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, 2002 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 6, 2002, the Registrant had outstanding 9,000 shares of Class A Common Stock and 113,647,571 shares of Class B Common Stock. Table of Contents - -------------------------------------------------------------------------------- Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 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 19 Risk Item 4. Controls and Procedures 19 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K 20 (b) Reports on Form 8-K 20 Signatures 21 Certifications 22 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, 2001, 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 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 1. Financial Statements Consolidated Balance Sheets (dollars in thousands) (unaudited) September 30, December 31, 2002 2001 Current Assets: Cash and cash equivalents $122,738 $73,511 Marketable securities 1,472 4,602 Receivables, net of reserve of $238 and $315, respectively 28,657 32,581 Accrued revenues 6,658 6,596 Prepaid expenses 5,456 2,633 Current deferred tax asset, net 390 2,025 Other current assets 622 361 Total current assets 165,993 122,309 Long-Term Assets: Goodwill, net of accumulated amortization of $24,862 164,934 131,867 Other intangible assets, net 73,391 80,026 Deferred sales commissions, net of accumulated amortization of $53,924 and $47,222, respectively 58,894 56,875 Property and equipment, net of accumulated depreciation of $51,149 and $47,264, respectively 35,680 34,521 Other long-term assets 3,341 5,955 Total long-term assets 336,240 309,244 Total assets $502,233 $431,553 Current Liabilities: Cash overdraft $2,804 $5,085 Current portion of long-term debt - recourse 776 157 Accrued expenses 60,224 58,275 Accounts payable 26,305 29,102 Income taxes payable 1,084 26,543 Other current liabilities 4,369 5,946 Total current liabilities 95,562 125,108 Long-Term Liabilities: Long-term debt - recourse 1,338 0 Long-term debt - nonrecourse 57,152 54,954 Long-term deferred tax liability, net 11,757 7,036 Other long-term liabilities 7,180 6,995 Total long-term liabilities 77,427 68,985 Total liabilities 172,989 194,093 Minority interest 455 363 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 82,506 82,299 Additional paid-in capital from treasury stock transactions 3,610 3,54 Retained earnings 548,000 411,447 Treasury stock, at cost, 15,622,885 and 14,144,515 shares Class B common stock, respectively (305,165) (259,626) Employee restricted stock plan (290) (469) Accumulated other comprehensive loss (61) (286) Total shareholders' equity 328,789 237,097 Total liabilities, minority interest, and shareholders' equity $502,233 $431,553 (The accompanying notes are an integral part of these consolidated financial statements.) Consolidated Statements of Income (in thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 Revenue: Investment-advisory fees, net-affiliates $107,350 $105,968 $333,480 $303,019 Investment-advisory fees, net-other 3,265 2,647 9,474 7,823 Administrative-service fees, net-affiliates 30,812 28,072 92,507 79,232 Administrative-service fees, net-other 3,782 5,184 13,663 15,655 Other service fees, net-affiliates 20,909 34,521 65,843 100,318 Other service fees, net-other 5,896 7,105 18,591 20,856 Commission income 778 595 2,551 2,422 Other, net 443 654 1,127 1,582 Total revenue 173,235 184,746 537,236 530,907 Operating Expenses: Compensation and related 40,473 45,590 136,438 129,126 Advertising and promotional 19,197 16,630 55,592 50,126 Systems and communications 6,851 7,196 20,861 21,925 Office and occupancy 6,563 6,654 19,281 20,264 Professional service fees 4,946 6,235 16,216 20,384 Travel and related 3,152 3,146 9,137 9,910 Amortization of deferred sales commissions 3,460 10,355 11,001 34,559 Amortization of intangible assets 2,651 6,078 8,655 12,158 Other 2,224 2,123 6,578 4,920 Total operating expenses 89,517 104,007 283,759 303,372 Operating income 83,718 80,739 253,477 227,535 Nonoperating Income (Expenses): Interest and dividends 652 1,408 1,736 8,326 Loss on securities, net (640) 0 (793) (496) Debt expense - recourse (130) (1,493) (338) (5,100) Debt expense - nonrecourse (1,104) (5,647) (3,221) (17,673) Other, net (1,876) (4,987) (1,944) (5,292) Total nonoperating expenses, net (3,098) (10,719) (4,560) (20,235) Income before minority interest and income taxes 80,620 70,020 248,917 207,300 Minority interest 2,973 2,773 8,274 8,132 Income before income taxes 77,647 67,247 240,643 199,168 Income tax provision 27,720 24,056 85,782 71,459 Net income $49,927 $43,191 $154,861 $127,709 Earnings per share: Basic $0.45 $0.37 $1.37 $1.11 Diluted $0.43 $0.36 $1.32 $1.06 Cash dividends per share $0.057 $0.046 $0.160 $0.129 (The accompanying notes are an integral part of these consolidated financial statements.) Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine Months Ended September 30, 2002 2001 Operating Activities: Net income $154,861 $127,709 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets 8,655 12,158 Depreciation and other amortization 5,768 6,632 Amortization of deferred sales commissions 11,001 34,559 Minority interest 8,274 8,132 Net gain on disposal of assets (2,585) (2,611) Provision (benefit) for deferred income taxes 5,357 (1,583) Tax benefit from exercise of stock options 82 6,703 Deferred sales commissions paid (61,534) (53,772) Purchases of trading securities (16,053) 0 Proceeds from redemptions of trading securities 14,662 0 Contingent deferred sales charges received 587 25,034 Proceeds from sale of certain future revenues 51,340 46,179 Other changes in assets and liabilities: Decrease (increase) in receivables, net 4,029 (366) Decrease in other assets 696 2,617 Decrease in accounts payable and accrued expenses (997) (4,396) (Decrease) increase in income taxes payable (25,459) 15,498 (Decrease) increase in other current liabilities (4,182) 1,632 Decrease in other long-term liabilities (835) (2,480) Net cash provided by operating activities 153,667 221,645 Investing Activities: Additions to property and equipment (5,013) (5,220) Proceeds from disposal of property and equipment 18 43 Business acquisitions (33,657) (172,606) Purchases of securities available for sale (113) (25,504) Proceeds from redemptions of securities available for sale 4,530 53,297 Net cash used by investing activities (34,235) (149,990) Financing Activities: Distributions to minority interest (8,182) (8,430) Dividends paid (18,308) (15,108) Proceeds from exercise of options 218 1,087 Purchase of treasury stock (45,690) (48,529) Proceeds from new borrowings - nonrecourse 10,515 9,458 Payments on debt - nonrecourse (8,317) (56,838) Payments on debt - recourse (441) (14,224) Net cash used by financing activities (70,205) (132,584) Net increase (decrease) in cash and cash equivalents 49,227 (60,929) Cash and cash equivalents, beginning of period 73,511 149,920 Cash and cash equivalents, end of period $122,738 $88,991 (The accompanying notes are an integral part of these consolidated financial statements.) Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (unaudited) (1) Summary of Significant Accounting Policies (a) Basis of Presentation The unaudited 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, 2001. Certain items previously reported have been reclassified to conform with the current year's presentation. (b) Marketable Securities Marketable securities include available-for-sale and trading securities held by Federated. An investment is classified as a trading security when it is management's intent at the time of purchase to sell the security within a short period of time. Trading securities are carried at fair value based on quoted market prices. The unrealized and realized gains and losses on trading securities are recognized in "Loss on securities, net" in the Consolidated Statements of Income. At September 30, 2002, "Marketable securities" included a $0.6 million investment in a restricted corporate bond, which was classified as a trading security. There were no trading securities held at December 31, 2001. "Loss on securities, net" for the three- and nine-month periods ended September 30, 2002 included a $0.4 million charge for unrealized losses on trading securities. (c) Recent Accounting Pronouncements In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, Statement 145 eliminates the requirement under FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt" to report gains and losses from extinguishment of debt as extraordinary items in the income statement. Similarly, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" has been rescinded. Accordingly, gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement 145 also amends FASB Statement No. 13 to require that certain modifications to capital leases be treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). The adoption of Statement 145 is not expected to have a material impact on Federated's results of operations or financial position. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Statement 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and Issue No. 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that such a liability be recognized when the liability is incurred as opposed to the date of an entity's commitment to an exit plan, as defined in Issue No. 94-3. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of Statement 146 is not expected to have a material impact on Federated's results of operations or financial position. (2) Intangible Assets and Goodwill On January 1, 2002, Federated adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 states that goodwill and other intangible assets with indefinite useful lives should no longer be amortized but rather tested at least annually for impairment. This statement requires that goodwill be tested for impairment annually or when indicators of potential impairment exist using a two-step process that begins with an estimation of the fair value of a reporting unit. This first step is a screen for potential impairment, and if impairment has occurred, the second step measures the amount of impairment. Management has identified and determined the fair value of its reporting unit for purposes of completing this first step of the transitional impairment test and has concluded that no impairment has occurred. Federated continues to amortize identifiable intangible assets, including investment advisory contracts and noncompete agreements, over their useful lives, which range from one to 14 years. Federated reverses the cost and accumulated amortization balances for all fully amortized intangible assets. The following table shows the balances of identifiable intangible assets as of September 30, 2002 and December 31, 2001, and the related cost and accumulated amortization: September 30, 2002 December 31, 2001 Accumulated Carrying Accumulated Carrying in thousands Cost Amortization Value Cost Amortization Value Investment advisory contracts $71,803 $(10,539) $61,264 $78,920 $(13,511) $65,409 Noncompete agreements 15,400 (4,449) 10,951 15,400 (2,139) 13,261 Other 1,795 (619) 1,176 1,780 (424) 1,356 Total identifiable intangible assets $88,998 $15,607) $73,391 $96,100 $(16,074) $80,026 Following is a schedule of expected aggregate annual amortization expense for intangible assets in each of the five years following December 31, 2002 assuming no new acquisitions or impairments: in thousands 2003 $10,557 2004 $10,427 2005 $10,204 2006 $7,843 2007 $6,876 The balance representing goodwill at September 30, 2002, was $164.9 million as compared to $131.9 million at December 31, 2001. The $33.0 million increase in goodwill reflects the first contingent purchase price payment for the acquisition of substantially all of the business of Edgemont Asset Management Corporation completed in the second quarter 2001. The first contingent purchase price payment was made on May 8, 2002, and represented approximately 20% of the total amount of contingent purchase price available to be paid over the first six years following the closing date of the acquisition, provided certain revenue targets are met. Amortization expense for identifiable intangible assets for the three- and nine-month periods ended September 30, 2002, was $2.7 million and $8.7 million, respectively as compared to $4.1 million and $8.1 million, respectively for the same periods last year. The following table presents adjusted net income for the three- and nine-month periods ended September 30, 2002 and 2001, reflecting prior year net income and basic and diluted earnings per share as though Federated had adopted the provisions of SFAS 142 on January 1, 2001: Three Months Ended Nine Months Ended September 30, September 30, in thousands, except per share data 2002 2001 2002 2001 Net income $49,927 $43,191 $154,861 $127,709 Add back: Goodwill amortization, net of tax 0 1,480 0 3,241 Adjusted net income $49,927 $44,671 $154,861 $130,950 Basic earnings per share $0.45 $0.37 $1.37 $1.11 Add back: Goodwill amortization, net of tax 0.00 0.02 0.00 0.03 Adjusted basic earnings per share $0.45 $0.39 $1.37 $1.14 Diluted earnings per share $0.43 $0.36 $1.32 $1.06 Add back: Goodwill amortization, net of tax 0.00 0.01 0.00 0.03 Adjusted diluted earnings per share $0.43 $0.37 $1.32 $1.09 (3) Long-Term Debt - Recourse During the first quarter 2002, Federated repaid all outstanding liabilities on the capital leases held as of December 31, 2001. Federated entered into two new capital leases for computer hardware during the first nine months of 2002 and recorded recourse debt which has a balance of $2.1 million as of September 30, 2002. These leases had an average interest rate of 4.40% for the nine months ended September 30, 2002, and will expire in 2006. (4) B-Share Programs and Long-Term Debt - Nonrecourse Federated sells its rights to future cash flow streams associated with B-share deferred sales commissions [distribution and servicing fees as well as contingent deferred sales charges (CDSCs)] to an independent third party. For accounting purposes, sales of these distribution fees and CDSCs from inception of the first program in 1997 through September 2000 were accounted for as financings as a result of Federated's retained interest in any residual cash flows in this program. Sales of servicing fees under the first program were also accounted for as financings due to the same retained interest as well as Federated's ongoing involvement in performing shareholder-servicing activities. Accordingly, nonrecourse debt was recorded. As a result, "Other service fees, net - affiliates" in the Consolidated Statements of Income reflected distribution and servicing fees earned on B shares sold through September 2000. In addition, debt expense associated with the nonrecourse debt, amortization of deferred sales commissions and other program-related expenses were recorded for sales through September 2000. Beginning in October 2000, pursuant to the terms of a second sales program with an independent third party, Federated accounted for the sales of its rights to future distribution fees and CDSCs as sales. Sales of Federated's rights to future servicing fees continued to be accounted for as financings due to Federated's ongoing involvement in performing shareholder-servicing activities. Accordingly, nonrecourse debt has been recorded. Total nonrecourse debt at September 30, 2002, and December 31, 2001, was $57.2 million and $55.0 million, respectively. The nonrecourse debt carries interest rates ranging from 5.80% to 8.60% with weighted average interest rates of 7.46% and 7.79% at September 30, 2002 and December 31, 2001, respectively. The current B-share program allows Federated to sell its rights to future cash flow streams associated with B-share deferred sales commissions through December 2003. On December 31, 2001, Federated sold its retained interest in the residual cash flows under its first B-share program to an independent third party. As a result, Federated recognized sale treatment accounting for B-share 12b-1 fees and CDSCs sold under this program. The recognition of sale treatment resulted in the reversal of certain asset and liability balances associated with this program as of December 31, 2001. Beginning January 1, 2002, Federated no longer recognizes revenue and expense items in its Consolidated Statements of Income for these sold 12b-1 fees and CDSCs or the related asset and liability balances. Federated continues to account for the prior sale of rights to future servicing fees as financings. "Other service fees, net-affiliates," "Amortization of deferred sales commissions" and "Debt expense - nonrecourse" for the three and nine months ended September 30, 2001, included $11.5 million and $37.5 million, $6.3 million and $20.6 million and $4.6 million and $14.7 million, respectively, recorded in connection with the financing accounting treatment of future 12b-1 fees and CDSCs sold under this B-share program. (5) Common Stock (a) Cash Dividends and Stock Repurchases Federated's Second Amended and Restated Credit Agreement (Credit Facility) contains restrictions on cash payments of dividends and purchases of treasury stock. The Credit Facility limits cash payments for dividends to 50% of net income earned during the period from January 1, 2000, to and including the payment date, less certain payments for dividends and stock repurchases. As of September 30, 2002, approximately $175.3 million was available to pay dividends under this restriction. The Credit Facility limits cash payments for purchases of treasury stock to $125.0 million plus the amount allowable for dividend payments less certain additional stock repurchases. As of September 30, 2002, approximately $176.1 million was available to repurchase stock under this restriction. Federated paid cash dividends of $5.3 million or $0.046 per share in the first quarter of 2002 and $6.5 million or $0.057 per share in both the second and third quarters of 2002 to holders of common shares. Additionally, on October 22, 2002, the board of directors of Federated declared a dividend of $0.057 per share to be paid on November 15, 2002 to shareholders of record as of November 7, 2002. Under Federated's share buyback programs, Federated purchased 1.5 million shares of Class B common stock for $45.7 million during the first nine months of 2002. As of September 30, 2002, Federated can repurchase approximately 5.5 million additional shares subject to the cash payment limit imposed by its Credit Facility. (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 September 30, 2002, a total of 54,318 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 Ended Nine Months Ended September 30, September 30, in thousands, except per share data 2002 2001 2002 2001 Numerator Net income $49,927 $43,191 $154,861 $127,709 Denominator Basic weighted-average shares outstanding 112,161 115,297 112,649 115,281 Dilutive potential shares from stock-based compensation 5,016 4,876 5,041 5,033 Diluted weighted-average shares outstanding 117,177 120,173 117,690 120,314 Basic earnings per share $ 0.45 $0.37 $1.37 $1.11 Diluted earnings per share $ 0.43 $0.36 $1.32 $1.06 (7) Comprehensive Income Comprehensive income was $49.9 million and $42.8 million for the three-month periods ended September 30, 2002 and 2001, respectively, and $155.1 million and $125.9 million for the nine-month periods ended September 30, 2002 and 2001, respectively. Part I, Item 2. Management's Discussion and Analysis - -------------------------------------------------------------------------------- of Financial Condition and Results of Operations (unaudited) 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, 2001. 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. Asset Highlights Managed Assets at Period End Percent in millions as of September 30, 2002 2001 Change By Asset Class Money market $138,552 $123,203 12% Fixed-income 25,277 19,945 27% Equity 17,097 20,497 (17%) Total managed assets $180,926 $163,645 11% By Product Type Mutual Funds: Money market $126,292 $122,263 3% Fixed-income 21,310 16,410 30% Equity 15,506 18,840 (18%) Total mutual fund assets $163,108 $157,513 4% Separate Accounts: Money market $12,260 $940 1,204% Fixed-income 3,967 3,535 12% Equity 1,591 1,657 (4%) Total separate account assets $17,818 $6,132 191% Total managed assets $180,926 $163,645 11% Average Managed Assets Three Months Ended Nine Months Ended September 30, Percent September 30, Percent in millions 2002 2001 Change 2002 2001 Change By Asset Class Money market $147,174 $120,811 22% $144,074 $113,765 27% Fixed-income 24,333 19,536 25% 23,008 18,966 21% Equity 18,515 22,705 (18%) 21,028 22,729 (7%) Total average managed assets $190,022 $163,052 17% $188,110 $155,460 21% By Product Type Mutual Funds: Money market $134,747 $119,892 12% $135,367 $112,969 20% Fixed-income 20,461 15,959 28% 19,196 15,373 25% Equity 16,838 20,841 (19%) 19,210 20,895 (8%) Total average mutual fund assets $172,046 $156,692 10% $173,773 $149,237 16% Separate Accounts: Money market $12,427 $919 1,252% $8,707 $796 994% Fixed-income 3,872 3,577 8% 3,812 3,593 6% Equity 1,677 1,864 (10%) 1,818 1,834 (1%) Total average separate account assets $17,976 $6,360 183% 14,337 $6,223 130% Total average managed assets $190,022 $163,052 17% $188,110 $155,460 21% Period-End and Average Administered Assets Three Months Ended Nine Months Ended September 30, Percent September 30, Percent in millions 2002 2001 Change 2002 2001 Change Period-end assets $31,485 $40,070 (21%) $31,485 $40,070 (21%) Average assets $32,319 $41,400 (22%) $38,412 $41,892 (8%) Components of Changes in Equity Mututal Fund Managed Assets Three Months Ended Nine Months Ended September 30, September 30, in millions 2002 2001 2002 2001 Equity Funds Beginning assets $19,034 $22,461 $20,760 $20,641 Sales 1,380 1,033 4,470 4,038 Redemptions (1,604) (1,387) (4,299) (4,571) Net (redemptions) sales (224) (354) 171 (533) Net exchanges (177) (117) (207) (154) Acquisition related 41 - 41 3,235 Other* (3,168) (3,150) (5,259) (4,349) Ending assets $15,506 $18,840 $15,506 $18,840 * Includes changes in the market value of securities held by the funds, reinvested dividends and distributions and net investment income. Components of Changes in Fixed-Income Mututal Fund Managed Assets Three Months Ended Nine Months Ended September 30, September 30, in millions 2002 2001 2002 2001 Fixed-Income Funds Beginning assets $19,472 $15,179 $17,378 $14,268 Sales 4,325 2,261 10,629 5,851 Redemptions (2,788) (1,230) (7,310) (4,018) Net sales 1,537 1,031 3,319 1,833 Net exchanges 68 66 202 24 Other* 233 134 411 285 Ending assets $21,310 $16,410 $21,310 $16,410 * Includes changes in the market value of securities held by the funds, reinvested dividends and distributions and net investment income. The September 30, 2002, period-end managed assets increased 11% over period-end managed assets at September 30, 2001. Average managed assets for the three months ended September 30, 2002 grew 17% over average managed assets for the three months ended September 30, 2001. These increases in total and average assets primarily reflect strong money market and fixed-income fund sales in the fourth quarter 2001 and strong fixed-income sales in the first nine months of 2002 as well as the additions of the Federated Kaufmann Fund in the second quarter 2001 and TexPool, a local government investment pool in Texas, in the second quarter 2002. As interest rates have decreased, yields on money market funds have decreased leading to increased use of short-term bond funds. Equity market fluctuations have also contributed to higher use of bond and money market products. Federated benefited from the quality and performance of its products, the strength of its relationships with intermediaries and institutions and an increase in cash-management relationships with corporations, universities, government entities and broker/dealer organizations. Changes in Federated's average asset mix period over period, which reflect shifts in investor demands, have a direct impact on Federated's total revenue per dollar of assets managed as money market and fixed-income products generally carry lower management fees per invested dollar than equity products. The following table shows the percent of total revenue derived from each asset type for the three and nine months ended September 30: Relative Contribution to Total Revenue Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 Money market assets 48% 41% 47% 40% Equity assets 27% 35% 30% 36% Fixed-income assets 19% 17% 17% 18% Other activities 6% 7% 6% 6% The increase in revenue derived from money market and fixed-income assets and decrease in revenue from equity assets for the third quarter 2002 as compared to 2001, reflect not only strong growth in money market and fixed-income assets experienced during the fourth quarter 2001 and the first nine months of 2002, but also a change to sale-treatment accounting beginning January 1, 2002 for the 12b-1 cash flows associated with Class B shares of Federated mutual funds (see "B-Share Programs" for a detailed explanation). Results of Operations The table below presents the highlights of our operations for the three- and nine-month periods ended September 30, 2002 and 2001. The operating highlights for the third quarter 2001 and first nine months of 2001 have been adjusted as footnoted to reflect the change in Federated's B-share program (see "B-Share Programs" for a detailed explanation) and for the change in accounting for goodwill (see footnote (2) to the Consolidated Financial Statements) as if these changes were effective at the beginning of 2001. Three Months Nine Months Ended Ended September 30, Percent September 30, Percent ---------------------- --------------------- dollars in millions, 2002 2001 Change Change 2002 2001 Change Change except per share data Net income1 $49.9 $44.3 $5.6 13% $154.9 $129.7 $25.2 19% Earnings per share1 Basic $0.45 $0.38 $0.07 18% $1.37 $1.13 $0.24 21% Diluted $0.43 $0.37 $0.06 16% $1.32 $1.08 $0.24 22% Revenue Revenue from managed assets2 $163.1 $160.3 $2.8 2% $503.8 $455.3 $48.5 11% Service-related revenue from sources other than managed assets 10.1 12.9 (2.8) (22%) 33.4 38.1 (4.7) (12%) Total Revenue $173.2 $173.2 $0.0 0% $537.2 $493.4 $43.8 9% Operating expenses Compensation and related $40.5 $45.6 $(5.1) (11%) $136.4 $129.1 $7.3 6% Advertising and promotional 19.2 16.6 2.6 16% 55.6 50.1 5.5 11% Amortization of deferred sales commissions2 3.5 4.1 (0.6) (15%) 11.0 13.9 (2.9) (21%) Amortization of intangible assets3 2.7 4.1 (1.4) (34%) 8.7 8.1 0.6 7% All other 23.6 25.3 (1.7) (7%) 72.1 77.1 (5.0) (6%) Total Operating Expenses $89.5 $95.7$ (6.2) (6%) $283.8 $278.3 $5.5 2% Operating margin 48.3% 44.8% 3.5% 8% 47.2% 43.6% 3.6% 8% Nonoperating Expenses, Net2 $3.1 $6.1 (3.0) (49%) $4.6 $5.5 (0.9) (16%) 1 Net income and earnings per share reflect the after-tax effect of the adjustments described in footnotes 2 and 3 below. 2 "Other service fees, net-affiliates," "Amortization of deferred sales commissions" and "Debt expense - nonrecourse" for the three and nine months ended September 30, 2001, have been adjusted to exclude $11.5 million and $37.5 million, $6.3 million and $20.6 million, and $4.6 million and $14.7 million, respectively, recorded in connection with the financing accounting treatment of future 12b-1 fees and CDSCs sold under the B-share program. 3 "Amortization of intangible assets" for the third quarter and first nine months of 2001 have been adjusted to exclude $2.0 million and $4.1 million in goodwill amortization expense, respectively. Net Income. Net income for the three- and nine-month periods ended September 30, 2002 increased 13% and 19%, respectively, compared to adjusted net income for the same periods last year. The increases primarily reflect improved operating margins. Diluted earnings per share for the three- and nine-month periods ended September 30, 2002 increased 16% and 22%, respectively, compared to adjusted diluted earnings per share for the same periods of 2001 due to increased net income and reduced weighted-average diluted shares outstanding resulting from stock repurchases during 2001 and the first nine months of 2002. Revenue. Total revenue for the three-month period ended September 30, 2002 remained unchanged as compared to adjusted total revenue for the same period of 2001. Federated's managed assets experienced a change in composition period over period. Equity assets declined 18% on average largely as a result of market depreciation. Money market and fixed income assets each increased quarter over quarter as a result of strong sales growth. Revenue from managed assets grew period over period, but to a lesser degree than the overall 17% growth in average assets due to a higher composition of money market and fixed-income products, which earn, on average, lower fees per invested dollar than equity products. Total revenue for the third quarter 2002 was also impacted by a 22% reduction in average administered assets. Total revenue for the nine-month period ended September 30, 2002 increased $43.8 million as compared to adjusted total revenue for the prior year period. Revenue from managed assets in the first nine months of 2002 increased over adjusted revenue from managed assets for the prior year period as significant asset and sales growth in money market and fixed-income products more than offset decreases in equity assets resulting from market declines. Revenue from managed assets grew period over period, but to a lesser degree than the 21% growth in average assets due once again to a higher composition of money market and fixed-income products. Service-related revenue from sources other than managed assets decreased $2.8 million and $4.7 million for the three- and nine-month periods ended September 30, 2002, respectively, as compared to the same periods last year. The decreases were due largely to the internalization of administrative services and other changes in services provided to certain bank customers. These revenues represented 1.5% of Federated's total revenue in 2001. Operating Expenses. Total operating expenses for the three-month period ended September 30, 2002, decreased $6.2 million or 6% as compared to adjusted operating expenses for the same period last year. Compensation and related expense for third quarter 2002 decreased as compared to the same period last year as a result of decreased variable-based compensation. The increase in advertising and promotional expense reflects increases in marketing allowances due primarily to significant asset and sales growth, partially offset by a decrease in costs associated with Federated's advertising campaign. Amortization of deferred sales commissions decreased for third quarter 2002 as compared to adjusted amortization of deferred sales commissions for the same period last year primarily as a result of a decrease in B-share assets and associated cash flows. Amortization of intangible assets decreased for third quarter 2002 as compared to adjusted amortization of intangible assets for 2001 as a result of the full amortization of certain assets during 2001 and 2002. All other expenses decreased in the third quarter 2002 as compared to 2001 primarily as a result of reductions to professional service fees due to the change in services provided to certain bank customers. Total operating expenses for the nine-month period ended September 30, 2002, increased $5.5 million or 2% as compared to adjusted operating expenses for the same period last year. Compensation and related expense for the first nine months of 2002 increased as compared to the same period last year as a result of increased variable-based compensation due to higher sales and assets and the acquisition of substantially all of the business of Edgemont Asset Management Corporation in the second quarter 2001 (the Kaufmann Acquisition). The increase in advertising and promotional expense reflects increases in marketing allowances due primarily to significant asset and sales growth, partially offset by a decrease in costs associated with Federated's advertising campaign. Amortization of deferred sales commissions decreased for the nine-month period ended September 30, 2002 as compared to adjusted amortization of deferred sales commissions for the same period last year primarily as a result of a decrease in B-share assets and associated cash flows. Amortization of intangible assets increased for the first nine months of 2002 as compared to adjusted amortization expense for 2001 as a result of the amortization of intangible assets acquired in connection with the Kaufmann Acquisition in 2001, partially offset by the full amortization of certain assets during 2001 and 2002. All other expenses decreased for 2002 as compared to 2001 primarily as a result of reductions to professional service fees due to the change in services provided to certain bank customers and a general reduction in consulting and legal fees. Nonoperating Income (Expenses). Net nonoperating expenses for the three- and nine-months ended September 30, 2002, decreased $3.0 million and $0.9 million, respectively, compared to adjusted net nonoperating expenses for the same periods last year. Interest and dividend income decreased in 2002 due to lower investment yields and, for the year-to-date comparison, lower investment balances as a result of cash used for the Kaufmann Acquisition in the second quarter 2001. Recourse debt expense decreased in 2002 as a result of lower levels of outstanding debt due to the early retirement of Federated's 7.96% Senior Secured Notes in the fourth quarter of 2001. "Other, net" for the third quarter and first nine months of 2002 included a $1.8 million non-cash charge to write-down the carrying value of Federated's mortgage-backed collateralized bond obligation (CBO) investment to $0.7 million. The fair value of this investment decreased as a result of significant declines in the value of the underlying securities held by the CBO. "Other, net" for the three- and nine-month periods ended September 30, 2001, included non-cash charges equal to $5.0 million and $5.2 million, respectively, to write-down the carrying values of Federated's investments in high-yield CBO products and certain Federated-sponsored mutual funds also as a result of depreciated fair values. Income Taxes. The income tax provision for the three- and nine-month periods ended September 30, 2002 were $27.7 million and $85.8 million as compared to $24.1 million and $71.5 million, respectively, for the same periods in 2001. The effective tax rate was 35.7% and 35.8% for the third quarters of 2002 and 2001, respectively, and 35.6% and 35.9% for the first nine months of 2002 and 2001, respectively. B-Share Programs. Federated funds upfront commissions paid to broker/dealers on the sale of Class B shares of Federated mutual funds (B shares) through the sale of the rights to future cash flow streams associated with B-share commissions to an independent third party. Rights to future 12b-1 fees and contingent deferred sales charges (CDSCs) sold through September 2000 were accounted for as financings for financial reporting purposes as a result of Federated's retained interest in the residual cash flows under this program. Rights to future shareholder service fees were also accounted for as financings due to the same retained interest as well as Federated's ongoing involvement in performing shareholder-servicing activities. Accordingly, sales commissions paid were capitalized and nonrecourse debt was recorded. On December 31, 2001, Federated sold its retained interest in the residual cash flows under this B-share program to an independent third party. As a result, Federated recognized sale treatment accounting for B-share 12b-1 fees and CDSCs sold under this program. The recognition of sale treatment resulted in the reversal of certain asset and liability balances associated with this program as of December 31, 2001. Beginning January 1, 2002, Federated no longer recognizes revenue and expense items in its Consolidated Statements of Income for these sold 12b-1 fees and CDSCs or the related asset and liability balances. Federated continues to account for the prior sale of rights to future shareholder service fees as financings as a result of Federated's ongoing involvement in performing shareholder-servicing activities. Rights to future B-share-related 12b-1 fees and CDSCs sold subsequent to September 2000 have been and continue to be accounted for as sales and gains on these sales are recorded in "Other service fees, net-affiliates" in the Consolidated Statements of Income. The sale of rights to future shareholder service fees continues to be accounted for as financings. Liquidity and Capital Resources At September 30, 2002, liquid assets, consisting of cash and cash equivalents, the current portion of marketable securities and receivables, totaled $152.9 million as compared to $110.7 million at December 31, 2001. Operating Activities. Net cash provided by operating activities totaled $153.7 million for the nine-month period ended September 30, 2002, as compared to $221.6 million for the same period of 2001. This decrease is largely attributable to increased income taxes paid in the first nine months of 2002 as compared to 2001 due to a one-time extension in the third quarter 2001 of the federal government's deadline for paying quarterly tax estimates, the effects of certain cash payments made in the first nine months of 2002 and the elimination of 12b-1 fees and CDSCs received on Class B shares of Federated's mutual funds as a result of the fourth quarter 2001 sale of Federated's retained interest in residual cash flows associated with the B shares (see "B-Share Programs" for a detailed explanation). Cash payments made in the first nine months of 2002 included taxes paid on the sale of Federated's retained interest in the residual cash flows and the payment of normal operating expenses accrued as of the end of 2001. Investing Activities. During the first nine months of 2002, Federated made a $33.1 million contingent payment related to the Kaufmann Acquisition, paid $5.0 million to acquire property and equipment and to develop internally-used software and received $4.5 million from redemptions of available-for-sale securities. Financing Activities. During the nine months ended September 30, 2002, Federated used $70.2 million for financing activities. Of this amount, $45.7 million was used to repurchase 1.5 million shares of Class B common stock. As of September 30, 2002, Federated can repurchase an additional 5.5 million shares through its authorized programs. Repurchases under these programs are subject to restrictions under Federated's Second Amended and Restated Credit Agreement, which limit cash payments for additional stock repurchases to $160.4 million after considering earnings through September 30, 2002, certain stock repurchases through October 31, 2002, and the planned dividend payment on November 15, 2002 (see Note (5) to the Consolidated Financial Statements). Federated paid dividends of $5.3 million or $0.046 per share in the first quarter 2002 and $6.5 million or $0.057 per share in both the second and third quarters of 2002. In October 2002, Federated's board of directors declared a dividend of $0.057 per share that will be paid on November 15, 2002, to shareholders of record as of November 7, 2002. After considering earnings through September 30, 2002, certain stock repurchases through October 31, 2002, and the planned dividend payment on November 15, 2002, Federated, given current debt covenants, has the ability to pay dividends of approximately $164.2 million. Payments on debt-nonrecourse were significantly lower during the first nine months of 2002 than in the first nine months of 2001 as a result of the fourth quarter 2001 sale of Federated's retained interest in residual cash flows associated with the B shares (see "B-Share Programs" for a detailed explanation). Payments on debt-recourse were lower during the first nine months of 2002 than amounts for the same period in 2001 due to the early retirement of Federated's 7.96% Senior Secured Notes in the fourth quarter 2001. Future Cash Requirements. Management expects that the principal uses of cash will be to advance sales commissions, fund marketing allowances, repurchase company stock, fund strategic business acquisitions, including potential future contingent payments relating to the Kaufmann Acquisition, pay shareholder dividends, pay incentive compensation, fund property and equipment acquisitions and initiatives to develop internally-used software, fund minimum lease payments and seed new products. Federated has experienced increases in the cost of insurance and management expects these increases, including the assumption of additional risk, to be significant going forward. Management believes that Federated's existing liquid assets, together with the expected continuing cash flow from operations, its borrowing capacity under the current credit facility, the B-share program and its ability to issue stock will be sufficient to meet its present and reasonably foreseeable cash needs. Alternative Products Federated acts as the investment manager for two high-yield collateralized bond obligation (CBO) products and a mortgage-backed CBO product pursuant to the terms of an investment management agreement between Federated and each CBO. The CBO products are structured using special-purpose entities. The financial condition and results of operations of these CBOs are not included in Federated's Consolidated Financial Statements as of and for the three- and nine-month periods ended September 30, 2002, or for any prior period. In each case, there exists a majority owner(s) that is an independent third party from Federated owning at least three percent equity in the CBO. Federated has not guaranteed nor has any recourse related to any of the notes issued by the CBOs. As of September 30, 2002, assets managed by Federated in the CBOs totaled $1.0 billion. The Financial Accounting Standards Board is currently deliberating new rules regarding the consolidation of certain special purpose entities. As of the date of this report, it is unclear what effect, if any, the new rules will have on Federated's accounting for the CBOs. Management will explore all of its options relating to its relationship with the CBOs in the event that application of the final rules, which are expected to be issued in the fourth quarter 2002, would require the consolidation of the CBOs in Federated's Consolidated Financial Statements. Critical Accounting Policies Federated's Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Of the significant accounting policies described in Federated's Annual Report on Form 10-K for the year ended December 31, 2001, management believes that its policy regarding the identification, valuation and impairment of intangible assets involves a high degree of judgment and complexity due to the significant use of assumptions. Significant differences between actual results and the assumptions used in the valuation and impairment analyses could have a significant impact on the carrying value of the assets. (See Note (1) to the Consolidated Financial Statements included in Federated's Annual Report on Form 10-K for the year ended December 31, 2001, and Note (2) to the Consolidated Financial Statements included herein). Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------------------- (unaudited) In the normal course of our business, Federated is exposed to the risk of loss due to fluctuations in the securities market and general economy. Management is responsible for identifying, assessing and managing market and other risks. Federated's investments are primarily money market funds and mutual funds with investments which have a duration of two years or less. Federated also invests in mutual funds sponsored by Federated (performance seeds) 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. At September 30, 2002, Federated was exposed to price risk with regard to its $0.1 million of performance seed investments in fluctuating-value mutual funds. Price risk is the risk that the fair value of the investments will decline and ultimately result in the recognition of a loss for Federated. Federated did not hold any derivative investments to hedge its performance seeds at September 30, 2002. At September 30, 2002, Federated held an investment in a restricted corporate bond with a carrying value of $0.6 million. This investment exposes Federated to interest rate and credit risk. In order to limit its exposure relative to these risks, Federated completed a short sale of a similar unrestricted bond with an independent third party during the third quarter 2002. This hedge was recorded in "Other current liabilities" on the Consolidated Balance Sheets with a carrying value of $0.7 million as of September 30, 2002. During the third quarter 2002, Federated recorded a $1.8 million pre-tax impairment charge related to an other-than-temporary decline in the fair value of its investment in its mortgage-backed CBO product. Federated's remaining investment in this product, which totaled $0.7 million at September 30, 2002, is subject to interest rate risk and may be adversely affected by increases in interest rates. It is also important to note that a significant portion of Federated's revenue is based on the market value of managed and administered assets. Declines in the market values of assets as a result of changes in market or other conditions will therefore negatively impact revenue and net income. Part I, Item 4. Controls and Procedures - -------------------------------------------------------------------------------- (unaudited) Within 90 days prior to the date of this report, Federated carried out an evaluation, under the supervision and with the participation of management, including Federated's President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Federated's disclosure controls and procedures. Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that Federated's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the registrant in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. During the period covered by this report, there have not been any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 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: None (b) Reports on Form 8-K: No reports on Form 8-K were filed during the period subject to this Quarterly Report on Form 10-Q. 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 8, 2002 By: /s/ J. Christopher Donahue J. Christopher Donahue President and Chief Executive Officer Date November 8, 2002 By: /s/ Thomas R. Donahue Thomas R. Donahue Chief Financial Officer CERTIFICATIONS I, J. Christopher Donahue, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Federated Investors, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 8, 2002 By: /s/ J. Christopher Donahue J. Christopher Donahue President and Chief Executive Officer CERTIFICATIONS I, Thomas R. Donahue, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Federated Investors, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 8, 2002 By: /s/ Thomas R. Donahue Thomas R. Donahue Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Federated Investors, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date November 8, 2002 By: /s/ J. Christopher Donahue J. Christopher Donahue President and Chief Executive Officer Date November 8, 2002 By: /s/ Thomas R. Donahue Thomas R. Donahue Chief Financial Officer