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 September 30, 2001
-------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------------EXCHANGE ACT OF 1934
For the transition period from to
---------------- --------------------
Commission File Number 001-14818
-----------
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
------------------------ ----------
(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 8, 2001, the
Registrant had outstanding 9,000 shares of Class A Common Stock and 116,191,141
shares of Class B Common Stock.
Federated Investors, Inc.
Form 10-Q
For the Three Months and Nine Months Ended
September 30, 2001
Table of Contents
Page No.
Part I. Financial Information
Item 1.Financial Statements
Consolidated Balance Sheets at
September 30, 2001, and December 31, 2000 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 2001 and 2000 4
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 16
Part II. Other Information
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K 16
(b) Reports on Form 8-K 16
Signatures 17
Part I, Item I. Financial Statements
Federated Investors, Inc.
Consolidated Balance Sheets
(dollars in thousands)
(unaudited) September 30, December 31,
2001 2000
---------- ----------
Current Assets:
Cash and cash equivalents $ 88,991 $ 149,920
Securities available for sale 53,620 85,305
Receivables, net of reserve of $229 and $86, 37,309 36,943
respectively
Accrued revenues 7,065 6,594
Prepaid expenses 3,447 3,156
Current deferred tax asset, net 2,718 2,349
Other current assets 584 280
---------- ----------
Total current assets 193,734 284,547
---------- ----------
Long-Term Assets:
Goodwill, net of
accumulated amortization of $23,047 and 132,914 32,099
$18,949, respectively
Other intangible assets, net of
accumulated amortization of $25,587 and 83,174 14,878
$17,527, respectively
Deferred sales commissions, net of
accumulated amortization of $170,968 and 266,774 315,612
$136,409, respectively
Property and equipment, net of
accumulated depreciation of $45,631 and 35,392 36,406
$39,479, respectively
Other long-term assets 17,559 21,208
---------- ----------
Total long-term assets 535,813 420,203
---------- ----------
Total assets $ 729,547 $ 704,750
========== ==========
Current Liabilities:
Cash overdraft $ 4,103 $ 1,090
Current portion of long-term debt - recourse 14,230 14,280
Accrued expenses 52,523 56,806
Accounts payable 30,048 30,161
Income taxes payable 23,660 8,162
Other current liabilities 3,642 5,023
---------- ----------
Total current liabilities 128,206 115,522
---------- ----------
Long-Term Liabilities:
Long-term debt - recourse 56,000 70,174
Long-term debt - nonrecourse 276,438 323,818
Long-term deferred tax liability, net 35,190 40,565
Other long-term liabilities 6,141 6,265
---------- ----------
Total long-term liabilities 373,769 440,822
---------- ----------
Total liabilities 501,975 556,344
---------- ----------
Minority interest 240 538
---------- ----------
Shareholders' Equity :
Common stock :
Class A, no par value, 20,000 shares authorized, 189 189
9,000 shares issued and outstanding
Class B, no par value, 900,000,000 shares 82,253 75,287
authorized, 129,505,456 shares issued
APIC from treasury stock transactions 3,543 0
Retained earnings 376,057 263,456
Treasury stock, at cost, 13,103,615 and 12,384,647
shares of Class B common stock, respectively (229,648) (187,582)
Employee restricted stock plan (535) (736)
Accumulated other comprehensive income (4,527) (2,746)
---------- ----------
Total shareholders' equity 227,332 147,868
---------- ----------
Total liabilities, minority $ 729,547 $ 704,750
interest, and shareholders' equity ========== ==========
(The accompanying notes are an integral part of these consolidated
financial statements.)
<table>
<caption>
Federated Investors, Inc.
Consolidated Statements of Income
<s> <c> <c> <c> <c>
(dollars in thousands, except per share Three Months Nine Months
data) Ended Ended
(unaudited) September 30, September 30,
------------------ -----------------
-------- -------- ------- --------
2001 2000 2001 2000
-------- -------- ------- --------
-------- -------- ------- --------
Revenue:
Investment-advisory fees, $105,221 $ 93,203 $ 300,420 $273,381
net-Federated funds
Investment-advisory fees, net-other 3,394 3,754 10,422 10,011
Administrative-service fees, 28,072 21,901 79,232 64,364
net-Federated funds
Administrative-service fees, 5,184 5,624 15,655 17,367
net-other
Other service fees, net-Federated 34,521 35,392 100,318 104,122
funds
Other service fees, net-other 7,105 7,428 20,856 21,516
Commission income 595 1,398 2,422 4,760
Interest and dividends 1,409 4,340 8,326 13,401
Loss on sale of securities available 0 (228) (496) (523)
for sale
Other income, net (4,334) 288 (3,710) 1,862
-------- -------- ------- --------
Total revenue 181,167 173,100 533,445 510,261
-------- -------- -------- --------
Operating Expenses:
Compensation and related 45,590 40,570 129,126 125,422
Advertising and promotional 16,803 15,079 50,652 45,888
Systems and communications 7,196 7,753 21,925 21,987
Office and occupancy 6,654 6,258 20,264 18,711
Professional service fees 6,235 6,731 20,384 19,205
Travel and related 3,146 3,449 9,910 10,401
Amortization of deferred sales 10,355 15,560 34,559 44,983
commissions
Amortization of intangible assets 6,078 1,982 12,158 5,610
Other 1,950 1,762 4,394 6,291
-------- -------- -------- --------
Total operating expenses 104,007 99,144 303,372 298,498
-------- -------- -------- --------
Operating income 77,160 73,956 230,073 211,763
-------- -------- -------- --------
Nonoperating Expenses:
Debt expense - recourse 1,493 1,942 5,100 6,372
Debt expense - nonrecourse 5,647 6,721 17,673 19,236
-------- -------- -------- --------
Total nonoperating expenses 7,140 8,663 22,773 25,608
-------- -------- -------- --------
Income before minority interest and 70,020 65,293 207,300 186,155
income taxes
Minority interest 2,773 2,564 8,132 7,560
-------- -------- -------- --------
Income before income taxes 67,247 62,729 199,168 178,595
Income tax provision 24,056 22,717 71,459 64,305
-------- -------- -------- --------
Net income $43,191 $ 40,012 $ 127,709 $114,290
======== ======== ======== ========
Earnings per share:
Basic $ 0.37 $ 0.34 $ 1.11 $0.97
======== ======== ======== ========
Diluted $ 0.36 $ 0.33 $ 1.06 $0.93
======== ======== ======== ========
Cash dividends per share $ 0.046 $ 0.037 $ 0.129 $0.102
======== ======== ======== ========
(The accompanying notes are an integral part of these consolidated
financial statements.)
</table>
Federated Investors, Inc.
Consolidated Statements of Cash Flows Nine Months Ended
(dollars in thousands) September 30,
------------------
(unaudited) 2001 2000
-------- --------
Operating Activities:
Net income $ 127,709 $ 114,290
Adjustments to reconcile net income to net
cash provided by
operating activities:
Amortization of intangible assets 12,158 5,610
Depreciation and other amortization 6,632 6,076
Amortization of deferred sales commissions 34,559 44,983
Minority interest 8,132 7,560
(Gain) loss on disposal of assets (2,611) 696
(Benefit) provision for deferred income (1,583) 6,686
taxes
Tax benefit from exercise of stock options 6,703 0
Deferred sales commissions paid (53,772) (113,900)
Contingent deferred sales charges received 25,034 36,193
Proceeds from sale of certain future 46,179 0
revenues
Other changes in assets and liabilities:
(Increase) decrease in receivables, net (366) 418
Decrease (increase) in other assets 2,617 (3,213)
Decrease in accounts payable and accrued (4,396) (1,939)
expenses
Increase (decrease) in income taxes 15,498 (1,344)
payable
Increase in other current liabilities 1,632 193
(Decrease) increase in other long-term (2,480) 884
liabilities
-------- --------
Net cash provided by operating activities 221,645 103,193
-------- --------
Investing Activities:
Additions to property and equipment (5,220) (8,238)
Proceeds from disposal of property and 43 158
equipment
Cash paid for business acquisitions and (172,606) (11,636)
joint venture
Purchases of securities available for sale (25,504) (28,429)
Proceeds from redemptions of securities 53,297 1,720
available for sale
-------- --------
Net cash used by investing activities (149,990) (46,425)
-------- --------
Financing Activities:
Distributions to minority interest (8,430) (7,684)
Dividends paid (15,108) (12,214)
Proceeds from exercise of options 1,087 0
Purchase of treasury stock (48,529) (86,076)
Proceeds from new borrowings - nonrecourse 9,458 107,580
Payments on debt - recourse (14,224) (14,200)
Payments on debt - nonrecourse (56,838) (78,415)
-------- --------
Net cash used by financing activities (132,584) (91,009)
-------- --------
Net decrease in cash and cash equivalents (60,929) (34,241)
Cash and cash equivalents, beginning of period 149,920 171,490
-------- --------
Cash and cash equivalents, end of period $ 88,991 $ 137,249
======== ========
(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.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Statement 141 eliminates the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001, and clarifies the criteria to recognize intangible assets
separately from goodwill. This statement is effective for all business
combinations completed after June 30, 2001.
Under Statement 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed at least annually for impairment.
Federated will adopt Statement 142 on January 1, 2002, in accordance with its
effective date for calendar year companies. As a result of adopting this
standard, Federated anticipates that annual amortization expense will decrease
by approximately $6 million.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The primary objectives of this statement were to
establish a single accounting model for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired, and to broaden the
presentation of discontinued operations to include more disposal transactions.
Although Statement 144 supersedes FASB Statement No. 121 on impairment of
long-lived assets, many of the requirements of Statement 121 regarding the test
for and measurement of impairment losses of long-lived assets were retained.
Federated will adopt Statement 144 on January 1, 2002. The adoption of this
statement is not expected to have a material impact on Federated's results of
operations or financial position.
(2) Securities Available For Sale
Federated's current and long-term securities available for sale consisted
of the following:
Gross Unrealized Estimated
Market
Value
----------------------
----------------------
(in thousands) Cost Gains (Losses)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Performance seeds $ 35,360 $ 29 $ (6,769) $ 28,620
Securities held in short-term 25,000 0 0 25,000
bond funds
Asset-backed securities 12,336 0 0 12,336
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total as of September 30, 2001 $ 72,696 $ 29 $ (6,769) $ 65,956
==========================================================================
==========================================================================
Performance seeds $ 38,785 $ 68 $ (4,347) $ 34,506
Securities held in short-term 50,017 0 (609) 49,408
bond funds
Asset-backed securities 17,374 844 0 18,218
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total as of December 31, 2000 $ 106,176 $ 912 $ (4,956) $ 102,132
==========================================================================
During the third quarter 2001, Federated recorded a $3.9 million impairment
charge in "Other income, net" on the Consolidated Statements of Income related
to Federated's high-yield collateralized bond obligation (CBO) investments. As
default rates rose during the third quarter, the fair value of these investments
declined below carrying value. Under EITF 99-20 (see Note (1)(b)), such a
decline results in the recognition of impairment.
Federated recorded a $1.1 million charge in "Other income, net" related to
other-than-temporary declines in value of two investments in mutual funds
sponsored by Federated (performance seeds) in the third quarter 2001. This
charge resulted from management's assessment of its ability to recover the
unrealized losses in the carrying value of these investments. Management will
continue to monitor these investments as appropriate.
(3) Long-Term Debt - Recourse
Federated's long-term debt - recourse consisted of the following:
Interest September 30, December 31,
Rate 2001 2000
-------------------------------------------------------------------
-------------------------------------------------------------------
(in thousands)
Recourse Debt:
Senior Secured Note 7.96% $ 70,000 $ 84,000
Purchase Agreements
Capitalized leases 7.1%-8.5% 230 454
-------------------------------------------------------------------
-------------------------------------------------------------------
Total recourse debt 70,230 84,454
Less current portion 14,230 14,280
-------------------------------------------------------------------
-------------------------------------------------------------------
Total long-term debt - $ 56,000 $ 70,174
recourse
===================================================================
(4) 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
Federated mutual funds. 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 9/30/2001
Payments
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1997-1 Class A 7.44% $ 36,418 $ 0 $ 8,860 $ 27,558
Class B 9.80% 9,700 0 0 9,700
Financings 10/97
through 9/00 6.68% - 8.60% 274,949 0 47,033 227,916
Financings 10/00
through 9/01 5.80% - 8.60% 2,751 9,458 945 11,264
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 323,818 $ 9,458 $ 56,838 $ 276,438
=========================================================================
(5) 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 September
30, 2001, approximately $62.0 million was available to pay dividends or
repurchase stock under the more restrictive limitation.
Cash dividends of $0.037, $0.046 and $0.046 per share or approximately $4.3
million, $5.4 million and $5.4 million were paid in the first, second and third
quarters of 2001, respectively, to holders of common shares. Additionally, on
October 23, 2001, the board of directors declared a dividend of $0.046 per share
to be paid on November 15, 2001, to shareholders of record as of November 7,
2001.
As of September 30, 2001, under Federated's current share buyback program,
Federated can repurchase approximately 3.1 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 that 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, 2001, a total of 44,163 shares had been purchased by
employees in this plan.
(6) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ---------------
---------------- ---------------
2001 2000 2001 2000
----------------------------------------------------------------
----------------------------------------------------------------
(in thousands, except per share data)
Numerator:
Net income $ 43,191 $40,012 $127,70 $114,290
================================================================
================================================================
Denominator:
Basic weighted-average 115,297 116,598 115,281 118,201
shares outstanding
Dilutive potential shares
from stock-based 4,876 4,926 5,033 4,579
compensation
----------------------------------------------------------------
----------------------------------------------------------------
Diluted weighted-average
shares outstanding 120,173 121,524 120,314 122,780
================================================================
================================================================
Basic earnings per share $ 0.37 $ 0.34 $ 1.11 $ 0.97
================================================================
================================================================
Diluted earnings per share $ 0.36 $ 0.33 $ 1.06 $ 0.93
================================================================
(7) Comprehensive Income
Comprehensive income was $42.8 million and $40.0 million for the
three-month periods ended September 30, 2001 and 2000, respectively, and $125.9
million and $111.6 million for the nine-month periods ended September 30, 2001
and 2000, respectively.
(8) Business Combinations
In September 2001, Federated signed a definitive agreement with Lincoln
Investment Planning, Inc. and Rightime Econometrics, Inc. As a result of this
transaction, assets of three mutual funds currently advised by Rightime
Econometrics, Inc., totalling approximately $159.1 million as of October 22,
2001, are planned to be merged into Federated Capital Appreciation Fund on the
transaction close date which is anticipated for the fourth quarter 2001. This
transaction is not expected to have a material impact on Federated's results of
operations or financial position.
On April 20, 2001, Federated completed the acquisition of substantially all
of the business of Edgemont Asset Management Corporation, the former advisor of
The Kaufmann Fund (Edgemont Acquisition). The purchase price for this
acquisition was approximately $182 million. This price included cash payments of
approximately $173 million, including transaction costs, and approximately
316,000 shares of Federated Class B common stock valued at approximately $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. The purchase price payments
will be recorded as additional goodwill at the time of payment while the
incentive compensation payments are recognized as compensation expense during
the periods in which the payments are earned. 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, approximately $77
million of identifiable intangible assets and $105 million of goodwill, as well
as the results of those assets were included in Federated's consolidated
financial statements beginning on the date of acquisition. The amount assigned
to intangible assets represents the fair value of the advisory contract, the
noncompete agreement and the workforce as of April 20, 2001. These assets are
being amortized on a straight-line basis over their useful lives which range
from 4 to 10 years. Acquired goodwill is being amortized on a straight-line
basis over 25 years. Upon adoption of SFAS 142 on January 1, 2002 (see Note
(1)(b)), Federated will no longer amortize goodwill.
The following unaudited pro forma data for Federated includes the results
of the assets purchased from Edgemont Asset Management Corporation, giving
effect to the acquisition as if it occurred at the beginning of the periods
presented. The pro forma data is based on historical information and does not
reflect the actual results that would have occurred nor is it indicative of
future results of operations.
Pro Forma Data for
the
Nine Months Ended
September 30,
(In millions except per share data) 2001 2000
----------------------------------------------------------------------
----------------------------------------------------------------------
Revenue $ 546.7 $ 546.8
Net income 128.8 121.4
Earnings per share:
Basic 1.11 1.02
Diluted 1.07 0.99
----------------------------------------------------------------------
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
(in millions
As of September 30, Percent
2001 2000 Change
-------- ------- ------
Money market funds $122,263 $87,139 40%
Equity funds 18,840 23,222 (19%)
Fixed-income funds 16,410 14,340 14%
Separate accounts 6,132 5,669 8%
-------- -------
Total managed assets $163,645 $130,370 26%
======== =======
Total administered $40,070 $38,905 3%
assets
======== =======
Average Managed and
Administered Assets
(in millions) Three Months Nine Months
Ended Ended
September 30, Percent September 30, Percent
2001 2000 Change 2001 2000 Change
-------- ------- ------
------ ------ ------- ------
Money market funds $119,892 $85,528 40% $112,96$ 84,055 34%
Equity funds 20,841 23,261 (10%) 20,895 22,428 (7%)
Fixed-income funds 15,959 14,548 10% 15,373 14,913 3%
Separate accounts 6,360 5,677 12% 6,223 5,000 24%
-------- ------- ------ -------
------ -------
Total average managed $163,052 $129,014 26% $155,46$ 126,396 23%
assets
======== ======= ====== =======
====== =======
Total average $41,400 $41,403 0% $41,892$ 42,795 (2%)
administered assets
======== ======= ====== =======
Components of Changes in Equity and Fixed-Income Fund
Managed Assets
(in millions)
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
------- ------- -------- ---------
Equity
Funds
Beginning assets $ 22,461 $22,512 $ 20,641 $ 20,941
-------- --------- ------- -------
Sales 1,033 1,949 4,038 8,584
Redemptions (1,387) (1,503) (4,571) (5,768)
-------- --------- ------- -------
------- -------
Net (354) 446 (533) 2,816
(redemptions) sales
Net exchanges (117) (70) (154) 69
Acquisition related 0 319 3,235 319
Other* (3,150) 15 (4,349) (923)
-------- --------- ------- -------
-------- --------- ------- -------
Ending assets $ 18,840 $23,222 $ 18,840 $ 23,222
======== ========= ======= =======
======= =======
Fixed-Income Funds
Beginning assets $ 15,179 $14,660 $ 14,268 15,857
-------- --------- ------- -------
Sales 2,261 882 5,851 2,867
Redemptions (1,230) (1,168) (4,018) (4,174)
-------- --------- ------- -------
------- -------
Net 1,031 (286) 1,833 (1,307)
sales (redemptions)
Net exchanges 66 (156) 24 (409)
Acquisition related 0 11 0 11
Other* 134 111 285 188
-------- --------- ------- -------
-------- --------- ------- -------
Ending assets $ 16,410 $14,340 $ 16,410 14,340
======== ========= ======= =======
- -------------------------------------------------------------------------------
* 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 Federated's 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-
and nine-month periods ended September 30, 2001 and 2000:
<table>
<caption>
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 Change Change 2001 2000 Change Change
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Net income (in millions) $43.2 $40.0 $3.2 8% $127.7 $114.3 $13.4 12%
Earnings per share
Basic $0.37 $0.34 $0.03 9% $1.11 $0.97 $0.14 14%
Diluted $0.36 $0.34 $0.03 9% $1.06 $0.93 $0.13 14%
Revenue (in millions)
Revenue from $171.8 $155.6 $16.2 10% $492.8 $456.6 $36.2 8%
managed assets
Service-related
revenue from 12.3 13.1 (0.8) (6%) 36.5 38.9 (2.4) (6%)
sources other
than managed assets
Other (2.9) 4.4 (7.3) (166%) 4.1 14.8 (10.7) (72%)
Total Revenue $181.2 $173.1 $8.1 5% $533.4 $510.3 $23.1 5%
Operating margin 42.6% 42.7% (0.1%) 0% 43.1% 41.5% 1.6% 4%
</table>
Net Income. Net income for the three- and nine-month periods ended
September 30, 2001, increased 8% and 12%, respectively, compared to the same
periods last year. The increases primarily reflect increased revenue from
managed assets as a result of significant growth in money market fund assets.
Diluted earnings per share for the three- and nine-month periods ended September
30, 2001, increased 9% and 14%, respectively, compared to the same periods of
2000 due to increased net income and reduced weighted-average diluted shares
outstanding resulting from stock repurchases during 2000 and the first nine
months of 2001. Net income for the third quarter and the first nine months of
2001 included non-cash, after-tax impairment charges of $3.2 million and $3.4
million, respectively, related to other-than-temporary declines in the fair
values of various investments. Excluding the effect of this charge, Federated
would have realized net income for the third quarter and the first nine months
of 2001 equal to $46.4 million and $131.1 million, respectively.
Revenue. Revenue for the three- and nine-month periods ended September 30,
2001, increased $8.1 million and $23.1 million, respectively, as compared to the
same periods of 2000 as a result of growth in Federated's managed assets. Total
average managed assets climbed from $129.0 billion for the third quarter 2000 to
$163.1 billion for the third quarter of 2001 and from $126.4 billion for the
first nine months of 2000 to $155.5 billion for the first nine months of 2001.
These increases reflect significant growth in Federated's money market funds,
which continued to benefit from the declining short-term 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, on average, higher
fees per invested dollar, to money market and fixed-income funds.
Other revenue for the three- and nine-month periods ended September 30,
2001, decreased compared to the same periods last year. The decreases primarily
reflect non-cash charges equal to $5.0 million and $5.2 million recorded in the
third quarter and first nine months of 2001, respectively, to write-down the
carrying values of certain Federated investments in CBO products and mutual
funds that we sponsor (performance seeds). The decrease also reflects a decrease
in interest and dividend income resulting from lower investment balances as a
result of cash used for the Edgemont Acquisition and a decrease in investment
yields since September 2000. For additional information regarding the impairment
charges, see Note (2) to the Consolidated Financial Statements.
Operating Expenses. Operating expenses for the three- and nine-month
periods ended September 30, 2001 and 2000 are set forth in the following table:
<table>
<caption>
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
(in millions) 2001 2000 Change Change 2001 2000 Change Change
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Compensation and related $45.6 $40.6 $5.0 12% $129.1 $125.4 $3.7 3%
Advertising and promotional 16.8 15.1 1.7 11% 50.7 45.9 4.8 10%
Amortization of deferred 10.4 15.6 (5.2) (33%) 34.6 45.0 (10.4) (23%)
sales commissions
Other 31.2 27.8 3.4 12% 89.0 82.2 6.8 8%
Total Operating Expenses $104.0 $99.1 $4.9 5% $303.4 $298.5 $4.9 2%
</table>
Total operating expenses for the three- and nine-month periods ended
September 30, 2001, were up 5% and 2%, respectively, as compared to the same
periods last year. Certain expenses such as marketing allowances (included in
Advertising and promotional) increased during these periods as compared to the
prior year due to significant asset growth, while other expenses such as
amortization of deferred sales commissions decreased during these periods as
compared to the prior year primarily as a result of decreased net asset values
of equity fund assets. Increases in compensation and related expense during the
three- and nine-month periods ended September 30, 2001 as compared to the same
periods last year reflect increased base salary and variable-based compensation
attributable to the Edgemont Acquisition. Likewise, amortization of intangible
assets increased during the three- and nine-month periods ended September 30,
2001, as compared to the same periods last year, as a result of the Edgemont
Acquisition.
Income Taxes. The income tax provision for the three- and nine-month
periods ended September 30, 2001, was $24.1 million and $71.5 million,
respectively, as compared to $22.7 million and $64.3 million for the same
periods of 2000. The effective tax rate was 35.8% and 36.2% for the third
quarter 2001 and 2000, respectively, and 35.9% and 36.0% for the first nine
months of 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. Consequently, beginning in October 2000, additions to
the deferred sales commission and nonrecourse debt balances result only from the
sale of future servicing fees on the B shares. Prior to this new financing
arrangement and related accounting treatment, the deferred sales commission and
nonrecourse debt balances were increased for the sale of all future fees on the
B shares.
In the first nine months of 2001, deferred sales commissions related to B
shares and nonrecourse debt decreased $45.1 million and $47.4 million,
respectively. These decreases reflect continued asset amortization and debt
servicing partially offset by additions to the asset and nonrecourse debt
balances for new sales of rights to B-share-related future servicing fees. The
following table presents the effects of the B-share financing programs on the
Consolidated Balance Sheets at September 30, 2001, and December 31, 2000:
At September At December
(in millions) 30, 2001 31, 2000
--------------------------------------------------------------------
Assets
Deferred sales commissions, net* $260.4 $305.5
Receivables 7.5 7.5
Other assets 1.2 2.6
Liabilities
Long-term debt - nonrecourse $276.4 $323.8
Accounts payable 5.5 6.1
--------------------------------------------------------------------
--------------------------------------------------------------------
* Excludes deferred sales commissions related to B-share revenue
streams that have not been sold as of the end of the period due to
the timing of the sale of the revenue streams.
Due to the nonrecourse nature of these financing arrangements, the $12.8
million excess of B-share-related liabilities over the related assets at
September 30, 2001, will be recognized in income over the remaining life of
certain B-share cash flows.
Shareholders' Equity. Shareholders' equity increased by $79.5 million in
the first nine months of 2001 primarily as a result of net income and treasury
stock issuances related to the Edgemont Acquisition, partially offset by
treasury stock purchases and dividends declared. During the first nine months of
2001, Federated continued to purchase shares of its Class B common stock under
the stock repurchase program. As of September 30, 2001, Federated can repurchase
approximately 3.1 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 $56.7 million after
considering earnings through September 30, 2001, the dividend payment on
November 15, 2001, and certain stock repurchases.
Cash Flow. Cash and cash equivalents and the current portion of securities
available for sale totaled $142.6 million at September 30, 2001, as compared to
$235.2 million at December 31, 2000. This decrease is primarily due to cash used
in the second quarter 2001 to complete the Edgemont Acquisition.
Cash provided by operating activities totaled $221.6 million for the
nine-month period ended September 30, 2001, as compared to $103.2 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, the sales
treatment of the B-share transaction, increased income taxes payable due to a
one-time extension of the federal government's deadline for paying quarterly tax
estimates and increased profitability in 2001. Net cash used by investing
activities in the first nine months of 2001 reflects cash paid for the Edgemont
Acquisition and the purchase of securities available for sale, partially offset
by proceeds from the sale of certain investments held by Federated in
anticipation of the Edgemont Acquisition. Other uses of cash flow from operating
activities in the first nine months of 2001 included payments on debt, the
purchase of treasury stock, dividend payments and distributions to a minority
interest partner.
Business Combination. On April 20, 2001, Federated completed the
acquisition of substantially all of the business of Edgemont Asset Management
Corporation, the former advisor of The Kaufmann Fund. The purchase price for
this acquisition was approximately $182 million. This price included cash
payments of approximately $173 million, including transaction costs, and
approximately 316,000 shares of Federated Class B common stock valued at
approximately $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, approximately $77
million of identifiable intangible assets and $105 million of goodwill, as well
as the results of those assets were included in Federated's consolidated
financial statements beginning on the date of acquisition. The amount assigned
to intangible assets represents the fair value of the advisory contract, the
noncompete contract and the workforce as of April 20, 2001. These assets are
being amortized on a straight-line basis over their useful lives which range
from 4 to 10 years. Acquired goodwill is being amortized on a straight-line
basis over 25 years. Upon adoption of SFAS 142 on January 1, 2002 (see Note
(1)(b)), Federated will no longer amortize goodwill.
Dividends paid. Federated pays cash dividends on a quarterly basis.
Dividends of $0.037, $0.046 and $0.046 per share, or $4.3 million, $5.4 million
and $5.4 million were paid in the first, second and third quarters of 2001,
respectively. Federated's board of directors declared a dividend of $0.046 per
share to be paid on November 15, 2001, to shareholders of record as of November
7, 2001. After considering earnings through September 30, 2001, the dividend
payment on November 15, 2001, certain stock repurchases, and current debt
covenants, Federated has the ability to pay cash for dividends and stock
repurchases of approximately $56.7 million.
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.
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Statement 141 eliminates the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001, and clarifies the criteria to recognize intangible assets
separately from goodwill. This Statement is effective for all business
combinations completed after June 30, 2001.
Under Statement 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed at least annually for impairment.
Federated will adopt Statement 142 on January 1, 2002, in accordance with its
effective date for calendar year companies. As a result of adopting this
standard, Federated anticipates that annual amortization expense will decrease
by approximately $6 million.
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 of the company, 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. Many of these factors may be more likely to occur as a
result of the ongoing threat of terrorism. As a result, 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 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. We invest in new
Federated-sponsored mutual funds (performance seeds) in order to provide
investable cash to the fund allowing the fund to establish a performance
history. In the third quarter 2001, Federated recorded a $1.1 million charge
related to other-than-temporary declines in value of two of Federated's
performance seed investments. At September 30, 2001, the fair value of
Federated's performance seed investments was $28.6 million and related
unrealized losses were $6.8 million. As of November 8, 2001, net unrealized
losses for performance seeds were $5.9 million. Management will continue to
monitor these investments as appropriate.
Federated also has investments in asset-backed securities. During the third
quarter 2001, Federated recorded a $3.9 million impairment charge related to
other-than-temporary declines in the fair value of Federated's high-yield
collateralized bond obligation investments. As of September 30, 2001,
Federated's remaining investments in asset-backed securities totaled $12.3
million. 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 increased expected 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:
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 November 13, 2001 By: /s/ J. Christopher Donahue
----------------------------- ---------------------------------
J. Christopher Donahue
President and
Chief Executive Officer
Date November 13, 2001 By: /s/ Thomas R. Donahue
----------------------------- ---------------------------
Thomas R. Donahue
Chief Financial Officer