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, 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)
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 September 30, 1998, the
Registrant had outstanding 6,000 shares of Class A Common Stock and 86,288,250
shares of Class B Common Stock.
<PAGE>
Federated Investors, Inc.
Form 10-Q
For the Three Months and Nine Months
Ended September 30, 1998
Index
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K 18
(b) Reports on Form 8-K 18
Signatures 19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FEDERATED INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Share Data)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
Current Assets:
Cash and cash equivalents $ $
168,035 22,912
Marketable securities
6,095 8,945
Receivables, net of reserve of $3,020 and $3,266,
respectively 30,468 27,478
Accrued revenues
4,015 4,600
Prepaid expenses
2,132 2,853
Income taxes receivable
- 7,519
Other current assets
2,214 1,805
--------------- --------------
Total Current Assets
212,959 76,112
--------------- --------------
Long-Term Assets:
Customer relationships, net of accumulated
amortization of $36,534 and $26,907, respectively 20,771 30,398
Goodwill, net of accumulated amortization of
$13,198 and $11,512, respectively 35,669 37,356
Other intangible assets, net
110 126
Deferred sales commissions, net
241,764 164,623
Property and equipment, net
20,925 22,163
Other long-term assets
4,960 6,378
--------------- --------------
Total Long-Term Assets
324,199 261,044
--------------- --------------
Total Assets $ $
537,158 337,156
=============== ==============
Current Liabilities:
Cash overdraft $ $
6,975 7,680
Current portion of long-term debt - Recourse
249 280
Accrued expenses
49,672 34,939
Accounts payable
23,909 18,634
Income taxes payable
4,697 -
Other current liabilities
2,569 2,520
--------------- --------------
Total Current Liabilities
88,071 64,053
--------------- --------------
Long-Term Liabilities:
Long-term debt - Recourse
98,773 98,950
Long-term debt - Nonrecourse
256,437 185,388
Deferred tax liability, net
25,820 26,546
Other long-term liabilities
2,790 2,863
--------------- --------------
Total Long-Term Liabilities
383,820 313,747
--------------- --------------
Total Liabilities
471,891 377,800
--------------- --------------
Minority Interest
476 466
--------------- --------------
Shareholders' Equity :
Common Stock :
Class A, no par value, 20,000 shares
authorized, 6,000 and 0 shares issued and
outstanding, respectively 189 -
Class B, no par value, 900,000,000 shares
authorized, 86,337,000 and 0 shares issued,
respectively 75,268 -
Class A, $1.00 stated value, 99,000 shares
authorized, 0 and 6,000 shares issued and
outstanding, respectively - 6
Class B, $.01 stated value, 149,700,000 shares
authorized,
0 and 90,093,758 shares issued, respectively
- 901
Additional paid-in capital
- 28,574
(Accumulated deficit) retained earnings
(8,999) 55,139
Treasury stock, at cost, 48,750 and 6,666,758
shares Class B Common Stock, respectively (8) (123,373)
Employee restricted stock plan
(1,657) (2,266)
Accumulated other comprehensive income
(2) (91)
--------------- --------------
Total Shareholders' Equity
64,791 (41,110)
--------------- --------------
Total Liabilities, Minority $ $
Interest, and Shareholders' Equity 537,158 337,156
=============== ==============
</TABLE>
December 31, 1997 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.)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FEDERATED INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars In Thousands Except Per Share SEPTEMBER 30, SEPTEMBER 30,
Data)
--------------------- ---------------------
1998 1997 1998 1997
------- --------- --------- -------
Revenue:
Investment advisory fees, $ $ $ 196,389 $ 154,905
net-Federated Funds 69,621 56,504
Investment advisory fees, net-Other 5,485 3,964
1,834 1,638
Administrative service fees, 53,682 44,249
net-Federated Funds 18,723 15,673
Administrative service fees, 15,319 17,853
net-Other 4,988 6,210
Other service fees, net-Federated 73,577 47,673
Funds 25,934 18,745
Other service fees, net-Other 21,652 15,209
7,108 5,263
Commission income-Federated Funds 3,140 1,824
998 751
Interest and dividends 6,079 2,024
2,520 721
Marketable securities (losses) gains (169) 8
(210) 16
Other income 6,723 3,936
1,552 1,039
------- ---------
--------- -------
Total Revenue
133,068 106,560 381,877 291,645
------- --------- --------- -------
Operating Expenses:
Compensation and related 111,664 102,407
36,863 35,606
Amortization of deferred sales 22,926 16,068
commissions 8,219 6,162
Office and occupancy 20,588 18,723
6,665 6,120
Systems and communications 19,423 20,094
6,331 6,652
Advertising and promotional 33,619 25,641
12,680 8,618
Travel and related 9,841 10,934
3,155 3,654
Other 21,924 12,448
7,886 3,817
Amortization of intangible assets 11,331 9,939
3,777 3,761
------- ---------
------- --------- --------- -------
Total Operating Expenses
85,576 74,390 251,316 216,254
------- --------- --------- -------
Operating income
47,492 32,170 130,561 75,391
------- --------- --------- -------
Nonoperating Expenses:
Interest expense 18,690 14,453
6,729 4,781
Other debt expense 1,400 754
448 245
------- ---------
--------- -------
Total Nonoperating Expenses
7,177 5,026 20,090 15,207
------- --------- --------- -------
Income before minority interest and
income taxes 40,315 27,144 110,471 60,184
Minority interest 6,485 5,610
2,277 1,928
------- --------- --------- -------
Income before income taxes
38,038 25,216 103,986 54,574
Income tax provision 38,467 20,631
14,428 9,207
------- --------- --------- -------
Net income $ $ $ $
23,610 16,009 65,519 33,943
======= ========= ========= =======
Earnings per common share:
Basic $ 0.28 $ 0.19 $ 0.78 $ 0.41
======= ========= ========= =======
Diluted $ 0.27 $ 0.19 $ 0.76 $ 0.41
======= ========= ========= =======
Cash dividends declared and paid per $ 0.038 $ - $ 0.097 $ -
common share ======= ========= ========= =======
</TABLE>
Per share amounts for 1997 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.)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FEDERATED INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
(Dollars in Thousands) SEPTEMBER 30,
-------------------
1998 1997
- ------------------------------------------------------- -------- -------
Operating Activities:
Net income $ 65,519 $ 33,943
Adjustments to reconcile net income to net cash
provided by
operating activities:
Amortization of intangible assets 11,331 9,939
Depreciation and other amortization 4,915 6,455
Amortization of deferred sales commissions 22,926 16,068
Minority interest 6,485 5,610
Disposal of property and equipment (59) (15)
Amortization of employee restricted stock and 804 422
other compensation plans
(Benefit) provision for deferred income taxes (776) 19,122
Net realized loss (gain) on sale of marketable 169 (8)
securities
Foreign currency translation (17) 3
Deferred sales commissions (116,797) (79,859)
Contingent deferred sales charges received 16,730 8,818
Other changes in assets and liabilities:
Increase in receivables, net (2,990) (3,204)
Decrease (increase) in accrued revenues 585 (65)
Decrease (increase) in prepaid expenses and 312 (452)
other current assets
Decrease in other long-term assets 1,418 1,247
Increase in accounts payable and accrued 20,008 7,697
expenses
Increase in income taxes payable 12,226 1,200
Decrease in other current liabilities (201) (7,968)
(Decrease) increase in other long-term (74) 926
liabilities
-------- -------
Net Cash Provided by Operating Activities 42,514 19,879
-------- -------
Investing Activities:
Proceeds from sale of property and equipment 5
-
Additions to property and equipment (3,618) (1,379)
Cash paid for acquisitions (456) (14,297)
Purchases of marketable securities (6,155) (22,786)
Proceeds from redemptions of marketable securities 8,992 26,044
-------- -------
Net Cash Used by Investing Activities (1,237) (12,413)
-------- -------
Financing Activities:
Distributions to minority interest (6,475) (6,096)
Dividends paid (8,201)
-
Issuance of common stock/stock options 47,689 25
Purchase of treasury stock (77)
(8)
Proceeds from new borrowings - Recourse 26,324
-
Proceeds from new borrowings - Nonrecourse 111,026
-
Payments on debt - Recourse (208) (28,894)
Payments on debt - Nonrecourse (39,977)
-
-------- -------
Net Cash Provided (Used) by Financing Activities 103,846 (8,718)
-------- -------
Net Increase (Decrease) In Cash and Cash Equivalents 145,123 (1,252)
Cash and Cash Equivalents, Beginning of Period 22,912 6,561
-------- -------
Cash and Cash Equivalents, End of Period $ 168,035 $ 5,309
======== =======
</TABLE>
(THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.)
<PAGE>
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) BASIS OF PRESENTATION
The interim financial statements of Federated Investors, Inc. (the
"Company") 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) COMPREHENSIVE INCOME
In 1998, the Company 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
$23.7 million and $16.1 million for the three month periods ended
September 30, 1998 and 1997, respectively and $65.6 million and $34.1
million for the nine month periods ended September 30, 1998 and 1997,
respectively.
(c) 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.
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.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which is required to be adopted in years beginning after June 15, 1999. As
a result of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.
(2) Deferred Sales Commissions and Nonrecourse Debt
The Company 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
<PAGE>
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(2) Deferred Sales Commissions and Nonrecourse Debt, Continued
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 nonrecourse debt related to this agreement:
<TABLE>
<CAPTION>
<S> <C>
Nine Months Ended
SEPTEMBER 30, 1998
(In Thousands)
Deferred Sales Commissions:
Deferred B share sales commissions at December 31, 1997 $162,398
Payments to brokers/dealers 112,890
CDSC fees collected (16,080)
Amortization (20,676)
--------------
Deferred B share sales commissions at September 30, 1998 $238,532
========
Nonrecourse Debt:
Nonrecourse debt at December 31, 1997 $185,388
Additional financings 111,026
Payments of nonrecourse debt (39,977)
--------------
Nonrecourse debt at September 30, 1998 $256,437
==========
The nonrecourse debt had a weighted average interest rate of 7.63% at
September 30, 1998.
</TABLE>
(3) Long-Term Debt
The Company's long-term debt consisted of the following:
September December
30, 31,
1998 1997
----------- ----------
(In Thousands)
Recourse Debt:
Senior Secured Note Purchase Agreement $98,000 $98,000
Capitalized Leases................ 1,022 1,230
-------------------------
Total Recourse Debt......... 99,022 99,230
Less Current Portion............... 249 280
-------------------------
Total Long-Term Debt - Recourse....$ 98,773 $ 98,950
============ ===========
Nonrecourse Debt...................... $ 256,437 $ 185,388
=========== ==========
<PAGE>
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(4) Common Stock
(a) Initial Public Offering and Subsequent Merger
On May 19, 1998, Federated Investors was merged with and into the
Company, a wholly owned subsidiary, with the Company continuing as the
surviving corporation. 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 the Company, respectively, with
the same proportionate ownership and substantially similar rights, and all
treasury stock of Federated Investors was retired.
As a condition precedent to the merger described above, the Company
issued an additional 2,610,000 shares of Class B common stock in an
initial public offering for net proceeds of approximately $46 million in
cash. At September 30, 1998, 6,000 and 86,228,250 shares of Class A and
Class B Common Stock were outstanding, respectively.
(b) Dividends
A one for one stock dividend was paid on April 15, 1998 to stockholders
of record on March 17, 1998. Also, a one for two stock dividend was paid
on April 30, 1998 to stockholders of record on April 21, 1998. The 1997
per share amounts have been restated to reflect the affect of the stock
dividends.
The Company's Senior Secured Credit Agreement allows dividends in an
amount not to exceed $20 million plus 50% of any net income (less 100% of
any net loss) during the period from January 1, 1998 to and including the
date of payment. The Senior Secured Note Purchase Agreement allows
dividends to an amount of $5 million plus 50% of any net income (less 100%
of any net loss) during the period from January 1, 1996 to and including
the date of payment. Cash dividends of $0.0208, $0.038 and $0.038 per
share or approximately $1.7 million, $3.2 million and $3.3 million were
paid in the first, second and third quarters of 1998, respectively, to
holders of common shares. Additionally, on October 15, 1998, the Board of
Directors of the Company declared a dividend of $0.038 per share to be
paid on November 13, 1998 to shareholders of record as of October 30,
1998. After the payment of the dividend on November 13, 1998, the Company,
given current debt covenants, has the ability to pay dividends of
approximately $41.3 million.
(c) Employee Stock Purchase Plan
In July 1998, the Company established an Employee Stock Purchase Plan
which allows for employees to purchase a maximum of 500,000 shares of
Class B Common Stock. The shares under the plan may be newly issued or may
be shares purchased by the Company on the open market.
<PAGE>
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(5) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
(In Thousands, Except Per Share Data)
Numerator:
Net income $
23,610 $ 16,009 $ 65,519 $ 33,943
========== ========= ========== ==========
Denominator:
Basic weighted-average common
shares outstanding 85,183 82,275 83,850 82,263
Dilutive potential common
shares from stock based
compensation 2,512 881 2,380 1,029
---------- --------- ---------- ----------
Diluted weighted-average common
shares outstanding 87,695 83,156 86,230 83,292
========== ========= ========== ==========
Earnings per Basic common share $ 0.28 $ 0.19 $ 0.78 $ 0.41
========== ========= ========== ==========
Earnings per Diluted common $ 0.27 $ 0.19 $ 0.76 $ 0.41
share
========== ========= ========== ==========
</TABLE>
<PAGE>
Part I, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
HIGHLIGHTS
<TABLE>
<CAPTION>
Three Months Nine Months Ended
Ended
SELECTED OPERATING DATA (IN THOUSANDS, September 30, September 30,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
------------------- -------------------
1998 1997 1998 1997
--------- -------- --------- --------
$ $ $ $
Total Revenue............................. 133,068 106,560 381,877 291,645
Operating Expenses.......................... 85,576 74,390 251,316 216,254
--------- -------- --------- --------
Operating Income.............................47,492 32,170 130,561 75,391
Nonoperating Expenses and Minority
Interest.......................... 9,454 6,954 26,575 20,817
--------- -------- --------- --------
Income Before Income Taxes...................38,038 25,216 103,986 54,574
Income Tax Provision.........................14,428 9,207 38,467 20,631
--------- -------- --------- --------
Net Income................................ $23,610 $16,009 $65,519 $33,943
========= ======== ========= ========
Operating Margin Percentage 35.7% 30.2% 34.2% 25.9%
Earnings per Basic Common $ 0.28 $ 0.19 $ 0.78 $ 0.41
Share......................................
Earnings per Diluted Common Share $ 0.27 $ 0.19 $ 0.76 $ 0.41
</TABLE>
MANAGED AND ADMINISTERED
ASSETS (IN MILLIONS) September 30, %
-------------------
1998 1997 Change
--------- -------- ---------
Money Market Funds......................... $71,228 $58,235 22.3%
Fixed Income Funds......................... 16,089 14,718 9.3%
Equity Funds............................... 13,267 11,173 18.7%
Separate Accounts.......................... 2,323 1,831 26.9%
--------- --------
Total Managed $ 102,907 $85,957 19.7%
Assets................... ========= ========
Total Administered Assets....... $54,574 $44,876 21.6%
========= ========
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
AVERAGE MANAGED AND Three Months Ended Nine Months Ended
ADMINISTERED ASSETS
(IN MILLIONS) September 30, % September 30, %
-------------------- ---------------------
1998 1997 Change 1998 1997 Change
--------- --------------- ---------- ---------------
Money Market Funds.............$..69,864 $ 56,458 23.7% $ 66,711 $ 53,857 23.9%
Fixed Income Funds................15,931 14,531 9.6% 15,708 14,212 10.5%
Equity Funds......................13,918 10,557 31.8% 13,560 9,138 48.4%
Separate Accounts..................2,300 1,779 29.3% 2,309 1,822 26.7%
=========
Total Average Managed $ 102,013 $ 83,325 22.4% $98,288 $ 79,029 24.4%
Assets
========= ========= ========== =========
Total Average $ 54,772 $ 43,989 24.5% $ 53,043 $ 41,520 27.8%
Administered Assets ========= ========= ========== =========
</TABLE>
COMPONENTS OF CHANGES IN EQUITY AND FIXED INCOME FUND
MANAGED ASSETS (IN MILLIONS)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
EQUITY FUNDS 1998 1997 1998 1997
- ------------
--------- --------- -------- --------
Beginning Assets........$ 14,561 $ 9,795 $ 11,710 $ 7,594
--------- --------- -------- --------
Sales.................. 1,193 1,092 3,986 2,897
Redemptions............. (932) (546) (2,274) (1,644)
--------- --------- -------- --------
Net Sales..................261 546 1,712 1,253
Net Exchanges........... - 52 (18) 116
Acquisition
Related................. - - - 353
Other*................ (1,555) 780 (137) 1,857
--------- --------- -------- --------
Ending Assets...........$ 13,267 $ 11,173 $ 13,267 $ 11,173
========= ========= ======== ========
FIXED INCOME FUNDS
Beginning Assets........$ 15,816 $ 14,286 $ 15,067 $ 14,109
-------- --------- -------- --------
Sales................ 1,525 1,134 4,506 3,329
Redemptions........... (1,265) (1,073) (3,466) (3,364)
--------- --------- -------- --------
Net Sales(Redemptions). 260 61 1,040 (35)
Net Exchanges............ 14 1 (243) (52)
Acquisition Related.... - - - 175
Other*.................. (1) 370 225 521
--------- --------- -------- --------
Ending Assets...........$ 16,089 $ 14,718 $ 16,089 $ 14,718
========= ========= ======== ========
* Primarily reinvested dividends and distributions, net investment income and
changes in the value of securities held by the funds.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1997
In preparing the discussion and analysis below, Federated Investors,
Inc. (the "Company") has presumed that the readers of the interim
financial information have read or have access to the Company's discussion
and analysis of financial condition and results of operations for the year
ended December 31, 1997.
NET INCOME. Net income for the three months ended September 30, 1998 was
$23.6 million, or $0.27 per diluted share, a 47.5% and 42.1% increase,
respectively, over the same period in 1997. Revenue growth of 24.9% from
higher levels of average managed and administered assets and improvements
in operating margins from 30.2% to 35.7% were the primary reasons for
improved financial performance. The higher levels of average managed and
administered assets occured despite the recent volatility in the stock
market.
REVENUE. The Company's consolidated revenue increased $26.5 million, or
24.9% to $133.1 million for the quarter ended September 30, 1998 from
$106.6 million for the same period in 1997. Approximately $23.8 million,
or 89.8% of this increase in revenues is due to higher levels of managed
assets. Average managed assets increased 22.4% from $83.3 billion for the
third quarter of 1997 to $102.0 billion for the third quarter of 1998,
including increases of 31.8%, 23.7%, 9.6%, and 29.3% in equity funds,
money market funds, fixed income funds, and separate accounts,
respectively. Average managed equity assets, however, declined by 2.0% in
the third quarter as compared to the second quarter of 1998, as declines
in market values of equity fund assets more than offset net sales of their
shares during the period. Average managed and administered money market
assets, meanwhile, increased 6.8% in the third quarter as compared to the
second quarter of 1998. Service related revenues from sources other than
managed and administered assets increased by approximately $0.6 million
due primarily to increased revenues within the Company's clearing and
retirement plan recordkeeping services. Interest and dividends increased
by $1.8 million as a result of higher levels of invested cash resulting
from the B share advanced commission financing programs, net proceeds from
the Company's initial public offering, and higher levels of cash generated
from operations.
Recently, the Company has received notice from certain clients for which
it provides administrative services that those clients will end their
service arrangements in the fourth quarter of 1998. Collectively, these
clients had administered assets of $28.5 billion as of September 30, 1998
and represented approximately 1.4% of total revenue for the quarter ended
September 30, 1998. The Company expects to receive termination payments of
approximately $3.5 million for the cessation of these arrangements.
OPERATING EXPENSES. Total operating expenses increased from $74.4
million for the third quarter of 1997 to $85.6 million for the third
quarter of 1998, an increase of $11.2 million or 15.0%. Expense management
continues to be a major focus for the Company. As a result, expense growth
has been contained at levels substantially below the 24.9% increase in
revenues and accordingly, operating margins have improved to 35.7% for the
quarter ended September 30, 1998 from 30.2% for the same period in 1997.
Compensation and related expenses increased $1.3 million or 3.5% from
$35.6 million for the quarter ended September 30, 1997 to $36.9 million
for the quarter ended September 30, 1998. The increase was mainly
attributed to staff growth experienced within investment research and
certain service areas, as well as an increase in variable based
compensation and was partially offset by reductions resulting from the
outsourcing of the portfolio accounting function.
Amortization of deferred sales commissions increased from $6.2 million
for the third quarter of 1997 to $8.2 million for the same period of 1998,
an increase of $2.0 million or 33.4%. This increase was due to higher
levels of deferred sales commissions as a result of the continued sale of
shares of funds which require the Company to advance a commission to the
broker/dealers.
Office and occupancy expenses increased from $6.1 million in the third
quarter of 1997 to $6.7 million for the same period in 1998, an increase
of $0.6 million or 8.9%. The increase is primarily attributable to
increased rent expense for leased space.
Advertising and promotional expenses increased from $8.6 million for the
quarter ended September 30, 1997 to $12.7 million for the quarter ended
September 30, 1998, an increase of $4.1 million or 47.1%, 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 further build
company name and brand awareness.
Travel and related expenses declined $0.5 million or 13.7%, from $3.7
million in the third quarter of 1997 to $3.2 million for the same period
of 1998 as a result of continued expense management.
Other expenses increased $4.1 million or 106.6% from $3.8 million for
the quarter ended September 30, 1997 to $7.9 million for the quarter ended
September 30, 1998. This increase is predominantly attributable to fees
paid to third parties for portfolio accounting services which were
performed internally throughout most of 1997.
NONOPERATING EXPENSES. Nonoperating expenses increased by $2.2 million,
or 42.8%, to $7.2 million for the three months ended September 30, 1998 as
compared to $5.0 million for the three months ended September 30, 1997.
This increase is attributable to the interest and other debt related
expenses 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 third quarter of 1997 to $2.3 million for the third quarter of 1998,
an increase of $0.4 million or 18.1%. This increase is a result of higher
net income being recorded for the subsidiary for which the Company acts as
the general partner with a majority interest of 50.5%. The increase in
income is attributable to higher average managed assets of the funds which
the subsidiary advises.
INCOME TAXES. The income tax provision for the quarter ended September
30, 1998 was $14.4 million as compared to $9.2 million for the third
quarter of 1997, an increase of $5.2 million or 56.7%. This increase was
due primarily to the increase in the level of income before income taxes
from $25.2 million for the three months ended September 30, 1997 to $38.0
million for the three months ended September 30, 1998, an increase of
50.9%.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
NET INCOME. Net income for the first nine months ending September 30,
1998 was $65.5 million, or $0.76 per diluted share, a 93.0% and 85.4%
increase, respectively, over the same period in 1997. Revenue growth of
30.9% from higher levels of average managed and administered assets and
improvements in operating margins from 25.9% to 34.2% were the primary
reasons for improved financial performance.
REVENUE. The Company's consolidated revenue increased $90.3 million, or
30.9% to $381.9 million for the nine month period ended September 30, 1998
from $291.6 million for the same period in 1997. Approximately $79.7
million, or 88.3% of this increase is due to revenues derived from managed
assets. Average managed assets increased 24.4% from $79.0 billion for the
first nine months of 1997 to $98.3 billion for the same period in 1998,
including increases of 48.4%, 23.9%, 10.5%, and 26.7% in equity funds,
money market funds, fixed income funds, and separate accounts,
respectively. Service related revenues from other sources other than
managed and administered assets increased by approximately $3.9 million
due primarily to an increase in average administered assets and increased
revenues within the Company's clearing and retirement plan recordkeeping
services. Average administered assets increased $11.5 billion or 27.8%
from $41.5 billion for the first three quarters of 1997 to $53.0 billion
for the same period in 1998. Interest and dividends increased by $4.1
million as a result of higher levels of invested cash from the B share
advanced commission financing programs, net proceeds from the initial
public offering, and higher levels of cash generated from operations.
Other income improved $2.8 million due primarily to a servicing contract
buyout by a bank-sponsored mutual fund complex resulting in a payment of
$2.5 million in the first quarter of 1998. This servicing contract
accounted for approximately 0.4% of administrative and other service fee
revenue.
OPERATING EXPENSES. Total operating expenses increased from $216.3
million for the nine month period ended September 30, 1997 to $251.3
million for the same period in 1998, an increase of $35.0 million or
16.2%.
Compensation and related expenses increased $9.3 million or 9.0% from
$102.4 million for the first three quarters of 1997 to $111.7 million for
the first three quarters of 1998. The increase was mainly attributed to
staff growth experienced within investment research and certain service
areas, related increases in payroll taxes and retirement plan expenses, as
well as an increase in variable based compensation. The increase was
partially offset by reductions resulting from the outsourcing of the
portfolio accounting function.
Amortization of deferred sales commissions increased from $16.1 million
for the nine month period ended September 30, 1997 to $22.9 million for
the same period of 1998, an increase of $6.8 million or 42.7%. This
increase was due to higher levels of deferred sales commissions as a
result of the continued sale of shares of funds which require the Company
to advance a commission to the broker/dealers.
Office and occupancy expenses increased from $18.7 million for the first
nine months of 1997 to $20.6 million for the same period in 1998, an
increase of $1.9 million or 10.0%. The increase is primarily attributable
to increased rent expense for leased space.
Advertising and promotional expenses increased from $25.6 million for
the nine month period ended September 30, 1997 to $33.6 million for the
nine month period ended September 30, 1998, an increase of $8.0 million or
31.1%, 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 further build company name and brand awareness.
Travel and related expenses declined $1.1 million, or 10.0%, from $10.9
million in the first three quarters of 1997 to $9.8 million for the same
period of 1998 as a result of continued expense management.
Other expenses increased $9.5 million or 76.1% from $12.4 million for
the nine month period ended September 30, 1997 to $21.9 million for the
nine month period ended September 30, 1998. This increase is primarily
attributable to fees paid to third parties for portfolio accounting
services which were performed internally throughout most of 1997. This
increase was partially offset by reductions in consulting expenses as well
as reduced bad debt expense as a result of improved collections of various
receivables.
Amortization of intangible assets increased by $1.4 million, or 14.0%
from $9.9 million for the nine months ended September 30, 1997 to $11.3
million for the nine months ended September 30, 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 $4.9 million,
or 32.1% to $20.1 million for the nine months ended September 30, 1998 as
compared to $15.2 million for the nine months ended September 30, 1997.
This increase is attributable to the interest and other debt related
expenses recognized relative to nonrecourse debt incurred for the
securitization of certain B share fund assets.
MINORITY INTEREST. The minority interest increased $0.9 million, or
15.6% from $5.6 million for the first three quarters of 1997 to $6.5
million for the first three quarters of 1998 as a result of higher net
income being recorded for the subsidiary for which the Company acts as the
general partner with a majority interest of 50.5%. The increase in income
is attributable to higher average managed assets of the funds which the
subsidiary advises.
INCOME TAXES. The income tax provision for the nine month period ended
September 30, 1998 was $38.5 million as compared to $20.6 million for the
same period in 1997, an increase of $17.9 million or 86.5%. This increase
was due primarily to the increase in the level of income before income
taxes from $54.6 million for the nine months ended September 30, 1997 to
$104.0 million for the nine months ended September 30, 1998, an increase
of 90.5%.
DEFERRED SALES COMMISSIONS AND NONRECOURSE DEBT
Certain subsidiaries of the Company pay commissions to broker/dealers
(deferred sales commissions) to promote investments in certain mutual
funds. For mutual fund shares sold under such marketing programs, the
Company retains certain distribution and servicing 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 the Company a CDSC fee based on a
percentage of the lower of the current market value or the original cost
basis of the redeemed shares, such percentage diminishing over a recovery
schedule not to exceed six years.
For non-B share related sales the up front commissions the Company 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. The 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, the Company 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 the
Company 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 Consolidated Statements of Income
reflect 12b-1 and shareholder service fees which are included in Other
Service Fees, net - Federated Funds as well as interest expense associated
with the nonrecourse debt and amortization of deferred sales commissions.
In the first nine months of 1998, pursuant to the terms of the
agreement, the Company received $111.4 million in cash in exchange for the
rights to certain future revenue streams associated with B share advanced
commissions with a book value of $108.8 million. As of September 30, 1998
the Company had $256.4 million of nonrecourse debt and $238.5 million in
book value of deferred sales commission assets related to the B shares.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW.Cash provided by operating activities totaled $42.5 million
for the first three quarters of 1998. The cash flow from operating
activities is primarily utilized for the purchase of equipment, dividend
payments, distributions to the minority interest, as well as payments on
long term debt.
The deferred sales commissions paid to broker/dealers on certain shares
of funds totaled $116.8 million for the first nine months of 1998. Also,
in the first nine months of 1998, the Company exchanged for $111.4 million
the rights to certain future revenue streams associated with the class B
share advance commission assets with a book value of $108.8 million.
CAPITAL EXPENDITURES. Capital expenditures totaled $3.6 million for the
first nine months of 1998, with $2.0 million of capital expenditures
incurred in the third quarter of 1998. Capital expenditures are not
expected to exceed $10 million in 1998, exclusive of Year 2000 related
project costs described below.
DIVIDENDS.The Board of Directors of the Company adopted a policy to
declare and pay cash dividends on a quarterly basis. In July 1998, the
Company amended the Senior Secured Credit Agreement in order to allow
additional dividends. Dividends of $0.0208, $0.038 and $0.038 per share
were paid on January 31, 1998, April 30, 1998 and August 10, 1998,
respectively. The Company's Board of Directors declared a dividend of
$0.038 per share to be paid on November 13, 1998 to registered
shareholders as of October 30, 1998. After the payment of the dividend on
November 13, 1998, the Company, given current debt covenants, has the
ability to pay dividends of approximately $41.3 million.
DEBT FACILITIES. The Company has the following recourse debt
facilities: Senior Secured Credit Agreement and Senior Secured Note
Purchase Agreement.
SENIOR SECURED CREDIT AGREEMENT. At September 30, 1998, the outstanding
balance under the Senior Secured Credit Agreement was zero with an amount
available to borrow of $149.1 million. The Senior Secured Credit Agreement
contains various financial and other covenants. The Company was in
compliance with all debt covenants at September 30, 1998.
SENIOR SECURED NOTE PURCHASE AGREEMENT. The Senior Secured Note Purchase
Agreement debt totaled $98.0 million as of September 30, 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 the Company was in compliance at
September 30, 1998.
CAPITALIZED LEASE OBLIGATIONS. At September 30, 1998, the Company had
capitalized lease obligations totaling $1.0 million related to certain
telephone equipment. The scheduled principal payments approximate $0.2
million per year for 1998 through 2002.
NONRECOURSE DEBT. The Company had nonrecourse debt obligations aggregating
$256.4 million at September 30, 1998. This obligation was incurred in
connection with the exchange of rights to certain future revenue streams
associated with the B share advance commissions.
SHAREHOLDERS' EQUITY. In May 1998, Federated Investors was merged with
and into the Company, its 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 the
Company, respectively, with the same proportionate ownership and
substantially similar rights. All treasury stock of Federated Investors
was retired and additional paid-in-capital was transferred to the no par
Class A and Class B common stock of the Company based on their relative
proportionate values immediately prior to the merger.
Also in May 1998, the Company issued an additional 2,610,000 shares of
Class B common stock in an initial public offering for net proceeds of
approximately $46 million in cash.
YEAR 2000 DISCLOSURE: Many existing information technology ("IT")
products and systems and non-IT products and systems containing embedded
processor technology were originally programmed to represent any date by
using six digits (e.g., 12/31/99), as opposed to eight digits (e.g.,
12/31/1999). Accordingly, such products and systems may experience
miscalculations, malfunctions or disruptions when attempting to process
information containing dates that fall after December 31, 1999 or when
attempting to recognize the year 2000 as a leap year. These potential
problems are collectively referred to as the "Year 2000" problem, or
"Y2K". Also, the occurrence of such problems may take place before the
year 2000 if a computer system utilizes future dates during its
processing.
THE COMPANY'S STATE OF READINESS: Computer processing is critical to the
Company's business operations and the Y2K issue poses a significant
potential risk to operations. Therefore, the Company has established an
enterprise-wide project to address this issue. The project includes four
phases: inventory / assessment which includes the identification of all
components of the Company's computing environment and the assessment of
Y2K issues for these components; remediation of the Y2K issues identified
in the inventory / assessment phase; testing to ensure that remediation
was successful; and implementation of the modified systems.
The project scope has been divided into four segments which comprise our
computing environment. These are: Systems developed internally by the
Company's IT division - this constitutes the majority of the Company's
Y2K efforts Mission-critical processing provided by the funds' service
providers Other critical aspects of systems and operations within the
business units, including both commercially available computer
applications and the progress of key business partners
Embedded systems - for the Company's operations, embedded systems
mainly consist of building systems and office equipment
The Company's goal for addressing internally-developed systems is to
complete remediation and initial testing by the end of 1998. Further large
scale integration and external testing will continue into 1999. The
Company expects the funds' service providers to also become compliant by
the end of 1998. Regarding critical systems used within the Company's
various business units and embedded systems, the Company plans to complete
assessment, remediation, and testing by mid-1999.
As of the end of September 1998, the Company has completed the inventory
/ assessment of its internally-developed systems. Over 90% of remediation
work is complete as well, with the remaining work on schedule.
Approximately three-quarters of the applications have completed Y2K
testing for the individual programs and have been returned to production.
Currently, the Company is conducting more extensive integration and system
testing and arranging to test with external, interfacing systems. The
Company has established an isolated computer network for these testing
efforts, which will continue into 1999.
Certain mission critical processing is performed for the Company's funds
by outside service providers, including the transfer agency, portfolio
accounting, and custody functions. The Company has identified these
service providers and assessed the Y2K risks associated with these
relationships. The Company is monitoring the progress of these companies
in addressing Y2K issues via progress reports and meetings and is working
with the service providers to test the systems, as appropriate.
Assessment and remediation are underway for business unit systems, key
business partners, and embedded systems. The Company currently expects to
meets its goals listed above for these areas.
Additionally, the Company is participating in the "industry-wide
testing" being coordinated by the Securities Industry Association. This
testing is being conducted to ensure that major broker dealers, exchanges,
clearing houses, and depositories are able to communicate properly in the
year 2000. The Company participated in initial tests for processing of
mutual funds transactions in both July and October 1998. The Company will
also participate in the full industry-wide test slated for March 1999.
COSTS TO ADDRESS Y2K: The Company estimates its Y2K project will cost at
least $10 million. The Company has incurred approximately $3.9 million
from the inception of the Y2K project through September 30, 1998, with
$3.0 million being reflected within the current year's financial
statements. Y2K costs are being funded from operating revenue and are
being expensed as incurred. These cost estimates are subject to change as
the project continues. The estimated total costs are not considered to
have a material impact on the Company's results of operations or financial
position.
While certain non-time sensitive IT projects have been delayed due to
Y2K efforts and costs, no strategic projects or projects for legal or
regulatory requirements have been deferred or canceled.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES: It must be realized that, as
with all other companies in the financial services industry, many
day-to-day functions of the Company are dependent on accurate computer
processing. Further, this processing is conducted by an extensive network
of systems, both internal to the Company and external, with both direct
and indirect interaction. Accordingly, if not addressed, Y2K issues could
result in the Company's inability to perform mission critical functions,
including the trading of securities and processing of fund shareowner
transactions.
A portion of the Company's business involves international investments,
thereby exposing the Company to operations, custody and settlement
processes outside the United States. The Company is monitoring the
progress of the funds' international custodians in these areas. Further,
the Company is assessing the Y2K readiness of its foreign brokers.
Y2K is a risk for many of the issuers of the specific securities in
which the Company's funds invest, in both the U.S. and international
markets. Accordingly, the Company has incorporated assessment of Y2K risk
into its investment management process.
THE COMPANY'S CONTINGENCY PLANS: Because the Company's operations are
reliant upon systems which are not under its direct control, the Company's
Y2K plan includes the development of contingency plans to address its
critical operations in the event of Y2K-related disruptions. Y2K
contingency planning is planned for early 1999 as part of an update of the
Company's overall contingency planning; however, no guarantee can be made
that Y2K-related disruptions will not occur.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION. Certain statements
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" such as included in the Year 2000 disclosure 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, or achievements
of the Company, or industry results, to be materially different from any
future results, levels of activity, performance, or achievements expressed
or implied by such forward-looking statements. For a discussion of such
risk factors, see the section titled Risk Factors in the Company's
Registration Statement on Form S-1 and quarterly reports on Form 10-Q on
file with the Securities and Exchange Commission. As a result of the
foregoing and other factors, no assurance can be given as to future
results, levels of activity, or achievements, and neither the Company nor
any other person assumes responsibility for the accuracy and completeness
of such statements.
Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's investments are primarily in money market funds.
Occasionally, the Company invests in new fluctuating net asset value
mutual funds (priming) sponsored by the Company in order to provide
investable cash, allowing the fund to establish a yield history. The
Company may use derivative financial instruments as an attempt to hedge
these investments. As of September 30, 1998, the book value of the priming
investments and the derivative financial instruments were $5.1 million and
zero, respectively. In October 1998, the Company entered into a derivative
instrument with an initial cost basis of $0.4 million for the purpose of
hedging a $5.0 million priming investment that was initiated on September
30, 1998. All of the Company's debt instruments carry fixed interest rates
and therefore are not subject to market risk.
Part II, Item 5. Other Information
The Board of Directors of the Company elected Michael J. Farrell and
James L. Murdy as outside directors to the Board of Directors effective
August 31, 1998.
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:
Exhibit 10. Material contracts - Federated Investors, Inc. Stock
Incentive Plan, amended as of August 26, 1998
Exhibit 27. Financial Data Schedule (filed herewith)
(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 NOVEMBER 12, 1998 By: /S/ J. CHRISTOPHER DONAHUE
------------------- -------------------------------
J. Christopher Donahue
President and
Chief Executive Officer
Date NOVEMBER 12, 1998 By: /S/ THOMAS R. DONAHUE
------------------- -------------------------
Thomas R. Donahue
Chief Financial Officer and
Principal Accounting Officer
FEDERATED INVESTORS, INC.
STOCK INCENTIVE PLAN
(Adopted as of February 20, 1998)
(Amended as of August 26,1998)
1. PURPOSE
The purpose of the Federated Investors, Inc. Stock Incentive Plan
(the "PLAN") is to:
Facilitate the assumption by Federated Investors, Inc., as the
surviving corporation of a merger with its parent corporation,
Federated Investors, of certain stock incentive awards previously
made by Federated Investors to its employees; and
Continue to promote the long-term growth and performance of
Federated Investors, Inc. and its affiliates and to attract and
retain outstanding individuals by awarding directors, executive
officers and key employees stock options, stock appreciation rights,
performance awards, restricted stock and/or other stock-based
awards.
2. DEFINITIONS
The following definitions are applicable to the Plan:
"AWARD" means the grant of Options, SARs, Performance Awards, Restricted
Stock or other stock-based award under the Plan.
"BOARD" means the Board of Directors of the Company.
"BOARD COMMITTEE" means the committee of the Board appointed in accordance
with Section 4 to administer the Plan.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Class B Common Stock of the Company, par value
$0.01 per share.
"COMPANY" means Federated Investors, Inc., a Pennsylvania corporation, and
its successors and assigns.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means, on any date, the closing sale price of one
share of Common Stock, as reported on the New York Stock Exchange or any
national securities exchange on which the Common Stock is then listed or on The
NASDAQ Stock Market's National Market ("NNM") if the Common Stock is then quoted
thereon, as published in the Wall Street Journal or another newspaper of general
circulation, as of such date or, if there were no sales reported as of such
date, as of the last date preceding such date as of which a sale was reported.
In the event that the Common Stock is not listed for trading on a national
securities exchange or authorized for quotation on NNM, Fair Market Value shall
be the closing bid price as reported by The NASDAQ Stock Market or The NASDAQ
SmallCap Market (if applicable), or if no such prices shall have been so
reported for such date, on the next preceding date for which such prices were so
reported. In the event that the Common Stock is not listed on the New York Stock
Exchange, a national securities exchange or NNM, and is not listed for quotation
on The NASDAQ Stock Market or The NASDAQ SmallCap Market, Fair Market Value
shall be determined in good faith by the Board Committee in its sole discretion,
and for this purpose the Board Committee shall be entitled to rely on the
opinion of a qualified appraisal firm with respect to such Fair Market Value,
but the Board Committee shall in no event be obligated to obtain such an opinion
in order to determine Fair Market Value.
"GRANT DATE" means the date on which the grant of an Option under Section
5.1 hereof or a SAR under Section 6.1 hereof becomes effective pursuant to the
terms of the Stock Option Agreement or Stock Appreciation Rights Agreement, as
the case may be, relating thereto.
"INCENTIVE STOCK OPTION" means an option to purchase shares of Common
Stock designated as an incentive stock option and which complies with Section
422 of the Code.
"NON-STATUTORY STOCK OPTION" means an option to purchase shares of Common
Stock which is not an Incentive Stock Option.
"OFFERING" means the initial public offering of Class B Common Stock by
United States and international underwriters.
"OPTION" means any option to purchase shares of Common Stock granted under
Sections 5.1 or 10.1 hereof.
"OPTION PRICE" means the purchase price of each share of Common Stock
under an Option.
"OUTSIDE DIRECTOR" means a member of the Board who is not an employee of
the Company or any Subsidiary.
"PARTICIPANT" means any salaried employee of the Company and its affiliates
designated by the Board Committee to receive an Award under the Plan.
"PERFORMANCE AWARD" means an Award of shares of Common Stock granted under
Section 7.
"PERFORMANCE PERIOD" means the period of time established by the Board
Committee for achievement of certain objectives under Section 7.1 hereof.
"RESTRICTION PERIOD" means the period of time specified in a Performance
Share Award Agreement or a Restricted Stock Award Agreement, as the case may be,
between the Participant and the Company during which the following conditions
remain in effect: (i) certain restrictions on the sale or other disposition of
shares of Common Stock awarded under the Plan, and (ii) subject to the terms of
the applicable agreement, a requirement of continued employment of the
Participant in order to prevent forfeiture of the Award.
"STOCK APPRECIATION RIGHTS" or "SARS" means the right to receive a cash
payment from the Company equal to the excess of the Fair Market Value of a
stated number of shares of Common Stock at the exercise date over a fixed price
for such shares.
"SUBSIDIARY" means any corporation, business trust or partnership (other
than the Company) in an unbroken chain of corporations, business trusts or
partnerships beginning with the Company if each of the corporations, business
trusts or partnerships (other than the last corporation, business trust or
partnership in the chain) owns stock, beneficial interests or partnership
interests possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations, business trusts or
partnerships in the chain.
"TEN PERCENT HOLDER" means a person who owns (within the meaning of
Section 424(d) of the Code) more than ten percent of the voting power of all
classes of stock of the Company or of its parent corporation or Subsidiary.
3. SHARES SUBJECT TO PLAN
3.1 SHARES RESERVED UNDER THE PLAN. Subject to adjustment as
provided in Section 3.2, the number of shares of Common Stock cumulatively
available under the Plan shall equal 13,500,000 shares. All of such authorized
shares of Common Stock shall be available for the grant of Incentive Stock
Options under the Plan. No Participant shall receive Awards in respect of more
than 600,000 shares of Common Stock in any fiscal year of the Company. In
addition, the aggregate Fair Market Value (determined on the Grant Date) of
Common Stock with respect to which Incentive Stock Options granted a Participant
become exercisable for the first time in any single calendar year shall not
exceed $100,000. Any Common Stock issued by the Company through the assumption
or substitution of outstanding grants from an acquired corporation or entity
shall not reduce the shares available for grants under the Plan. Shares of
Common Stock to be issued pursuant to the Plan may be authorized and unissued
shares, treasury shares, or any combination thereof. Subject to Section 6.2
hereof, if any shares of Common Stock subject to an Award hereunder are
forfeited or any such Award otherwise terminates without the issuance of such
shares of Common Stock to a Participant, or if any shares of Common Stock are
surrendered by a Participant in full or partial payment of the Option Price of
an Option, such shares, to the extent of any such forfeiture, termination or
surrender, shall again be available for grant under the Plan.
3.2 ADJUSTMENTS. The aggregate number of shares of Common Stock
which may be awarded under the Plan and the terms of outstanding Awards shall be
adjusted by the Board Committee to reflect a change in the capitalization of the
Company, including but not limited to, a stock dividend or split,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, spin-off, spin-out or other distribution of assets to shareholders;
PROVIDED that the number and price of shares subject to outstanding Options
granted to Outside Directors pursuant to Section 10 hereof and the number of
shares subject to future Options to be granted pursuant to Section 10 shall be
subject to adjustment only as set forth in Section 10 hereof.
3.3 MERGER WITH FEDERATED INVESTORS. Notwithstanding the foregoing,
the Company's merger with Federated Investors and assumption of its outstanding
stock incentive awards will not result in any adjustment to the number of shares
available under the Plan and will reduce the number of shares available under
this Plan accordingly. For purposes of this Plan, after the merger all such
stock incentive awards shall be treated as Awards under this Plan, except that
any Grant Date, Performance Period or Restricted Period shall relate back to the
date on which the awards were made by Federated Investors.
4 . ADMINISTRATION OF PLAN
4.1 ADMINISTRATION BY THE BOARD COMMITTEE. The Plan shall be
administered as follows.
Prior to an Offering, the Plan shall be administered by either the
full Board or by the Board Committee if one is established by the
Board. Prior to an Offering, any member of the Board may serve on
the Board Committee.
After an Offering, the Plan shall be administered by the Board
Committee, which shall consist of no fewer than two members of the
Board who are (i) "Non-Employee Directors" for purposes of Rule
16b-3 of the Commission under the Exchange Act and (ii) to the
extent required to ensure that awards under the Plan are exempt for
purposes of Section 162(m) of the Code, "outside directors" for
purposes of Section 162(m); PROVIDED, HOWEVER, that the Board
Committee may delegate some or all of its authority and
responsibility under the Plan with respect to Awards to Participants
who are not subject to Section 16 of the Exchange Act to the Chief
Executive Officer of the Company. In the event that, after an
Offering, the Board does not have two members who qualify has
"Non-Employee Directors" for purposes of Rule 16b-3, the Plan shall
be administered by the full Board.
The Board Committee shall have authority to interpret the Plan, to
establish, amend, and rescind any rules and regulations relating to
the Plan, to prescribe the form of any agreement or instrument
executed in connection herewith, and to make all other
determinations necessary or advisable for the administration of the
Plan. All such interpretations, rules, regulations and
determinations shall be conclusive and binding on all persons and
for all purposes. In addition, the Board Committee shall have
authority, without amending the Plan, to grant Awards hereunder to
Participants who are foreign nationals or employed outside the
United States or both, on terms and conditions different from those
specified herein as may, in the sole judgment and discretion of the
Board Committee, be necessary or desirable to further the purpose of
the Plan.
Notwithstanding the foregoing, the Board Committee shall not have
any discretion with respect to Options granted to Outside Directors
pursuant to Section 10 hereof. In the event that the Board does not
establish a Board Committee for any reason, any reference in this
Plan to the Board Committee shall be deemed to refer to the full
Board.
4.2 DESIGNATION OF PARTICIPANTS. Participants shall be selected,
from time to time, by the Board Committee, from those executive officers and key
employees of the Company and its affiliates who, in the opinion of the Board
Committee, have the capacity to contribute materially to the continued growth
and successful performance of the Company. Outside Directors shall be
Participants only in accordance with Section 10.
5. STOCK OPTIONS
5.1 GRANTS. Options may be granted, from time to time, to such
Participants as may be selected by the Board Committee on such terms, not
inconsistent with this Plan, as the Board Committee shall determine. The Option
Price shall be determined by the Board Committee effective on the Grant Date;
PROVIDED, HOWEVER, that (i) in the case of Incentive Stock Options granted to a
Participant who on the Grant Date is not a Ten Percent Holder, such price shall
not be less than one hundred percent (100%) of the Fair Market Value of a share
of Common Stock on the Grant Date, (ii) in the case of an Incentive Stock Option
granted to a Participant who on the Grant Date is a Ten Percent Holder, such
price shall be not less than one hundred and ten percent (110%) of the Fair
Market Value of a share of Common Stock on the Grant Date, and (iii) in the case
of Non-Statutory Stock Options, such price shall be not less than eighty-five
percent (85%) of the Fair Market Value of a share of Common Stock on the Grant
Date. The number of shares of Common Stock subject to each Option granted to
each Participant, the terms of each Option, and any other terms and conditions
of an Option granted hereunder shall be determined by the Board Committee, in
its sole discretion, effective on the Grant Date; PROVIDED, HOWEVER, that no
Incentive Stock Option shall be exercisable any later than ten (10) years from
the Grant Date. Each Option shall be evidenced by a Stock Option Agreement
between the Participant and the Company which shall specify the type of Option
granted, the Option Price, the term of the Option, the number of shares of
Common Stock to which the Option pertains, the conditions upon which the Option
becomes exercisable and such other terms and conditions as the Board Committee
shall determine.
5.2 PAYMENT OF OPTION PRICE. No shares of Common Stock shall be
issued upon exercise of an Option until full payment of the Option Price
therefor by the Participant. Upon exercise, the Option Price may be paid in
cash, in shares of Common Stock having a Fair Market Value equal to the Option
Price, or in any combination thereof, or in any other manner approved by the
Board Committee.
5.3 RIGHTS AS SHAREHOLDERS. Participants shall not have any of the
rights of a shareholder with respect to any shares subject to an Option until
such shares have been issued upon the proper exercise of such Option.
5.4 TRANSFERABILITY OF OPTIONS. Options granted under the Plan may
not be sold, transferred, pledged, assigned, hypothecated or otherwise disposed
of except by will or by the laws of descent and distribution; PROVIDED, HOWEVER,
that, if authorized in the applicable Award agreement, a Participant may make
one or more gifts of Options granted hereunder to members of the Participant's
immediate family or trusts or partnerships for the benefit of such family
members. All Options granted to a Participant under the Plan shall be
exercisable during the lifetime of such Participant only by such Participant,
his agent, guardian or attorney-in-fact.
5.5 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an
employee of either the Company or of any of its affiliates, the Options granted
hereunder shall be exercisable in accordance with the Stock Option Agreement
between the Participant and the Company.
DESIGNATION OF INCENTIVE STOCK OPTIONS. Except as otherwise
expressly provided in the Plan, the Board Committee may, at the time of the
grant of an Option, designate such Option as an Incentive Stock Option under
Section 422 of the Code.
CERTAIN INCENTIVE STOCK OPTION TERMS. In the case of any
grant of an Incentive Stock Option, whenever possible, each provision in the
Plan and in any related agreement shall be interpreted in such a manner as to
entitle the Option holder to the tax treatment afforded by Section 422 of the
Code, and if any provision of this Plan or such agreement shall be held not to
comply with requirements necessary to entitle such Option to such tax treatment,
then (i) such provision shall be deemed to have contained from the outset such
language as shall be necessary to entitle the Option to the tax treatment
afforded under Section 422 of the Code, and (ii) all other provisions of this
Plan and the agreement relating to such Option shall remain in full force and
effect. If any agreement covering an Option designated by the Board Committee to
be an Incentive Stock Option under this Plan shall not explicitly include any
terms required to entitle such Incentive Stock Option to the tax treatment
afforded by Section 422 of the Code, all such terms shall be deemed implicit in
the designation of such Option and the Option shall be deemed to have been
granted subject to all such terms.
6. STOCK APPRECIATION RIGHTS
6.1 GRANTS. Stock Appreciation Rights may be granted, from time to
time, to such salaried employees of the Company and its affiliates as may be
selected by the Board Committee. SARs may be granted at the discretion of the
Board Committee either (i) in connection with an Option or (ii) independent of
an Option. The price from which appreciation shall be computed shall be
established by the Board Committee at the Grant Date; PROVIDED, HOWEVER, that
such price shall not be less than one-hundred percent (100%) of the Fair Market
Value of the number of shares of Common Stock subject of the grant on the Grant
Date. In the event the SAR is granted in connection with an Option, the fixed
price from which appreciation shall be computed shall be the Option Price. Each
grant of a SAR shall be evidenced by a Stock Appreciation Rights Agreement
between the Participant and the Company which shall specify the type of SAR
granted, the number of SARs, the conditions upon which the SARs vest and such
other terms and conditions as the Board Committee shall determine.
6.2 EXERCISE OF SARS. SARs may be exercised upon such terms and
conditions as the Board Committee shall determine; PROVIDED, HOWEVER, that SARs
granted in connection with Options may be exercised only to the extent the
related Options are then exercisable. Notwithstanding Section 3.1 hereof, upon
exercise of a SAR granted in connection with an Option as to all or some of the
shares subject of such Award, the related Option shall be automatically canceled
to the extent of the number of shares subject of the exercise, and such shares
shall no longer be available for grant hereunder. Conversely, if the related
Option is exercised as to some or all of the shares subject of such Award, the
related SAR shall automatically be canceled to the extent of the number of
shares of the exercise, and such shares shall no longer be available for grant
hereunder.
6.3 PAYMENT OF EXERCISE. Upon exercise of a SAR, the holder shall be
paid in cash the excess of the Fair Market Value of the number of shares subject
of the exercise over the fixed price, which in the case of a SAR granted in
connection with an Option shall be the Option Price for such, shares.
6.4 RIGHTS OF SHAREHOLDERS. Participants shall not have any of the
rights of a shareholder with respect to any Options granted in connection with a
SAR until shares have been issued upon the proper exercise of an Option.
6.5 TRANSFERABILITY OF SARS. SARs granted under the Plan may not be
sold, transferred, pledged, assigned, hypothecated or otherwise disposed of
except by will or by the laws of descent and distribution. All SARs granted to a
Participant under the Plan shall be exercisable during the lifetime of such
Participant only by such Participant, his agent, guardian, or attorney-in-fact.
6.6 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an
employee of either the Company or of any of its affiliates, SARs granted
hereunder shall be exercisable in accordance with the Stock Appreciation Rights
Agreement between the Participant and the Company.
7. PERFORMANCE AWARDS
7.1 AWARDS. Awards of shares of Common Stock may be made, from time
to time, to such Participants as may be selected by the Board Committee. Such
shares shall be delivered to the Participant only upon (i) achievement of such
corporate, sector, division, individual or any other objectives or criteria
during the Performance Period as shall be established by the Board Committee and
(ii) the expiration of the Restriction Period. Except as provided in the
Performance Share Award Agreement between the Participant and the Company,
shares subject to such Awards under this Section 7.1 shall be released to the
Participant only after the expiration of the relevant Restriction Period. Each
Award under this Section 7.1 shall be evidenced by a Performance Share Award
Agreement between the Participant and the Company which shall specify the
applicable performance objectives, the Performance Period, the Restriction
Period, any forfeiture conditions and such other terms and conditions as the
Board Committee shall determine.
7.2 STOCK CERTIFICATES. Upon an Award of shares of Common Stock
under Section 7.1 of the Plan, the Company shall issue a certificate registered
in the name of the Participant bearing the following legend and any other legend
required by any federal or state securities laws or by the Delaware Business
Trust Act:
"The sale or other transfer of the shares of stock represented by
this certificate is subject to certain restrictions set forth in the
Federated Investors, Inc. Stock Incentive Plan, administrative rules
adopted pursuant to such Plan and a Performance Share Award
Agreement between the registered owner and Federated Investors, Inc.
A copy of the Plan, such rules and such Agreement may be obtained
from the Secretary of Federated Investors, Inc."
Unless otherwise provided in the Performance Share Award Agreement between the
Participant and the Company, such certificates shall be retained by the Company
until the expiration of the Restriction Period. Upon the expiration of the
Restriction Period, the Company shall (i) cause the removal of the legend from
the certificates for such shares as to which a Participant is entitled in
accordance with the Performance Share Award Agreement between the Participant
and the Company and (ii) release such shares to the custody of the Participant.
7.3 RIGHTS AS SHAREHOLDERS. Subject to the provisions of the
Performance Share Award Agreement between the Participant and the Company,
during the Performance Period, dividends and other distributions paid with
respect to all shares awarded thereto under Section 7.1 hereof shall, in the
discretion of the Board Committee, either be paid to Participants or held in
escrow by the Company and paid to Participants only at such time and to such
extent as the related Performance Award is earned. During the period between the
completion of the Performance Period and the expiration of the Restriction
Period, Participants shall be entitled to receive dividends and other
distributions only as to the number of shares determined in accordance with the
Performance Share Award Agreement between the Participant and the Company.
7.4 TRANSFERABILITY OF SHARES. Certificates evidencing the shares of
Common Stock awarded under the Plan shall not be sold, exchanged, assigned,
transferred, pledged, hypothecated or otherwise disposed of until the expiration
of the Restriction Period.
7.5 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an
employee of either the Company or of one of its affiliates, the number of shares
subject of the Award, if any, to which the Participant shall be entitled shall
be determined in accordance with the Performance Share Award Agreement between
the Participant and the Company.
7.6 TRANSFER OF EMPLOYMENT. If a Participant transfers employment
from one business unit of the Company or any of its affiliates to another
business unit during a Performance Period, such Participant shall be eligible to
receive such number of shares of Common Stock as the Board Committee may
determine based upon such factors as the Board Committee in its sole discretion
may deem appropriate.
8. RESTRICTED STOCK AWARDS
8.1 AWARDS. Awards of shares of Common Stock subject to such
restrictions as to vesting and otherwise as the Board Committee shall determine,
may be made, from time to time, to Participants as may be selected by the Board
Committee. The Board Committee may in its sole discretion at the time of the
Award or at any time thereafter provide for the early vesting of such Award
prior to the expiration of the Restriction Period. Each Award under this Section
8.1 shall be evidenced by a Restricted Stock Award Agreement between the
Participant and the Company which shall specify the vesting schedule, any rights
of acceleration, any forfeiture conditions, and such other terms and conditions
as the Board Committee shall determine.
8.2 STOCK CERTIFICATES. Upon an Award of shares of Common Stock
under Section 8.1 of the Plan, the Company shall issue a certificate registered
in the name of the Participant bearing the following legend and any other legend
required by any federal or state securities laws or by the Delaware Business
Trust Act.
"The sale or other transfer of the shares of stock represented by
this certificate is subject to certain restrictions set forth in the
Federated Investors, Inc. Stock Incentive Plan, administrative rules
adopted pursuant to such Plan and a Restricted Stock Award Agreement
between the registered owner and Federated Investors, Inc. A copy of
the Plan, such rules and such agreement may be obtained form the
Secretary of Federated Investors, Inc."
Unless otherwise provided in the Restricted Stock Award Agreement between the
Participant and the Company, such certificates shall be retained in custody by
the Company until the expiration of the Restriction Period. Upon the expiration
of the Restriction Period, the Company shall (i) cause the removal of the legend
from the certificates for such shares as to which a Participant is entitled in
accordance with the Restricted Stock Award Agreement between the Participant and
the Company and (ii) release such shares to the custody of the Participant.
8.3 RIGHTS AS SHAREHOLDERS. During the Restriction Period,
Participants shall be entitled to receive dividends and other distributions paid
with respect to all shares awarded thereto under Section 8.1 hereof.
8.4 TRANSFERABILITY OF SHARES. Certificates evidencing the shares of
Common Stock awarded under the Plan shall not be sold, exchanged, assigned,
transferred, pledged, hypothecated or otherwise disposed of until the expiration
of the Restriction Period.
8.5 TERMINATION OF EMPLOYMENT. If a Participant ceases to be an
employee of either the Company or of any of its affiliates, the number of shares
subject of the Award, if any, to which the Participant shall be entitled shall
be determined in accordance with the Restricted Stock Award Agreement between
the Participant and the Company. All remaining shares as to which restrictions
apply at the date of termination of employment shall be forfeited subject to
such exceptions, if any, authorized by the Board Committee.
9. OTHER STOCK-BASED AWARDS
Awards of shares of Common Stock and other awards that are valued in whole
or in part by reference to, or are otherwise based on, Common Stock, may be
made, from time to time, to salaried employees of the Company and its affiliates
as may be selected by the Board Committee. Such Awards may be made alone or in
addition to or in connection with any other Award hereunder. The Board Committee
may in its sole discretion determine the terms and conditions of any such Award.
Each such Award shall be evidenced by an agreement between the Participant and
the Company which shall specify the number of shares of Common Stock subject of
the Award, any consideration therefor, any vesting or performance requirements
and such other terms and conditions as the Board Committee shall determine.
10. OUTSIDE DIRECTORS' OPTIONS
INITIAL GRANTS. Effective on the dates set forth below, each
category of Outside Director of the Company described below shall be
automatically granted an Option to purchase 4,500 shares of Common Stock:
(i) for any Outside Director serving on the Board at the effective date of
the Offering, the effective date of the Offering;
(ii) for any Outside Director elected by the shareholders of the Company
subsequent to the effective time of the Offering, the date of such
Outside Director's initial election to the Board; and
(iii) for any Outside Director appointed by the Board subsequent to the
effective time of the Offering, the date such Outside Director's
appointment to the Board becomes effective.
All such Options shall be Non-Statutory Stock Options. The Option Price for all
Options granted pursuant to this Section 10 shall be the greater of (a) $19.00
per share or (b) one hundred percent (100%) of the Fair Market Value per share
of Common Stock on the date of grant.
10.2 ANNUAL GRANTS. Effective on the date of each Annual Meeting of
the shareholders of the Company that occurs after the Offering, each Outside
Director who will be continuing as a director after such Annual Meeting, but not
including any Outside Director who is first elected at such Annual Meeting,
shall automatically be granted an Option to purchase 1,500 shares of Common
Stock. All such Options shall be Non-Statutory Stock Options. The Option price
shall be the greater of (a) $19.00 per share or (b) one-hundred percent (100%)
of the Fair Market Value per share of Common Stock on the date of grant.
10.3 EXERCISE OF OPTIONS. One third (1/3) of the initial Options
granted pursuant to Section 10.1 shall vest in an Outside Director on each
anniversary of such grant until such Options are fully vested at the end of
three years. All Options granted pursuant to Section 10.2 shall vest
immediately. All vested Options shall be immediately exercisable and may be
exercised by the Outside Director for a period of ten (10) years from the date
of grant; PROVIDED, HOWEVER, that in the event of the death or disability of an
Outside Director, the Option shall be exercisable only within the twelve (12)
months next succeeding the date of death or disability and only if and to the
extent that the Outside Director was entitled to exercise the Option at the date
of the Outside Director's death or disability, as the case may be; PROVIDED
FURTHER, however, that if an Outside Director's service with the Company
terminates for any reason other than death or disability, the Option shall be
exercisable for thirty (30) days after the date of such termination and only if
and to the extent that the Outside director was entitled to exercise the Option
at the date of such termination. In the case of death, such Options shall be
exercisable only by the executor or administrator of the Outside Director's
estate or by the person or persons to whom the Outside Director's rights under
the Option shall pass by the Outside Director's will or the laws of descent and
distribution. Notwithstanding the foregoing, in no event shall any Option be
exercisable more than ten (10) years after the date of grant.
PAYMENT OF OPTION PRICE. An Option granted to an Outside
Director shall be exercisable only upon payment to the Company of the Option
price. Payment for the shares shall be in United States dollars, payable in cash
or by check.
10.5 ADJUSTMENTS. In case there shall be a merger, reorganization,
consolidation, recapitalization, stock dividend or other change in corporate
structure such that the shares of Common Stock are changed into or become
exchangeable for a larger or smaller number of shares, thereafter the number of
shares subject to outstanding Options granted to Outside Directors and the
number of shares subject to Options to be granted to Outside Directors pursuant
to the provisions of this Section 10 shall be increased or decreased, as the
case may be, in direct proportion to the increase or decrease in the number of
shares of Common Stock by reason of such change in corporate structure, provided
that the number of shares shall always be a whole number, and the purchase price
per share of any outstanding Options shall, in the case of an increase in the
number of shares, be proportionately reduced, and in the case of a decrease in
the number of shares, shall be proportionately increased.
11. AMENDMENT OR TERMINATION OF PLAN
The Board may amend, suspend or terminate the Plan or any part thereof
from time to time, provided that no change may be made which would impair the
rights of a Participant to whom shares of Common Stock have theretofore been
awarded without the consent of said Participant.
12. MISCELLANEOUS
12.1 RIGHTS OF EMPLOYEES. Nothing in the Plan shall interfere with
or limit in any way the right of the Company or any affiliate to terminate any
Participant's employment at any time, nor confer upon any Participant any right
to continued employment with the Company or any affiliate.
12.2 TAX WITHHOLDING. The Company shall have the authority to
withhold, or to require a Participant to remit to the Company, prior to issuance
or delivery of any shares or cash hereunder, an amount sufficient to satisfy
federal, state and a local tax withholding requirements associated with any
Award. In addition, the Company may, in its sole discretion, permit a
Participant to satisfy any tax withholding requirements, in whole or in part, by
(i) delivering to the Company shares of Common Stock held by such Participant
having a Fair Market Value equal to the amount of the tax or (ii) directing the
Company to retain shares of Common stock otherwise issuable to the Participant
under the Plan.
12.3 STATUS OF AWARDS. Awards hereunder shall not be deemed
compensation for purposes of computing benefits under any retirement plan of the
Company or affiliate and shall not affect any benefits under any other benefit
plan now or hereafter in effect under which the availability or amount of
benefits is related to the level of compensation.
12.4 WAIVER OF RESTRICTIONS. The Board Committee may, in its sole
discretion, based on such factors as the Board Committee may deem appropriate,
waive in whole or in part, any remaining restrictions or vesting requirements in
connection with any Award hereunder.
12.5 ADJUSTMENT OF AWARDS. Subject to Section 11, the Board
Committee shall be authorized to make adjustments in performance award criteria
or in the terms and conditions of other Awards (except Options granted pursuant
to Section 10 hereof) in recognition of unusual or nonrecurring events affecting
the Company or its financial statements or changes in applicable laws,
regulations or accounting principles; PROVIDED HOWEVER, that no such adjustment
shall impair the rights of any Participant without his consent. The Board
Committee may also make Awards hereunder in replacement of, or as alternatives
to, Awards previously granted to Participants, including without limitation,
previously granted Options having higher Option Prices and grants or rights
under any other plan of the Company or of any acquired entity. The Board
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem desirable to carry it into effect. In the event the Company shall assume
outstanding employee benefit awards or the right or obligation to make future
such awards in connection with the acquisition of another corporation or
business entity, the Board Committee may, in its discretion, make such
adjustments in the terms of Awards under the Plan as it shall deem appropriate.
Notwithstanding the above, only the full Board (and not the Board Committee)
shall have the right to make any adjustments in the terms or conditions of
Options granted pursuant to Section 10.
12.6 CONSIDERATION FOR AWARDS. Except as otherwise required in any
applicable agreement or by the terms of the Plan, Participants under the Plan
shall not be required to make any payment or provide consideration for an Award
other than the rendering of services.
12.7 SPECIAL FORFEITURE RULE. Notwithstanding any other provision of
this Plan to the contrary, the Board Committee shall be authorized to impose
additional forfeiture restrictions with respect to Awards granted under the
Plan, other than Awards pursuant to Section 10 hereof, including, without
limitation, provisions for forfeiture in the event the Participant shall engage
in competition with the Company or in any other circumstance the Board Committee
may determine.
12.8 EFFECTIVE DATE AND TERM OF PLAN. The Plan shall be effective as
of the date it is approved by the Board, subject to the approval thereof by the
shareholders of the Company. Unless terminated under the provisions of Section
11 hereof, the Plan shall continue in effect indefinitely; PROVIDED, HOWEVER,
that no Incentive Stock Options shall be granted after the tenth anniversary of
the effective date of the Plan.
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0
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