UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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.
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(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
------------------------ ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 412-288-1900
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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 May 7, 2001, the
Registrant had outstanding 9,000 shares of Class A Common Stock and 117,031,641
shares of Class B Common Stock.
Federated Investors, Inc.
Form 10-Q
For the Three Months Ended
March 31, 2001
Table of Contents
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 2001, and December 31, 2000 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 2001 and 2000 4
Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of
Regulation S-K 13
(b) Reports on Form 8-K 13
Signatures 14
Part I, Item I. Financial Statements
Federated Investors, Inc.
Consolidated Balance Sheets
(dollars in thousands)
(unaudited) March 31, December 31,
2001 2000
---------- -----------
Current Assets:
Cash and cash equivalents $ 223,032 $ 149,920
Securities available for sale 31,832 85,305
Receivables, net of reserve of $89 and $86, respectively 35,724 36,943
Accrued revenues 6,374 6,594
Prepaid expenses 3,343 3,156
Current deferred tax asset, net 2,814 2,349
Other current assets 673 280
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Total current assets 303,792 284,547
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Long-Term Assets:
Goodwill, net of accumulated amortization of $19,693
and $18,949, respectively 31,354 32,099
Other intangible assets, net of accumulated amortization
of $18,793 and $17,527, respectively 13,649 14,878
Deferred sales commissions, net of accumulated
amortization of $149,057 and $136,409, respectively 297,357
315,612
Property and equipment, net of accumulated depreciation
of $41,470 and $39,479, respectively 36,098 36,406
Other long-term assets
21,301 21,208
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Total long-term assets
399,759 420,203
---------- -----------
Total assets
$ 703,551 $ 704,750
========== ===========
Current Liabilities:
Cash overdraft $ 4,604 $ 1,090
Current portion of long-term debt - recourse 14,287 14,280
Accrued expenses 35,755 56,806
Accounts payable 30,438 30,161
Income taxes payable 20,970 8,162
Other current liabilities 9,126 5,023
---------- -----------
Total current liabilities 115,180 115,522
---------- -----------
Long-Term Liabilities:
Long-term debt - recourse 70,083 70,174
Long-term debt - nonrecourse 304,976 323,818
Long-term deferred tax liability, net 39,077 40,565
Other long-term liabilities 6,230 6,265
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Total long-term liabilities 420,366 440,822
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Total liabilities 535,546 556,344
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Minority interest 91 538
---------- -----------
Shareholders' Equity :
Common stock :
Class A, no par value, 20,000 shares authorized, 9,000 189 189
shares issued and outstanding
Class B, no par value, 900,000,000 shares authorized,
129,505,456 shares issued 78,334 75,287
Retained earnings
300,772 263,456
Treasury stock, at cost, 12,808,147 and 12,384,647 shares (206,742) (187,582)
Class B common stock, respectively
Employee restricted stock plan
(668) (736)
Accumulated other comprehensive income
(3,971) (2,746)
---------- -----------
Total shareholders' equity
167,914 147,868
---------- -----------
Total liabilities, minority interest,
and shareholders' equity $ 703,551 $ 704,750
========== ===========
(The accompanying notes are an integral part of these consolidated
financial statements.)
Federated Investors, Inc.
Consolidated Statements of Income Three Months
Ended
(dollars in thousands, except per share data) March 31,
------------------
(unaudited) 2001 2000
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Revenue:
Investment-advisory fees,
net-Federated funds $ 93,447 $ 89,863
Investment-advisory fees, net-other 3,555 3,103
Administrative-service fees,
net-Federated funds 24,601 21,238
Administrative-service fees, net-other 5,221 6,027
Other service fees, net-Federated funds 32,444 34,842
Other service fees, net-other 6,711 7,181
Commission income 1,067 1,604
Interest and dividends 4,498 4,710
Loss on sale of securities available for
sale (496) (351)
Other income, net
366 656
------- ---------
Total revenue
171,414 168,873
------- ---------
Operating Expenses:
Compensation and related 39,645 42,831
Advertising and promotional 15,815 15,170
Systems and communications 7,490 6,829
Professional service fees 6,980 6,493
Office and occupancy 6,462 6,143
Travel and related 3,219 3,011
Amortization of deferred sales
commissions 12,648 14,799
Amortization of intangible assets 2,011 1,795
Other 1,444 1,880
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Total operating expenses 95,714 98,951
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Operating income 75,700 69,922
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Nonoperating Expenses:
Debt expense - recourse 1,797 2,229
Debt expense - nonrecourse 6,146 6,160
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Total nonoperating expenses 7,943 8,389
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Income before minority interest and income taxes 67,757 61,533
Minority interest 2,648 2,534
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Income before income taxes 65,109 58,999
Income tax provision 23,465 21,351
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Net income $ 41,644 $ 37,648
======= =========
Earnings per share:
Basic $ 0.36 $ 0.31
======= =========
Diluted $ 0.35 $ 0.30
======= =========
Cash dividends per share $ 0.037 $ 0.028
======= =========
Per share amounts have been restated to reflect the three-for-two
stock split paid in July 2000.
(The accompanying notes are an integral part of these consolidated
financial statements.)
Federated Investors, Inc.
Consolidated Statements of Cash Flows Three Months
Ended
(dollars in thousands) March 31,
------------------
(unaudited) 2001 2000
-------- --------
Operating Activities:
Net income $ 41,644 $ 37,648
Adjustments to reconcile net income to net
cash provided by
operating activities:
Amortization of intangible assets 2,011 1,795
Depreciation and other amortization 2,263 1,951
Amortization of deferred sales commissions 12,648 14,799
Minority interest 2,648 2,534
(Gain) loss on disposal of assets (670) 183
(Benefit) provision for deferred income (711) 3,268
taxes
Tax benefit from exercise of stock options 2,540 0
Deferred sales commissions paid (20,428) (51,358)
Contingent deferred sales charges received 10,085 13,305
Proceeds from sale of certain future 17,134 0
revenues
Other changes in assets and liabilities:
Decrease in receivables, net 1,172 1,389
Increase in other assets (1,760) (2,228)
Decrease in accounts payable and accrued (20,774) (8,908)
expenses
Increase in income taxes payable 12,808 16,776
Increase in other current liabilities 7,617 5,113
Increase in other long-term liabilities 6 307
-------- --------
Net cash provided by operating activities 68,233 36,574
-------- --------
Investing Activities:
Additions to property and equipment (1,784) (1,677)
Proceeds from disposal of property and 25 158
equipment
Cash paid for business acquisitions and (38) (2,527)
joint venture
Purchases of securities available for sale (504) (561)
Proceeds from redemptions of securities 52,354 941
available for sale -------- --------
Net cash provided (used) by investing 50,053 (3,666)
activities
-------- --------
Financing Activities:
Distributions to minority interest (3,095) (2,702)
Dividends paid (4,328) (3,422)
Proceeds from exercise of options 367 0
Purchase of treasury stock (19,192) (26,913)
Proceeds from new borrowings - nonrecourse 3,509 43,717
Payments on debt - recourse (84) (70)
Payments on debt - nonrecourse (22,351) (27,948)
-------- --------
Net cash used by financing activities (45,174) (17,338)
-------- --------
Net increase in cash and cash equivalents 73,112 15,570
Cash and cash equivalents, beginning of period 149,920 171,490
-------- --------
Cash and cash equivalents, end of period $ 223,032 $ 187,060
======== ========
(The accompanying notes are an integral part of these consolidated
financial statements.)
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, 2000. Certain items
previously reported have been reclassified to conform with the current year's
presentation.
(b) Recent Accounting Pronouncements
On April 1, 2001, Federated adopted Emerging Issues Task Force Issue No.
99-20, "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" (EITF 99-20). EITF 99-20
states that interest income earned on retained or purchased beneficial interests
in securitized financial assets should be recognized over the life of the
investment based on an anticipated yield determined by periodically estimating
cash flows. Interest income should be revised prospectively for changes in cash
flows. Additionally, impairment should be recognized if the fair value of the
beneficial interest has declined below its carrying amount and the decline is
other than temporary. Because the book value of Federated's asset-backed
securities was less than or equal to the fair value of those investments on
April 1, 2001, Federated did not recognize a transition adjustment as a result
of adopting this statement.
(2) Long-Term Debt - Recourse
Federated's long-term debt - recourse consisted of the following:
Interest March 31, December
31,
Rate 2001 2000
--------- ------------ ----------
(in thousands)
Recourse Debt:
Senior Secured Note 7.96% $ 84,000 $ 84,000
Purchase Agreements
Capitalized leases 7.1%-8.5% 370 454
------------ ----------
Total recourse debt 84,370 84,454
Less current portion 14,287 14,280
------------
------------ ----------
Total long-term debt - $ 70,083 $ 70,174
recourse
============ ==========
(3) Long-Term Debt - Nonrecourse
Federated sells the rights to receive future 12b-1 fees, shareholder
service fees and contingent deferred sales charges on Class B shares of various
mutual funds we manage. For accounting purposes, certain transactions executed
under the sales agreements are reflected as financings, and various tranches of
nonrecourse debt have been recorded. Below is the activity of the nonrecourse
debt tranches:
(in thousands)
-------------------------------------------
Interest Balance Additional Balance
Tranche Rate 12/31/2000 Financings 3/31/2001
Payments
- ------------------ ----------- --------- -------- -------- --------
1997-1 Class A 7.44% $ 36,418 $ 0 $ 4,224 $ 32,194
Class B 9.80% 9,700 0 0 9,700
Financings 10/97
through 9/00 6.68% - 8.60% 274,949 0 17,952 256,997
Financings 10/00
through 3/01 8.60% 2,751 3,509 175 6,085
--------- -------- -------- --------
$ 323,818 $ 3,509 $ 22,351 $ 304,976
========= ======== ======== ========
(4) Common Stock
(a) Cash Dividends and Stock Repurchases
Federated's recourse debt agreements contain restrictions on payments of
dividends and purchases of treasury stock. The more restrictive of the
agreements limits cash payments for these purposes to $5.0 million plus 50% of
net income during the period from January 1, 1996, to and including the payment
date, less certain payments for dividends and stock repurchases. As of March 31,
2001, approximately $65.4 million was available to pay dividends or repurchase
stock under the more restrictive limitation.
Cash dividends of $0.037 per share or approximately $4.3 million were paid
in the first quarter of 2001 to holders of common shares. Additionally, on April
25, 2001, the board of directors declared a dividend of $0.046 per share to be
paid on May 15, 2001, to shareholders of record as of May 7, 2001. As of March
31, 2001, under Federated's current share buyback program, Federated can
repurchase approximately 3.7 million additional shares subject to the cash
payment limit imposed by Federated's debt covenants.
(b) 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 March 31, 2001, a total of 38,894 shares had been purchased by
employees in this plan.
(5) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31,
---------------------
2001 2000
--------- ---------
(in thousands, except per share data)
Numerator:
Net income $ 41,644 $ 37,648
========= =========
Denominator:
Basic weighted-average shares
outstanding 115,154 120,085
Dilutive potential shares from 5,160 4,175
stock-based compensation --------- ---------
Diluted weighted-average shares
outstanding 120,314 124,260
========= =========
Basic earnings per share $ 0.36 $ 0.31
========= =========
Diluted earnings per share $ 0.35 $ 0.30
========= =========
Per share amounts have been restated to reflect the
three-for-two stock split paid in July 2000.
(6) Comprehensive Income
Comprehensive income was $40.4 million and $37.4 million for the
three-month periods ended March 31, 2001 and 2000, respectively.
(7) Business Combination
On April 20, 2001, Federated completed the acquisition of substantially all
of the assets of Edgemont Asset Management Corporation, the former advisor of
the $3.2 billion Kaufmann Fund. The purchase price included consideration of
approximately $170.8 million in cash payments and 315,732 shares of Federated
Class B common stock valued at approximately $8.9 million. The acquisition
agreement provides for additional purchase price payments and incentive
compensation payments based upon the achievement of specified revenue growth
over the next six years. These payments could aggregate to approximately $200
million if revenue targets are met.
This acquisition was accounted for using the purchase method of accounting
and, accordingly, the fair value of the assets acquired, primarily intangible
assets, as well as the results of those assets will be included in Federated's
consolidated financial statements beginning on the date of acquisition.
Part I, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset Highlights
Managed and Administered Assets
at Period End As of March 31,
(in millions) ------------------ Percent
2001 2000 Change
-------- -------- --------
Money market funds $ 106,990 $ 82,438 30%
Equity funds 18,249 23,431 (22%)
Fixed-income funds 15,112 15,041 0%
Separate accounts 6,096 4,453 37%
-------- --------
Total managed assets $ 146,447 $ 125,363 17%
======== ========
Total administered $ 41,870 $ 44,691 (6%)
assets ======== ========
Average Managed and
Administered Assets
(in millions) Three Months Ended
March 31, Percent
------------------
2001 2000 Change
-------- -------- --------
Money market funds $ 105,552 $ 83,127 27%
Equity funds 19,881 22,070 (10%)
Fixed-income funds 14,992 15,453 (3%)
Separate accounts 6,137 4,633 32%
-------- --------
Total average managed $ 146,562 $ 125,283 17%
assets ======== ========
Total average $ 42,077 $ 43,539 (3%)
administered assets ======== ========
Components of Changes in Equity and Fixed-Income Fund
Managed Assets
(in millions)
Three Months
Ended
March 31,
------------------
2001 2000
-------- --------
Equity
Funds
Beginning assets $ 20,641 $ 20,941
Sales 1,668 3,749
Redemptions (1,738) (2,287)
-------- --------
Net (70) 1,462
(redemptions) sales
Net exchanges (65) 153
Other* (2,257) 875
-------- --------
-------- --------
Ending assets $ 18,249 $ 23,431
======== ========
Fixed-Income Funds
Beginning assets $ 14,268 $15,857
-------- --------
Sales 1,959 1,022
Redemptions (1,398) (1,647)
-------- --------
Net 561 (625)
sales (redemptions)
Net exchanges (13) (203)
Other* 296 12
-------- --------
-------- --------
Ending assets $ 15,112 $15,041
======== ========
- -------------------------------------------------------------------------------
* Includes changes in the market value of securities held by the funds,
reinvested dividends and distributions and net investment income.
The discussion and analysis below should be read in conjunction with the
consolidated financial statements appearing elsewhere in this report. We have
presumed that the readers of this interim financial information have read or
have access to management's discussion and analysis of financial condition and
results of operations appearing in our Annual Report on Form 10-K for the year
ended December 31, 2000.
Results of Operations
General. Federated is a leading provider of investment management products
and related financial services. The majority of our revenue is derived from
advising, distributing and servicing Federated mutual funds, separately managed
accounts and other related products, in both domestic and international markets.
We also derive revenue through servicing third-party mutual funds.
Investment advisory, distribution and the majority of our servicing fees
are based on the net asset value of investment portfolios that we manage or
administer. As such, these revenues are dependent upon factors including market
conditions and the ability to attract and maintain assets. Accordingly, revenues
will fluctuate with changes in the total value and composition of the assets
under management or administration.
The table below presents the highlights of our operations for the
three-month periods ended March 31, 2001 and 2000:
Three months ended
March 31, Percent
2001 2000 Change Change
--------------------------------------------------------------
Net income (in millions) $41.6 $37.6 $4.0 11%
Earnings per share*
Basic $0.36 $0.31 $0.05 16%
Diluted $0.35 $0.30 $0.05 17%
Revenue (in millions)
Revenue from managed assets $155.1 $150.7 $4.4 3%
Service-related revenue from 11.9 13.2 (1.3) (10%)
sources other than
managed assets
Other 4.4 5.0 (0.6) (12%)
Total Revenue $171.4 $168.9 $2.5 1%
Operating margin 44.2% 41.4% 2.8% 7%
--------------------------------------------------------------
* Per share amounts have been restated to reflect the three-for-two stock
split paid in July 2000.
Net Income. Net income for the three-month period ended March 2001
increased 11% compared to the same period last year. The increase reflects
increased revenue from managed assets as a result of significant growth in money
market fund assets and improved operating margins. Diluted earnings per share
for the first quarter 2001 increased 17% compared to the same period of 2000 due
to increased net income and reduced weighted-average diluted shares resulting
from stock repurchases during 2000 and the first quarter 2001.
Revenue. Revenue for the first quarter 2001 increased $2.5 million as
compared to the same period of 2000 as a result of strong growth in Federated's
money market fund assets. Due largely to depreciation in the market value of
equity fund managed assets, equity fund assets decreased $5.2 billion or 22%
compared to March 31, 2000. However, total average managed assets climbed from
$125.3 billion for the first quarter 2000 to $146.6 billion for the first
quarter of 2001 as Federated's money market funds benefited from a more
favorable interest rate environment, the tendency of investors to increase their
allocation to cash during periods of significant equity market fluctuations and
an increase in customer relationships among corporations, universities,
government entities and broker/dealer organizations. Revenue from managed assets
increased as a result of growth in average assets, but to a lesser degree than
the growth in assets due to a shift in asset mix from equity products, which
earn higher-than-average fees per invested dollar, to money market funds.
Operating Expenses. Operating expenses for the three-month periods ended
March 31, 2001 and 2000 are set forth in the following table:
Three months
ended
March 31, Percent
-------------
(in millions) 2001 2000 Change Change
-------------------------------------------------------------
Operating Expenses
Compensation and related $39.6 $42.8 $(3.2) (7%)
Advertising and 15.8 15.2 0.6 4%
promotional
Amortization of deferred 12.7 14.8 (2.1) (14%)
sales commissions
Other 27.6 26.2 1.4 5%
---------------------------
Total $95.7 $99.0 $(3.3) (3%)
Operating Expenses
===========================
Total operating expenses for the three-month period ended March 31, 2001,
decreased $3.3 million as compared to the same period last year. This decrease
primarily reflects decreases in incentive compensation and the amortization of
deferred sales commissions, both of which were due largely to reduced sales and
lower average asset values for equity products. All other expenses combined for
the three-month period ended March 31, 2001, have remained relatively unchanged
as compared to the same period last year.
Income Taxes. The income tax provision for the three-month period ended
March 31, 2001 was $23.5 million as compared to $21.4 million for the same
period of 2000. The effective tax rate was 36.0% and 36.2% for the first quarter
2001 and 2000, respectively.
Financial Condition, Capital Resources and Liquidity
Deferred Sales Commissions and Nonrecourse Debt. Federated finances
up-front commissions paid to broker/dealers on the sale of B shares through the
sale of the rights to future revenue streams associated with B-share deferred
sales commissions. Under Federated's first B-share financing arrangement that
expired September 30, 2000, sales were accounted for as financings for reporting
purposes and nonrecourse debt was recorded. In October 2000, as a result of
entering into a new financing arrangement, Federated began accounting for the
sale of certain B-share-related future revenue streams as true sales and
continued to account for the sale of the rights to future servicing fees on the
B shares as financings. Deferred sales commissions and nonrecourse debt
decreased $18.3 million and $18.8 million, respectively, in the first quarter
2001. These decreases reflect fewer additions to the asset and nonrecourse debt
balances for new B-share sales as a result of the change in accounting treatment
that accompanied the new financing arrangement, as well as continued asset
amortization and debt servicing. The following table presents the effects of the
B-share financing programs on the Consolidated Balance Sheets at March 31, 2001,
and December 31, 2000:
(in millions)
2001 2000
-------------------------------------------------------------------------
March 31 and December 31, respectively
Assets
Deferred sales commissions, net* $288.5 $305.5
Receivables 7.3 7.5
Other assets 1.4 2.6
Liabilities
Long-term debt - nonrecourse $305.0 $323.8
Accounts payable 5.9 6.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* Excludes deferred sales commissions related to B-share revenue
streams that have not been financed as of the end of the period due to
the timing of the sale of the revenue streams to the third party.
Due to the nonrecourse nature of these financing arrangements, the $13.7
million excess of B-share-related liabilities over the related assets at March
31, 2001, will be recognized in income over the remaining life of certain
B-share cash flows.
Shareholders' Equity. Shareholders' equity increased by $20.0 million in
the first quarter 2001 primarily as a result of net income partially offset by
treasury stock purchases and dividends declared. During the first quarter 2001,
Federated purchased 708,500 shares of Class B common stock for approximately
$19.2 million under the stock repurchase program. As of March 31, 2001,
Federated can repurchase approximately 3.7 million additional shares under the
current company buy back program, subject to current debt-covenant restrictions
which limit cash payments for additional stock repurchases and dividends to
$60.0 million after considering earnings through March 31, 2001, the dividend
payment on May 15, 2001, and certain stock repurchases.
Cash Flow. Cash and cash equivalents and the current portion of securities
available for sale totaled $254.9 million at March 31, 2001, as compared to
$235.2 million at December 31, 2000.
Cash provided by operating activities totaled $68.2 million for the
three-month period ended March 31, 2001, as compared to $36.6 million for the
same period of 2000. This increase is primarily attributable to a decrease in
sales commissions paid to brokers due to reduced sales of B shares and, to a
lesser extent, to increased profitability in 2001. Net cash provided by
investing activities in the first three months of 2001 included proceeds from
the sale of certain investments held by Federated in anticipation of Federated's
acquisition relating to The Kaufmann Fund. Other uses of cash flow from
operating activities in the first quarter 2001 included the purchase of treasury
stock, payments on debt, dividend payments and distributions to the minority
interest partner.
Capital Expenditures. Capital expenditures totaled $1.8 million for the
three-month period ended March 31, 2001 compared to $1.7 million for the same
period of 2000.
Dividends paid. Federated pays cash dividends on a quarterly basis.
Dividends of $0.037 per share, or $4.3 million, were paid in the first quarter
of 2001. Federated's board of directors declared a dividend of $0.046 per share
to be paid on May 15, 2001, to shareholders of record as of May 7, 2001. After
considering earnings through March 31, 2001, the dividend payment on May 15,
2001, certain stock repurchases, and current debt covenants, Federated has the
ability to pay cash for dividends and stock repurchases of approximately $60.0
million.
Business Combination. On April 20, 2001, Federated completed the
acquisition of substantially all of the assets of Edgemont Asset Management
Corporation, the former advisor of the $3.2 billion Kaufmann Fund. The purchase
price included consideration of approximately $170.8 million in cash payments
and 315,732 shares of Federated Class B common stock valued at approximately
$8.9 million. The acquisition agreement provides for additional purchase price
payments and incentive compensation payments contingent upon the achievement of
specified revenue growth over the next six years. These payments could aggregate
to approximately $200 million if revenue targets are met.
This acquisition was accounted for using the purchase method of accounting
and, accordingly, the fair value of the assets acquired, primarily intangible
assets, as well as the results of those assets will be included in Federated's
consolidated financial statements beginning on the date of acquisition.
Future Cash Requirements. Management expects that the principal needs for
cash will be to advance sales commissions, repurchase company stock, service
recourse debt, fund property and equipment acquisitions, pay shareholder
dividends, seed new products and fund strategic business acquisitions.
Management believes that Federated's existing liquid assets, together with the
expected continuing cash flow from operations, its borrowing capacity under
current credit facilities, the B-share financing arrangement and its ability to
issue stock will be sufficient to meet its present and reasonably foreseeable
cash needs.
Recent Accounting Pronouncements. On April 1, 2001, Federated adopted
Emerging Issues Task Force Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" (EITF 99-20). EITF 99-20 states that interest income earned on
retained or purchased beneficial interests in securitized financial assets
should be recognized over the life of the investment based on an anticipated
yield determined by periodically estimating cash flows. Interest income should
be revised prospectively for changes in cash flows. Additionally, impairment
should be recognized if the fair value of the beneficial interest has declined
below its carrying amount and the decline is other than temporary. Because the
book value of Federated's asset-backed securities was less than or equal to the
fair value of those investments on April 1, 2001, Federated did not recognize a
transition adjustment as a result of adopting this statement.
Special Note Regarding Forward-Looking Information. Certain statements
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in Future Cash Requirements and elsewhere in this
report, constitute forward-looking statements, which involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
levels of activity, performance, achievements, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. For a
discussion of such risk factors, see the section titled Risk Factors and
Cautionary Statements in Federated's Annual Report on Form 10-K for the year
ended December 31, 2000, and other reports on file with the Securities and
Exchange Commission. As a result of the foregoing and other factors, no
assurance can be given as to future results, levels of activity, performance or
achievements, and neither we nor any other person assumes responsibility for the
accuracy and completeness of such statements.
Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of our business, Federated is exposed to the risk of
securities market and general economic fluctuations. Federated's approach has
been to limit the use of derivative instruments to hedging activities.
Federated's investments are primarily in money market funds and mutual funds
with investments which have a duration of two years or less. Occasionally, we
invest in new mutual funds (performance seeds) that we sponsor in order to
provide investable cash to the fund allowing the fund to establish a performance
history. Federated may use derivative financial instruments to hedge these
investments. As of March 31, 2001, the fair value of the performance seed
investments was $30.3 million, none of which were being hedged as of the end of
the period.
In addition, as of March 31, 2001, we had investments in high-yield
asset-backed securities and mortgage-backed securities that are included in
"Securities available for sale" and "Other long-term assets" on the Consolidated
Balance Sheets. These investments expose Federated to credit and interest rate
risk. In periods of either rising default rates or interest rates, the carrying
value of Federated's investments in asset-backed securities may be adversely
affected by unfavorable changes in cash flow estimates, declines in the value of
the underlying fixed-rate securities, and reduced returns. All of our debt
instruments carry fixed interest rates.
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits required to be filed by Item 601 of Regulation S-K
are filed herewith and incorporated by reference herein:
(b) Reports on Form 8-K:
Form 8-K filed on May 3, 2001
Form 8-K/A filed on May 14, 2001
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 May 14, 2001 By: /s/ J. Christopher Donahue
J. Christopher Donahue
President and
Chief Executive Officer
Date May 14, 2001 By: /s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer