22
PI-312470.08
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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 1-14818
FEDERATED INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- -------------------------------------------------------------------------------
25-1111467
PENNSYLVANIA
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CLASS B COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH
REGISTERED)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
- -------------------------------------------------------------------------------
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 A No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the Class B Common Stock held by
non-affiliates of the registrant as of March 22, 2000 was approximately
$1,488,903,000, based on the last reported sales price of $26.0625 as reported
by the New York Stock Exchange. For purposes of this calculation, the registrant
has deemed all of its executive officers and directors to be affiliates, but has
made no determination as to whether any other persons are "affiliates" within
the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. The number
of shares of Class B Common Stock outstanding on March 22, 2000, was 80,745,035
shares.
Documents incorporated by reference:
Selected portions of the 1999 Annual Report to Shareholders - Part I, Part
II and Part IV of this Report.
Selected portions of the 2000 Information Statement - Part III of this
Report.
PART I
ITEM 1 - BUSINESS
OVERVIEW
Federated Investors, Inc. and its consolidated subsidiaries (collectively,
"Federated") is a leading provider of investment management and related
financial services. Federated sponsors, markets and provides investment
advisory, distribution and administrative services primarily to mutual funds.
Total assets under management at December 31, 1999, were $124.8 billion,
primarily in funds managed, distributed and administered by Federated and in
other non-fund products ("Managed Assets"), of which $4.7 billion were in
separately managed accounts. Managed Assets at December 31, 1999, increased
$13.3 billion since December 31, 1998.
Federated provided investment advisory services to 129 funds at December
31, 1999. These funds are offered through banks, broker/dealers and other
financial intermediaries who use them to meet the needs of their customers;
these customers include retail investors, corporations, and retirement plans.
Federated also provides mutual fund administrative services to its managed funds
and to funds sponsored by third parties, where Federated also acts as fund
distributor. Federated provided these services for $41.2 billion of assets in
funds sponsored by third parties, primarily banks, ("Administered Assets") as of
December 31, 1999. In addition, Federated provides other services related to
mutual funds including trade execution and clearing and retirement plan
recordkeeping.
Total Managed Assets for each of the past three years are as follows:
MANAGED ASSETS Growth Rate
-------------------
(DOLLARS IN MILLIONS) As of December 31, 3 Yr.
----------------------------
1999 1998 1997 CAGR* 1999
-------------------------------------------------
Money Market Funds/
Cash Equivalents $83,299 $77,055 $63,622 18% 8%
Equity Funds 20,941 15,503 11,710 40% 35%
Fixed-Income Funds 15,857 16,437 15,067 4% -4%
Separate Accounts 4,723 2,558 2,141 34% 85%
-------------------------------------------------
Total Managed Assets $124,820 $111,553 $92,540 19% 12%
=================================================
*Compound Annual Growth Rate
Average Managed Assets for the past three years were as follows:
AVERAGE MANAGED ASSETS Growth Rate
-------------------
(DOLLARS IN MILLIONS) Year ended December 31, 3 Yr.
----------------------------
1999 1998 1997 CAGR* 1999
-------------------------------------------------
Money Market Funds/
Cash Equivalent $79,253 $69,074 $55,636 21% 15%
Equity Funds 17,531 13,777 9,690 41% 27%
Fixed-Income Funds 16,680 15,851 14,382 6% 5%
Separate Accounts 4,109 2,334 1,872 35% 76%
-------------------------------------------------
Total Average Managed Assets $117,573 $101,036 $81,580 21% 16%
=================================================
* Compound Annual Growth Rate
Federated's revenues from investment advisory, related administrative and
other service fees provided under agreements with the funds and other entities,
and other income over the last three years were as follows (Certain amounts
previously reported have been reclassified to conform to the current year's
presentation.):
REVENUE
(DOLLARS IN THOUSANDS) Growth Rate
-----------------------
Year ended December 31, 3 Yr.
-------------------------------
1999 1998 1997 CAGR* 1999
------------------------------------------------------
Investment Advisory $324,923 $280,046 $220,912 22% 16%
Fees
Administrative 104,381 97,234 85,429 13% 7%
Service Fees
Other Service Fees 147,700 124,599 88,163 35% 19%
Other Income 24,094 20,248 9,215 37% 19%
------------------------------------------------------
TOTAL REVENUE $601,098 $522,127 $403,719 23% 15%
======================================================
* Compound Annual Growth Rate
BUSINESS STRATEGY
Federated pursues a multi-faceted business strategy having three broad
objectives:
-To be widely recognized as a world class investment management
company that offers highly competitive performance and disciplined risk
management across a broad spectrum of products.
-To profitably expand market penetration by increasing its assets
under management in each market where it chooses to apply its substantial
distribution resources.
-To profitably expand its customer relationships by providing
superior services designed to support the growth of Managed and Administered
Assets.
Federated offers a wide range of products, including equity, fixed-income
and money market investments designed to meet the needs of investors with
varying investment objectives. Federated has structured its investment process
to meet the requirements of fiduciaries and others who use Federated's products
to meet the needs of their customers. Fiduciaries typically have stringent
demands related to portfolio composition, risk and investment performance.
Since 1994, in response to market demand and to diversify its managed
assets, Federated has emphasized growth of its equity business and has broadened
its range of equity products. Equity assets are managed across a wide range of
styles including large cap value ($6.8 billion), equity income ($4.8 billion),
international ($3.1 billion) and mid-large cap growth ($2.9 billion)
investments. Federated also manages assets in equity index funds ($3.4 billion),
balanced and asset allocation funds ($1.2 billion) and small cap blend ($506
million). These asset allocation funds may include fixed-income assets.
Federated's fixed-income assets are managed in a wide range of sectors
including high yield ($4.9 billion), mortgage-backed ($4.7 billion),
multi-sector ($2.7 billion), municipal ($2.2 billion), corporate ($1.7 billion),
U.S. government ($1.6 billion) and international/global ($1.0 billion).
Federated's fixed-income funds offer fiduciaries and others a broad range of
highly defined products designed to meet many of their investment needs and
requirements.
Federated uses a team of portfolio managers led by a senior portfolio
manager for each fund. Federated's investment research process combines
disciplined quantitative screening along with rigorous fundamental analysis to
identify attractive securities. Portfolios are continually reevaluated with
respect to valuation, price and earnings estimate momentum, company
fundamentals, market factors, economic conditions and risk controls in order to
achieve specific investment objectives.
Federated is one of the largest U.S. managers of money market fund assets,
with $83.3 billion in assets under management at December 31, 1999. Federated
has developed expertise in managing cash for institutions, which typically have
stringent requirements for regulatory compliance, relative safety, liquidity and
competitive yields. Federated has managed money market funds for over 25 years
and began selling money market fund products to institutions in 1974. Federated
also manages retail money market fund products which are typically distributed
through broker/dealers. Federated manages money market fund assets in a variety
of asset classes including government ($43.9 billion), prime ($26.5 billion) and
tax-free ($12.9 billion).
Federated's distribution strategy is to provide products geared to
financial intermediaries, primarily banks, broker/dealers and investment
advisers, and directly to institutions such as corporations and government
entities. Through substantial investments in distribution for more than 20
years, Federated has developed selling relationships with more than 4,000
institutions and sells its products directly to another 500 corporations and
government entities. Federated uses its trained sales force of more than 190
representatives and managers across the United States to add new customer
relationships and strengthen and expand existing relationships.
INVESTMENT PRODUCTS AND MARKETS
Federated's investment products are distributed in four principal
markets: the bank trust market, the broker/dealer market, the institutional
market and the international market. The following chart shows Federated Managed
Assets by market for the dates indicated:
MANAGED ASSETS BY MARKET Growth Rate
------------------
(DOLLARS IN MILLIONS) As of December 31, 3 Yr.
----------------------------
1999 1998 1997 CAGR* 1999
----------------------------- ------------------
Bank Trust Market $61,912 $58,891 $49,662 16% 5%
Broker/Dealer Market 41,930 35,232 28,256 24% 19%
Institutional Market 16,349 13,993 11,343 19% 17%
International Market 1,104 0 0 n/a n/a
Other 3,525 3,437 3,279 7% 3%
-----------------------------
Total Managed Assets $124,820 $111,553 $92,540 19% 12%
=============================
*Compound Annual Growth Rate
BANK TRUST MARKET. Federated pioneered the concept of providing cash
management to bank trust departments through mutual funds over 20 years ago. In
addition, Federated initiated a strategy to provide a broad range of equity and
fixed-income funds, termed MultiTrust(TM), to meet the evolving needs of bank
trust departments. Federated's bank trust customers invest the assets subject to
their control, or upon direction from their customers, in one or more funds
managed by Federated. Federated employs a dedicated sales force backed by a
staff of support personnel to offer its products and services in the bank trust
market.
Money market funds contain the majority of Federated's Managed Assets in
the bank trust market. In allocating investments across various asset classes,
investors typically maintain a portion of their portfolios in cash or cash
equivalents, including money market funds, irrespective of trends in bond or
stock prices. Federated also offers an extensive menu of equity and fixed-income
mutual funds structured for use in the bank trust market. As of December 31,
1999, Managed Assets in the bank trust market were comprised of $51.1 billion in
money market funds and cash equivalents, $5.7 billion in equity funds and $5.1
billion in fixed-income funds.
BROKER/DEALER MARKET. Federated distributes its products in this market
through a large, diversified group of approximately 2,000 national, regional,
independent, and bank broker/dealers. Federated maintains a sales staff
dedicated to this market, with a separate group focused on the bank
broker/dealers. Broker/dealers use Federated's products to meet the needs of
their customers, who are typically retail investors. Federated offers products
with a variety of commission structures that enable brokers to offer their
customers a choice of pricing options. Federated also offers money market mutual
funds as cash management products designed for use in the broker/dealer market.
As of December 31, 1999, Managed Assets in the broker/dealer market were
comprised of $22.1 billion in money market funds, $12.3 billion in equity funds,
and $7.5 billion in fixed-income funds.
INSTITUTIONAL MARKET. Federated maintains a dedicated sales staff to focus
on the distribution of its products to a wide variety of users: investment
advisors, corporations, corporate and public pension funds, insurance companies,
government entities, foundations, endowments, hospitals, and non-Federated
investment companies. As of December 31, 1999, Managed Assets in the
institutional market were comprised of $9.5 billion in money market funds, $2.0
billion in fixed-income funds, $1.9 billion in equity funds and $2.9 billion in
separate accounts.
INTERNATIONAL MARKET. Federated is taking steps to broaden distribution to
areas outside of the U.S. In 1998, Federated entered into an agreement with
LVM-Versicherungen (LVM), a large German insurance company, to create a
joint-venture company named Federated Fonds-Service GmbH ("Federated GmbH"), to
exclusively manage, distribute and market a family of mutual funds to insurance
clients of LVM, as well as pursue institutional separate accounts. In the fourth
quarter of 1999, a Trust was established with six sub-funds to be sold in German
speaking countries in Europe. Marketing of these funds began in January 2000.
ALTERNATIVE PRODUCTS. In 1999, Federated entered into an agreement to
manage a portfolio of high yield bonds totaling $362 million at inception for a
collateralized bond obligation (CBO) product. This product packages Federated's
mutual fund investment management expertise into an alternative product
structure and offers another source of investment advisory fee revenue.
Federated plans to continue to seek opportunities to manage CBOs and other
alternative products.
Federated completed three acquisitions between November, 1996 and May,
1997, which together resulted in an increase of approximately $4.8 billion in
Managed Assets. In January 2000, Federated acquired InvestLink Technologies,
Inc., a software developer and marketer of applications for recordkeeping,
administration and servicing of defined contribution benefit plans. Federated
will seek to identify additional acquisitions and alliances that it believes
will enhance shareholder value by adding assets, complementary investment
management expertise or distribution capabilities.
Federated's principal source of revenue is investment advisory fees earned
by various subsidiaries and affiliates pursuant to investment advisory contracts
with the funds. These subsidiaries and affiliates are registered as investment
advisers under the Investment Advisers Act of 1940 (the "Advisers Act").
Investment advisers are compensated for their services in the form of investment
advisory fees based upon the average daily net assets of the fund.
Federated provided investment advisory services to 129 funds as of
December 31, 1999. The funds sponsored by Federated are domiciled in the U.S.,
with the exception of Federated International Funds PLC and Federated Unit
Trusts which are domiciled in Dublin, Ireland. Each of Federated's
U.S.-domiciled funds (with the exception of a collective investment trust) is
registered under the Investment Company Act of 1940 ("Investment Company Act")
and under applicable federal and state laws. Each of the funds enters into an
advisory agreement. The advisory agreements are subject to annual approval by
the fund directors or trustees, including a majority of the directors who are
not "interested persons" of the funds or Federated as defined under the
Investment Company Act. Advisory agreements are subject to periodic review by
the directors or trustees of the respective funds and amendments to such
agreements must be approved by the fund shareholders. A significant portion of
Federated's revenue is derived from these advisory agreements which generally
are terminable upon 60 days notice.
Of these 129 funds, Federated's investment advisory subsidiaries managed
53 money market funds (and cash equivalents) totaling $83.3 billion in assets,
42 fixed-income funds with $15.9 billion in assets and 34 equity funds with
$20.9 billion in assets. Appendix "A" hereto lists all of these funds, including
asset levels and date of inception.
Federated also serves as investment advisor to pension and other employee
benefit plans, corporations, trusts, foundations, endowments, mutual funds
sponsored by third parties, and other investors. These separate accounts totaled
$4.7 billion in assets under management as of December 31, 1999. Fees for
separate accounts are typically based on the value of assets under management
pursuant to investment advisory agreements that may be terminated at any time.
Federated also provides a broad range of services to support the
operation, administration, and distribution of Federated-sponsored funds. These
services, for which Federated receives fees pursuant to administrative
agreements with the funds, include legal support and regulatory compliance,
audit, fund financial services, transfer agency services, and shareholder
servicing and support. Federated also offers these services to institutions
seeking to outsource all or part of their mutual fund service and distribution
functions. Through various subsidiaries, Federated provides its experience and
expertise in these areas to expand its relationships with key financial
intermediaries, primarily banks, who sponsor proprietary mutual funds. Federated
receives fees from these bank-sponsored funds for providing fund services.
The following chart shows period-end and average Administered Assets since
1997:
ADMINISTERED ASSETS As of and for the year ended Growth
(DOLLARS IN MILLIONS) December 31, Rate
----------------------------- ----------
1999 1998 1997 1999
----------------------------- ----------
Period End Administered Assets $41,234 $28,165 $46,999 46%
Average Administered Assets 35,079 53,136 42,965 -34%
The decrease in 1999 average Administered Assets and in year-end 1998
Administered Assets was due primarily to the termination of certain
administration contracts in 1998 due to internalization of these functions by
banks who developed the ability to provide mutual fund services through
acquisitions. These customers collectively accounted for less than 2% of 1998
total revenue.
In addition, certain Funds sponsored by Federated have adopted
distribution plans which, subject to applicable law, provide for payment to
Federated for the reimbursement of marketing expenses, including sales
commissions paid to broker/dealers. These distribution plans are implemented
through a distribution agreement between Federated and the Fund. Although the
specific terms of each such agreement vary, the basic terms of the agreements
are similar. Pursuant to the agreements, Federated acts as underwriter for the
fund and distributes shares of the Fund through unaffiliated dealers. Each
distribution plan and agreement is initially approved by the directors or
trustees of the respective Funds and is reviewed for approval annually.
Federated also provides retirement plan recordkeeping services and trade
execution and settlement services through its various subsidiaries.
COMPETITION
The mutual fund industry is highly competitive. According to the
Investment Company Institute, at the end of 1999, there were over 7,800
registered open-end investment companies, of varying sizes and investment
policies, whose shares are currently being offered to the public both on a load
and no-load basis. In addition to competition from other mutual fund managers
and investment advisers, Federated and the mutual fund industry compete with
investment alternatives offered by insurance companies, commercial banks,
broker/dealers and other financial institutions.
Competition for sales of mutual fund shares is influenced by various
factors, including investment performance in terms of attaining the stated
objectives of the particular funds and in terms of fund yields and total
returns; advertising and sales promotional efforts; and type and quality of
services.
Changes in the mix of customers for mutual fund distribution and
administrative services are expected to continue. Competition for fund
administration services is extremely high. In addition to competing with other
service providers, banks sponsoring mutual funds may choose to internalize
certain service functions. Consolidation within the banking industry also
impacts the fund administration business as merging bank funds typically choose
a single fund administration provider. Due to the relatively lower revenues,
changes in the amount of Administered Assets generally have less impact on
Federated's results of operations than changes in the amount of Managed Assets.
REGULATORY MATTERS
Substantially all aspects of Federated's business are subject to federal
and state regulation and to the extent operations take place outside the United
States they are subject to the regulations of foreign countries. Depending upon
the nature of any non-compliance, the results could include the suspension or
revocation of licenses or registration, including broker/dealer licenses and
registrations and transfer agent registrations, as well as the imposition of
civil fines and penalties and in certain limited circumstances prohibition from
acting as an adviser to registered investment companies. Federated's advisory
companies are registered with the Securities and Exchange Commission (the
"Commission") under the Advisers Act and with certain states. All of the mutual
funds managed, distributed, and administered by Federated are registered with
the Commission under the Investment Company Act. Certain wholly owned
subsidiaries of Federated are registered as broker-dealers with the Commission
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
with various states and are members of the National Association of Securities
Dealers (the "NASD"). Their activities are regulated by the Commission, the
NASD, and the various states in which they are registered. These subsidiaries
are required to meet capital requirements established by the Commission pursuant
to the Exchange Act. Two other subsidiaries are registered with the Commission
as transfer agents. Federated Investors Trust Company is regulated by the State
of New Jersey. Federated believes that it and its subsidiaries are in
substantial compliance with all applicable laws and regulations. Amendments to
current laws and regulations or newly-promulgated laws and regulations governing
Federated's operations could have a material adverse impact on Federated.
The federal, state and foreign laws and regulations applicable to most
aspects of Federated's business are primarily intended to benefit or protect
Federated's customers and the funds' shareholders and generally grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict Federated from carrying on its business in the event that
it fails to comply with such laws and regulations. In such event, the possible
sanctions that may be imposed include the suspension of individual employees,
limitations on engaging in certain lines of business for specified periods of
time, revocation of broker/dealer licenses and registrations and transfer agent
registrations, censure and fines.
EMPLOYEES
At December 31, 1999, Federated employed 1,831 persons. Federated
considers its relationships with its employees to be satisfactory.
FORWARD-LOOKING INFORMATION
THIS ANNUAL REPORT ON FORM 10-K AND THE 1999 ANNUAL REPORT TO SHAREHOLDERS
CONTAIN CERTAIN "FORWARD- LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE CERTAIN
UNKNOWN RISKS AND UNCERTAINTIES, INCLUDING, AMONG OTHERS THOSE DISCUSSED UNDER
THE CAPTION "RISK FACTORS AND CAUTIONARY STATEMENTS" BELOW, THAT COULD CAUSE
ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, OR ACHIEVEMENTS OF FEDERATED,
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. FEDERATED CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE, AND
SHOULD BE READ IN CONJUNCTION WITH THE RISK DISCLOSURE BELOW. FEDERATED WILL NOT
UNDERTAKE AND SPECIFICALLY DECLINES ANY OBLIGATION TO RELEASE PUBLICLY THE
RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS OR REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS. AS A RESULT OF THE FOREGOING,
AND OTHER FACTORS, NO ASSURANCE CAN BE GIVEN AS TO FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE, OR ACHIEVEMENTS OF FEDERATED, AND NEITHER FEDERATED NOR
ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF SUCH
STATEMENTS.
RISK FACTORS AND CAUTIONARY STATEMENTS
POTENTIAL ADVERSE EFFECTS OF INCREASED COMPETITION IN THE INVESTMENT
MANAGEMENT BUSINESS. The investment management business is highly competitive.
Federated competes in the distribution of mutual funds with other independent
fund management companies, national and regional broker/dealers, commercial
banks, insurance companies, and other institutions. Many of these competitors
have substantially greater resources and brand recognition than Federated.
Competition is based on various factors, including business reputation; the
investment performance of funds managed or administered by Federated; quality of
service; the strength and continuity of management and selling relationships;
marketing and distribution services offered; the range of products offered; and
fees charged. See "Business--Competition."
Many of Federated's fund products are designed for use by institutions
such as banks, insurance companies and other corporations. A large portion of
Federated's Managed Assets, particularly money market and fixed-income Managed
Assets, are held by institutional investors. Because most institutional mutual
funds are sold without sales commissions at either the time of purchase or the
time of redemption, institutional investors may be more inclined to move their
assets among various institutional funds than investors in retail mutual funds.
Of Federated's 129 managed funds, 93 are sold without sales commission.
Institutions are sensitive to fund investment performance, consistent adherence
to investment objectives, quality of service and pricing. Federated believes
that competitive pressures in the institutional fund market are increasing as a
result of (i) the entry of well known managers from the retail investment
industry and of low-fee investment managers, (ii) mergers and consolidation
occurring in the banking industry, (iii) increased offering of proprietary funds
by institutional investors such as banks, and (iv) regulatory changes affecting
banks and other financial service firms.
A significant portion of Federated's revenue is derived from providing
mutual funds to its bank trust market, comprising over 1,400 banks and other
financial institutions. Future profitability of Federated will be affected by
its ability to retain its share of this market, and could also be adversely
affected by the general consolidation which is occurring in the banking industry
as well as recent regulatory changes. In addition, bank consolidation trends
could not only cause changes in Federated's customer mix, but could also affect
the scope of services provided and fees received by Federated, depending upon
the degree to which banks internalize administrative functions attendant to
proprietary mutual funds.
POTENTIAL ADVERSE EFFECTS OF A DECLINE IN SECURITIES MARKETS. Changes in
economic or market conditions may adversely affect the profitability and
performance of and demand for Federated's investment products and services. The
ability of Federated to compete and grow is dependent, in part, on the relative
attractiveness of the types of investment products Federated offers and its
investment philosophies and market strategies under prevailing market
conditions. A significant portion of Federated's revenue is derived from
investment advisory fees, which are based on the value of Managed Assets and
vary with the type of asset being managed, with higher fees generally earned on
equity and fixed-income funds than on money market funds. Consequently,
significant fluctuations in the prices of securities held by, or the level of
redemptions from, the funds advised by Federated may affect materially the
amount of Managed Assets and thus Federated's revenue, profitability and ability
to grow. Substantially all of Federated's Managed Assets are in open end funds,
which permit investors to redeem their investment at any time.
POTENTIAL ADVERSE AFFECTS ON MONEY MARKET FUNDS RESULTING FROM INCREASES
IN INTEREST RATES. Approximately 34% of Federated's revenue in 1999 was from
managed money market funds. Assets in these funds are largely from institutional
investors. In a period of rapidly rising interest rates, institutional investors
may redeem shares in money market funds to invest directly in market issues
offering higher yields. These redemptions would reduce Managed Assets, thereby
reducing Federated's advisory fee revenue. Federated has been actively
diversifying its products to expand its Managed Assets in equity mutual funds
which may be less sensitive to interest rate increases. There can be no
assurance that Federated will continue to be successful in these diversification
efforts.
ADVERSE EFFECTS OF POOR FUND PERFORMANCE. Success in the investment
management and mutual fund business is largely dependent on the funds'
investment performance relative to market conditions and performance of
competing funds. Good performance generally stimulates sales of the funds'
shares and tends to keep redemptions low. Sales of funds generate higher
revenues (which are largely based on assets of the funds). Good performance also
attracts private institutional accounts to Federated. Conversely, relatively
poor performance tends to result in decreased sales, increased redemptions of
the funds' shares, and the loss of private institutional accounts, with
corresponding decreases in revenues to Federated. Failure of the funds to
perform well could, therefore, have a material adverse effect on Federated.
ADVERSE EFFECTS OF TERMINATION OR FAILURE TO RENEW FUND AGREEMENTS ON
FEDERATED'S REVENUES AND PROFITABILITY. A substantial majority of Federated's
revenues are derived from investment management agreements with the funds that,
as required by law, are terminable on 60 days' notice. In addition, each such
investment management agreement must be approved and renewed annually by each
fund's board, including disinterested members of the board, or its shareholders,
as required by law. Generally, Federated's administrative servicing agreements
with bank proprietary fund customers have an initial term of three years with a
provision for automatic renewal unless notice is otherwise given and provide for
termination for cause. Failure to renew or termination of a significant number
of these agreements could have a material adverse impact on Federated. In
addition, as required by the Investment Company Act, each investment advisory
agreement with a mutual fund automatically terminates upon its "assignment,"
although new investment advisory agreements may be approved by the mutual fund's
directors or trustees and shareholders. A sale of a sufficient number of shares
of Federated's voting securities to transfer control of Federated could be
deemed an "assignment" in certain circumstances. An assignment, actual or
constructive, will trigger these termination provisions and may adversely affect
Federated's ability to realize the value of these assets.
POTENTIAL ADVERSE EFFECTS OF CHANGES IN LAWS AND REGULATIONS ON
FEDERATED'S INVESTMENT MANAGEMENT BUSINESS. Federated's investment management
business is subject to extensive regulation in the United States primarily at
the Federal level, including regulations by the Commission particularly under
the Investment Company Act and the Advisers Act as well as the rules of the NASD
and all states. Federated is also affected by the regulations governing banks
and other financial institutions and, to the extent operations take place
outside the United States, by foreign regulations. Changes in laws or
regulations or in governmental policies could materially and adversely affect
the business and operations of Federated.
NO ASSURANCE OF SUCCESSFUL FUTURE ACQUISITIONS. Federated's business
strategy contemplates the acquisition of other investment management companies
as well as investment assets. There can be no assurance that Federated will find
suitable acquisition candidates at acceptable prices, have sufficient capital
resources to realize its acquisition strategy, be successful in entering into
definitive agreements for desired acquisitions, or successfully integrate
acquired companies into Federated, or that any such acquisitions, if
consummated, will prove to be advantageous to Federated.
SYSTEMS AND TECHNOLOGY RISKS. Federated utilizes software and related
technologies throughout its businesses including both proprietary systems as
well as those provided by outside vendors. As the century date change occurred,
Federated encountered no significant problems with date-sensitive systems of its
own or third party vendors in recognizing the year 2000. Unanticipated issues
could still occur and it is not possible to predict with certainty all of the
adverse effects that could result from a failure of a third party to address
computer system problems related to year 2000 issues or otherwise. Accordingly,
there can be no assurance that potential system interruptions or the cost
necessary to rectify the problems would not have a material adverse effect on
Federated's business, financial condition, results of operations or business
prospects.
ITEM 2 - PROPERTIES
Federated's facilities are concentrated in Pittsburgh, Pennsylvania where
it leases space sufficient to meet its operating needs. Federated's headquarters
is located in the Federated Investors Tower, where Federated occupies
approximately 345,000 square feet. Federated leases approximately 100,000 square
feet at the Pittsburgh Office and Research Park and an aggregate of 60,000
square feet at other locations in Pittsburgh. Federated also leases
approximately 50,400 square feet of office space for a portion of its servicing
business in Rockland, Massachusetts. Federated maintains office space in Dublin,
Ireland, where administrative offices for offshore funds are maintained; in New
York, New York, where Federated Global Investment Management Corp. conducts its
business; and in Gibbsboro, New Jersey, where Federated Investors Trust Company
is located. Additional offices in Naples, Florida and Wilmington, Delaware are
subleased by Federated.
ITEM 3 - LEGAL PROCEEDINGS
There is currently no pending litigation of a material nature involving
Federated.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The information required by this Item is contained in Federated's 1999
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements" and is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this Item is contained in Federated's 1999
Annual Report to Shareholders under the caption "Selected Consolidated Financial
Data" and is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is contained in Federated's 1999
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and is incorporated
herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is contained in Federated's 1999
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and is incorporated
herein by reference.
ITEM 8 - FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The information required by this Item is contained in Federated's 1999
Annual Report to Shareholders under the captions "Report of Ernst & Young LLP,
Independent Auditors," "Consolidated Balance Sheets," "Consolidated Statements
of Income," "Consolidated Statements of Changes in Shareholders' Equity,"
"Consolidated Statements of Cash Flows," and "Notes to Consolidated Financial
Statements" and is incorporated herein by reference.
ITEM 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item (other than the information set
forth below) will be contained in Federated's Information Statement for its 1999
Annual Meeting of Shareholders under the captions "Board of Directors and
Election of Directors" and "Security Ownership - Section 16(a) Beneficial
Ownership Reporting Compliance," and is incorporated herein by reference.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of Federated as of March 22, 2000:
<TABLE>
<CAPTION>
<S> <C> <C>
NAME POSITION AGE
- ---- -------- ---
John F. Donahue Chairman and Director 75
J. Christopher Donahue President, Chief Executive Officer and Director 50
Arthur L. Cherry President, Federated Services Company and 46
Director
William D. Dawson III Executive Vice President and Chief Investment 51
Officer - U.S. Fixed Income of Federated
Advisory Companies*
Thomas R. Donahue Vice President, Treasurer, Chief Financial 41
Officer and Director
John B. Fisher President - Institutional Sales Division of 43
Federated Securities Corp. and Director
Henry A. Frantzen Executive Vice President and Chief Investment 57
Officer - Global
Equity and Fixed Income of Federated Advisory
Companies*
James F. Getz President -- Retail Sales Division of 53
Federated Securities Corp. and Director
J. Thomas Madden Executive Vice President and Chief Investment 52
Officer - Domestic Equity, High Yield and
Asset Allocation of Federated
Advisory Companies*
Eugene F. Maloney Vice President and Director 55
John W. McGonigle Executive Vice President, Chief Legal Officer, 61
Secretary and Director
- ----------------------------
</TABLE>
*Federated Advisory Companies include the following subsidiaries of Federated:
Federated Global Investment Management Corp., Passport Research Limited,
Federated Investment Counseling, and Federated Investment Management Company.
Mr. John F. Donahue was a founder of the predecessor of Federated and was
Chairman and Chief Executive Officer of Federated and a trustee of Federated
Investors, a Delaware business trust (the "Trust"), prior to the May 1998 merger
of the Trust into Federated, its wholly-owned subsidiary (the "Merger"). Mr.
Donahue has continued to serve as Chairman following the consummation of the
Merger. He served as President from 1989 until 1993. Mr. Donahue is Chairman or
President and a director or trustee of the investment companies managed by
subsidiaries of Federated. Mr. Donahue was a member of the Board of Directors of
Aetna Life and Casualty Company until April 1995. Mr. Donahue is the father of
J. Christopher Donahue and Thomas R. Donahue, each of whom serves as an
executive officer and director of Federated.
Mr. J. Christopher Donahue was a trustee of the Trust from 1989 until the
consummation of the Merger and has been a director of Federated since the
consummation of the Merger. He served as President and Chief Operating Officer
from 1993 until April 1998, when he became President and Chief Executive
Officer. Prior to 1993, he served as Vice President. He is President or
Executive Vice President of the investment companies managed by subsidiaries of
Federated and a director, trustee or managing general partner of some of the
investment companies. Mr. Donahue is the son of John F. Donahue and the brother
of Thomas R. Donahue.
Mr. Arthur L. Cherry was a trustee of the Trust from 1997 until the Merger
and has been a director of Federated since the consummation of the Merger. He is
the President of Federated Services Company, a wholly-owned subsidiary of
Federated. Prior to joining Federated in January 1997, he was a managing partner
of AT&T Solutions and former president of Scudder Services Corporation.
Mr. William D. Dawson III serves as Executive Vice President and Chief
Investment Officer - U.S. Fixed Income of Federated Advisory Companies. He has
served as a portfolio manager and held various other positions in the advisory
companies. He is responsible for the investment policy and management of
domestic fixed-income funds. Mr. Dawson is a Chartered Financial Analyst.
Mr. Thomas R. Donahue was a trustee of the Trust from 1995 until the
consummation of the Merger and has been a director of Federated since the
consummation of the Merger. He has been Vice President since 1993 and currently
serves as Vice President, Treasurer and Chief Financial Officer. Prior to
joining Federated, Mr. Donahue was in the venture capital business, and from
1983 to 1987 was employed by PNC Bank in its Investment Banking Division. Mr.
Donahue is the son of John F. Donahue and the brother of J. Christopher Donahue.
Mr. John B. Fisher has been a director of Federated since the consummation
of the Merger. He is President-Institutional Sales Division of Federated
Securities Corp., a wholly-owned subsidiary of Federated, and is responsible for
the distribution of Federated's products and services to investment advisors,
insurance companies, retirement plans and corporations
Mr. Henry A. Frantzen serves as Executive Vice President and Chief
Investment Officer - Global Equity and Fixed Income of Federated Advisory
Companies. Mr. Frantzen is primarily responsible for the management of global
equity and fixed-income funds. Prior to joining Federated, Mr. Frantzen was
Managing Director of International Equities for Brown Brothers Harriman
Investment Management Ltd. and Manager and International Equity Chief Investment
Officer for Brown Brothers Harriman and Co. from 1992 to 1995. Prior thereto Mr.
Frantzen served in executive capacities for various investment management
companies, including Oppenheimer Management Corp., Yamaichi Capital Management
and CREF.
Mr. James F. Getz has been a director of Federated since the consummation
of the Merger. He serves as President - Retail Sales Division of Federated
Securities Corp., a wholly-owned subsidiary of Federated, and is responsible for
the marketing and sales efforts in the trust and broker/dealer markets. Mr. Getz
is a Chartered Financial Analyst.
Mr. J. Thomas Madden serves as Executive Vice President and Chief
Investment Officer - Domestic Equity, High Yield and Asset Allocation of
Federated Advisory Companies. Mr. Madden oversees the portfolio management in
the domestic equity, high yield and asset allocation areas. Mr. Madden is a
Chartered Financial Analyst.
Mr. Eugene F. Maloney was a trustee of the Trust from 1989 until the
consummation of the Merger and has continued as a director of Federated since
the consummation of the Merger. He serves as a Vice President of Federated and
provides certain legal, technical and management expertise to Federated's sales
divisions, including regulatory and legal requirements relating to a bank's use
of mutual funds in both trust and commercial environments.
Mr. John W. McGonigle was a trustee of the Trust from 1989 until the
consummation of the Merger and has been a director since the consummation of the
Merger. Mr. McGonigle has served as Secretary of Federated since 1989. He served
as Vice President of Federated from 1989 until August 1995, when he became
Executive Vice President. Mr. McGonigle acted as General Counsel until 1998 when
he became the Chief Legal Officer. Mr. McGonigle is Executive Vice President and
Secretary of the investment companies managed by subsidiaries of Federated.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is contained in Federated's
Information Statement for the 2000 Annual Meeting of Shareholders under the
captions "Board of Directors and Election of Directors" and "Executive
Compensation" and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in Federated's
Information Statement for the 2000 Annual Meeting of Shareholders under the
caption "Security Ownership" and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
The information required by this Item is contained in Federated's 1999
Annual Report to Shareholders under the captions "Report of Ernst & Young LLP,
Independent Auditors," "Consolidated Balance Sheets," "Consolidated Statements
of Income," "Consolidated Statements of Changes in Shareholders' Equity,"
"Consolidated Statements of Cash Flows," and "Notes to Consolidated Financial
Statements" and is incorporated herein by reference.
(A)(2) FINANCIAL STATEMENT SCHEDULES:
Schedules for which provision is made in the applicable accounting
regulations of the United States Securities and Exchange Commission have been
omitted because such schedules are not required under the related instructions
or are inapplicable or because the information required is included in the
Consolidated Financial Statements or notes thereto.
(A)(3) EXHIBITS:
The following exhibits are filed or incorporated as part of this report:
Exhibit
NUMBER DESCRIPTION
2.01 Agreement and Plan of Merger, dated as of February 20, 1998, between
Federated Investors and Federated (incorporated by reference to
Exhibit 2.01 to the Registration Statement on Form S-1 (File No.
333-48405))
3.01 Restated Articles of Incorporation of Federated (incorporated by
reference to Exhibit 3.01 to the Registration Statement on Form S-1
(File No. 333-48405))
3.02 Restated By-Laws of Federated (incorporated by reference to Exhibit
3.02 to the Registration Statement on Form S-1 (File No. 333-48405))
4.01 Form of Class A Common Stock certificate (incorporated by reference
to Exhibit 4.01 to the Registration Statement on Form S-1 (File No.
333-48405))
4.02 Form of Class B Common Stock certificate (incorporated by reference
to Exhibit 4.02 to the Registration Statement on Form S-1 (File No.
333-48405))
4.03 Stock Purchase Agreement, dated August 1, 1989, between Federated
and Westinghouse Credit Corporation (incorporated by reference to
Exhibit 4.04 to the Registration Statement on Form S-1 (File No.
333-48405))
4.04 Intercompany Subordination Agreement, dated as of June 15, 1996, by
and among Federated Investors and its subsidiaries (incorporated by
reference to Exhibit 4.05 to the Registration Statement on Form S-1
(File No. 333-48405))
4.05 Shareholder Rights Agreement, dated August 1, 1989, between
Federated and The Standard Fire Insurance Company, as amended
January 31, 1996 (incorporated by reference to Exhibit 4.06 to the
Registration Statement on Form S-1 (File No. 333-48405))
4.06 Senior Secured Credit Agreement, dated as of January 31, 1996, by
and among Federated and the Banks set forth therein and PNC Bank,
National Association (incorporated by reference to Exhibit 4.07 to
the Registration Statement on Form S-1 (File No. 333-48405))
9.01 Voting Shares Irrevocable Trust dated May 31, 1989 (incorporated by
reference to Exhibit 9.01 to the Registration Statement on Form S-1
(File No. 333-48405))
10.01 Amendment No. 4 to Credit Agreement, dated as of May 11, 1998, by
and among Federated Investors, Inc., the banks set forth therein
and PNC Bank, National Association. (incorporated by reference to
Exhibit 10.1 of the June 30, 1998 Quarterly Report on Form 10-Q
(File No. 001-14818))
10.02 Amendment No. 5 to Credit Agreement, dated as of May 11, 1998, by
and among Federated Investors, Inc., the banks set forth therein
and PNC Bank, National Association. (incorporated by reference to
Exhibit 10.2 of the June 30, 1998 Quarterly Report on Form 10-Q
(File No. 001-14818))
10.03 Amendment No. 6 to Credit Agreement, dated as of December 3, 1998,
by and among Federated Investors, Inc., the banks set forth therein
and PNC Bank, National Association (incorporated by reference to
Exhibit 10.03 of the Form 10-K for the fiscal year ended December
31, 1998 (File No. 001-14818))
10.04 Amendment No. 7 to Credit Agreement, dated as of February 22, 1999,
by and among Federated Investors, Inc., the banks set forth therein
and PNC Bank, National Association (incorporated by reference to
Exhibit 10.1 of the June 30, 1999 Quarterly Report on Form 10-Q
(File No. 001-14818))
10.05 Federated Note Purchase Agreement, dated as of June 15, 1996
(incorporated by reference to Exhibit 4.08 to the Registration
Statement on Form S-1 (File No. 333-48405))
10.06 Federated Program Master Agreement, dated as of October 24, 1997,
among Federated, Federated Funding 1997-1, Inc., Federated
Management Company, Federated Securities Corp., Wilmington Trust
Company, PLT Finance, L.P., Putnam, Lovell & Thornton Inc. and
Bankers Trust Company (incorporated by reference to Exhibit 4.09 to
the Registration Statement on Form S-1 (File No. 333-48405))
10.07 Federated Investors, Inc. Employee Stock Purchase Plan, amended as
of July 20, 1999 (incorporated by reference to Exhibit 10.2 of the
June 30, 1999 Quarterly Report on Form 10-Q (File No. 001-14818))
10.08 Federated Investors Program Initial Purchase Agreement, dated as of
October 24, 1997, between Federated Funding 1997-1, Inc. and
Wilmington Trust Company, solely as Trustee of the PLT Finance Trust
1997-1 (incorporated by reference to Exhibit 4.10 to the
Registration Statement on Form S-1 (File No. 333-48405))
10.09 Federated Investors Program Revolving Purchase Agreement, dated as
of October 24, 1997, between Federated Funding 1997-1, Inc. and
PLT Finance, L.P. (incorporated by reference to Exhibit 4.11 to the
Registration Statement on Form S-1 (File No. 333-48405))
10.10 Federated Investors Program Fee Agreement, dated as October 24,
1997, between Federated Investors and PLT Finance, L.P.
(incorporated by reference to Exhibit 4.12 to the Registration
Statement on Form S-1 (File No. 333-48405))
10.11 Schedule X to Federated Program Master Agreement, dated as of
October 24, 1997, among Federated, Federated Funding 1997-1, Inc.,
Federated Investors Management Company, Federated Securities Corp.,
Wilmington Trust Company, PLT Finance, L.P., Putnam, Lovell &
Thornton Inc. and Bankers Trust Company (incorporated by reference
to Exhibit 4.13 to the Registration Statement on Form S-1 (File No.
333-48405))
10.12 Stock Incentive Plan, as amended as of July 20, 1999 (incorporated
by reference to Exhibit 10.3 to the June 30, 1999 Quarterly Report
on Form 10-Q (File No. 001-14818))
10.13 Executive Annual Incentive Plan (incorporated by reference to
Exhibit 10.02 to the Registration Statement on Form S-1 (File No.
333-48405))
10.14 Form of Bonus Stock Option Agreement (incorporated by reference to
Exhibit 10.13 of the Form 10-K for the fiscal year ended December
31, 1998 (File No. 001-14818))
10.15 Federated Investors Tower Lease dated January 1, 1993 (incorporated
by reference to Exhibit 10.03 to the Registration Statement on Form
S-1 (File No. 333-48405))
10.16 Federated Investors Tower Lease dated February 1, 1994 (incorporated
by reference to Exhibit 10.04 to the Registration Statement on Form
S-1 (File No. 333-48405))
10.17 Centre City Tower Lease dated July 23, 1992, as amended
(incorporated by reference to Exhibit 10.05 to the Registration
Statement on Form S-1 (File No. 333-48405))
10.18 Employment Agreement, dated January 16, 1997, between Federated
Investors and an executive officer (incorporated by reference to
Exhibit 10.06 to the Registration Statement on Form S-1 (File No.
333-48405))
10.19 Employment Agreement, dated December 28, 1990, between Federated
Investors and an executive officer (incorporated by reference to
Exhibit 10.08 to the Registration Statement on Form S-1 (File No.
333-48405))
10.20 Employment Agreement, dated December 22, 1993, between Federated
Securities Corp. and an executive officer (incorporated by
reference to Exhibit 10.09 to the Registration Statement on Form
S-1 (File No. 333-48405))
10.21 Employment Agreement, dated March 17, 1995, between Federated
Investors and an executive officer (incorporated by reference to
Exhibit 10.07 to the Registration Statement on Form S-1 (File No.
333-48405))
13.01 Selected Portions of 1999 Annual Report to Shareholders (Filed
herewith)
21.01 Subsidiaries of the Registrant (Filed herewith)
23.01 Consent of Ernst & Young LLP (Filed herewith)
27.01 Financial Data Schedule (Filed herewith)
(B) REPORTS ON FORM 8-K:
No current reports on Form 8-K were filed for the quarter ended December
31, 1999.
(C) EXHIBITS:
See (a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES:
See (a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FEDERATED INVESTORS, INC.
By: /S/ J. CHRISTOPHER DONAHUE
J. Christopher Donahue
President and Chief Executive Officer
Date: March 28, 2000
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ John F. Donahue Chairman and Director March 28, 2000
- -------------------------
John F. Donahue
/s/ J. Christopher Donahue President, Chief Executive March 28, 2000
- ------------------------- Officer and Director
J. Christopher Donahue (Principal Executive Officer)
e
/s/ John W. McGonigle Director March 28, 2000
- -------------------------
John W. McGonigle
/s/ Arthur L. Cherry Director March 28, 2000
- -------------------------
Arthur L. Cherry
/s/ James F. Getz Director March 28, 2000
- -------------------------
James F. Getz
/s/ John B. Fisher Director March 28, 2000
- -------------------------
John B. Fisher
SIGNATURE TITLE DATE
/s/ Thomas R. Donahue Chief Financial Officer and March 28, 2000
- ------------------------- Director Principal Accounting
and Financial Officer)
/s/ Eugene F. Maloney Director March 28, 2000
- -------------------------
Eugene F. Maloney
/s/ Michael J. Farrell Director March 28, 2000
- -------------------------
Michael J. Farrell
/s/ James L. Murdy Director March 28, 2000
- -------------------------
James L. Murdy
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
13.01 Selected Portions of 1999 Annual Report to Shareholders
21.01 Subsidiaries of the Registrant
23.01 Consent of Ernst & Young LLP
27.01 Financial Data Schedule
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Appendix A
FEDERATED FUNDS
Number of Fund
Share Assets Effective
FUND NAME Classes FUND CATEGORY as of LOAD DATE
as of 12/31/99
--------- -------- ------------- -------- ---- ----------
12/31/99
EQUITY FUNDS:
FEDERATED AGGRESSIVE GROWTH 3 Equity Fund - Growth $125,454,745 Y 11/18/1996
FUND
FEDERATED AMERICAN LEADERS 4 Equity Fund - Growth 4,020,031,975 Y 2/26/1969
FUND INC. and Income
FEDERATED AMERICAN LEADERS 1 Equity Fund - Growth 477,433,471 N 12/15/1993
FUND II and Income
FEDERATED ASIA PACIFIC GROWTH 3 International/Global 61,707,460 Y 1/31/1996
FUND
FEDERATED CAPITAL APPRECIATION 3 Equity Fund - Growth 488,977,392 Y 11/14/1995
FUND
FEDERATED COMMUNICATIONS 3 Equity Fund - Growth 354,802,418 Y 9/13/1999
TECHNOLOGY FUND
FEDERATED EMERGING MARKETS 1 International/Global 7,320,500 N 9/22/1997
COMMINGLED TRUST
FEDERATED EMERGING MARKETS FUND 3 International/Global 78,758,039 Y 1/31/1996
FEDERATED EQUITY INCOME FUND 4 Equity 2,886,577,082 Y 12/30/1986
INC.
FEDERATED EQUITY INCOME FUND II 1 Equity 87,534,571 N 12/16/1996
FEDERATED EUROPEAN GROWTH FUND 3 International/Global 75,353,576 Y 1/31/1996
FEDERATED GLOBAL EQUITY INCOME 3 International/Global 42,507,348 Y 3/8/1998
FUND
FEDERATED GLOBAL FINANCIAL 3 International/Global 18,510,535 Y 8/24/1998
SERVICES FUND
FEDERATED GROWTH STRATEGIES 3 Equity Fund - Growth 1,347,884,313 Y 8/23/1984
FUND
FEDERATED GROWTH STRATEGIES 1 Equity Fund - Growth 132,596,607 N 9/30/1995
FUND II
FEDERATED INTERNATIONAL EQUITY 1 International Equity 30,817,436 N 3/21/1997
COMMINGLED TRUST Fund
FEDERATED INTERNATIONAL EQUITY 3 International Equity 572,959,874 Y 8/17/1984
FUND Fund
FEDERATED INTERNATIONAL EQUITY 1 International Equity 104,382,150 N 4/4/1995
FUND II Fund
FEDERATED INTERNATIONAL SMALL 3 International/Global 1,362,673,868 Y 1/31/1996
COMPANY FUND
FEDERATED LARGE CAP GROWTH FUND 3 Equity Fund - Growth 457,148,472 Y 12/23/1998
FEDERATED LATIN AMERICAN 3 International/Global 13,416,052 Y 1/31/1996
GROWTH FUND
FEDERATED MANAGED AGGRESSIVE 2 Asset Allocation Fund 174,878,090 N 3/11/1994
GROWTH FUND
FEDERATED MANAGED GROWTH AND 2 Asset Allocation Fund 216,179,270 N 3/11/1994
INCOME FUND
FEDERATED MANAGED GROWTH FUND 2 Asset Allocation Fund 274,651,548 N 3/11/1994
FEDERATED MAX-CAP FUND 3 Equity Fund - Growth 3,110,178,933 N 7/2/1990
and Income/Index
FEDERATED MID-CAP FUND 1 Equity Fund - Growth 127,344,613 N 7/7/1992
and Income/Index
FEDERATED MINI-CAP FUND 2 Equity Fund - Growth 115,192,320 N 7/7/1992
and Income/Index
FEDERATED SMALL CAP STRATEGIES 3 Equity Fund - Growth 461,873,674 Y 9/13/1995
FUND
FEDERATED SMALL CAP STRATEGIES 1 Equity Fund - Growth 2,703,532 N 5/21/1999
FUND II
FEDERATED STOCK AND BOND FUND 3 Balanced 286,899,894 N 10/31/1984
INC.
FEDERATED STOCK TRUST 1 Equity Fund - Growth 1,681,976,431 N 3/31/1982
and Income
FEDERATED UTILITY FUND INC. 4 Equity Fund - Domestic 1,423,748,506 Y 5/29/1987
Utility
FEDERATED UTILITY FUND II 1 Equity Fund - Domestic 187,666,085 N 12/15/1993
Utility
FEDERATED WORLD UTILITY FUND 4 International Equity 130,766,627 Y 4/12/1994
Fund
---------------
TOTAL EQUITY FUNDS $20,940,907,407
---------------
FIXED-INCOME FUNDS:
CAPITAL PRESERVATION FUND 1 Short-Term Corporate $630,835,972 N 8/1/1988
Bond Fund - High Grade
FEDERATED ADJUSTABLE RATE U.S. 1 Government Bond Fund 113,029,416 Y 3/2/1992
GOVERNMENT FUND INC
FEDERATED ARMS FUND 2 Adjustable Rate 366,649,950 N 12/3/1985
Mortgage-Backed Fund
FEDERATED BOND FUND 4 Long Corporate Bond 1,018,886,222 Y 6/27/1995
Fund - High Grade
FEDERATED CALIFORNIA MUNICIPAL 2 Municipal Bond Fund 58,637,731 Y 11/24/1992
INCOME FUND
FEDERATED FUND FOR U.S. 3 Mortgage Backed Fund 1,133,910,260 Y 10/6/1969
GOVERNMENT SECURITIES INC
FEDERATED FUND FOR U.S. 1 Mortgage Backed Fund 133,676,886 N 12/15/1993
GOVERNMENT SECURITIES II
FEDERATED GNMA TRUST 2 Mortgage Backed Fund 934,730,662 N 3/23/1982
FEDERATED GOVERNMENT INCOME 4 Mortgage Backed Fund 1,235,246,772 Y 8/2/1996
SECURITIES INC.
FEDERATED GOVERNMENT 2 Government Bond Fund 159,849,745 N 9/29/1999
ULTRASHORT FUND
FEDERATED HIGH INCOME 1 High Yield Fund 73,875,244 Y 9/20/1993
ADVANTAGE FUND
FEDERATED HIGH INCOME BOND 3 High Yield Fund 2,312,156,535 Y 11/30/1977
FUND INC.
FEDERATED HIGH INCOME BOND 1 High Yield Fund 239,008,449 N 12/15/1993
FUND II
FEDERATED HIGH YIELD TRUST 1 High Yield Fund 857,261,646 N 8/23/1984
FEDERATED INCOME TRUST 2 Mortgage Backed Fund 727,364,011 N 3/30/1982
FEDERATED INTERMEDIATE INCOME 2 General Investment Grade 317,822,067 N 12/8/1993
FUND
FEDERATED INTERMEDIATE 1 Municipal Bond Fund 195,826,988 N 12/26/1985
MUNICIPAL TRUST
FEDERATED INTERNATIONAL HIGH 3 International Bond Fund 94,086,491 Y 9/9/1996
INCOME FUND
FEDERATED INTERNATIONAL INCOME 3 International Bond Fund 125,227,528 Y 5/15/1991
FUND
FEDERATED LIMITED DURATION FUND 2 Mortgage Backed Fund 78,110,666 N 9/16/1996
FEDERATED LIMITED TERM FUND 2 Short-Term Corporate 141,376,099 Y 12/24/1991
Bond Fund - High Grade
FEDERATED LIMITED TERM 2 Municipal Bond Fund 110,194,879 Y 8/31/1993
MUNICIPAL FUND
FEDERATED MANAGED INCOME FUND 2 Asset Allocation Fund 126,888,706 N 3/11/1994
FEDERATED MICHIGAN 1 Municipal Bond Fund 71,853,886 Y 9/9/1991
INTERMEDIATE MUNICIPAL TRUST
FEDERATED MORTGAGE FUND 2 US Government Int. 18,237,558 N 6/30/1998
Muni. Bond
FEDERATED MUNICIPAL 4 Municipal Bond Fund 412,170,032 Y 5/3/1996
OPPORTUNITIES FUND INC.
FEDERATED MUNICIPAL SECURITIES 3 Municipal Bond Fund 561,235,467 N 10/4/1976
FUND INC.
FEDERATED NEW YORK MUNICIPAL 1 Municipal Bond Fund 22,817,349 Y 11/24/1992
INCOME FUND
FEDERATED NORTH CAROLINA 1 Municipal Bond Fund 41,184,674 Y 6/4/1999
MUNICIPAL INCOME FUND
FEDERATED OHIO MUNICIPAL 1 Municipal Bond Fund 75,586,085 Y 10/10/1990
INCOME FUND
FEDERATED PENNSYLVANIA 2 Municipal Bond Fund 246,414,270 Y 10/10/1990
MUNICIPAL INCOME FUND
FEDERATED QUALITY BOND FUND II 1 Short-Term Corporate 18,593,764 N 4/21/1999
Bond Fund - High Grade
FEDERATED SHORT-TERM INCOME 2 Short-Term Corporate 206,489,555 N 7/1/1986
FUND Bond Fund - High Grade
FEDERATED SHORT-TERM MUNICIPAL 2 Municipal Bond Fund 213,572,799 N 8/20/1981
TRUST
FEDERATED STRATEGIC INCOME FUND 4 Balanced 976,495,584 Y 4/5/1994
FEDERATED STRATEGIC INCOME 1 Balanced 16,156,386 N 5/21/1999
FUND II
FEDERATED TOTAL RETURN BOND 2 Mortgage Backed Fund 166,914,941 N 1/19/1994
FUND
FEDERATED U.S.GOVERNMENT BOND 1 Mortgage Backed Fund 120,353,134 N 12/2/1985
FUND
FEDERATED ULTRASHORT BOND FUND 1 US Government ST 215,135,511 N 10/27/1998
FEDERATED US GOVERNMENT 2 Government Bond Fund 510,111,022 N 3/15/1984
SECURITIES FUND: 1-3 YEARS
FEDERATED US GOVERNMENT 2 Government Bond Fund 685,778,346 N 2/18/1983
SECURITIES FUND: 2-5 YEARS
FEDERATED US GOVERNMENT 2 Government Bond Fund 93,197,000 N 9/13/1995
SECURITIES FUND: 5-10 YRS
---------------
TOTAL FIXED-INCOME FUNDS $15,856,950,288
---------------
---------------
TOTAL EQUITY AND FIXED-INCOME $36,797,857,695
FUNDS
---------------
MONEY MARKET FUNDS:
ALABAMA MUNICIPAL CASH TRUST 1 Municipal Money Market $229,292,996 N 12/1/1993
ARIZONA MUNICIPAL CASH TRUST 1 Municipal Money Market 31,042,873 N 5/30/1998
AUTOMATED CASH MANAGEMENT TRUST 2 Prime Money Market Fund 2,738,614,255 N 9/19/1996
AUTOMATED GOVERNMENT CASH 1 Government Money Market 629,143,438 N 2/2/1990
RESERVES Fund
AUTOMATED GOVERNMENT MONEY 1 Government Money Market 1,941,191,200 N 6/1/1982
TRUST Fund
AUTOMATED TREASURY CASH 1 Government Money Market 248,208,224 N 8/5/1991
RESERVES Fund
CALIFORNIA MUNICIPAL CASH TRUST 2 Municipal Money Market 596,190,790 N 2/29/1996
CONNECTICUT MUNICIPAL CASH 1 Municipal Money Market 276,209,077 N 11/1/1989
TRUST
EDWARD D. JONES DAILY PASSPORT 1 Government Money Market 8,645,883,754 N 5/9/1980
CASH TRUST Fund
FEDERATED MASTER TRUST 1 Prime Money Market Fund 347,756,802 N 12/16/1977
FEDERATED PRIME MONEY FUND II 1 Prime Money Market Fund 192,227,319 N 12/15/1993
FEDERATED SHORT-TERM EURO FUND 1 Prime Money Market Fund 116,289,942 N 11/9/1999
FEDERATED SHORT-TERM U.S. 1 Government Money Market 289,118,695 N 4/16/1987
GOVERNMENT TRUST Fund
FEDERATED SHORT-TERM U.S. 1 Government Money Market 958,309,200 N 9/20/1993
PRIME FUND Fund
FEDERATED SHORT-TERM U.S.GOVT 3 Government Money Market 1,004,568,359 N 1/18/1991
SECURITIES FUND Fund
FEDERATED SHORT-TERM 1 Government Money Market 1,179,319,668 N 4/16/1992
U.S.TREASURY SECURITIES FUND Fund
FEDERATED TAX-FREE TRUST 1 Municipal Money Market 537,553,865 N 3/6/1979
FLORIDA MUNICIPAL CASH TRUST 2 Municipal Money Market 929,555,860 N 11/16/1995
GEORGIA MUNICIPAL CASH TRUST 1 Municipal Money Market 263,692,267 N 8/14/1995
GOVERNMENT CASH SERIES 1 Government Money Market 597,456,538 N 8/15/1989
Fund
GOVERNMENT OBLIGATIONS FUND 2 Government Money Market 7,233,911,699 N 12/11/1989
Fund
GOVERNMENT OBLIGATIONS TAX 2 Government Money Market 3,176,886,132 N 5/7/1995
MANAGED FUND Fund
LIBERTY U.S. GOVERNMENT MONEY 2 Government Money Market 684,495,922 N 6/6/1980
MARKET TRUST Fund
LIQUID CASH TRUST 1 Government Money Market 214,602,844 N 12/12/1980
Fund
MARYLAND MUNICIPAL CASH TRUST 1 Municipal Money Market 42,946,829 N 5/4/1994
MASSACHUSETTS MUNICIPAL CASH 2 Municipal Money Market 660,978,331 N 2/22/1993
TRUST
MICHIGAN MUNICIPAL CASH TRUST 2 Municipal Money Market 202,197,995 N 2/29/1996
MINNESOTA MUNICIPAL CASH TRUST 2 Municipal Money Market 510,566,059 N 12/31/1990
MONEY MARKET MANAGEMENT INC. 1 Prime Money Market Fund 76,840,950 N 2/25/1993
MONEY MARKET TRUST 1 Prime Money Market Fund 379,492,960 N 10/13/1978
MUNICIPAL CASH SERIES 1 Municipal Money Market 438,463,219 N 8/15/1989
MUNICIPAL CASH SERIES II 1 Municipal Money Market 297,938,915 N 1/25/1991
MUNICIPAL OBLIGATIONS FUND 3 Municipal Money Market 460,153,328 N 2/5/1993
NEW JERSEY MUNICIPAL CASH TRUST 2 Municipal Money Market 169,881,380 N 12/10/1990
NEW YORK MUNICIPAL CASH TRUST 2 Municipal Money Market 752,499,565 N 5/30/1994
NORTH CAROLINA MUNICIPAL CASH 1 Municipal Money Market 192,711,765 N 12/1/1993
TRUST
OHIO MUNICIPAL CASH TRUST 3 Municipal Money Market 270,668,112 N 3/26/1991
PENNSYLVANIA MUNICIPAL CASH 3 Municipal Money Market 509,552,927 N 12/21/1990
TRUST
PRIME CASH OBLIGATIONS FUND 3 Prime Money Market Fund 4,046,223,456 N 2/5/1993
PRIME CASH SERIES 1 Prime Money Market Fund 4,809,133,493 N 8/15/1989
PRIME OBLIGATIONS FUND 2 Prime Money Market Fund 10,806,001,60 N 7/5/1994
PRIME VALUE OBLIGATIONS FUND 3 Prime Money Market Fund 2,035,734,781 N 2/5/1993
TAX-FREE INSTRUMENTS TRUST 2 Municipal Money Market 1,992,964,183 N 12/21/1982
TAX-FREE OBLIGATIONS FUND 2 Municipal Money Market 3,234,405,272 N 12/11/1989
TENNESSEE MUNICIPAL CASH TRUST 2 Municipal Money Market 53,466,366 N 5/14/1996
TREASURY CASH SERIES 1 Government Money Market 879,082,399 N 2/5/1990
Fund
TREASURY CASH SERIES II 1 Government Money Market 257,362,042 N 1/25/1991
Fund
TREASURY OBLIGATIONS FUND 3 Government Money Market 11,719,388,14 N 4/14/1997
Fund
TRUST FOR GOVERNMENT CASH 1 Government Money Market 513,768,826 N 3/30/1989
RESERVES Fund
TRUST FOR SHORT-TERM U.S. 1 Government Money Market 558,360,562 N 12/29/1975
GOVERNMENT SECURITIES Fund
TRUST FOR U.S. TREASURY 1 Government Money Market 1,247,307,988 N 11/8/1979
OBLIGATIONS Fund
U.S. TREASURY CASH RESERVES 2 Government Money Market 2,579,055,829 N 5/14/1991
Fund
VIRGINIA MUNICIPAL CASH TRUST 2 Municipal Money Market 278,494,025 N 8/30/1993
---------------
TOTAL MONEY MARKET FUNDS $ 83,037,163,016
---------------
------- ---------------
MANAGED FUND TOTAL 248 $ 119,835,020,711
------- ---------------
Other Managed Assets* 4,984,535,660
---------------
---------------
TOTAL MANAGED ASSETS $ 124,819,556,371
===============
</TABLE>
Summary:
Total Number of Load Funds: 36
Total Number of No-Load
Funds: 93
Total Number of Funds: 129
*Other Managed Assets include
primarily Separate Accounts
FINANCIAL REVIEW
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with Federated Investors, Inc. and its subsidiaries' (Federated) Consolidated
Financial Statements and Notes. The selected consolidated financial data (except
managed and administered assets) of Federated for the five years ended December
31, 1999 have been derived from the audited consolidated financial statements of
Federated. See the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section and the consolidated financial statements
which follow.
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands, except per share data) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue $ 601,098 $ 522,127 $403,719 $ 321,793 $ 279,831
Operating expenses:
Compensation and related 152,469 146,927 139,373 126,966 101,534
Other operating expenses 201,278 177,845 141,004 134,308 104,885
Amortization of intangible assets 10,405 14,937 13,715 8,886 10,445
Total operating expenses 364,152 339,709 294,092 270,160 216,864
Operating income 236,946 182,418 109,627 51,633 62,967
Nonoperating expenses 31,846 27,614 20,060 20,287 9,826
Minority interest 10,219 8,870 7,584 6,811 5,801
Income tax provision 70,861 53,565 30,957 10,930 18,809
Income before extraordinary item 124,020 92,369 51,026 13,605 28,531
Extraordinary item, net of tax 0 0 449 986 0
Net income 124,020 92,369 50,577 12,619 28,531
Dividends on preferred stock 0 0 0 3,025 6,000
Net income applicable to common stock $ 124,020 $ 92,369 $ 50,577 $ 9,594 $ 22,531
Cash dividends per common share 1 $ 0.1640 $ 0.1350 $ 0.0583 $ 0.0417 $ 0.1667
Earnings per common
share-basic:
Income before extraordinary item 1 $ 1.49 $ 1.10 $ 0.62 $ 0.13 $ 0.25
Earnings per common share-assuming dilution:
Income before extraordinary item 1 $ 1.44 $ 1.07 $ 0.61 $ 0.13 $ 0.24
Operating margin 39% 35% 27% 16% 23%
BALANCE SHEET DATA AT PERIOD END:
Cash and cash equivalents $ 171,490 $ 185,581 $ 22,912 $ 6,561 $ 7,181
Securities available for sale 66,438 13,398 8,945 13,761 16,387
Deferred sales commissions, net 298,978 258,593 164,623 85,905 36,845
Intangible assets, net 42,547 52,953 67,880 69,105 63,703
Total assets 673,193 581,656 338,435 248,231 185,402
Long-term debt-recourse 84,446 98,698 98,950 244,125 68,062
Long-term debt-nonrecourse 2 309,741 272,850 185,388 0 0
Total liabilities 553,785 492,279 379,079 334,339 155,883
Shareholders' equity 118,812 88,706 (41,110) (86,922) 28,692
Book value per common share $ 1.45 $ 1.03 $ (0.49) $ (1.04) $ 0.32
MANAGED AND ADMINISTERED ASSETS AT PERIOD
END (in millions):
Money market funds $ 83,299 $ 77,055 $ 63,622 $ 51,163 $ 40,610
Equity funds 20,941 15,503 11,710 7,594 5,287
Fixed-income funds 15,857 16,437 15,067 14,109 14,330
Separate accounts 4,723 2,558 2,141 1,976 1,486
Total managed assets $ 124,820 $ 111,553 $ 92,540 $ 74,842 $ 61,713
Total administered assets $ 41,234 $ 28,165 $ 46,999 $ 35,574 $ 22,089
</TABLE>
1 Reflects the one-for-one stock dividend paid in 1996 and the one-for-one
stock dividend and one-for-two stock dividend paid in 1998.
2 See Note 5 to the Consolidated Financial Statements for information
concerning nonrecourse debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
AVERAGE MANAGED AND ADMINISTERED ASSETS
<TABLE>
<CAPTION>
Percent
Year Ended December 31, Change
(dollars in millions) 1999 1998
<S> <C> <C> <C>
Money market funds $ 79,253 $ 69,074 15%
Equity funds 17,531 13,777 27%
Fixed-income funds 16,680 15,851 5%
Separate accounts 4,109 2,334 76%
Total average managed assets $ 117,573 $ 101,036 16%
Total average administered assets $ 35,079 $ 53,136 (34%)
</TABLE>
COMPONENTS OF CHANGES IN EQUITY AND FIXED-INCOME FUND MANAGED ASSETS
<TABLE>
<CAPTION>
Percent
Year Ended December 31, Change
(dollars in millions) 1999 1998
<S> <C> <C> <C>
EQUITY FUNDS
Beginning assets $ 15,503 $ 11,710 32%
Sales 6,536 5,049 29%
Redemptions (4,549) (3,098) 47%
Net sales 1,987 1,951 2%
Net exchanges 128 (17) 853%
Other 1 3,323 1,859 79%
Ending assets $ 20,941 $ 15,503 35%
FIXED-INCOME FUNDS
Beginning assets $ 16,437 $ 15,067 9%
Sales 5,799 6,170 (6%)
Redemptions (5,891) (4,831) 22%
Net (redemptions) sales (92) 1,339 (107%)
Net exchanges 50 (274) 118%
Other 1 (538) 305 (276%)
Ending assets $ 15,857 $ 16,437 (4%)
</TABLE>
1 Includes primarily reinvested dividends and distributions, net investment
income and changes in the market value of securities held by the funds.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the "Selected Consolidated
Financial Data" section and the consolidated financial statements appearing
elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
Federated is a leading provider of investment management products and related
financial services.
Federated derives a majority of its revenue through advising, distributing and
servicing the Federated funds, separately managed accounts and other related
products, in both domestic and international markets. Federated also derives
revenue through servicing third-party mutual funds.
Investment advisory, distribution and the majority of the servicing fees are
based on the net asset value of the investment portfolios that are managed or
administered by Federated. As such, these revenues are dependent upon factors
including market conditions and the ability to attract and maintain assets.
Accordingly, revenues will fluctuate with changes in the total value and
composition of the assets under management or administration.
YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
NET INCOME. Net income for the year ended December 31, 1999, was $124.0 million
or $1.44 per diluted share as compared to $92.4 million or $1.07 per diluted
share for 1998. This increase of 34% and 35%, respectively, reflects increased
revenue primarily due to growth in fees earned from equity and money market
assets, as well as improvements in operating margins, from 35% to 39%.
REVENUE. Total revenue increased $79.0 million or 15% to $601.1 million for 1999
from $522.1 for 1998. Reve nue from managed assets was $534.5 million for 1999
as compared to $457.4 million for 1998. This increase of $77.1 million or 17%
reflects a 16% increase in average managed assets from $101.0 billion for 1998
to $117.6 billion for 1999. The significant asset growth included increases of
15%, 27%, 5% and 76% in money market funds, equity funds, fixed-income funds and
separate accounts, respectively. Revenue from managed assets increased at a
higher rate than the rate of average managed asset growth due to the composition
of assets, with significant growth in equity fund assets, which earn the highest
fees per invested dollar. Interest and dividends increased by $5.0 million or
57% over the prior year as a result of the investment of increased operating
cash flows in interest-earning accounts and securities. Other income decreased
$2.7 million or 35% from $7.6 million for 1998 to $4.9 million for 1999,
principally as a result of servicing contract buyouts during 1998 totaling $6.0
million partially offset by a $3.0 million gain on the sale of certain
nonearning assets in the second quarter of 1999.
OPERATING EXPENSES. Total operating expenses were $364.2 million in 1999 as
compared to $339.7 million in 1998. This increase of $24.5 million or 7% is
largely attributable to growth in sales and average assets under management as
more than 85% of the change over 1998 is due
to increases in expenses which fluctuate in correlation with changes in sales
and average managed assets. These expenses include incentive compensation,
marketing allowances and amortization of deferred sales commissions. Operating
margins have improved to 39% for 1999 from 35% for 1998.
Advertising and promotional expenses were $55.1 million for 1999 as compared to
$46.0 million for 1998. This increase of $9.1 million or 20% is primarily the
result of higher levels of marketing allowances being paid to brokers and bank
clients for the retailing efforts of marketing funds, as well as increased
advertising, promotional and printing expenses to further build company name and
brand awareness.
Professional service fees were $24.4 million for 1999 as compared to $21.2
million for 1998. This increase of $3.2 million or 15% is primarily due to
higher fees paid to a third party for outsourced portfolio accounting services
as a result of the increased average assets in 1999 as compared to 1998. To a
lesser extent, the increase in professional service fees is attributable to
increased consulting fees relating to certain information systems and other
special projects in 1999.
Amortization of deferred sales commissions was $48.3 million for 1999 as
compared to $32.1 million for 1998. This increase of $16.2 million or 50% is due
to higher levels of deferred sales commissions as a result of the continued sale
of shares of funds which require Federated to advance commissions to
broker/dealers.
Amortization of intangible assets was $10.4 million for 1999 as compared to
$14.9 million for 1998. This decrease of $4.5 million or 30% is attributable to
certain intangible assets reaching the end of their amortization schedules in
1999.
Other expenses were $6.5 million for 1999 as compared to $9.7 million for 1998.
This decrease of $3.2 million or 32% is primarily the result of a favorable
settlement of certain non-income related taxes and a reduction in bad-debt
expense as a result of improved collection of accounts receivable.
NONOPERATING EXPENSES. Nonoperating expenses were $31.8 million for 1999 as
compared to $27.6 million for 1998. This increase of $4.2 million or 15% is
primarily attributable to increased interest and other debt-related expenses
recognized on higher levels of nonrecourse debt incurred in connection with the
securitization of B Share fund assets.
MINORITY INTEREST. Minority interest was $10.2 million for 1999 as compared to
$8.9 million for 1998. This increase of $1.3 million or 15% is a result of
higher net income being recorded for a subsidiary for which Federated acts as
the general partner with a majority interest of 50.5%. The increase in income is
attributable to higher average managed assets of funds advised by the
subsidiary.
INCOME TAXES. The income tax provision for 1999 was $70.9 million as compared to
$53.6 million for 1998. This increase of $17.3 million or 32% is primarily due
to the increase in the level of income before income taxes from $145.9 million
for 1998 to $194.9 million for 1999, an increase of $49.0 million or 34%. The
effective tax rate for 1999 and 1998 was 36.4% and 36.7%, respectively.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO THE
YEAR ENDED DECEMBER 31, 1997
NET INCOME. Net income for the year ended December 31, 1998, was $92.4 million,
or $1.07 per diluted share, an 83% and 78% increase, respectively, over 1997.
Revenue growth of 29% from higher levels of average managed assets as well as
improvements in operating margins, from 27% to 35%, were the primary reasons for
the improved financial performance. The higher levels of average managed assets
occurred despite the market volatility experi enced in 1998. In 1998, net sales
for equity and fixed-income funds were $2.0 billion and $1.3 billion,
respectively, resulting in increases of 7% and 697%, respectively, over 1997, as
a result of the continued strong investment performance and expanded product
menu of these asset classes. The increase in money market fund assets in 1998
was the result of increased customer demand for investment vehicles in which to
place cash during periods of market volatility, as well as efforts to expand the
corporate customer base.
REVENUE. Total revenue was $522.1 million for 1998 as compared to $403.7 million
for 1997. This increase of $118.4 million or 29% is primarily due to higher
levels of managed assets. Average managed assets increased 24% from $81.6
billion for 1997 to $101.0 billion for 1998, including increases of 24%, 42%,
10% and 25% in money market funds, equity funds, fixed-income funds and separate
accounts, respectively. Service-related revenues from sources other than managed
assets increased by approximately $3.3 million primarily due to increased
revenues within Federated's clearing and retirement plan recordkeeping services.
Interest and dividends increased by $5.9 million or 193% over the prior year as
a result of higher levels of invested cash resulting from the B Share advanced
commission financing program, net proceeds from Federated's initial public
offering in May 1998 and higher levels of cash generated from operations. Other
income increased $4.3 million or 126%, from $3.4 million for 1997 to $7.6
million for 1998, principally as a result of servicing contract buyouts during
1998 totaling $6.0 million. Collectively, these clients, as well as certain
other clients whose contracts had expired and were not renewed during 1998, had
administered assets of $31.6 billion at the time of their departure. However,
these assets generated less than 2% of 1998 total revenue.
OPERATING EXPENSES. Total operating expenses were $339.7 million for 1998 as
compared to $294.1 million for 1997. This increase of $45.6 million or 16% is
largely the result of continued expense management, with expense increases
largely attributable to growth in sales and assets under management. Expense
growth has been contained at levels substantially below the 29% increase in
revenues, and, accordingly, operating margins have improved to 35% for 1998 from
27% for 1997.
Compensation and related expenses were $146.9 million for 1998 as compared to
$139.4 million for 1997. This increase of $7.5 million or 5% is primarily
attributed to a 54% increase in variable-based compensation as a result of
increased sales, favorable investment performance as compared to benchmarks and
overall improved financial performance of Federated, as well as staff growth of
15% within the investment research area and 6% within certain service areas.
These increases were partially offset by staffing reductions resulting from the
outsourcing of the portfolio accounting function and the capitalization of
certain salaries and employee benefits related to internally developed software.
Advertising and promotional expenses were $46.0 million for 1998 as compared to
$34.6 million for 1997. This increase of $11.4 million or 33% is primarily the
result of higher levels of marketing allowances being paid to brokers and bank
clients for the retailing efforts of marketing funds, as well as increased
spending for printing, advertising and promotional expenses to further build
company name and brand awareness.
Office and occupancy expenses were $27.2 million for 1998 as compared to $24.9
million for 1997. This increase of $2.3 million or 9% is primarily attributable
to increased rent expense for leased space as a result of general rate increases
and to Federated's acquisition of additional office space in the second quarter
of 1998 as part of an effort to consolidate certain servicing functions. This
consolidation eventually resulted in a net reduction of leased office space at
the end of 1998.
Professional service fees were $21.2 million for 1998 as compared to $8.5
million for 1997. This increase of $12.7 million or 148% is due to fees paid to
a third party for portfolio accounting services, which were performed internally
throughout most of 1997, and was partially offset by reductions in consulting
and legal fees.
Amortization of deferred sales commissions was $32.1 million for 1998 as
compared to $20.9 million for 1997. This increase of $11.2 million or 54% is due
to higher levels of deferred sales commissions as a result of the continued sale
of shares of funds which require Federated to advance commissions to
broker/dealers.
Amortization of intangible assets was $14.9 million for 1998 as compared to
$13.7 million for 1997. This increase of $1.2 million or 9% is the result of a
business acquisition in the second quarter of 1997.
NONOPERATING EXPENSES. Nonoperating expenses were $27.6 million for 1998 as
compared to $20.1 million for 1997. This increase of $7.5 million or 38% is
attributable to interest and other debt-related expenses recognized relative to
higher levels of nonrecourse debt incurred for the securitization of B Share
fund assets and was partially offset by the elimination of interest expense on
Federated's revolving line of credit as a result of the reduction of
debt previously held within Federated's Senior Secured Credit Agreement.
MINORITY INTEREST. Minority interest was $8.9 million for 1998 as compared to
$7.6 million for 1997. This increase of $1.3 million or 17% is the result of
higher net income being recorded for a subsidiary for which Fed erated acts as
the general partner with a majority interest of 50.5%. The increase in income is
attributable to higher average managed assets of funds advised by the
subsidiary.
INCOME TAXES. The income tax provision for 1998 was
$53.6 million as compared to $31.0 million for 1997,
an increase of $22.6 million or 73%. This increase was
due primarily to the level of income before income taxes
increasing from $82.0 million for 1997 to $145.9 million
for 1998, an increase of $63.9 million or 78%. The
effective tax rate for 1998 and 1997 was 36.7% and 37.8%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. Cash and cash equivalents and securities
available for sale totaled $237.9 million in 1999 as compared
to $199.0 million in 1998.
Cash provided by operating activities totaled $132.1 million for 1999 as
compared to $60.1 million for 1998. This increase is due primarily to higher net
income in 1999 and a decrease in sales commissions paid to brokers due to
reduced sales of B shares. In 1999, the cash flow from operating activities was
primarily utilized for the purchase of securities, treasury stock and equipment,
dividend payments, distributions to the minority interest partner and payments
on debt.
CAPITAL EXPENDITURES. Capital expenditures totaled $17.5 million for the year
ended December 31, 1999, which excludes Year 2000-related project costs
described below. It is anticipated that 2000 capital expenditures will range
from $10 million to $15 million.
DIVIDENDS. In 1998, Federated's board of directors adopted a policy to declare
and pay cash dividends on a quarterly basis. Dividends paid per share in 1999,
1998 and 1997 were $0.1640, $0.1350 and $0.0583, respectively. In January 2000,
Federated's board of directors declared a dividend of $0.042 per share that was
paid on February 15, 2000. After the payment of the dividend on February 15,
2000, and stock repurchase payments through March 6, 2000, given current debt
covenants as disclosed in the Common Stock footnote (Note 9 to the consolidated
financial statements), Federated has the ability to pay dividends of
approximately $14.1 million.
DEBT FACILITIES. Federated has the following recourse
debt facilities: Senior Secured Credit Agreement and
Senior Secured Note Purchase Agreement.
SENIOR SECURED CREDIT AGREEMENT. At December 31, 1999, the outstanding balance
under the Senior Secured Credit Agreement was zero with an amount available to
borrow of $150.0 million. The Senior Secured Credit Agreement contains various
financial and other covenants. Federated was in compliance with all debt cov
enants at December 31, 1999.
SENIOR SECURED NOTE PURCHASE AGREEMENT. The Senior Secured Note Purchase
Agreement debt totaled $98.0 million as of December 31, 1999. This note is due
in seven annual $14.0 million installments beginning June 2000 and ending June
2006. The Senior Secured Note Purchase Agreement contains various financial and
other covenants. Federated was in compliance with all debt covenants at December
31, 1999.
CAPITALIZED LEASE OBLIGATIONS. At December 31, 1999, Federated had capitalized
lease obligations totaling $0.7 million related to certain telephone equipment.
The scheduled principal payments approximate $0.3 million per year for 2000
through 2002.
DEFERRED SALES COMMISSIONS AND NONRECOURSE DEBT. Certain subsidiaries of
Federated pay commissions to broker/dealers (deferred sales commissions) to
promote investments in certain mutual funds. For mutual fund shares sold under
such programs, Federated receives certain distribution and servicing fees from
the mutual fund over the outstanding life of such shares. These fees consist of
12b-1 fees, shareholder service fees and contingent deferred sales charges
(CDSCs). 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 a CDSC 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, Federated capitalizes up-front commissions paid
to broker/dealers as deferred sales commissions and amortizes them over the
estimated benefit period not to exceed CDSC periods. The 12b-1 and shareholder
service fees are recognized in the Consolidated Statements of Income over the
life of the mutual fund class share. Any CDSCs collected are used to reduce the
deferred sales commission asset.
For B Share-related sales, Federated finances up-front commissions paid to
broker/dealers through the sale of the rights to future revenue streams
associated with B Share deferred sales commissions. For accounting purposes,
these sales are accounted for as financings, and nonrecourse debt is recorded.
The current financing agreement expires in October 2000.
The following table demonstrates the effects of the B Share financing program on
the Consolidated Balance Sheets at December 31, 1999 and 1998 and the
Consolidated Statements of Income for the years ended December 31, 1999, 1998
and 1997, respectively:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
<S> <C> <C>
DECEMBER 31
Assets
Deferred sales
commissions, net 1 $ 288,844 $ 249,580
Receivables-Federated funds 8,363 6,314
Other long-term assets 2,075 2,798
Liabilities
Long-term debt-
nonrecourse $ 309,741 $ 272,850
Accounts payable 6,186 3,951
<CAPTION>
(in thousands) 1999 1998 1997 2
<S> <C> <C> <C>
PERIODS ENDED DECEMBER 31
Revenues
Other service fees, net-Federated $ 72,311 $ 52,472 $ 8,582
funds
Expenses
Amortization of deferred
sales commissions $ 43,080 $ 28,881 $ 4,191
Debt expense-nonrecourse 22,979 18,759 1,936
Other expenses 599 764 124
</TABLE>
1 Excludes deferred sales commissions related to B Share revenue streams which
have not been financed as of the end of the period due to the timing of the sale
of the revenue streams to the third party.
2 Represents activity from the inception of the B Share financing program in the
fourth quarter 1997 through December 31, 1997.
Due to the nonrecourse nature of this financing arrangement, the $16.6 million
excess of B Share-related liabilities over the related assets at December 31,
1999, will be recognized in income over the remaining life of the
B Share cash flows.
SHAREHOLDERS' EQUITY. In May 1998, Federated Investors was merged with and into
Federated Investors, Inc., 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 Federated
Investors, Inc., 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 Federated Investors, Inc. based on their relative
proportionate values immediately prior to the merger.
Also in May 1998, Federated issued an additional 2,610,000 shares of Class B
common stock in an initial public offering for net proceeds of approximately
$46.2 million in cash.
In 1999, the Federated board of directors approved two
separate share repurchase programs authorizing
Federated to purchase up to $20.0 million of Federated Class B common stock
under the first program and up to five million shares of Federated Class B
common stock under the second program. Under each of the programs, shares can be
repurchased in open market transactions over a period of 12 months from the date
of the board resolution. In addition, under the second program, shares can also
be purchased in private transactions. The programs authorize executive
management to determine the timing and the amount of shares for each purchase.
The repurchased stock will be held in treasury to be used for employee benefit
plans, potential acquisitions and other corporate activities. As of December 31,
1999, Federated has purchased 4,348,610 shares of Class B common stock under
these programs and can repurchase an additional 1,836,043 shares through its
current authorized programs, subject to debt-covenant restrictions.
FUTURE CASH REQUIREMENTS. Management expects that the principal needs for cash
will be to advance sales commissions, repurchase company stock, service recourse
debt, fund property and equipment acquisitions, pay shareholder dividends, seed
new products and fund strategic business acquisitions. Management believes that
Federated's existing liquid assets, together with the expected continuing cash
flow from operations, its borrowing capacity under current credit facilities,
its B Share financing arrangement and its ability to issue stock will be
sufficient to meet its present and reasonably foreseeable cash needs.
YEAR 2000 DISCLOSURE
Federated completed all of its year 2000 (Y2K) readiness work for its computer
systems prior to December 31, 1999, and closely managed the period from the end
of December through the beginning of January 2000 to ensure its systems and
operations functioned correctly through this period. Federated encountered no
significant Y2K problems with its computer systems. Only minor problems were
encountered, all of which were quickly detected and corrected with little or no
incremental cost to Federated.
Federated incurred costs of approximately $10.0 million through December 31,
1999, to address the Y2K issue, with approximately $4.8 million being reflected
within the current year's financial statements.
Federated's preparation for Y2K illustrates that widespread computer problems
may have an adverse impact on Federated's results of operations and financial
position. It is not possible to predict with certainty all of the adverse
effects that could result from a failure of third parties to address computer
system problems or whether such effects could have a material adverse impact on
Federated. Federated will continue to monitor its computing environment.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Year 2000 Readiness
Disclosure, Future Cash Requirements and elsewhere in this report constitute
forward-looking statements which involve known and unknown risks, uncertainties
and other factors that may cause the actual results, levels of activity,
performance or achievements of Federated or industry results to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. For a
discussion of such risk factors, see the section titled Risk Factors and
Cautionary Statements in Federated's Annual Report on Form 10-K for the year
ended December 31, 1999, and other reports on file with the Securities and
Exchange Commission. As a result of the foregoing and other factors, no
assurance can be given as to future results, levels of activity, performance or
achievements, and neither Federated nor any other person assumes responsibility
for the accuracy and completeness of such state ments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Federated's investments are primarily money market funds and fluctuating value
mutual funds with investments of two years or less. In addition, as of December
31, 1999,
Federated had an investment in high yield asset-backed
securities which is included in "Other long-term assets"
on the Consolidated Balance Sheets. Occasionally,
Federated invests in new fluctuating value mutual
funds (performance seeds) sponsored by Federated in order to provide investable
cash to the fund allowing the fund to establish a performance history. Federated
may use derivative financial instruments to hedge these investments. As of
December 31, 1999, the book value of the performance seed investments and the
derivative financial instruments were $17.1 million and $(0.1) million,
respectively. All of Federated's debt instruments carry fixed interest rates and
therefore are not subject to market risk.
MANAGEMENT'S REPORT
Federated Investors, Inc. (Federated) management takes responsibility for the
integrity and fair presentation of the financial statements in this annual
report. These financial statements were prepared from accounting records which
management believes fairly and accurately reflect Federated's operations and
financial position.
The financial statements were prepared in conformity with accounting principles
generally accepted in the United States and, as such, include amounts based on
management's best estimates and judgements considering currently available
information and management's view of current conditions and circumstances.
Management also prepared the other information in this report and is responsible
for its accuracy and consistency with the financial statements.
Management is responsible for establishing and maintaining effective internal
control designed to provide reasonable assurance that assets are protected from
improper use and accounted for in accordance with its policies and that
transactions are recorded accurately in Federated's records. The concept of
reasonable assurance is based upon a recognition that the cost of the controls
should not exceed the benefit derived. Even effective internal control, no
matter how well designed, has inherent limitations - including the possibility
of circumvention or overriding of controls - and therefore can only provide
reasonable assurance with respect to financial statement preparation and
safeguarding of assets.
The financial statements of Federated have been audited by Ernst & Young LLP,
independent auditors. Their accompanying report is based on an audit conducted
in accordance with auditing standards generally accepted in the United States.
Federated Investors, Inc.
[Graphic]
J. Christopher Donahue
President and Chief Executive Officer
[Graphic]
Thomas R. Donahue
Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Federated Investors, Inc.
We have audited the accompanying consolidated balance sheets of Federated
Investors, Inc. and subsidiaries (Federated) as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in share holders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of Federated's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Federated
Investors, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
Pittsburgh, Pennsylvania
January 24, 2000
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 171,490 $185,581
Securities available for sale 66,438 13,398
Receivables - Federated funds 29,750 26,097
Receivables - other, net of reserve of $184
and $1,276, respectively 5,413 4,872
Accrued revenues 6,050 3,666
Prepaid expenses 3,305 4,688
Current deferred tax asset, net 1,382 1,636
Other current assets 319 3,958
Total current assets 284,147 243,896
LONG-TERM ASSETS
Customer relationships, net of accumulated
amortization of $12,800 and $39,571,
respectively 9,613 17,743
Goodwill, net of accumulated amortization
of $16,013 and $13,762, respectively 32,856 35,107
Other intangible assets, net of accumulated
amortization of $112 and $3,608,
respectively 78 103
Deferred sales commissions, net of
accumulated amortization of $79,365 and
$82,517, respectively 298,978 258,593
Property and equipment, net 31,305 21,550
Other long-term assets 16,216 4,664
Total long-term assets 389,046 337,760
Total assets $ 673,193 $ 581,656
CURRENT LIABILITIES
Cash overdraft $ 9,111 $ 5,932
Current portion of long-term debt -
recourse 14,259 239
Accrued expenses 58,768 51,096
Accounts payable 29,321 24,864
Income taxes payable 2,865 2,522
Other current liabilities 1,148 1,675
Total current liabilities 115,472 86,328
LONG-TERM LIABILITIES
Long-term debt - recourse 84,446 98,698
Long-term debt - nonrecourse 309,741 272,850
Long-term deferred tax liability, net 37,177 31,585
Other long-term liabilities 6,949 2,818
Total long-term liabilities 438,313 405,951
Total liabilities 553,785 492,279
Minority interest 596 671
SHAREHOLDERS' EQUITY Common stock:
Class A, no par value, 20,000 shares
authorized, 6,000 shares issued and
outstanding 189 189
Class B, no par value, 900,000,000 shares
authorized, 86,337,000 shares issued 75,087 75,090
Retained earnings 124,653 14,556
Treasury stock, at cost, 4,622,360 and
138,750 shares Class B common stock,
respectively (79,976) (23)
Employee restricted stock plan (1,046) (1,512)
Accumulated other comprehensive income (95) 406
Total shareholders' equity 118,812 88,706
Total liabilities, minority interest, and
shareholders' equity $ 673,193 $581,656
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
REVENUE
Investment advisory fees, net - Federated funds $313,725 $ 272,686 $ 215,405
Investment advisory fees, net - other 11,198 7,360 5,507
Administrative service fees, net - Federated funds 80,993 72,101 60,934
Administrative service fees, net - other 23,388 25,133 24,495
Other service fees, net - Federated funds 124,188 101,252 67,494
Other service fees, net - other 23,512 23,347 20,669
Commission income 4,407 4,008 2,744
Interest and dividends 13,926 8,887 3,032
Gain (loss) on sale of securities available for sale 820 (295) 49
Other income 4,941 7,648 3,390
Total revenue 601,098 522,127 403,719
OPERATING EXPENSES
Compensation and related 152,469 146,927 139,373
Advertising and promotional 55,132 46,042 34,609
Systems and communications 27,809 27,840 27,118
Office and occupancy 25,313 27,215 24,863
Professional service fees 24,431 21,171 8,539
Travel and related 13,797 13,802 14,968
Amortization of deferred sales commissions 48,275 32,117 20,882
Amortization of intangible assets 10,405 14,937 13,715
Other 6,521 9,658 10,025
Total operating expenses 364,152 339,709 294,092
Operating income 236,946 182,418 109,627
NONOPERATING EXPENSES
Debt expense-recourse 8,867 8,855 18,124
Debt expense-nonrecourse 22,979 18,759 1,936
Total nonoperating expenses 31,846 27,614 20,060
Income before minority interest,
income taxes and extraordinary item 205,100 154,804 89,567
Minority interest 10,219 8,870 7,584
Income before income taxes and extraordinary item 194,881 145,934 81,983
Income tax provision 70,861 53,565 30,957
Income before extraordinary item 124,020 92,369 51,026
Extraordinary item related to debt
restructuring costs, net of tax 0 0 449
Net income $124,020 $ 92,369 $ 50,577
EARNINGS PER SHARE-BASIC
Income before extraordinary item $1.49 $ 1.10 $ 0.62
Extraordinary item related to debt
restructuring costs, net of tax -- -- (0.01)
Net income per share - basic $1.49 $ 1.10 $ 0.61
EARNINGS PER SHARE-ASSUMING DILUTION
Income before extraordinary item $1.44 $ 1.07 $ 0.61
Extraordinary item related to debt restructuring
costs, net of tax -- -- (0.01)
Net income per share - assuming dilution $1.44 $ 1.07 $ 0.60
Cash dividends per share $0.1640 $ 0.1350 $ 0.0583
</TABLE>
Per share amounts have been restated to reflect the one-for-one stock dividend
and one-for-two stock dividend paid in 1998.
(The accompanying notes are an integral part of these consolidated financial
statements.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
Additional
Shares Common Paid-in
Class A Class B Treasury Stock Capital
<S> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1997 2,000 27,988,000 6,487,758 $ 347 $ 29,605
Net income 0 0 0 0 0
Other comprehensive income,
net of tax: Unrealized
loss on securities
available for sale, net of
reclassification adjustment 0 0 0 0 0
Other 0 0 0 0 0
Comprehensive
income
Amortization of employee
restricted stock plan and
other compensation plans 0 0 0 0 257
Dividends declared 0 0 0 562 0
Issuance of stock under
employee restricted
stock plan, net 0 0 0 0 (218)
Restricted stock forfeitures 0 0 0 0 (1,070)
Purchase of treasury stock 0 (179,000) 179,000 0 0
BALANCE AT DECEMBER
31, 1997 2,000 27,809,000 6,666,758 909 28,574
Net income 0 0 0 0 0
Other comprehensive
income, net of tax:
Unrealized gain on
securities available
for sale, net of
reclassification
adjustment 0 0 0 0 0
Other 0 0 0 0 0
Comprehensive
income
Amortization of employee
restricted stock plan and
other compensation plans 0 0 0 216 42
Dividends declared 4,000 55,818,000 13,333,516 0 0
Initial public offering of
Class B common stock 0 2,610,000 0 46,202 0
Merger of Federated
Investors into Federated
Investors, Inc. 0 0 (20,000,274) 27,707 (27,707)
Issuance/exercise of stock
options 0 100,000 0 487 (909)
Restricted stock forfeitures 0 0 0 (242) 0
Purchase of treasury stock 0 (138,750) 138,750 0 0
Other 0 0 0 0 0
BALANCE AT DECEMBER 31, 1998 6,000 86,198,250 138,750 75,279 0
Net income 0 0 0 0 0
Other comprehensive income,
net of tax: Unrealized loss
on securities available for
sale, net of reclassification
adjustment 0 0 0 0 0
Foreign currency translation 0 0 0 0 0
Other 0 0 0 0 0
Comprehensive
income
Amortization of employee
restricted stock plan and
other compensation plans 0 0 0 260 0
Dividends declared 0 0 0 0 0
Restricted stock
forfeitures 0 0 0 (263) 0
Purchase of treasury
stock 0 (4,483,610) 4,483,610 0 0
Other 0 0 0 0 0
BALANCE AT
DECEMBER 31, 1999 6,000 81,714,640 4,622,360 $75,276 $ 0
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Employee Other Total
Restricted Compre- Share-
Retained Treasury Stock hensive holders'
Earnings Stock Plan Income Equity
<S> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1997 $ 9,989 $ (123,711) $ (3,167) $ 15 $ (86,922)
Net income 50,577 0 0 0 50,577
Other comprehensive income,
net of tax: Unrealized
loss on securities
available for sale, net of
reclassification adjustment 0 0 0 (110) (110)
Other 0 0 0 4 4
Comprehensive income 50,471
Amortization of employee
restricted stock plan and
other compensation plans 0 0 28 0 285
Dividends declared (5,429) 0 0 0 (4,867)
Issuance of stock under
employee restricted
stock plan, net 0 440 (197) 0 25
Restricted stock forfeitures 0 0 1,070 0 0
Purchase of treasury stock 0 (102) 0 0 (102)
BALANCE AT DECEMBER
31, 1997 55,137 (123,373) (2,266) (91) (41,110)
Net income 92,369 0 0 0 92,369
Other comprehensive
income, net of tax:
Unrealized gain on
securities available
for sale, net of
reclassification
adjustment 0 0 0 502 502
Other 0 0 0 (5) (5)
Comprehensive
income 92,866
Amortization of employee
restricted stock plan and
other compensation plans 0 0 512 0 770
Dividends declared (11,480) 0 0 0 (11,480)
Initial public offering of
Class B common stock 0 0 0 0 46,202
Merger of Federated
Investors into Federated
Investors, Inc. (121,464) 121,464 0 0 0
Issuance/exercise of stock
options 0 1,909 0 0 1,487
Restricted stock forfeitures 0 0 242 0 0
Purchase of treasury stock 0 (23) 0 0 (23)
Other (6) 0 0 0 (6)
BALANCE AT DECEMBER 31, 1998 14,556 (23) (1,512) 406 88,706
Net income 124,020 0 0 0 124,020
Other comprehensive income,
net of tax: Unrealized loss
on securities available for
sale, net of reclassification
adjustment 0 0 0 (449) (449)
Foreign currency translation 0 0 0 (63) (63)
Other 0 0 0 11 11
Comprehensive
income
123,519
Amortization of employee
restricted stock plan and
other compensation plans 0 0 203 0 463
Dividends declared (13,924) 0 0 0 (13,924)
Restricted stock
forfeitures 0 0 263 0 0
Purchase of treasury
stock 0 (79,953) 0 0 (79,953)
Other 1 0 0 0 1
BALANCE AT
DECEMBER 31, 1999 $ 124,653 $ (79,976) $ (1,046) $ (95) $ 118,812
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
OPERATING
ACTIVITIES
Net income $ 124,020 $ 92,369 $50,577
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED BY
OPERATING
ACTIVITIES
Extraordinary loss 0 0 690
Amortization of intangible assets 10,405 14,937 13,715
Depreciation and other amortization 7,712 8,693 8,833
Amortization of deferred sales commissions 48,275 32,117 20,882
Minority interest 10,219 8,870 7,584
(Gain) loss on disposal of property and
equipment (2,973) 1,582 271
Provision for deferred income taxes 4,540 3,123 11,117
Net realized (gain) loss on sale of securities
available for sale (820) 295 (49)
Deferred sales commissions paid (128,059) (149,137) (111,628)
Contingent deferred sales charges received 39,399 23,050 12,027
Other changes in assets and liabilities:
Increase in receivables, net (4,194) (3,491) (5,780)
(Increase) decrease in accrued revenues (2,384) 934 (1,216)
Decrease (increase) in other current assets 5,276 (4,345) (183)
(Increase) decrease in other long-term
assets (501) 348 (1,870)
Increase in accounts payable and accrued
expenses 12,129 22,387 15,790
Increase (decrease) in income taxes
payable 343 10,052 (961)
Increase (decrease) in other current
liabilities 2,652 (2,022) (4,904)
Increase (decrease) in other long-term
liabilities 6,106 301 172
Net cash provided by operating
activities 132,145 60,063 15,067
INVESTING
ACTIVITIES
Proceeds from disposal of property and
equipment 4,007 0 2,454
Additions to property and equipment (17,451) (7,526) (3,129)
Cash paid for business acquisitions and
investments in joint ventures (2,158) (580) (14,699)
Purchases of securities available for sale (88,950) (16,082) (24,531)
Proceeds from redemptions of securities
available for sale 25,828 12,104 29,230
Net cash used by investing activities (78,724) (12,084) (10,675)
FINANCING
ACTIVITIES
Distributions to minority interest (10,294) (8,665) (7,932)
Dividends paid (13,924) (11,480) (4,867)
Proceeds from issuance of common stock/
options 0 47,689 25
Purchases of treasury stock (79,953) (23) (102)
Proceeds from new borrowings - recourse 0 0 15,729
Proceeds from new borrowings -
nonrecourse 123,372 142,977 195,156
Payments on debt - recourse (232) (293) (176,282)
Payments on debt - nonrecourse (86,481) (55,515) (9,768)
Net cash (used) provided by financing
activities (67,512) 114,690 11,959
Net (decrease) increase in cash and cash
equivalents (14,091) 162,669 16,351
Cash and cash equivalents, beginning of
period 185,581 22,912 6,561
Cash and cash equivalents, end of period $ 171,490 $ 185,581 $ 22,912
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW
INFORMATION
Cash paid during the year for:
Interest $ 13,611 $ 15,345 $ 21,444
Income taxes 63,957 49,075 20,495
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (December 31, 1999, 1998 and 1997)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
Federated Investors, Inc. and its subsidiaries (Federated) sponsor, market and
provide investment advisory, distribution and administrative services primarily
to mutual funds. Federated also provides investment advisory and adminis-trative
services to corporations, employee benefit plans and private investment advisory
accounts. The operations of Federated are organized into three principal
functions: investment advisory, distribution and services.
A large portion of Federated's revenue is derived from investment advisory
services provided to mutual funds and separately managed accounts through
various subsidiaries and affiliates pursuant to investment advisory contracts.
These subsidiaries are registered as investment advisers under the Investment
Advisers Act of 1940 and with certain states.
Shares of the portfolios or classes of shares under management or administration
by Federated are distributed by wholly-owned subsidiaries, which are registered
broker/ dealers under the Securities Exchange Act of 1934 and under applicable
state laws. Federated's investment products are primarily distributed within the
bank trust, broker/dealer and institutional markets.
Through wholly-owned subsidiaries, Federated provides mutual fund services to
support the operation and administration of all mutual funds it sponsors.
(B) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Federated
Investors, Inc. and its subsidiaries including special purpose entities (SPEs)
(see Note 5). All significant intercompany accounts and transactions have been
eliminated. The consolidated financial statements have been pre-pared in
accordance with accounting principles generally accepted in the United States.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements. Actual results may differ from those estimates, and such differences
may be material to the consolidated financial statements.
(C) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and investments, which consist of interest-bearing
deposits with banks, overnight federal funds sold, money market accounts, and
other investments with an original maturity of less than three months.
(D) SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at fair value based on quoted market
prices or discounted cash flows. These investments are classified as current or
long-term assets and included in "Securities available for sale" or "Other
long-term assets," respectively, on the Consolidated Balance Sheets based on
management's intention to sell the investment. The unrealized gains or losses on
these securities are included in "Accumulated other comprehensive income" on the
Consolidated Balance Sheets, net of tax. Realized gains and losses on these
securities are computed on a specific identification basis and recognized in the
Consolidated Statements of Income.
(E) DERIVATIVES
Federated enters into futures contracts and swap agreements (hedge instruments)
to hedge against market fluctuations related to certain investments (performance
seeds) in mutual funds it sponsors. Performance seeds enable the funds to build
a diversified portfolio and generally are redeemed as outside investors purchase
shares of the funds. To minimize market risk, Federated may utilize hedge
instruments which resemble the fund's portfolio. The hedge instruments are
carried at fair value based on various indices or dealer quotes and are included
in "Securities available for sale" on the Consolidated Balance Sheets. At
December 31, 1999, the futures contract and swap agreement had maturities of
less than one year.
Unrealized gains and losses on hedge instruments are recorded net of tax as part
of "Accumulated other comprehensive income" on the Consolidated Balance Sheets.
These unrealized gains and losses will be recognized upon redemption of the
instrument or termination of the agreement.
(F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, or fair value if acquired in
connection with a business combination, and are depreciated using the
straight-line method over their estimated useful lives ranging from three to 25
years. Leasehold improvements are depreciated using the straight-line method
over their estimated useful lives or their respective lease terms, whichever is
shorter. As property and equipment are placed out-of-service, the cost and
related accumulated depreciation are removed and any residual net book value is
reflected as other income in the Consolidated Statements of Income.
(G) COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Certain internal and external costs incurred in connection with developing or
obtaining software for internal use are capitalized in accordance with the
American Institute of Certified Public Accountants' Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." These capitalized costs are included in "Property and equipment,
net" on the Consolidated Balance Sheets and are amortized using the
straight-line method over the shorter of the estimated useful life of the
software or four years.
(H) INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis over
the estimated period of benefit, not to exceed 25 years. Customer relationships
are amortized using the straight-line method over their estimated period of
benefit (five to nine years). Federated continuously evaluates the remaining
useful lives and carrying values of the intangible assets to determine whether
events and circumstances indicate that a change in the useful life or impairment
in value may have occurred. Indicators of impairment monitored by Federated
include a decline in the level of managed assets, changes to contractual
provisions underlying certain intangible assets and reductions in operating cash
flows. Should there be an indication of a change in the useful life or an
impairment in value, Federated compares the carrying value of the asset and its
related useful life to the projected undiscounted cash flows expected to be
generated from the underlying asset over its remaining useful life to determine
whether an impairment has occurred. If the carrying value of the asset exceeds
the undiscounted cash flows, the asset is written down to its fair value.
Measuring impairment for the customer relationship intangible asset is dependent
upon the level of remaining managed assets for those relationships. A decline in
the remaining managed asset balance in excess of the estimated attrition rate
for those managed assets could have a considerable impact on the underlying
value of the customer relationship intangible asset.
(I) EQUITY INVESTMENT
Federated owns a 50% interest in a joint-venture company, Federated
Fonds-Service GmbH, which administers separate accounts for institutional
investors in Germany. This joint venture is accounted for under the equity
method of accounting. The equity investment is carried at Federated's share of
net assets and included in "Other long-term assets" on the Consolidated Balance
Sheets. The proportionate share of income or loss from this entity is included
in "Other income" on the Consolidated Statements of Income.
(J) DEFERRED SALES COMMISSIONS
Certain subsidiaries of Federated 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 receives certain
distribution and servicing fees from the mutual fund over the life of such
shares. These fees consist of 12b-1 fees, shareholder service fees and
contingent deferred sales charges (CDSCs). 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 a CDSC 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, Federated capitalizes up-front commissions paid
to broker/dealers as deferred sales commissions and amortizes them over the
estimated benefit period not to exceed CDSC periods. The 12b-1 and shareholder
service fees are recognized in the Consolidated Statements of Income over the
life of the mutual fund class share. Any CDSCs collected are used to reduce the
deferred sales commission asset.
For B Share-related sales, Federated finances up-front commissions paid to
broker/dealers through the sale of the rights to future revenue streams
associated with B Share deferred sales commissions. For accounting purposes,
these sales are accounted for as financings, and nonrecourse debt is 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 debt
expense associated with the nonrecourse debt, amortization of deferred sales
commissions and other program-related expenses.
(K) FOREIGN CURRENCY TRANSLATION
Federated's equity investment in the joint-venture company is translated at the
current exchange rate as of the end of the accounting period and the related
share of income or loss is translated at the average exchange rate in effect
during the period. Net exchange gains and losses resulting from translation are
excluded from income and are recorded in "Accumulated other comprehensive
income" on the Consolidated Balance Sheets. Foreign currency transaction gains
and losses relating to Federated's foreign subsidiaries are reflected in the
Consolidated Statements of Income.
(L) REVENUE RECOGNITION
Revenue is recognized during the period in which the services are performed.
Federated may waive certain fees for services (primarily investment advisory
fees) for competitive reasons, or to meet regulatory requirements.
(M) REPORTING ON ADVERTISING
Federated expenses the cost of all advertising as incurred.
(N) INCOME TAXES
Federated accounts for income taxes under the liability method, which requires
the recognition of deferred tax assets and liabilities for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
(O) COMPREHENSIVE INCOME
Federated reports all changes in comprehensive income in the Consolidated
Statements of Changes in Shareholders' Equity, in accordance with the provisions
of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). Comprehensive income includes net income, unrealized gains
and losses on securities available for sale, net of tax, and foreign currency
translation adjustments, net of tax.
(P) STOCK-BASED COMPENSATION
As allowed under the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), Federated has
elected to apply Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based plans.
(Q) RECLASSIFICATION OF PRIOR PERIODS' STATEMENTS
Certain items previously reported have been reclassified to conform with the
current year's presentation.
(R) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) requires that all derivatives,
including hedges, be recorded at fair value and that all changes in fair value
or cash flow of both the hedge and the hedged item be recognized in earnings in
the same period. SFAS 133 is effective for years beginning after June 15, 2000.
Federated intends to adopt SFAS 133 effective January 1, 2001. The impact of
adopting the provisions of this statement on Federated's earnings and financial
position will depend on the nature and extent of Federated's investment in
derivative instruments at the time of adoption.
(2) SECURITIES AVAILABLE FOR SALE
Current and long-term securities available for sale (see Note 1) consisted of
investments in fluctuating value mutual funds and asset-backed securities and
were as follows:
<TABLE>
<CAPTION>
Estimated
Gross Unrealized Market
(in thousands) Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
December 31, 1999 $ 76,772 $ 1,032 $ (1,081) $ 76,723
December 31, 1998 $ 12,757 $ 719 $ (78) $ 13,398
</TABLE>
The amounts above include Federated's derivative instruments as of December 31,
1999. Federated remains at risk for possible changes in the market value of the
derivatives; however, such risks should be mitigated by market fluctuations in
the underlying hedged item. The following table sets forth quantitative
information for the derivatives as of December 31, 1999.
<TABLE>
<CAPTION>
Recorded Aggregate
Fair Carrying Deferred Contract
(in thousands) Value Amount Loss Value
<S> <C> <C> <C> <C>
Swap agreement $ (244) $ (244) $ (244) $ 15,000
Futures contract $ 110 $ 110 $ (101) $ 1,530
</TABLE>
Gross realized gains and (losses) on the sale of securities available for sale
were approximately $1,162,000 and $(342,000); $395,000 and $(690,000); and
$275,000 and $(226,000), respectively, for the years ended December 31, 1999,
1998 and 1997.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1999 1998
<S> <C> <C>
Computer equipment $ 28,833 $ 30,701
Leasehold improvements 19,532 19,322
Transportation equipment 11,845 1,881
Office furniture and equipment 11,200 11,199
Software development 4,500 1,396
Total cost/fair value 75,910 64,499
Accumulated depreciation (44,605) (42,949)
Property and equipment, net $ 31,305 $ 21,550
</TABLE>
Depreciation expense was $6,663,000, $6,557,000 and $7,599,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, and included the
amortization of assets recorded under capital leases.
(4) LONG-TERM DEBT-RECOURSE
Federated's long-term debt -recourse consisted of the following:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1999 1998
<S> <C> <C>
Senior Secured Note Purchase Agreement (a) $ 98,000 $ 98,000
Capitalized leases 705 937
Total debt 98,705 98,937
Less: current portion 14,259 239
Total long-term debt - recourse $ 84,446 $ 98,698
</TABLE>
(a) The Senior Secured Note Purchase Agreement (the Note)
is due in seven equal annual installments begin
ning in 2000 and ending in 2006. The Note carries a
fixed interest rate of 7.96%. Under the terms of the Note, Federated may prepay
the debt at any time, however, a make-whole amount, equal to approximately $2.0
to $3.0 million at December 31, 1999, is required at the time of prepayment.
Borrowings under this agreement are secured by pledges of all the outstanding
common stock or shares of beneficial interest of all of the subsidiaries owned
by Federated Investors, Inc. The Note contains various financial and
nonfinancial covenants. Federated was in compliance with all such covenants at
both December 31, 1999 and 1998.
The aggregate contractual maturities of the recourse debt for the years
following December 31, 1999, are:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2000 $ 14,259
2001 14,281
2002 14,165
2003 14,000
2004 14,000
2005 and thereafter 28,000
Total recourse debt $ 98,705
</TABLE>
The Senior Secured Credit Agreement, which terminates in 2001, provides for
borrowing under a $150,000,000 revolving credit facility. Interest on borrowings
is based on a fluctuating rate generally based on, at the option of Federated, a
defined prime rate, the Federal Funds rate or the London Interbank Offering
Rate. During the term of this agreement, Federated pays a commitment fee of
0.25% on the unused portion of the revolving credit facility. At December 31,
1999, the outstanding balance under this agreement was $0. Borrowings under this
agreement are secured by pledges of all the outstanding common stock or shares
of beneficial interest of all of the subsidiaries owned by Federated Investors,
Inc. The Senior Secured Credit Agreement contains various financial and
nonfinancial covenants. Federated was in compliance with all such covenants at
both December 31, 1999 and 1998.
(5) SECURITIZATION OF B SHARE ASSETS AND NONRECOURSE DEBT
In 1997, Federated entered into an agreement with a third party to sell the
rights to the future revenue streams associated with the 12b-1 fees, shareholder
service fees and CDSCs 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 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. This agreement
expires in the fourth quarter 2000. Management intends to negotiate an
arrangement to continue the sale of the rights to these future revenue streams
after this first agreement expires.
In 1997, Federated exchanged its rights to certain future cash flows associated
with net deferred sales commission assets with a remaining book value of
$88,738,000 for $110,214,000 in cash. Two special purpose entities (SPEs) were
established for the purpose of the initial transaction. A bankruptcy remote SPE
was formed by Federated to purchase the rights to the future cash flows from a
subsidiary, which in turn sold these future cash flows to a third-party SPE. The
third-party SPE funded this purchase by issuing Class A and Class B notes.
The cash flows of the related B Share assets will be used by the third-party SPE
to first pay trustee fees and other program-related expenses. After these fees
are paid, interest and principal are paid in the following succession: Class A
interest, Class B interest, Class A principal and Class B principal (only upon
full payment of Class A principal). Any residual cash flow after full payment of
all principal on the notes will be paid 90% to Federated and 10% to the holders
of the Class B notes. As a result of Federated's 90% residual interest in the
third-party SPE cash flows, this SPE is a consolidated subsidiary of Federated.
The debt of this SPE is nonrecourse debt to Federated in the event the future
cash flows associated with the rights sold do not cover the full obligation of
the notes.
From 1997 through the end of 1999, Federated exchanged additional net deferred
sales commission assets for cash and additional third-party SPEs were formed.
However, these SPEs are not consolidated on Federated's financial statements as
a result of Federated having less than a 50% residual interest in these
third-party SPEs' cash flows. These transactions were accounted for as
financings, and the nonrecourse debt has been recorded with imputed interest
rates based on current market conditions at the time of issuance. Cash flows
associated with these B Share assets will be applied by the third-party SPEs in
the following succession: fees and other program- related expenses, interest and
principal. Federated will participate in varying levels of any residual cash
flow after full payment of program obligations. The nonrecourse debt does not
contain a contractual maturity but is amortized dependent upon the cash flows of
the related B Share assets.
The following tables summarize the changes in the deferred sales commissions
related to this agreement:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Financed balance at January 1, 1998 $ 162,398
B Share sales commissions financed 139,961
CDSCs collected (23,898)
Amortization (28,881)
Financed balance at December 31, 1998 249,580
B Share sales commissions financed 120,418
CDSCs collected (38,074)
Amortization (43,080)
Financed balance at December 31, 1999 $ 288,844
</TABLE>
Below is the activity of the nonrecourse debt tranches:
<TABLE>
<CAPTION>
Balance Balance
Interest Dec. 31, Additional Dec. 31,
(in thousands) Rate 1998 Financings Payments 1999
<S> <C> <C> <C> <C> <C>
1997-1 Class A 7.44% $ 74,251 $ 0 $ 21,275 $ 52,976
Class B 9.80% 9,700 0 0 9,700
Financings 10/97 through 12/99 6.68%-
8.01% 188,899 123,372 65,206 247,065
$ 272,850 $123,372 $ 86,481 $ 309,741
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
(A) 401(K)/PROFIT SHARING PLAN
The employees of Federated participate in a 401(k)/Profit Sharing Plan.
Federated offers a 401(k) plan covering substantially all employees. Under the
401(k) plan, employees can make salary deferral contributions at a rate of 1% to
15% of their annual compensation (as defined in the 401(k) plan), subject to
Internal Revenue Code limitations. Federated makes a matching contribution in an
amount equal to 100% of the first 2% that each participant deferred and 50% of
the next 4% of deferral contributions. Forfeitures of nonvested matching
contributions are used to offset future matching contributions.
Vesting in Federated's matching contributions commences once a participant in
the 401(k) plan has been employed at least three years and worked at least 1,000
hours per year. Upon completion of three years of service, 20% of Federated's
contribution included in a participant's account vests and 20% vests for each of
the following four years, if the participant works 1,000 hours per year.
Employees are immediately vested in their 401(k) salary deferral contributions.
Matching contributions to the 401(k) plan amounted to $2,241,000, $2,976,000 and
$2,537,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
A Federated employee becomes eligible to participate in the Profit Sharing Plan
upon the first day of employment. The Profit Sharing Plan is a defined
contribution plan to which Federated may contribute amounts as authorized by its
board of directors. No contributions have been made to the Profit Sharing Plan
in 1999, 1998 or 1997.
(B) EMPLOYEE STOCK PURCHASE PLAN
In July 1998, Federated established an Employee Stock Purchase Plan which allows
employees to purchase a maximum of 500,000 shares of Class B common stock.
Employees may contribute up to 10% of their salary to purchase shares of
Federated's Class B common stock on a quarterly basis at the market price. The
shares under the plan may be newly issued shares, treasury shares or shares
purchased on the open market. As of December 31, 1999, 16,223 shares were
purchased by the plan on the open market since the plan's inception.
(7) OTHER COMPENSATION PLANS
(A) DEFERRED COMPENSATION PLANS
In 1997, a deferred compensation arrangement was established for a group of key
employees for the purpose of providing incentives to certain individuals who
contribute to the success of Federated. Each annual award provided under this
program is deferred until 2001, with the vesting period beginning in 1997.
Termination of employment for any reason other than death, disability or
retirement, prior to the plan's vesting date of the third quarter 2001, causes
the participant's benefit to be forfeited. The liability at December 31, 1999
and 1998, was $863,000 and $316,000, respectively, and is included in "Other
long-term liabilities" on the Consolidated Balance Sheets. Amounts included in
"Compensation and related" expense on the Consolidated Statements of Income were
$508,000, $232,000 and $71,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
(B) EMPLOYEE RESTRICTED STOCK PLAN
Under the Employee Restricted Stock Plan, Federated has sold to certain key
employees, subject to restrictions, shares of Class B common stock. During the
restricted period, the recipient receives dividends on the shares. The
compensation cost to Federated (the difference between the estimated fair value
of the stock and the amount paid by the key employees at issuance) is expensed
over the period of employee performance during which the restrictions lapse, not
to exceed 10 years. In 1999, 1998 and 1997, 0, 0 and 75,000 shares,
respectively, of Class B common stock were sold under the Employee Restricted
Stock Plan. Forfeitures of 135,000, 139,000 and 612,000 shares occurred in 1999,
1998 and 1997, respectively. For the years ended December 31, 1999, 1998 and
1997, compensation expense related to the Employee Restricted Stock Plan was
$203,000, $512,000 and $28,000, respectively.
(C) STOCK OPTIONS
Stock options are part of the Stock Incentive Plan offered by Federated to
reward employees and independent directors who have contributed to the success
of Federated and to provide incentive to increase their efforts on behalf of
Federated.
In 1997, 1,683,000 stock options were granted to a group of key employees. In
1998, the final 48,000 stock appreciation rights under a discontinued Stock
Appreciation Rights Plan were converted to stock options, 300,000 employee stock
options were granted and 10,000 options were awarded to independent directors.
In 1999, 570,000 employee stock options were granted, 200,000 options were
awarded to executive officers in lieu of a portion of their 1998 earned bonus
awards and 3,000 options were awarded to independent directors. In the event the
independent appraisals (prior to the public registration of Federated's Class B
common stock in May 1998) or market value of the Class B common stock exceeds
the exercise price of the options at the time of issuance, the difference is
charged to compensation expense over the vesting period. For existing plans,
vesting occurs over a 0- to 10-year period and may be accelerated as a result of
meeting specific performance criteria. Each vested option may be exercised,
during the stated exercise period, for the purchase of one share of Class B
common stock at the exercise price.
For the years ended December 31, 1999, 1998 and 1997, compensation expense
related to the stock options was $260,000, $(57,000) and $231,000, respectively.
The following table summarizes the status of and changes in Federated's stock
option plan during the past three years:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Exercise Options Exercise
Options Price Exercisable Price
<S> <C> <C> <C> <C>
Outstanding at
beginning of 1997 2,733,000 $1.91 0 $0.00
Granted 1,683,000 5.53
Forfeited (397,200) 1.91
Outstanding at
end of 1997 4,018,800 3.43 0 0.00
Granted 358,000 8.58
Exercised (300,000) 3.33
Forfeited (249,450) 3.13
Outstanding at
end of 1998 3,827,350 3.94 0 0.00
Granted 773,000 18.57
Forfeited (131,550) 4.95
Outstanding at
end of 1999 4,468,800 $6.44 207,000 $17.64
</TABLE>
Additional information regarding stock options outstanding at December 31, 1999,
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Weighted- Remaining Weighted-
Range of Average Contractual Average
Exercise Exercise Life Exercise
Prices Outstanding Price (in Years) Exercisable Price
<S> <C> <C> <C> <C> <C>
$1.91 to $1.93 2,143,800 $ 1.92 5.8 0 $0.00
$6.00 to $9.30 1,551,750 6.64 7.7 0 0.00
$16.50 to $19.00 773,250 18.57 8.9 207,000 17.64
4,468,800 $ 6.44 7.0 207,000 $17.64
</TABLE>
Information regarding the fair value of options granted in 1999, 1998 and 1997
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Exercise price equals market price on date of
grant:
Weighted average grant-date fair value $ 7.44 $ 0.00 $1.89
Weight average exercise price 18.56 0.00 6.00
Exercise price is more than market price on date of grant:
Weighted average grant-date fair value $ 7.19 $ 1.70 $0.00
Weight average exercise price 19.00 9.61 0.00
Exercise price is less than market price on date of grant:
Weighted average grant-date fair value $ 0.00 $15.66 $0.00
Weight average exercise price 0.00 1.91 0.00
</TABLE>
Federated accounts for stock options and employee restricted stock in accordance
with APB 25. Had compensation costs for stock options and employee restricted
stock been determined based upon fair values at the grant dates in accordance
with SFAS 123, Federated would have experienced net income and earnings per
share similar to the pro forma amounts indicated below. For purposes of pro
forma results, the estimated fair values of the options and restricted stock are
recognized as expenses over the awards' vesting periods.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Pro forma net income (in thousands) $ 122,635 $ 92,235 $50,501
Pro forma basic earnings per share $ 1.47 $ 1.10 $0.61
Pro forma diluted earnings per share $ 1.43 $ 1.07 $0.60
</TABLE>
For stock options and restricted stock granted prior to Federated's initial
public offering, the fair value was estimated at the date of grant using the
Minimum Value option-pricing model with the following weighted average
assumptions: a risk-free interest rate of 5.72%; a dividend yield of 1.6%; and
an expected life of 9.5 years. For stock options granted after Federated's
initial public offering, Federated estimated the grant-date fair value using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1999 and 1998, respectively: dividend yields of 0.88% and 0.89%;
expected volatility factors of 29.2% and 29.6%; risk-free interest rates of
4.96% and 4.63%; and an expected life of 8.0 years and 5.5 years.
(8) MINORITY INTEREST IN SUBSIDIARY
A subsidiary of Federated Investors, Inc. has a majority
interest (50.5%) and acts as the general partner in Passport
Research, Ltd., a limited partnership. Edward Jones is the
limited partner with a 49.5% interest. The partnership
acts as investment adviser to two registered investment companies.
(9) COMMON STOCK
In May 1998, Federated Investors was merged with and into
Federated Investors, Inc., its wholly-owned subsidiary,
with Federated Investors, Inc. 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 Federated Investors, Inc., 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, Federated Investors, Inc. issued an additional
2,610,000 shares of Class B common stock in an initial
public offering for net proceeds of approximately
$46,200,000 in cash. The
Class A common stockholder has the entire voting rights
of Federated; however, without the consent of the majority of the holders of the
Class B common stock, the Class A common stockholder cannot alter Federated's
structure, dispose of all or substantially all of Federated's assets, amend the
Articles of Incorporation or Bylaws of Federated to adversely affect the Class B
common stockholders, or
liquidate or dissolve Federated.
Federated's Senior Secured Credit Agreement allows dividends in an amount not to
exceed $20,000,000 plus 50% of any net income (less 100% of any loss) of
Federated less any stock repurchase payments 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 $5,000,000 plus 50% of any net income
(less 100% of any loss) of Federated during the period from January 1, 1996, to
and including the date of payment. As of December 31, 1999, approximately
$22,814,000 was available to pay dividends under the more restrictive of the two
limitations. Cash dividends of $0.164, $0.135 and $0.0583 per share, or
$13,924,000, $11,480,000 and $4,867,000 were paid in 1999, 1998 and 1997,
respectively, to holders of shares of common stock.
In January 1999, the board of directors approved a share repurchase program
authorizing Federated to purchase up to $20,000,000 of Federated Class B common
stock during a 12-month period beginning January 26, 1999, in open market
transactions. In July 1999, a second share repurchase program was approved by
the board of directors authorizing Federated to purchase an additional five
million shares of Federated Class B common stock in open market and private
transactions during a 12-month period beginning July 20, 1999. The programs
authorize executive management to determine the timing and the amount of shares
for each purchase. The stock will be held in treasury for employee benefit
plans, potential acquisitions and other corporate activities. In 1999, Federated
purchased 4,348,610 shares of Class B common stock under these programs for
approximately $79,930,000. Of this amount, Federated expended the total
allowable amount under the first program of $20,000,000 with the purchase of
1,184,653 shares of Class B common stock and purchased an additional 3,163,957
shares of Class B common stock for $59,930,000 under the second program.
(10) LEASES
Federated has various operating lease agreements primarily involving facilities,
office and computer equipment, and vehicles. These leases are noncancellable and
expire on various dates through the year 2009. Most leases include renewal
options and, in certain leases, escalation clauses.
The following is a schedule by year of future minimum rental payments required
under the operating leases that have initial or remaining noncancellable lease
terms in excess of one year as of December 31, 1999:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2000 $ 14,848
2001 14,672
2002 13,517
2003 11,646
2004 11,706
2005 and thereafter 37,295
Total minimum lease payments $ 103,684
</TABLE>
Rent expense was approximately $17,723,000, $18,204,000 and $14,293,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(11) INCOME TAXES
Federated files a consolidated federal income tax return. Financial statement
tax expense is determined under the liability method.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1999 1998 1997
<S> <C> <C> <C>
CURRENT
Federal $ 65,414 $ 49,948 $ 19,597
State 907 494 243
66,321 50,442 19,840
DEFERRED
Federal 4,540 3,123 11,117
Extraordinary item 0 0 (241)
Total $ 70,861 $ 53,565 $ 30,716
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the foreign subsidiaries
had net income of $2,354,000, $4,224,000 and $1,449,000, respectively, for which
income tax expense of $974,000, $1,478,000 and $0, respectively, has been
provided.
The reconciliation between the federal statutory income tax rate and Federated's
effective income tax rate consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Expected statutory rate 35.0% 35.0% 35.0%
Increase:
State income taxes 0.3 0.2 0.2
Amortization of goodwill 0.4 0.5 1.0
Meals and entertainment limitation 0.6 0.8 1.2
Other 0.1 0.2 0.4
Total 36.4% 36.7% 37.8%
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1999 1998
<S>
DEFERRED TAX ASSETS <C> <C>
Intangible assets $ 14,665 $ 15,419
Organization costs 1,399 1,399
Employee restricted stock plan 294 223
Property and equipment depreciation 469 164
Reserve for bad debts 64 926
Other 1,352 1,133
Total gross deferred tax asset 18,243 19,264
DEFERRED TAX LIABILITIES
Deferred sales commissions 31,004 33,718
Deferred 12b-1 fee income 17,498 12,252
Other 5,536 3,243
Total gross deferred tax liability 54,038 49,213
Net deferred tax liability $ 35,795 $ 29,949
</TABLE>
(12) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(in thousands, except per share data) Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
NUMERATOR
Net income $ 124,020 $92,369 $ 50,577
DENOMINATOR
Denominator for basic earnings per share -
weighted-average shares 83,492 84,171 82,392
Effect of dilutive securities:
Dilutive potential shares from stock-based compensation 2,565 2,412 1,272
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 86,057 86,583 83,664
Basic earnings per share $ 1.49 $ 1.10 $ 0.61
Diluted earnings per share $ 1.44 $ 1.07 $ 0.60
</TABLE>
(13) ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of tax, are as
follows:
<TABLE>
<CAPTION>
Unrealized Foreign
Gain/(Loss) Currency
on Translation
Securities and Other
(in thousands) Available for Sale Adjustments Total
<S> <C> <C> <C>
Balance at December 31, 1996 $ 25 $ (10) $ 15
Total change in market value 1 (164) 0 (164)
Reclassification adjustment 2 54 0 54
Other adjustments 0 4 4
Balance at December 31, 1997 (85) (6) (91)
Total change in market value 1 393 0 393
Reclassification adjustment 2 109 0 109
Other adjustments 0 (5) (5)
Balance at December 31, 1998 417 (11) 406
Total change in market value 1 84 0 84
Reclassification adjustment 2 (533) 0 (533)
Loss on currency conversion 3 0 (63) (63)
Other adjustments 0 11 11
Balance at December 31, 1999 $ (32) $ (63) $ (95)
</TABLE>
1 The tax (expense)/benefit on the change in market value of securities
available for sale was $(46), $(211) and $89 for 1999, 1998 and 1997,
respectively.
2 The tax benefit/(expense) on the reclassification adjustment for securities
available for sale was $287, $(59) and $(30) for 1999, 1998 and 1997,
respectively.
3 The tax benefit on the foreign currency translation loss was $34 in 1999.
(14) DISCLOSURES OF FAIR VALUE
Estimated fair values of Federated's financial instruments have been determined
using available market information and appropriate valuation methodologies, as
set forth below. These fair values are not necessarily indicative of the amounts
that would be realized upon exchange of these instruments or Federated's intent
to dispose of these instruments.
Carrying amounts approximate fair value for the following financial instruments
due to their short maturities:
* Cash and cash equivalents
* Receivables
* Accounts payable
* Accrued expenses
Securities available for sale, including hedge instruments, are carried at fair
value (see Note 1).
The majority of Federated's recourse debt is comprised of the Note. The fair
value of Federated's Note is estimated based on the current market rates for
debt of the same remaining maturities. The estimated fair values of the Note are
as follows:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1999 1998
<S> <C> <C>
Carrying amount $ 98,000 $ 98,000
Fair value $ 97,345 $ 102,519
</TABLE>
For accounting purposes, Federated treats the sale of revenue streams related to
the B Share deferred sales commissions as a financing and nonrecourse debt is
recorded. Based on the nature of this debt and the uncertainty of the amounts
and timing of the cash flows, Federated is not able to determine the fair value
of the nonrecourse debt.
(15) COMMITMENTS AND CONTINGENCIES
Federated has claims asserted against it that result from litigation in the
ordinary course of business. Management believes that the ultimate resolution of
such matters will not materially affect the financial position or results of
operations of Federated.
(16) RELATED PARTY TRANSACTIONS
Federated provides investment advisory, administrative, distribution and
shareholder services to the Federated group of funds (Federated funds). All of
these services provided for the Federated funds are under contracts that
definitively set forth the fees to be charged for these services and are
approved by the funds' independent directors/ trustees. Federated may waive
certain fees charged for these services (primarily investment advisory fees) in
order to make the Federated funds more competitive or to meet regulatory
requirements.
(17) SUBSEQUENT EVENTS
On January 21, 2000, Federated, pursuant to an agreement with United Asset
Management Corporation, acquired InvestLink Technologies, Inc., a software
developer and marketer of applications for the recordkeeping, administration and
servicing of defined contribution plans. The acquisition was accounted for under
the purchase method of accounting. Also in January, and in connection with the
acquisition, Federated received cash from certain key employees of the acquired
company in exchange for a total of 10 percent interest in InvestLink
Technologies, Inc.
On January 25, 2000, the board of directors declared a $0.042 per share dividend
which was paid on February 15, 2000.
From January 1, 2000, to March 6, 2000, Federated repurchased an additional
787,505 shares of Class B common stock for $17,011,000 under the share
repurchase program approved by the board of directors in July 1999.
(18) SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
(in thousands, except per share data)
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
1999
Revenues $141,267 $150,178 $152,197 $157,455
Operating income 51,993 58,523 59,851 66,577
Net income 26,721 30,517 31,164 35,618
Basic earnings per share 0.31 0.36 0.38 0.44
Diluted earnings per share 0.31 0.35 0.36 0.42
Cash dividends per share 0.038 0.042 0.042 0.042
Stock price per share1
High 19 3/4 18 5/8 19 13/16 21 3/16
Low 15 1/16 15 7/8 16 5/8 15 3/8
1998 122,592 126,216 133,068 140,250
Operating income 39,893 43,176 47,492 51,857
Net income 20,837 21,071 23,610 26,850
Basic earnings per share 0.25 0.25 0.28 0.32
Diluted earnings per share 0.25 0.24 0.27 0.31
Cash dividends per share 0.021 0.038 0.038 0.038
Stock price per share1
High -- 20 3/16 18 1/4 19 5/16
Low -- 16 12 7/8 11
1 Federated's common stock is traded on the New York Stock Exchange under the
symbol "FII." Prior to May 14, 1998, there was no public market for the common
stock.
</TABLE>
The approximate number of recordholders of Federated's Class A and Class B
common stock as of February 24, 2000, was one and 10,979, respectively.
EXHIBIT 21.01
SIGNIFICANT SUBSIDIARIES OF FEDERATED INVESTORS, INC.:
Federated Securities Corp., a Pennsylvania corporation
Federated Investors Management Company, a Pennsylvania corporation
FII Holdings, Inc., a Delaware corporation
Federated Investment Management Company, a Delaware business trust
Federated Investment Counseling, a Delaware business trust
Federated Global Investment Management Corp., a Delaware corporation
Federated International Management, Ltd., an Ireland company
Federated Financial Services, Inc., a Pennsylvania corporation
Passport Research Ltd., a Pennsylvania limited partnership
Federated Services Company, a Pennsylvania corporation
Federated Funding 1997-1, Inc., a Delaware corporation
Federated Investors Trust Company, a New Jersey bank
Federated Administrative Services, a Delaware business trust
Federated Shareholder Services Company, a Delaware business trust
Retirement Plan Services Company of America, a Delaware business trust,
doing business as "Federated Retirement Plan Services Company"
Edgewood Services, Inc., a New York corporation
Federated Administrative Services, Inc., a Pennsylvania corporation
Federated Private Asset Management, Inc., a Delaware corporation
Federated International Holdings B.V., a Netherlands company
Federated Fonds - Service GMBH, a German company
Investlink Technologies, Inc., a Delaware corporation
Exhibit 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-56429) pertaining to the Federated Investors, Inc. Employee Stock
Purchase Plan and the Registration Statement (Form S-8 No. 333-62471) pertaining
to the Federated Investors, Inc. 1998 Stock Incentive Plan of our report dated
January 24, 2000, with respect to the consolidated financial statements of
Federated Investors, Inc. incorporated by reference in this Annual Report (Form
10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 171,490,000
<SECURITIES> 66,438,000
<RECEIVABLES> 35,347,000
<ALLOWANCES> 184,000
<INVENTORY> 0
<CURRENT-ASSETS> 284,147,000
<PP&E> 75,910,000
<DEPRECIATION> 44,605,000
<TOTAL-ASSETS> 673,193,000
<CURRENT-LIABILITIES> 115,472,000
<BONDS> 394,187,000
0
0
<COMMON> 75,276,000
<OTHER-SE> 43,536,000
<TOTAL-LIABILITY-AND-EQUITY> 673,193,000
<SALES> 0
<TOTAL-REVENUES> 601,098,000
<CGS> 0
<TOTAL-COSTS> 364,152,000
<OTHER-EXPENSES> 31,846,000
<LOSS-PROVISION> 682,000
<INTEREST-EXPENSE> 30,173,000
<INCOME-PRETAX> 194,881,000
<INCOME-TAX> 70,861,000
<INCOME-CONTINUING> 124,020,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,020,000
<EPS-BASIC> 1.49
<EPS-DILUTED> 1.44
</TABLE>
