are defined in Appendix A to this letter and, for
the purposes of this letter, shall only have the meanings set forth in
Appendix A.
The Company has requested us to determine whether, as of and after the Spin-
off and assuming the successful completion of the Refinancing (described
below):
1) The fair salable value of the Company's assets exceeds the stated
value of the Company's liabilities, including all contingent
liabilities identified to us by the Company;
2) The Company will not have an unreasonably small amount of capital
for the operation of the businesses in which it is engaged;
3) The Company will be able to pay its stated liabilities, including
identified contingent liabilities, as they mature; and
4) The fair salable value of the Company's assets exceeds the stated
value of the Company's liabilities, including all contingent
liabilities identified to us by the Company, by an amount greater
than the sum of the aggregate par value of its issued capital stock
and all amounts allocated to capital by the Board of Directors.
It is our understanding that, in connection with the Spin-off, the Company is
in the process of undergoing a refinancing of its current bank facilities and
public debt (the "Refinancing"). In the course of our assignment, we held
discussions with the senior management of KCSI and The Kansas City Southern
Railway Company at their offices in Kansas City, Missouri and via telephone
regarding the history, current operations, and probable future outlook of
KCSI after giving effect to the Spin-off and the Refinancing. We toured the
Company's rail yard in Shreveport, Louisiana. Our analysis is based on
audited consolidated financial information and unaudited segment information
on SEC Form 10K for the fiscal years ended December 31, 1995 to 1998;
unaudited consolidated and segment financial information on SEC Form 10Q for
the periods ended September 30, 1998 and 1999; a pro forma estimated balance
sheet prepared by management as of December 31, 1999 giving effect to the
Spin-off and the Refinancing; a schedule of identified contingent liabilities
giving effect to the Spin-off; and other internal management documents
provided to us, including financial projections. We have assumed that there
has been no material adverse change in the assets, financial condition,
business, or prospects of KCSI (after the Spin-off) since the date of the
most recent financial statements made available to us. We also reviewed the
terms of the agreements relating to the Spin-off.
Our analysis included a review of the financial projections provided by the
Company, supplemented by discussions with management and such other
procedures as we deemed appropriate regarding the reasonableness and
completeness of the Company's underlying assumptions. In addition, we
developed our own financial projections based on the Company's financial
projections. Our analysis also included statements by management as to their
plans and intentions, our investigation and understanding of the business,
and such other information as we deemed appropriate. We compared the
Company's post-Spin-off capital structure and cash flow generating ability
with those of companies engaged in comparable lines of business.
As part of our analysis, we inquired of senior management and of the
officials of the Company having principal responsibility for financial
reporting and accounting matters whether they were aware of any events
(including the Spin-off), conditions, or prospects that might cause the
Company to: 1) incur additional obligations that would cause the fair
salable value of its assets to be less than the stated value of its
liabilities, including all identified contingent liabilities; 2) engage in a
business for which the Company would have an unreasonably small amount of
capital; 3) be unable to pay its stated liabilities, including identified
contingent liabilities, as they mature; or 4) incur additional obligations
that would cause the fair salable value of its assets to exceed the stated
value of its liabilities, including all identified contingent liabilities, by
an amount less than the aggregate par value of its issued capital stock.
Industry information and data on comparable companies used as background for
our analysis and valuation were obtained from regularly published sources.
We did not independently verify the information obtained from Company
management including certain assumptions used in developing our financial
projections nor that obtained from published sources.
Based on all factors we regard as relevant and assuming the accuracy
and completeness of the information provided to us and assuming the
substantial continuity of current economic, competitive, and financial
conditions, it is our opinion that after giving effect to the consummation of
the Spin-off: 1) the fair salable value of the Company's assets exceeds the
stated value of the Company's liabilities, including all contingent
liabilities identified to us by the Company; 2) the Company will not have an
unreasonably small amount of capital for the operation of the business in
which it is engaged; 3) the Company will be able to pay its stated
liabilities, including identified contingent liabilities, as they mature; and
4) the fair salable value of the Company's assets exceeds the stated value of
the Company's liabilities, including all contingent liabilities identified to
us by the Company, by an amount greater than the sum of the aggregate par
value of its issued capital stock and all amounts allocated to capital by the
Board of Directors.
This letter is confidential and intended to be seen and relied on only by
Kansas City Southern Industries, Inc., its stockholders and the financial
institutions identified in Appendix B (which comprise the lending syndicate
in the Refinancing), except that Duff & Phelps consents to its inclusion in
any filing by Kansas City Southern Industries, Inc. and Stilwell Financial,
Inc. with the Securities Exchange Commission, the New York Stock Exchange, or
any other regulatory agency in connection with the Spin-off.
Respectfully submitted,
/s/ DUFF & PHELPS, LLC
DUFF & PHELPS, LLC
APPENDIX A
----------
DEFINITIONS OF TERMS USED IN THIS LETTER
----------------------------------------
"Fair salable value" of the Company's assets means the aggregate amount
(without deduction for costs of sale or taxes, if any) of money that could be
expected to be realized, as of the valuation date, from an interested
purchaser aware of all relevant information, by a seller, equally informed,
who is interested in disposing of the entire operation as a going concern,
presuming the business will be continued in its present form and character
within an approximate one (1) year time frame. This definition does not
contemplate a distress sale.
"Stated value of the Company's liabilities, including all contingent
liabilities" means solely the stated amount of liabilities as represented in
the Company's post-Spin-off, pro forma estimated balance sheet as of December
31, 1999, and contingent liabilities as identified to us and valued by
officers of the Company without any independent verification by us.
"Not have an unreasonably small amount of capital for the operation of the
businesses in which it is engaged" and "able to pay its stated liabilities,
including identified contingent liabilities, as they mature" mean that the
Company will be able to generate enough cash from either operations, asset
dispositions, or refinancing to meet its stated obligations and those
contingent liabilities identified to us by management.
APPENDIX B
----------
IDENTIFIED FINANCIAL INSTITUTIONS
---------------------------------
This solvency opinion letter is confidential and intended to be seen and
relied on only by Kansas City Southern Industries, Inc., its stockholders and
the following financial institutions which comprise the lending syndicate in
the Refinancing: the Lenders, the Administrative Agent, Collateral Agent,
the Issuing Bank and the Swingline Lender, who may, from time to time, be
party to the Credit Agreement to be dated as of January 11, 2000 among Kansas
City Southern Industries, Inc., the Kansas City Southern Railway Company, the
Lenders Party thereto and the Chase Manhattan Bank as Administrative Agent,
Collateral Agent, Issuing Bank and Swingline Lender.
