UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998 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)
INCORPORATED IN 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 . No X *.
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: As of May 31, 1998, the
Registrant had outstanding 6,000 shares of Class A Common Stock and 86,337,000
shares of Class B Common Stock.
* Initial S-1 Registration Statement effective May 13, 1998.
<PAGE>
Federated Investors, Inc.
Form 10-Q
For the Three Months Ended March 31, 1998
Index
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1998 and 1997 4
Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit 27. Financial Data Schedule 15
(b) Reports on Form 8-K 15
Signatures 16
<TABLE>
<CAPTION>
FEDERATED INVESTORS
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Share Data)
MARCH 31, DECEMBER
31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Current Assets:
Cash and cash $59,921 $
equivalents.........................................................................22,912
Marketable 3,983 8,945
securities................................................................................
Receivables-Federated - -
Funds.....................................................................................
Receivables, net of reserve of $4,238 and $3,266, 34,372
respectively........................................................................32,078.....
Prepaid 2,110 2,853
expenses......
Income taxes - 7,519
receivable......................................................................................
Other current 1,926 1,805
assets..................................................................................
-----------------------------
Total Current 102,312
Assets..............................................................................76,112..............
-----------------------------
Long-Term Assets:
Customer relationships, net of accumulated amortization of 27,189
$30,116 and $26,907, 30,398
respectively................................................................................................
Goodwill, net of accumulated amortization of $12,074 and 36,795
$11,512, 37,356
respectively................................................................................................
Other intangible assets, 122 126
net.........................................................................................................
Deferred sales commissions, 195,201
net.................................................................................164,623.................
Deferred tax asset,
net.........................................................................................................
Property and equipment, 21,530
net.................................................................................22,163..................
Other long-term 5,741 6,378
assets...........................................................................................................
-----------------------------
Total Long-Term 286,578
Assets..............................................................................261,044.................
-----------------------------
Total $388,890 $
Assets..............................................................................337,156.................
=============================
Current Liabilities:
Cash $ 4,401 $
overdraft...........................................................................7,680.....................
Current portion of long-term debt - 274 280
Recourse....................................................................................................
Accrued 32,213
expenses............................................................................34,939..................
Accounts 20,989
payable.............................................................................18,634..................
Income taxes 11,420 -
payable.....................................................................................................
Other current 3,858 2,520
liabilities.................................................................................................
-----------------------------
Total Current 73,155
Liabilities.........................................................................64,053..................
-----------------------------
Long-Term Liabilities:
Long-term debt - 98,905
Recourse............................................................................98,950..................
Long-term debt - 207,921
Nonrecourse.........................................................................185,388.................
Deferred tax liability, 26,252
net.................................................................................26,546..................
Other long-term 2,826 2,863
liabilities.................................................................................................
-----------------------------
Total Long-Term 335,904
Liabilities.........................................................................313,747.................
-----------------------------
Total 409,059
Liabilities.........................................................................377,800.................
-----------------------------
Minority 600 466
Interest....................................................................................................
-----------------------------
Shareholders' Equity:
Common Stock
Class A, $1.00 stated value, 99,000 shares authorized, 6 6
6,000 issued and outstanding..................................................
Class B, $.01 stated value, 149,700,000 shares
authorized, 90,294,000 and 90,094,000 shares
issued and 90,294,000 and 90,094,000 shares 903 901
outstanding,
respectively....................................................................................................
Additional paid-in 27,707
capital............................................................28,574.......................
Retained 74,144
earnings...........................................................55,139.......................
Treasury stock, at cost, 6,567,000 and 6,667,000 shares (121,464)
Class B Common Stock, respectively........................... (123,373)
Employee restricted stock (1,938) (2,266)
plan...............................................................
Accumulated other comprehensive (127) (91)
income..............................................................
-----------------------------
Total Shareholders' (20,769)
Equity..............................................................................(41,110).......
-----------------------------
Total Liabilities, Minority Interest, and $ 388,890 $
Shareholders' 337,156
Equity..........................................................................................................................
=============================
</TABLE>
Share amounts have been restated to reflect the one for one stock dividend
paid on April 15, 1998 and the one for two stock dividend paid on April 30,
1998.
(THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.)
FEDERATED INVESTORS
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS
(Dollars In Thousands Except Per Share Data) ENDED MARCH 31,
---------------------------
1998 1997
---------------------------
Revenue:
Investment advisory fees, $ 61,905 $ 49,408
net-Federated Funds
Investment advisory fees, net-Other 1,772 1,476
Administrative service fees, 17,262 14,245
net-Federated Funds
Administrative service fees, net-Other 5,425 5,764
Other service fees, net-Federated Funds 22,556 13,618
Other service fees, net-Other 7,349 4,827
Commission income-Federated Funds 941 458
Interest and dividends 1,395 684
Marketable securities gains 189 23
Other income 3,798 1,124
---------------------------
Total Revenue 122,592 91,627
---------------------------
Operating Expenses:
Compensation and related 37,518 33,507
Amortization of deferred sales 5,174 4,524
commissions
Office and occupancy 6,625 6,288
Systems and communications 6,361 6,474
Advertising and promotional 11,419 8,745
Travel and related 3,124 3,279
Other 8,702 4,386
Amortization of intangible assets 3,776 2,934
---------------------------
---------------------------
Total Operating Expenses 82,699 70,137
---------------------------
Operating income 39,893 21,490
---------------------------
Nonoperating Expenses:
Interest expense 5,718 4,845
Other debt expense 434 257
---------------------------
Total Nonoperating Expenses 6,152 5,102
---------------------------
Income before minority interest and income 33,741 16,388
taxes
Minority interest 1,996 1,881
---------------------------
Income before income taxes 31,745 14,507
Income tax provision 10,908 5,664
---------------------------
Net income 20,837 $8,843
===========================
Earnings per common share:
Basic.................................. 0.25 0.11
===========================
Diluted.....................................0.25 0.11
===========================
Cash dividends declared and paid per common 0.0208 0.0000
share..........................................
===========================
Per share amounts have been restated to reflect the one for one stock
dividend paid on April 15, 1998 and the one for two stock dividend paid on April
30, 1998.
(THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.)
FEDERATED INVESTORS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS
(Dollars in Thousands) ENDED MARCH 31,
1998 1997
Net Cash Provided (Used) by Operating Activities $13,173 $(4,801)
Investing Activities:
Proceeds from sale of property and equipment 0 5
Additions to property and equipment (894) (145)
Cash paid for acquisitions (162) (350)
Purchases of marketable securities (790) (2,700)
Proceeds from redemptions of marketable securities 5,800 7,505
Net Cash Provided by Investing Activities 3,954 4,315
Financing Activities:
Distributions to minority interest (1,862) (1,750)
Dividends paid (1,738) 0
Issuance of common stock 1,000 25
Purchase of treasury stock 0 (30)
Proceeds from new borrowings - Recourse 0 5,000
Proceeds from new borrowings - Nonrecourse 33,444 0
Payments on debt - Recourse (51) (3,923)
Payments on debt - Nonrecourse (10,911) 0
Net Cash Provided (Used) by Financing Activities 19,882 (678)
Net Increase (Decrease) In Cash and Cash Equivalents 37,009 (1,164)
Cash and Cash Equivalents, Beginning of Period 22,912 6,561
Cash and Cash Equivalents, End of Period $59,921 $5,397
(THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.)
FEDERATED INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) BASIS OF PRESENTATION
The interim financial statements of Federated Investors included herein
have been prepared in accordance with generally accepted accounting
principles. In the opinion of management, the financial statements reflect
all adjustments, which are of a normal recurring nature, necessary for a
fair statement of the results for the interim periods presented.
In preparing the unaudited consolidated interim financial statements,
management is required to make estimates and assumptions that affect the
amounts reported in the financial statements. Actual results will differ
from such estimates and such differences may be material to the financial
statements.
These financial statements should be read in conjunction with the
company's audited financial statements for the year ended December 31,
1997.
(b) PRO FORMA INFORMATION
On May 19, 1998, Federated Investors was merged with and into Federated
Investors, Inc., a wholly owned subsidiary. All outstanding Class A and
Class B common shares of Federated Investors were exchanged for an equal
number of shares of no par Class A and Class B common stock of Federated
Investors, Inc., respectively, with the same proportionate ownership and
substantially similar rights, and all treasury stock of Federated
Investors was retired. All information contained in this report is for
Federated Investors except for noted proforma information.
As a condition precedent to the merger described above, Federated
Investors, Inc. issued an additional 2,610,000 shares of Class B common
stock in an initial public offering for net proceeds of $46.5 million in
cash. At March 31, 1998, issued and outstanding shares of Class B common
stock, after taking into account the public offering, was 86,337,000 and
Total Shareholders' Equity was $25,683,000. Pro forma basic and diluted
earnings per share for the twelve months ended December 31, 1997 was $0.61
and $0.60, and the three month periods ended March 31, 1998 and 1997 was
$0.25 and $0.24 and $0.11 and $0.11, respectively.
(c) COMPREHENSIVE INCOME
In 1998, Federated Investors adopted Statement of Financial Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires
companies to report all changes in equity during a period, except those
resulting from investment by owners and distribution to owners, in a
financial statement for the period in which they are recognized.
Comprehensive income was $20.8 million and $8.7 million at March 31, 1998
and 1997, respectively.
(d) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") is effective for
financial statements for periods beginning after December 15, 1997. SFAS
131 is not required to be applied to interim financial statements in the
initial year of its application.
Federated Investors believes that the impact of the adoption of SFAS 131
will not impact the financial position or results of operations.
FEDERATED INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(d) RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED
Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") was adopted
effective January 1, 1998. SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining software for
internal use. Qualifying software costs are capitalized and amortized over
the estimated useful life of the software. Prior to the adoption of SOP
98-1, software costs were expensed as incurred. Restatement of prior year
financial statements was not required.
(2) Deferred Sales Commissions and Non-Recourse Debt
Federated Investors entered into an agreement in the fourth quarter of
1997 with a third party to sell the rights to the future revenue streams
associated with the 12b-1, shareholder service and CDSC fees of the Class
B shares of various mutual funds it manages. This agreement includes both
an initial sale of existent rights to future revenue streams as well as
establishing a program to sell on a continuous basis the future rights
associated with future revenue streams relating to the ongoing sale of B
shares. For accounting purposes, transactions executed under the agreement
are reflected as financings and nonrecourse debt has been recorded.
The following tables summarize the changes in both the deferred sales
commissions and non-recourse debt as a result of this agreement:
` Three Months Ended
March 31, 1998
(IN THOUSANDS)
Deferred Sales Commissions:
Deferred B share sales commissions at December 31, 1997 $162,398
Payments to brokers/dealers 38,848
CDSC fees collected (4,204)
Amortization (4,517)
-----------
Deferred B share sales commissions at March 31, 1998 $192,525
========
Nonrecourse Debt:
Nonrecourse debt at December 31, 1997 $185,388
Additional financings 33,444
Payments/Amortization of nonrecourse debt (10,911)
Nonrecourse debt at March 31, 1998 $207,921
==============
The nonrecourse debt had a weighted average interest rate of 7.63% at
March 31, 1998.
(3) Long-Term Debt
Federated Investors' long-term debt consisted of the following:
March 31, December
31,
----------- ----------
1998 1997
----------- ---------
(In Thousands)
Recourse Debt:
Senior Secured Note Purchase Agreement $ 98,000 $98,000
Capitalized Leases................ 1,179 1,230
-------------------------
Total Recourse Debt......... 99,179 99,230
Less Current Portion............... 274 280
--------------------------
Total Long-Term Debt - Recourse....$ 98,905 $ 98,950
============ ===========
Nonrecourse Debt...................... $ 207,921 $ 185,388
=========== ==========
FEDERATED INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(4) Common and Preferred Stock
On February 20, 1998, the Board of Directors declared a one for one
stock dividend payable on April 15, 1998 to stockholders of record on
March 17, 1998. Also, on April 16, 1998, the Board of Directors declared a
one for two stock dividend payable on April 30, 1998 to stockholders of
record on April 21, 1998. All per share amounts have been restated to
reflect the affect of the stock dividends.
Under the existing Federated Investors' debt agreements dividend
payments on common shares may not exceed $5,000,000 in any fiscal year nor
exceed the sum of $5,000,000 plus 50% of the net income of Federated
Investors during the period from January 1, 1996 to and including the date
of payment. A cash dividend of $0.0208 per share or approximately $1.7
million was paid in the first quarter of 1998 to holders of common shares.
Additionally, a cash dividend of $0.038 per share or $3.2 million was paid
to shareholders on April 30, 1998.
There is no additional dividend paying capacity remaining for the year
1998 after having made the cash dividend payments on April 30, 1998,
unless such restriction is modified or waived by the lenders.
(5) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS
ENDED MARCH 31,
1998 1997
--------- ---------
(In Thousands,
Except Per Share
Data)
Numerator:
Net income $ $
=========
20,837 8,843
Denominator:
Basic weighted-average common 82,335 82,307
shares outstanding
Effect of dilutive securities:
Restricted Stock 576 277
Employee stock options/SARs 1,379 567
--------- ---------
Dilutive potential common 1,955 844
shares
--------- ---------
Diluted weighted-average common 84,290 83,151
shares outstanding
========= =========
Basic earnings per share $ 0.25 $ 0.11
========= =========
========= =========
Diluted earnings per share $ 0.25 $ 0.11
========= =========
<PAGE>
Part I, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
HIGHLIGHTS
The tables below compare the summary financial and statistical results
for the first quarters of 1998 and 1997:
Three Months Ended
SELECTED OPERATING DATA (IN THOUSANDS, EXCEPT PER March 31,
SHARE DATA)
----------------------
1998 1997
---------- ----------
Total Revenue......................................$122,592 $ 91,627
Operating Expenses................................. 82,699 70,137
Operating Income 39,893 21,490
Nonoperating Expenses and Minority 8,148 6,983
Interest.....................................
---------- ----------
Income Before Income Taxes...........................31,745 14,507
Income Tax Provision.................................10,908 5,664
========== ==========
Net Income...........................................$ 20,837 $ 8,843
========== ==========
Earnings per Basic Common Share.......................$0.25 $0.11
Earnings per Diluted Common Share.....................$0.25 $0.11
MANAGED AND ADMINISTERED ASSETS
(IN MILLIONS) March 31,
----------------------
1998 1997
---------- ----------
Money Market Funds $ 64,215 $ 53,086
Fixed Income Funds 15,601 13,788
Equity 13,843 8,000
Funds
Separate 2,389 2,069
Accounts
Total Managed Assets $ 96,048 $ 76,943
Total Administered Assets $ 51,651 $ 38,860
AVERAGE MANAGED AND ADMINISTERED ASSETS Three Months Ended
(IN MILLIONS) March 31,
-------------------
1998 1997
------- ----------
Money Market Funds $ 64,830 $ 52,865
Fixed Income Funds 15,407 14,107
Equity 12,569 8,045
Funds
Separate 2,296 2,070
Accounts
Total Average Managed Assets $ 95,102 $ 77,087
Total Average Administered Assets $ 49,946 $ 39,228
COMPONENTS OF CHANGES IN EQUITY AND FIXED INCOME FUND
MANAGED ASSETS
(IN MILLIONS) Three Months Ended
March 31,
---------------------
Equity 1998 1997
Funds
Beginning Assets...................... $ 11,710 $7,594
Sales............................. 1,390 846
Redemptions....................... (631) (452)
Net Sales...................... 759 394
Net Exchanges..................... 51 0
Other *........................... 1,323 12
Ending Assets......................... $ 13,843 $ 8,000
Fixed Income Funds
Beginning Assets...................... $ 15,067 $ 14,109
Sales............................. 1,577 1,142
Redemptions....................... (1,063) (1,201)
Net Sales...................... 514 (59)
Net Exchanges..................... (130) (103)
Other *........................... 150 (159)
Ending Assets.....................$ 15,601 $ 13,788
----------------------------------------------
* Primarily reinvested dividends and distributions, net investment
income and changes in the value of securities held by the
funds.
SUBSEQUENT EVENT
On May 19, 1998, Federated Investors was merged with and into Federated
Investors, Inc., a wholly owned subsidiary. All outstanding Class A and
Class B common shares of Federated Investors were exchanged for an equal
number of shares of no par Class A and Class B common stock of Federated
Investors, Inc. with the same proportionate ownership and substantially
the same rights, and all treasury stock of Federated Investors was
retired. All information contained within this report is for Federated
Investors except for noted pro forma information.
Concurrently with the consummation of the merger on May 19, 1998 between
Federated Investors and the wholly owned subsidiary, Federated Investors,
Inc., (the "Company"), the Company completed its initial public offering
of Class B Common Stock. The net proceeds of $46.5 million received by the
Company in the sale of 2,610,000 shares of Class B Common Stock will be
used for working capital and other general corporate purposes.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
NET INCOME. Continued revenue growth raised Federated Investors'
consolidated net income for the first quarter to $20.8 million, or $0.25
per diluted common share. The 1998 results compare with net income of $8.8
million, or $0.11 per diluted common share in the first quarter of 1997.
The improved performance was principally the result of revenue growth of
$31.0 million, largely generated from higher levels of Managed and
Administered Assets.
REVENUE. Federated Investors consolidated revenue increased 33.8% to
$122.6 million for the quarter ended March 31, 1998 from $91.6 million for
the same period in 1997. This increase is primarily attributable to higher
fees produced from an increase in average Managed Assets. Average Managed
Assets increased 23.4% from $77.1 billion for the first quarter of 1997 to
$95.1 billion for the first quarter of 1998, including a 56.2% increase in
equity funds, a 22.6% increase in money market funds, a 9.2% increase in
fixed income funds and a 10.9% increase in separate accounts. Interest and
dividends more than doubled as a result of higher levels of invested cash.
Other income improved $2.7 million due to a servicing contract buyout of a
bank-sponsored mutual fund complex of $2.5 million. This servicing
contract accounted for approximately $0.5 million of administrative and
other service fee revenue in the first quarter of 1998.
OPERATING EXPENSES. Total operating expenses increased from $70.1
million for the three months ended March 31, 1997 to $82.7 million for the
three months ended March 31, 1998, an increase of $12.6 million or 17.9%.
Compensation and related expenses increased $4.0 million or 11.9% from
$33.5 million for the quarter ended March 31, 1997 to $37.5 million for
the quarter ended March 31, 1998. The increase was attributed to an
increase in variable based compensation and staff growth experienced
within the areas of investment research and other service areas and was
partially offset by reductions resulting from the outsourcing of the
portfolio accounting function.
Amortization of deferred sales commissions increased from $4.5 million
for the first quarter of 1997 to $5.2 million for the same period of 1998,
an increase of $0.7 million or 14.4%. This increase was due to the
continued sale of shares of funds which require Federated Investors to
advance a commission to the broker/dealers.
Advertising and promotional expenses increased from $8.8 million for the
quarter ended March 31, 1997 to $11.4 million for the quarter ended March
31, 1998, an increase of $2.6 million or 29.6%, primarily as a result of
higher levels of marketing allowances being paid to brokers and bank
clients for retailing efforts of marketing funds, as well as increased
spending in advertising and promotional expense to build company name
awareness.
Other expenses increased $4.3 million or 97.7% from $4.4 million for the
quarter ended March 31, 1997 to $8.7 million for the quarter ended March
31, 1998. This increase is primarily attributable to fees paid for the
outsourcing of portfolio accounting services. In 1997, Federated Investors
performed the portfolio accounting services internally.
Amortization of intangible assets increased by $842 thousand (28.7%)
from $2.9 million for the three months ended March 31, 1997 to $3.8
million for the three months ended March 31, 1998. The increase in the
amortization of intangible assets occurred as a result of an acquisition
in the second quarter of 1997.
NONOPERATING EXPENSES. Nonoperating expenses increased by $1.1 million
or 20.6% to $6.2 million for the three months ended March 31, 1998 as
compared to $5.1 million for the three months ended March 31, 1997. This
increase is attributable to the interest expense recognized relative to
nonrecourse debt incurred for the securitization of certain B share fund
assets.
MINORITY INTEREST. The minority interest increased from $1.9 million for
the three months ended March 31, 1997 to $2.0 million for the three months
ended March 31, 1998 as a result of higher net income for the subsidiary
for which Federated Investors acts as the general partner with a majority
interest of 50.5%.
INCOME TAXES. The income tax provision for the quarter ended March 31,
1998 was $10.9 million as compared to $5.7 million for the first quarter
of 1997, an increase of $5.2 million or 92.6%. This increase was due
primarily to the increase in the level of income before income taxes from
$14.5 million for the three months ended March 31, 1997 to $31.7 million
for the three months ended March 31, 1998, an increase of 118.8%.
DEFERRED SALES COMMISSIONS AND NONRECOURSE DEBT
Certain subsidiaries of Federated Investors pay commissions to
broker/dealers (deferred sales commissions) to promote investments in
certain mutual funds. For mutual fund shares sold under such marketing
programs, Federated Investors retains certain fees from the mutual fund
over the outstanding life of such shares. These fees consist of 12b-1,
shareholder service and contingent deferred sales charge (CDSC) fees. Both
12b-1 and shareholder service fees are calculated as a percentage of
Average Managed Assets associated with the related classes of shares. If
shares are redeemed before the end of a specified holding period as
outlined in the related mutual fund prospectus, the mutual fund
shareholder is normally required to pay Federated Investors a CDSC fee
based on a percentage of the assets redeemed, such percentage diminishing
over a recovery schedule not to exceed six years.
The up front commissions Federated Investors pays to broker/dealers are
capitalized and recorded as deferred sales commissions and are amortized
over the estimated benefit period not to exceed CDSC periods. 12b-1 and
shareholder service fees are recognized in the income statement over the
life of the mutual fund class share. Any CDSC fees collected are used to
reduce Deferred Sales Commissions.
In the fourth quarter of 1997, Federated Investors entered into an
agreement to sell certain of the future fee revenue associated with its
existing B Shares Deferred Sales Commissions. This agreement also provided
for Federated Investors to sell, on a regular basis, the rights associated
with such future revenue streams during a three year contract period. For
accounting purposes these agreements have been accounted for as financings
and nonrecourse debt was recorded. The income statement reflects 12b-1 and
shareholder service fees which is included in Other Service Fees, net -
Federated Funds as well as interest expenses associated with the
nonrecourse debt and deferred sales commission amortization.
In the first quarter of 1998, pursuant to the terms of the agreement,
Federated Investors received $33.9 million in cash in exchange for the
rights to certain future revenue streams associated with B share advanced
commissions with a book value of $33.0 million. As of March 31, 1998
Federated Investors had $207.9 million of nonrecourse debt associated with
$192.5 million in book value of deferred sales commission assets.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW.Cash provided by operating activities totaled $13.2 million
for the first quarter of 1998. The cash flow from operating activities is
primarily utilized for the purchases of equipment, dividend payments, as
well as payments on long term debt.
The recourse debt held by Federated Investors decreased $51 thousand
from December 31, 1997 due to payments on capital leases.
The deferred sales commissions paid to broker/dealers on certain shares
of funds totaled $40.2 million for the first quarter of 1998. Also, in the
first three months of 1998, Federated Investors exchanged for $33.9
million the rights to certain future revenue streams associated with the
class B share advance commission assets with a book value of $33.0
million.
CAPITAL EXPENDITURES. Capital expenditures totaled $0.9 million for the
first three months of 1998. Capital expenditures are expected to exceed
$10 million in 1998, exclusive of Year 2000 related project costs.
DIVIDENDS.The Board of Directors of Federated Investors adopted a policy
to declare and pay cash dividends on a quarterly basis. A first quarter
dividend of $0.0208 per common share was paid on January 31, 1998.
Additionally, a second quarter dividend of $0.038 was paid on April 30,
1998. Under the existing Federated Investors' debt agreements there is no
additional dividend paying capacity for the 1998 year unless such
restrictions are modified or waived by the lenders. Federated Investors is
seeking to amend the existing debt agreements to permit the payment of
regular quarterly cash dividends at a level comparable to that paid in the
second quarter of 1998 and to amend certain other covenants and
provisions.
DEBT FACILITIES. Federated Investors has the following recourse debt
facilities: Senior Secured Credit Agreement and Note Purchase Agreement.
SENIOR CREDIT FACILITY. The outstanding balance and amount available to
borrow under the Senior Secured Credit Agreement at March 31, 1998 was
zero and $149.0 million, respectively. The Senior Secured Credit Agreement
contains various financial and other covenants. Federated Investors was in
compliance with all debt covenants at March 31, 1998 and obtained the
consent of the lenders to permit the consummation of the merger on May 19,
1998 and the initial public offering.
SENIOR SECURED NOTES. The Senior Secured Note Purchase Agreement debt
totaled $98.0 million as of March 31, 1998. This note is due in seven
annual $14.0 million installments beginning June 27, 2000, and maturing
June 27, 2006. The Senior Secured Note Purchase Agreement contains various
covenants with which Federated Investors was in compliance at March 31,
1998.
CAPITALIZED LEASE OBLIGATIONS. At March 31, 1998, Federated Investors
had capitalized lease obligations totaling $1.2 million related to certain
telephone equipment. The scheduled principal payments approximate $0.2
million per year for 1998 through 2002.
NONRECOURSE DEBT. Federated Investors had nonrecourse debt obligations
aggregating $207.9 million at March 31, 1998. This obligation was incurred
in connection with the exchange of rights to certain future revenue
streams associated with the B share advance commissions.
<PAGE>
Part II, Item 2 Changes in Securities and Use of Proceeds
On May 13, 1998, the Company's Registration Statement on Form S-1
(Registration Number 333-48405), under which Federated Investors, Inc.
registered 18,733,770 shares of Class B Common Stock (including shares
subject to the Underwriters' over-allotment options), became effective. On
May 14, 1998, the Company filed a Registration Statement on Form S-1
(Registration Number 333-52611), in which Federated Investors, Inc.
registered an additional 1,455,543 shares of Class B Common Stock
(including shares subject to the Underwriters' over-allotment options)
pursuant to Rule 462(b) of the Securities Act of 1933. The company's
Registration Statements are collectively referred herein to as
"Registration Statements."
The consummation of the offering of Class B Common Stock pursuant to the
Company's Registration Statements occurred on May 19, 1998. Of the
17,557,226 shares of Class B Common Stock sold on that date, 14,045,780
shares were sold in the United States and Canada by the U.S. underwriters
(the "U.S. Offering") and 3,511,446 shares were sold concurrently outside
of the United States and Canada by the international underwriters (the
"International Offering"). In the U.S. Offering, the managing underwriters
were Merrill Lynch, Pierce, Fenner & Smith Incorporated, PaineWebber
Incorporated, and Smith Barney Inc. In the International Offering, the
managing underwriters were Merrill Lynch International, PaineWebber
International (U.K.) Ltd., and Smith Barney Inc. The Underwriters' 30 day
over-allotment options with respect to 2,632,087 shares of Class B Common
Stock expire on June 12, 1998.
Pursuant to the Registration Statements, the Company completed the sale
of 2,610,000 shares of Class B Common Stock on May 19, 1998 for an
aggregate offering price of $49,590,000, before taking into account
underwriting discounts and estimated offering expenses. The balance of the
shares, or 14,947,226 shares, were sold by certain selling shareholders
(the "Selling Shareholders") for an aggregate offering price of
$283,977,294.
The amount of expenses incurred by the Company and the Selling
Shareholders in connection with the issuance and distribution of the Class
B Common Stock (excluding any shares subject to the Underwriters' exercise
of their over-allotment options) is set forth below:
Expenses AMOUNT
Underwriting discounts and commissions $19,137,376
Finders' Fees 0
Expenses Paid to or for Underwriters 0
Other Expenses (principally legal, accounting,
printing, listing, and insurance fees) 1,975,000 *
-----------
TOTAL $21,112,376
===========
*Based on a reasonable estimate of the amount of expenses incurred.
None of these expenses were paid directly or indirectly to directors or
officers of Federated Investors, Inc. or its associates, nor were they
paid to affiliates of the Company or persons owning ten (10) percent or
more of the Company's equity securities.
Of these expenses, the Selling Shareholders paid $17,973,882 and the
company paid $3,138,494.
The net offering proceeds to Federated Investors, Inc. from the sale of
2,610,000 shares of Class B Common Stock, after deducting the total
expenses set forth above, were $46,451,506, which have been temporarily
invested in a money market account for later use by the Company for
working capital and other general corporate purposes.
<PAGE>
Part II, Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
............Exhibit 27. Financial Data Schedule
......
ITEM NUMBER ITEM DESCRIPTION AMOUNT
5-02(1) cash and cash items 59,921,000
5-02(2) marketable securities 3,983,000
5-02(3)(a)(1) notes and accounts receivable 38,610,000
-trade
5-02(4) allowances for doubtful accounts 4,238,000
5-02(6) inventory 0
5-02(9) total current assets 102,312,000
5-02(13) property, plant and equipment 64,489,000
5-02(14) accumulated depreciation 42,959,000
5-02(18) total assets 388,890,000
5-02(21) total current liabilities 73,155,000
5-02(22) bonds, mortgages and similar debt 306,826,000
5-02(28) preferred stock-mandatory 0
redemption
5-02(29) preferred stock-no mandatory 0
redemption
5-02(30) common stock 909,000
5-02(31) other stockholders'equity (21,678,000)
5-02(32) total liabilities and 388,890,000
stockholders' equity
5-03(b)1(a) net sales of tangible products 0
5-03(b)1 total revenues 122,592,000
5-03(b)2(a) cost of tangible goods sold 0
5-03(b)2 total costs and expenses 82,699,000
applicable to sales and revenues
5-03(b)3 other costs and expenses 6,152,000
5-03(b)5 provision for doubtful accounts 593,000
and notes
5-03(b)(8) interest and amortization of 5,718,000
debt discount
5-03(b)(10) income before taxes and other 31,745,000
items
5-03(b)(11) income tax expense 10,908,000
5-03(b)(14) income/loss continuing operations 20,837,000
5-03(b)(15) discontinued operations 0
5-03(b)(17) extraordinary items 0
5-03(b)(18) cumulative effect-change in 0
accounting principles
5-03(b)(19) net income or loss 20,837,000
5-03(b)(20) earnings per share-primary 0.25
5-03(b)(20) earnings per share-fully diluted 0.25
(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.
<PAGE>
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 JUNE 16, 1998 By:/s/J. Christopher Donahue
J. Christopher Donahue
President and
Chief Executive Officer
Date JUNE 16, 1998 By:/s/Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer and
Principal Accounting Officer
