UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 001-14818
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FEDERATED INVESTORS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1111467 (State or other
jurisdiction of (IRS Employer incorporation or
organization) Identification No.)
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 412-288-1900
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ______.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: As of November 6, 2000, the
Registrant had outstanding 9,000 shares of Class A Common Stock and 117,290,309
shares of Class B Common Stock.
This Amendment No. 1 to the Form 10-Q for the quarter ended September 30, 2000,
of Federated Investors, Inc. is being filed to amend "Item 1. Financial
Statements" under "Part I. Financial Information" in its entirety to correct the
following errors: (1) the amounts presented as cash used for the purchase of
treasury stock on the originally filed Consolidated Statements of Cash Flows
were inadvertently transposed during the edgarization process; and (2) several
line items appearing on the originally filed Consolidated Balance Sheets were
inadvertently included as a result of a clerical error which occurred during the
edgarization process.
Part I, Item I. Financial Statements
FEDERATED INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited) SEPTEMBER DECEMBER
30, 31,
2000 1999
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ $
137,249 171,490
Securities available for sale 81,950 66,438
Receivables, net of reserve of $60 and $184, respectively 34,974 35,163
Accrued revenues 7,450 6,050
Prepaid expenses 4,764 3,305
Current deferred tax asset, net 1,792 1,382
Other current assets 302 319
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Total current assets
268,481 284,147
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LONG-TERM ASSETS:
Customer relationships, net of accumulated amortization of 15,425 9,613
$16,192 and $12,800, respectively
Goodwill, net of accumulated amortization of $18,204 and $16,013, 32,843 32,856
respectively
Other intangible assets, net of accumulated amortization of $129 51 78
and $112, respectively
Deferred sales commissions, net of accumulated amortization of
$122,351 and $79,365, respectively 331,704 298,978
Property and equipment, net of accumulated depreciation of 34,296 31,305
$37,519 and $44,605, respectively
Other long-term assets 21,996 16,216
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Total long-term assets
436,315 389,046
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Total assets $ $
704,796 673,193
=========== ===========
CURRENT LIABILITIES:
Cash overdraft $ 6,398 $ 9,111
Current portion of long-term debt - recourse 14,275 14,259
Accrued expenses 57,107 58,768
Accounts payable 29,558 29,321
Income taxes payable 1,522 2,865
Other current liabilities 4,067 1,148
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Total current liabilities
112,927 115,472
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LONG-TERM LIABILITIES:
Long-term debt - recourse 70,230 84,446
Long-term debt - nonrecourse
338,906 309,741
Long-term deferred tax liability, net 43,472 37,177
Other long-term liabilities 6,298 6,949
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Total long-term liabilities
458,906 438,313
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Total liabilities
571,833 553,785
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Minority interest 472 596
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SHAREHOLDERS' EQUITY :
Common stock :
Class A, no par value, 20,000 shares
authorized, 9,000 shares issued and outstanding 189 189
Class B, no par value, 900,000,000 shares
authorized, 129,505,456 shares issued 75,227 75,087
Retained earnings
226,729 124,653
Treasury stock, at cost, 11,590,547 and 6,933,540 shares Class B (79,976)
common stock, respectively (166,052)
Employee restricted stock plan (813) (1,046)
Accumulated other comprehensive income (2,789) (95)
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Total shareholders' equity
132,491 118,812
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Total liabilities, minority interest, and $ $
shareholders' equity 704,796 673,193
=========== ===========
(The accompanying notes are an integral part of these consolidated financial statements.)
FEDERATED INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED NINE MONTHS ENDED
(dollars in thousands, except per share data) SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------------
(unaudited) 2000 1999 2000 1999
------------- -------- ------------- -------------
REVENUE:
Investment-advisory fees, net-Federated $ 93,203 $ $ 273,381 $ 230,876
funds 80,033
Investment-advisory fees, net-other 3,754 3,025 10,011 8,147
Administrative-service fees, net-Federated 21,901 64,364 60,150
funds 20,178
Administrative-service fees, net-other 5,624 6,025 17,367 17,080
Other service fees, net-Federated funds 35,392 104,122 91,381
31,632
Other service fees, net-other 7,428 6,032 21,516 17,109
Commission income 1,398 1,112 4,760 3,190
Interest and dividends 4,340 3,475 13,401 9,964
Gain (loss) on sale of securities (228) 83 (523) 851
available for sale
Other income 288 602 1,862 4,895
------------- -------- ------------- -------------
Total revenue 173,100 510,261 443,643
152,197
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OPERATING EXPENSES:
Compensation and related 40,570 125,422 116,748
38,803
Advertising and promotional 15,079 45,888 40,177
14,594
Systems and communications 7,753 6,991 21,987 20,800
Professional service fees 6,258 6,304 18,711 19,002
Office and occupancy 6,731 5,650 19,205 18,463
Travel and related 3,449 3,485 10,401 10,634
Amortization of deferred sales commissions 15,560 44,983 34,341
12,456
Amortization of intangible assets 1,982 1,668 5,610 8,737
Other 1,762 2,395 6,291 4,372
------------- -------- ------------- -------------
Total operating expenses 99,144 298,498 273,274
92,346
------------- -------- ------------- -------------
Operating income 73,956 211,763 170,369
59,851
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NONOPERATING EXPENSES:
Debt expense - recourse 1,942 2,212 6,372 6,643
Debt expense - nonrecourse 6,721 5,881 19,236 17,012
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Total nonoperating expenses 8,663 8,093 25,608 23,655
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Income before minority interest and income taxes 65,293 186,155 146,714
51,758
Minority interest 2,564 2,588 7,560 7,628
------------- -------- ------------- -------------
Income before income taxes 62,729 178,595 139,086
49,170
Income tax provision 22,717 64,305 50,684
18,006
------------- -------- ------------- -------------
Net income $ 40,012 $ $ 114,290 $ 88,402
31,164
============= ======== ============= =============
EARNINGS PER SHARE:
Basic $ 0.34 $ 0.25 $ 0.97 $ 0.70
============= ======== ============= =============
Diluted $ 0.33 $ 0.24 $ 0.93 $ 0.68
============= ======== ============= =============
Cash dividends per share $ 0.037 $ 0.028 $ 0.102 $ 0.081
============= ======== ============= =============
PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO
STOCK SPLIT PAID ON JULY 17, 2000.
(The accompanying notes are an integral part of these consolidated
financial statements.)
FEDERATED INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
(dollars in thousands) SEPTEMBER 30,
-------------------
(unaudited) 2000 1999
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OPERATING ACTIVITIES:
Net income $ 114,290 $ 88,402
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY
OPERATING ACTIVITIES:
Amortization of intangible assets 5,610 8,737
Depreciation and other amortization 6,076 5,559
Amortization of deferred sales commissions 44,983 34,341
Minority interest 7,560 7,628
Loss (gain) on disposal of property and 173 (2,973)
equipment
Provision for deferred income taxes 7,356 3,962
Net realized loss (gain) on sale of 523 (851)
securities available for sale
Deferred sales commissions paid (113,900) (96,104)
Contingent deferred sales charges received 36,193 28,298
Other changes in assets and liabilities:
Decrease (increase) in receivables, net 418 (1,012)
Increase in accrued revenues (1,341) (2,109)
(Increase) decrease in other current (3,492) 5,122
assets
Decrease (increase) in other long-term 1,620 (1,190)
assets
(Decrease) increase in accounts payable (1,939) 1,957
and accrued expenses
Decrease in income taxes payable (1,344) (1,456)
Increase in other current liabilities 193 578
Increase in other long-term liabilities 214 3,884
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Net cash provided by operating activities 103,193 82,773
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INVESTING ACTIVITIES:
Additions to property and equipment (8,238) (15,603)
Proceeds from disposal of property and 158 4,007
equipment
Cash paid for business acquisitions and (11,636) (1,398)
joint venture
Purchases of securities available for sale (28,429) (88,743)
Proceeds from redemptions of securities 1,720 24,459
available for sale
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Net cash used by investing activities (46,425) (77,278)
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FINANCING ACTIVITIES:
Distributions to minority interest (7,684) (7,847)
Dividends paid (12,214)
(10,446)
Purchase of treasury stock (86,076) (56,370)
Proceeds from new borrowings - nonrecourse 107,580
93,309
Payments on debt - recourse (14,200) (178)
Payments on debt - nonrecourse (78,415)
(62,569)
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Net cash used by financing activities (91,009) (44,101)
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Net decrease in cash and cash equivalents (34,241) (38,606)
Cash and cash equivalents, beginning of period 171,490 185,581
-------- --------
Cash and cash equivalents, end of period $ 137,249 $ 146,975
======== ========
(The accompanying notes are an integral part of these consolidated financial
statements.)
6
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Summary of Significant Accounting Policies
(a) BASIS OF PRESENTATION
The interim consolidated financial statements of Federated Investors,
Inc. (Federated) included herein have been prepared in accordance with
accounting principles generally accepted in the United States. In the
opinion of management, the financial statements reflect all adjustments
which are of a normal recurring nature and necessary for a fair statement
of the results for the interim periods presented.
In preparing the unaudited interim consolidated financial statements,
management is required to make estimates and assumptions that affect the
amounts reported in the financial statements. Actual results may differ
from such estimates and such differences may be material to the financial
statements.
These financial statements should be read in conjunction with
Federated's Annual Report on Form 10-K for the year ended December 31,
1999. Certain items previously reported have been reclassified to conform
with the current year's presentation.
(b) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133), requires that
all derivatives, including hedges, be recorded at fair value and that all
changes in the fair value or cash flow of both the hedge and the hedged
item be recognized in earnings in the same period. SFAS 133 is effective
for years beginning after June 15, 2000. Federated intends to adopt SFAS
133 effective January 1, 2001. The impact of adopting the provisions of
this statement on Federated's earnings and financial position will depend
on the nature and extent of Federated's investments in derivative
instruments at the time of adoption. Given Federated's current minimal use
of derivatives and based on our analysis, we do not anticipate the
adoption of SFAS 133 to have a significant effect on our earnings or
financial position.
(2) Securitization of B-Share Future Revenue Streams and Nonrecourse Debt
Pursuant to an agreement with a third party that expired in October
2000, Federated sold, on a continuous basis, the rights to future revenue
streams associated with 12b-1 fees, shareholder service fees and
contingent deferred sales charges (CDSCs) of Class B shares of various
mutual funds it manages. For accounting purposes, transactions executed
under the agreement were reflected as financings and nonrecourse debt was
recorded at interest rates based on market conditions at the time of the
financings. Federated has agreed to the preliminary terms of a new
arrangement with a third party to continue selling the rights to these
future revenue streams and anticipates finalizing the arrangement before
December 31, 2000.
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(2) Securitization of B-Share Future Revenue Streams and Nonrecourse Debt
(continued)
The following tables summarize the changes in the deferred sales
commissions related to this agreement:
Nine Months
Ended
September 30,
2000
----------------
(IN THOUSANDS)
Deferred B-Share Sales Commissions:
Financed balance at December $ 288,844
31, 1999
B-Share sales commissions 104,965
financed
CDSCs collected (34,888)
Amortization (40,072)
----------------
Financed balance at September $ 318,849
30, 2000
================
Below is the activity of the nonrecourse debt tranches:
(IN THOUSANDS)
---------------------------------------------
Interest Balance Additional Balance
Tranche Rate 12/31/99 Financings 9/30/00
Payments
- ----------------------- ------------ --------- ----------- ---------- ---------
1997-1 Class A 7.44% $ 52,976 $ 0 $ 12,645 $ 40,331
Class B 9.80% 9,700 0 0 9,700
Financings 10/97
through 9/00 6.68% - 247,065 107,580 65,770 288,875
8.60%
--------- ----------- ---------- ---------
$ 309,741 $ 107,580 $ 78,415 $ 338,906
========= =========== ========== =========
(3) Long-Term Debt - Recourse
Federated's long-term debt - recourse consisted of the following:
Interest September December
30, 31,
Rate 2000 1999
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(IN THOUSANDS)
Recourse Debt:
Senior Secured Note 7.96% $ 84,000 $ 98,000
Purchase Agreement
Capitalized leases 7.1%-8.5% 505 705
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Total recourse debt 84,505 98,705
Less current portion 14,275 14,259
------------
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Total long-term debt - $ 70,230 $ 84,446
recourse
============ ==========
On March 28, 2000, a wholly-owned subsidiary of Federated, Edgewood
Services, Inc., entered into a discretionary line of credit agreement with
a bank under which it can borrow up to $45.0 million for the payment of
obligations associated with daily net settlements of mutual funds
processed through the National Securities Clearing Corporation. Borrowings
under this agreement bear interest at a rate defined by the bank at the
time of the borrowing and are payable on demand. At September 30, 2000,
the outstanding balance under this agreement was zero.
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(4) Common Stock
(a) Cash Dividends
Federated's Senior Secured Credit Agreement allows dividends in an
amount not to exceed $20 million plus 50% of any net income (less 100% of
any loss) of Federated during the period from January 1, 1998, to and
including the date of payment, less certain stock repurchase payments. The
Senior Secured Note Purchase Agreements allow dividends in an amount not
to exceed $5 million plus 50% of any net income (less 100% of any loss) of
Federated during the period from January 1, 1996, to and including the
date of payment, less certain stock repurchase payments. Cash dividends of
$0.028, $0.037 and $0.037 per share or approximately $3.4 million, $4.4
million and $4.4 million were paid in the first, second and third quarter
of 2000, respectively, to holders of common shares. Additionally, on
October 17, 2000, the board of directors declared a dividend of $0.037 per
share to be paid on November 15, 2000, to shareholders of record as of
November 3, 2000. After considering earnings through September 30, 2000,
the dividend payment on November 15, 2000, and certain stock repurchase
payments, approximately $34.7 million is available to pay dividends under
the more restrictive of the two debt covenant limitations.
(b) Stock Split
In June 2000, the board of directors approved a three-for-two stock
split on Federated's common stock. The stock split was effected as a
dividend to shareholders of record as of July 7, 2000 and new shares were
distributed on July 17, 2000. Earnings and dividends per share, as well as
other share data, have been adjusted to reflect the stock distribution.
(c) Employee Stock Purchase Plan
Federated offers an Employee Stock Purchase Plan which allows employees
to purchase a maximum of 750,000 shares of Class B common stock. Employees
may contribute up to 10% of their salary to purchase shares of Federated's
Class B common stock on a quarterly basis at the market price. The shares
under the plan may be newly issued shares, treasury shares or shares
purchased on the open market. As of September 30, 2000, a total of 34,134
shares have been purchased by employees in this plan.
(d) Stock Repurchase Program
In 1999, the board of directors approved two separate share repurchase
programs authorizing Federated to purchase up to $20.0 million of
Federated Class B common stock under the first program and up to 7.5
million shares of Federated Class B common stock under the second program.
In March 2000, the board of directors approved a third program to purchase
up to 7.5 million shares of Federated Class B common stock. Under the
programs, shares can be repurchased in open market transactions over a
period of 12 months from the date of the board resolution. In addition,
under the second and third programs, shares can also be repurchased in
private transactions. The programs authorize executive management to
determine the timing and the amount of shares for each purchase. The
repurchased stock is held in treasury to be used for employee benefit
plans, potential acquisitions and other corporate activities. As of
September 30, 2000, Federated had purchased 11,179,922 shares of Class B
common stock for approximately $166.0 million under the programs and can
repurchase an additional 5,072,530 shares subject to current debt-covenant
restrictions which limit cash payments for additional stock repurchases to
$149.9 million. This cash payment limit is continuously adjusted to
reflect 50% of net income earned and stock repurchase and dividend
payments made during the period. From October 1, 2000, to November 6,
2000, an additional 624,600 shares of Class B common stock have been
repurchased under the programs for $16.6 million.
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(5) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income $ 40,012 $ 31,164 $ 114,290 $ 88,402
========= ======== ========= =========
Denominator:
Basic weighted-average shares 126,233
outstanding 124,604 118,201
116,598
Dilutive potential shares from 4,926 3,858 4,579 3,839
stock-based compensation
--------- -------- --------- ---------
Diluted weighted-average shares 121,524 128,462 122,780 130,072
outstanding
========= ======== ========= =========
Basic earnings per share $ 0.34 $ 0.25 $ 0.97 $ 0.70
========= ======== ========= =========
Diluted earnings per share $ 0.33 $ 0.24 $ 0.93 $ 0.68
========= ======== ========= =========
PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT
PAID ON JULY 17, 2000.
(6) Comprehensive Income
Comprehensive income was $40.0 million and $31.2 million for the
three-month periods ended September 30, 2000 and 1999, respectively, and
$111.6 million and $87.8 million for the nine-month periods ended September
30, 2000 and 1999, respectively.
(7) Business Combination
On September 15, 2000, Federated completed the acquisition of the mutual
fund assets of Investment Advisers, Inc. (IAI). As a result of this
transaction, Federated assumed the investment management, distribution and
shareholder servicing responsibilities for 11 former IAI funds totaling
$346.0 million in primarily equity assets as of the transaction date. This
acquisition was accounted for using the purchase method of accounting. The
entire purchase price, including direct costs, was allocated to customer
relationships which will be amortized over 14 years.
(8) Subsequent Event
On October 20, 2000, Federated signed a definitive agreement to acquire the
business of New York-based Edgemont Asset Management Corporation, the advisor
for the $3.7 billion Kaufmann Fund (Fund). The offer has been approved by
Federated's corporate and fund boards. The transaction, which is expected to
close during the first quarter 2001, includes an upfront payment due at the
transaction closing date, 95% of which is payable in cash and 5% of which is
payable with the issuance of Federated Class B common stock. Federated may
also make a series of additional cash payments over six years contingent upon
revenue growth. The upfront purchase price and the maximum available
contingent payments will be set on the closing date based on the level of
average assets of the Fund 30 days before closing. Based on assets at
September 30, 2000, the upfront purchase price would approximate $200 million
and, if revenue targets are met, the contingent payments, consisting of both
additional purchase price and incentive compensation, could aggregate to as
much as $220 million. This acquisition will be accounted for using the
purchase method of accounting.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERATED INVESTORS, INC.
- ------------------------ --------------------------
(Registrant)
Date DECEMBER 4, 2000 By: /S/ THOMAS R. DONAHUE
------------------------ --------------------------------
Thomas R. Donahue
Chief Financial Officer and
Principal Accounting Officer