UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------
Commission File Number 001-14818
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FEDERATED INVESTORS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1111467 (State or other
jurisdiction of (IRS Employer incorporation or
organization) Identification No.)
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
------------------------ ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 412-288-1900
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No ______.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date: As of November 6, 2000, the
Registrant had outstanding 9,000 shares of Class A Common Stock and 117,290,309
shares of Class B Common Stock.
Federated Investors, Inc.
Form 10-Q
For the Three Months and Nine Months Ended
September 30, 2000
Table of Contents
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 2000, and December 31, 1999 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 2000 and 1999 4
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K 15
(b) Reports on Form 8-K 15
Signatures 16
Part I, Item I. Financial Statements
<TABLE>
<CAPTION>
FEDERATED INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited) SEPTEMBER DECEMBER
30, 31,
2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 137,249 171,490
Securities available for sale 81,950 66,438
Receivables-Federated funds
Receivables, net of reserve of $60 and $184, respectively 34,974 35,163
Accrued revenues 7,450 6,050
Prepaid expenses 4,764 3,305
Current deferred tax asset, net 1,792 1,382
Other current assets 302 319
Total current assets 268,481 284,147
LONG-TERM ASSETS:
Customer relationships, net of accumulated amortization of
$16,192 and $12,800, respectively 15,425 9,613
Goodwill, net of accumulated amortization of $18,204 and $16,013,
respectively 32,843 32,856
Other intangible assets, net of accumulated amortization of $129
and $112, respectively 51 78
Deferred sales commissions, net of accumulated amortization of
$122,351 and $79,365, respectively 331,704 298,978
Deferred tax asset, net
Property and equipment, net of accumulated depreciation of
$37,519 and $44,605, respectively 34,296 31,305
Other long-term assets
21,996 16,216
Total long-term assets
436,315 389,046
704,796 673,193
CURRENT LIABILITIES:
Cash overdraft 6,398 9,111
Current portion of long-term debt - recourse 14,275 14,259
Accrued expenses 57,107 58,768
Accounts payable 29,558 29,321
Income taxes payable 1,522 2,865
Other current liabilities 4,067 1,148
Total current liabilities 112,927 115,472
LONG-TERM LIABILITIES:
Long-term debt - recourse 70,230 84,446
Long-term debt - nonrecourse 338,906 309,741
Long-term deferred tax liability, net 43,472 37,177
Other long-term liabilities 6,298 6,949
Total long-term liabilities 458,906 438,313
Total liabilities 571,833 553,785
Minority interest 472 596
SHAREHOLDERS' EQUITY :
Common stock :
Class A, no par value, 20,000 shares
authorized, 9,000 shares issued and outstanding
189 189
Class B, no par value, 900,000,000 shares
authorized, 129,505,456 shares issued
75,227 75,087
Class A, $1.00 stated value, 99,000 shares authorized, 0 and 6,000 shares
issued and outstanding,
respectively - -
Class B, $.01 stated value, 149,700,000 shares authorized,
0 and 90,093,758 shares issued, respectively
- -
Additional paid-in capital
- -
Retained earnings
226,729 124,653
Treasury stock, at cost, 11,590,547 and 6,933,540 shares Class B
common stock, respectively (166,052) (79,976)
Employee restricted stock plan
(813) (1,046)
Accumulated other comprehensive income
(2,789) (95)
------------ ------------
Total shareholders' equity
132,491 118,812
------------ ------------
Total liabilities, minority interest, and $ $
shareholders' equity 704,796 673,193
============ ============
</TABLE>
December 31, 1997 share amounts have been restated to reflect the one for
one stock dividend paid on April 15, 1998 and the one for two stock dividend
paid on April 30, 1998.
<TABLE>
<CAPTION>
FEDERATED INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED NINE
MONTHS
ENDED
(dollars in thousands, except per share data) SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------------
(unaudited) 2000 1999 2000 1999
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
REVENUE:
Investment-advisory fees, net-Federated $ $ $
funds 93,203 80,033 273,381 230,876
Investment-advisory fees, net-other
3,754 3,025 10,011 8,147
Administrative-service fees,
net-Federated funds 21,901 20,178 64,364 60,150
Administrative-service fees, net-other
5,624 6,025 17,367 17,080
Other service fees, net-Federated funds
35,392 31,632 104,122 91,381
Other service fees, net-other
7,428 6,032 21,516 17,109
Commission income
1,398 1,112 4,760 3,190
Interest and dividends
4,340 3,475 13,401 9,964
Gain (loss) on sale of securities
available for sale (228) 83 (523) 851
Other income
288 602 1,862 4,895
------------ ------------ ------------ ---------------
Total revenue
173,100 152,197 510,261 443,643
------------ ------------ ------------ ---------------
OPERATING EXPENSES:
Compensation and related
40,570 38,803 125,422 116,748
Advertising and promotional
15,079 14,594 45,888 40,177
Systems and communications
7,753 6,991 21,987 20,800
Professional service fees
6,258 6,304 18,711 19,002
Office and occupancy
6,731 5,650 19,205 18,463
Travel and related
3,449 3,485 10,401 10,634
Amortization of deferred sales commissions
15,560 12,456 44,983 34,341
Amortization of intangible assets
1,982 1,668 5,610 8,737
Other
1,762 2,395 6,291 4,372
------------ ------------ ------------ ---------------
Total operating expenses
99,144 92,346 298,498 273,274
------------ ------------ ------------ ---------------
Operating income
73,956 59,851 211,763 170,369
------------ ------------ ------------ ---------------
NONOPERATING EXPENSES:
Debt expense - recourse
1,942 2,212 6,372 6,643
Debt expense - nonrecourse
6,721 5,881 19,236 17,012
------------ ------------
------------ ---------------
Total nonoperating expenses
8,663 8,093 25,608 23,655
------------ ------------ ------------ ---------------
Income before minority interest and income
taxes 65,293 51,758 186,155 146,714
Minority interest
2,564 2,588 7,560 7,628
------------ ------------ ------------ ---------------
Income before income taxes
62,729 49,170 178,595 139,086
Income tax provision
22,717 18,006 64,305 50,684
------------ ------------ ------------ ---------------
Net income $ $ $
40,012 31,164 114,290 88,402
============ ============ ============ ===============
EARNINGS PER SHARE:
Basic 0.34 $ 0.25 $ 0.97 $ 0.70
============ ============ ============ ===============
Diluted 0.33 $ 0.24 $ 0.93 $ 0.68
============ ============ ============ ===============
Cash dividends per share 0.037 $ 0.028 $ 0.102 $ 0.081
============ ============ ============ ===============
PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT
PAID ON JULY 17, 2000.
</TABLE>
FEDERATED INVESTORS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
(dollars in thousands) SEPTEMBER 30,
------------------
(unaudited) 2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $114,290 $ 88,402
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Amortization of intangible assets 5,610 8,737
Depreciation and other amortization 6,076 5,559
Amortization of deferred sales commissions 44,983 34,341
Minority interest 7,560 7,628
Loss (gain) on disposal of property and equipment 173 (2,973)
Provision for deferred income taxes 7,356 3,962
Net realized loss (gain) on sale of securities available for sale 523 (851)
Deferred sales commissions paid (113,900) (96,104)
Contingent deferred sales charges received 36,193 28,298
Other changes in assets and liabilities:
Decrease (increase) in receivables, net 418 (1,012)
Increase in accrued revenues (1,341) (2,109)
(Increase) decrease in other current assets (3,492) 5,122
Decrease (increase) in other long-term assets 1,620 (1,190)
(Decrease) increase in accounts payable and accrued expenses (1,939) 1,957
Decrease in income taxes payable (1,344) (1,456)
Increase in other current liabilities 193 578
Increase in other long-term liabilities 214 3,884
-------- --------
Net cash provided by operating activities 103,193 82,773
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (8,238) (15,603)
Proceeds from disposal of property and equipment 158 4,007
Cash paid for business acquisitions and joint venture (11,636) (1,398)
Purchases of securities available for sale (28,429) (88,743)
Proceeds from redemptions of securities available for sale 1,720 24,459
-------- --------
Net cash used by investing activities (46,425) (77,278)
-------- --------
FINANCING ACTIVITIES:
Distributions to minority interest (7,684) (7,847)
Dividends paid (12,214) (10,446)
Purchase of treasury stock (56,370) (86,076)
Proceeds from new borrowings - nonrecourse 107,580 93,309
Payments on debt - recourse (14,200) (178)
Payments on debt - nonrecourse (78,415) (62,569)
-------- --------
Net cash used by financing activities (91,009) (44,101)
-------- --------
Net decrease in cash and cash equivalents (34,241) (38,606)
Cash and cash equivalents, beginning of period 171,490 185,581
-------- --------
Cash and cash equivalents, end of period $137,249 $146,975
======== ========
</TABLE>
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Summary of Significant Accounting Policies
(a) BASIS OF PRESENTATION
The interim consolidated financial statements of Federated Investors, Inc.
(Federated) included herein have been prepared in accordance with accounting
principles generally accepted in the United States. In the opinion of
management, the financial statements reflect all adjustments which are of a
normal recurring nature and necessary for a fair statement of the results for
the interim periods presented.
In preparing the unaudited interim consolidated financial statements,
management is required to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results may differ from such
estimates and such differences may be material to the financial statements.
These financial statements should be read in conjunction with Federated's
Annual Report on Form 10-K for the year ended December 31, 1999. Certain items
previously reported have been reclassified to conform with the current year's
presentation.
(b) 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
the 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
investments in derivative instruments at the time of adoption. Given Federated's
current minimal use of derivatives and based on our analysis, we do not
anticipate the adoption of SFAS 133 to have a significant effect on our earnings
or financial position.
(2) Securitization of B-Share Future Revenue Streams and Nonrecourse Debt
Pursuant to an agreement with a third party that expired in October 2000,
Federated sold, on a continuous basis, the rights to future revenue streams
associated with 12b-1 fees, shareholder service fees and contingent deferred
sales charges (CDSCs) of Class B shares of various mutual funds it manages. For
accounting purposes, transactions executed under the agreement were reflected as
financings and nonrecourse debt was recorded at interest rates based on market
conditions at the time of the financings. Federated has agreed to the
preliminary terms of a new arrangement with a third party to continue selling
the rights to these future revenue streams and anticipates finalizing the
arrangement before December 31, 2000.
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(2) Securitization of B-Share Future Revenue Streams and Nonrecourse Debt
(continued)
The following tables summarize the changes in the deferred sales
commissions related to this agreement:
Nine Months
Ended
September 30,
2000
----------------
(IN THOUSANDS)
Deferred B-Share Sales Commissions:
Financed balance at December $ 288,844
31, 1999
B-Share sales commissions 104,965
financed
CDSCs collected (34,888)
Amortization (40,072)
----------------
Financed balance at September $ 318,849
30, 2000
================
Below is the activity of the nonrecourse debt tranches:
(IN THOUSANDS)
Interest Balance Additional Balance
Tranche Rate 12/31/99 Financings 9/30/00
Payments
1997-1 Class A 7.44% $ 52,976 $ 0 $ 12,645 $ 40,331
Class B 9.80% 9,700 0 0 9,700
Financings 10/97
through 9/00 6.68% - 247,065 107,580 65,770 288,875
8.60%
--------- ----------- ---------- ---------
$ 309,741 $ 107,580 $ 78,415 $ 338,906
========= =========== ========== =========
(3) Long-Term Debt - Recourse
Federated's long-term debt - recourse consisted of the following:
Interest September December
30, 31,
Rate 2000 1999
--------- ------------ ----------
(IN THOUSANDS)
Recourse Debt:
Senior Secured Note 7.96% $ 84,000 $ 98,000
Purchase Agreement
Capitalized leases 7.1%-8.5% 505 705
------------ ----------
Total recourse debt 84,505 98,705
Less current portion 14,275 14,259
------------
------------ ----------
Total long-term debt - $ 70,230 $ 84,446
recourse
============ ==========
On March 28, 2000, a wholly-owned subsidiary of Federated, Edgewood
Services, Inc., entered into a discretionary line of credit agreement with a
bank under which it can borrow up to $45.0 million for the payment of
obligations associated with daily net settlements of mutual funds processed
through the National Securities Clearing Corporation. Borrowings under this
agreement bear interest at a rate defined by the bank at the time of the
borrowing and are payable on demand. At September 30, 2000, the outstanding
balance under this agreement was zero.
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(4) Common Stock
(a) Cash Dividends
Federated's Senior Secured Credit Agreement allows dividends in an amount
not to exceed $20 million plus 50% of any net income (less 100% of any loss) of
Federated during the period from January 1, 1998, to and including the date of
payment, less certain stock repurchase payments. The Senior Secured Note
Purchase Agreements allow dividends in an amount not to exceed $5 million 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, less certain stock
repurchase payments. Cash dividends of $0.028, $0.037 and $0.037 per share or
approximately $3.4 million, $4.4 million and $4.4 million were paid in the
first, second and third quarter of 2000, respectively, to holders of common
shares. Additionally, on October 17, 2000, the board of directors declared a
dividend of $0.037 per share to be paid on November 15, 2000, to shareholders of
record as of November 3, 2000. After considering earnings through September 30,
2000, the dividend payment on November 15, 2000, and certain stock repurchase
payments, approximately $34.7 million is available to pay dividends under the
more restrictive of the two debt covenant limitations.
(b) Stock Split
In June 2000, the board of directors approved a three-for-two stock split
on Federated's common stock. The stock split was effected as a dividend to
shareholders of record as of July 7, 2000 and new shares were distributed on
July 17, 2000. Earnings and dividends per share, as well as other share data,
have been adjusted to reflect the stock distribution.
(c) Employee Stock Purchase Plan
Federated offers an Employee Stock Purchase Plan which allows employees to
purchase a maximum of 750,000 shares of Class B common stock. Employees may
contribute up to 10% of their salary to purchase shares of Federated's Class B
common stock on a quarterly basis at the market price. The shares under the plan
may be newly issued shares, treasury shares or shares purchased on the open
market. As of September 30, 2000, a total of 34,134 shares have been purchased
by employees in this plan.
(d) Stock Repurchase Program
In 1999, the 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 7.5 million shares of
Federated Class B common stock under the second program. In March 2000, the
board of directors approved a third program to purchase up to 7.5 million shares
of Federated Class B common stock. Under 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 and third programs, shares can
also be repurchased in private transactions. The programs authorize executive
management to determine the timing and the amount of shares for each purchase.
The repurchased stock is held in treasury to be used for employee benefit plans,
potential acquisitions and other corporate activities. As of September 30, 2000,
Federated had purchased 11,179,922 shares of Class B common stock for
approximately $166.0 million under the programs and can repurchase an additional
5,072,530 shares subject to current debt-covenant restrictions which limit cash
payments for additional stock repurchases to $149.9 million. This cash payment
limit is continuously adjusted to reflect 50% of net income earned and stock
repurchase and dividend payments made during the period. From October 1, 2000,
to November 6, 2000, an additional 624,600 shares of Class B common stock have
been repurchased under the programs for $16.6 million.
FEDERATED INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(5) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income 40,012 $ 31,164 $ 114,290 $ 88,402
========= ======== ========= =========
Denominator:
Basic weighted-average shares 126,233
outstanding 124,604 118,201
116,598
Dilutive potential shares from 4,926 3,858 4,579 3,839
stock-based compensation
--------- -------- --------- ---------
Diluted weighted-average shares 121,524 128,462 122,780 130,072
outstanding
========= ======== ========= =========
Basic earnings per share 0.34 $ 0.25 $ 0.97 $ 0.70
========= ======== ========= =========
Diluted earnings per share 0.33 $ 0.24 $ 0.93 $ 0.68
========= ======== ========= =========
</TABLE>
PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT
PAID ON JULY 17, 2000.
(6) Comprehensive Income
Comprehensive income was $40.0 million and $31.2 million for the
three-month periods ended
September 30, 2000 and 1999, respectively, and $111.6 million and $87.8
million for the nine-month periods ended September 30, 2000 and 1999,
respectively.
(7) Business Combination
On September 15, 2000, Federated completed the acquisition of the mutual
fund assets of Investment Advisers, Inc. (IAI). As a result of this transaction,
Federated assumed the investment management, distribution and shareholder
servicing responsibilities for 11 former IAI funds totaling $346.0 million in
primarily equity assets as of the transaction date. This acquisition was
accounted for using the purchase method of accounting. The entire purchase
price, including direct costs, was allocated to customer relationships which
will be amortized over 14 years.
(8) Subsequent Event
On October 20, 2000, Federated signed a definitive agreement to acquire the
business of New York-based Edgemont Asset Management Corporation, the advisor
for the $3.7 billion Kaufmann Fund (Fund). The offer has been approved by
Federated's corporate and fund boards. The transaction, which is expected to
close during the first quarter 2001, includes an upfront payment due at the
transaction closing date, 95% of which is payable in cash and 5% of which is
payable with the issuance of Federated Class B common stock. Federated may also
make a series of additional cash payments over six years contingent upon revenue
growth. The upfront purchase price and the maximum available contingent payments
will be set on the closing date based on the level of average assets of the Fund
30 days before closing. Based on assets at September 30, 2000, the upfront
purchase price would approximate $200 million and, if revenue targets are met,
the contingent payments, consisting of both additional purchase price and
incentive compensation, could aggregate to as much as $220 million. This
acquisition will be accounted for using the purchase method of accounting.
Part I, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The discussion and analysis below should be read in conjunction with the
consolidated financial statements appearing elsewhere in this report. We have
presumed that the readers of this interim financial information have read or
have access to management's discussion and analysis of financial condition and
results of operations appearing in our Annual Report on Form 10-K for the year
ended December 31, 1999.
GENERAL
The majority of our revenue is derived through advising, distributing and
servicing the Federated funds, separately managed accounts and other related
products, in both domestic and international markets. We also derive revenue
through servicing third-party mutual funds.
Investment advisory, distribution and the majority of our servicing fees
are based on the net asset value of investment portfolios that we manage or
administer. As such, these revenues are dependent upon factors including market
conditions and the ability to attract and maintain assets. Accordingly, revenues
will fluctuate with changes in the total value and composition of the assets
under management or administration.
ASSET HIGHLIGHTS
MANAGED AND ADMINISTERED ASSETS
AT PERIOD END
(IN As of September Percent
MILLIONS) 30,
2000 1999 Change
-------- --------- --------
Money market funds $ 87,139 $ 77,006 13%
Equity funds 23,222 17,289 34%
Fixed-income funds 14,340 16,414 (13%)
Separate accounts 5,669 4,504 26%
-------- --------
Total managed assets $ 130,370 $ 115,213 13%
======== ========
Total administered assets $ 38,905 $ 37,445 4%
======== =========
<TABLE>
<CAPTION>
AVERAGE MANAGED AND
ADMINISTERED ASSETS
(IN MILLIONS) Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
<S> <C> <C> <C> <C> <C> <C>
---------------- -----------------
2000 1999 Change 2000 1999 Change
-------- ------- ------ -------- -------- --------
Money market funds 85,528 77,748 10% 84,055 78,526 7%
Equity funds 23,261 17,965 29% 22,428 17,052 32%
Fixed-income funds 14,548 16,669 (13%) 14,913 16,806 (11%)
Separate accounts 5,677 4,511 26% 5,000 3,975 26%
-------- ------- -------- --------
Total average managed 129,014 116,893 10% 126,396 116,359 9%
assets
Total average 41,403 36,824 12% 42,795 33,616 27%
administered assets
======== ======= ======== ========
</TABLE>
COMPONENTS OF CHANGES IN EQUITY AND FIXED-INCOME FUND
MANAGED ASSETS
(IN MILLIONS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Nine Months Ended
Ended
September 30, September 30,
2000 1999 2000 1999
EQUITY
FUNDS
Beginning assets $ 22,512 18,199 $ 20,941 $ 15,503
-------- -------- -------- --------
Sales 1,949 1,504 8,584 4,408
Redemptions (1,503) (1,275) (5,768) (3,280)
Net sales 446 229 2,816 1,128
Net exchanges (70) 17 69 96
Acquisition related 319 0 319 0
Other* 15 (923) 562
(1,156)
Ending assets $ 23,222 $ 23,222 $ 17,289
17,289
FIXED-INCOME FUNDS
Beginning assets $ 14,660 16,725 $ 15,857 $ 16,437
Sales 882 1,282 2,867 4,703
Redemptions (1,168) (1,456) (4,174) (4,411)
Net (286) (174) (1,307) 292
(redemptions) sales
Net exchanges (156) 39 (409) 136
Acquisition related 11 0 11 0
Other* 111 (176) 188 (451)
Ending assets $ 14,340 16,414 $ 14,340 $ 16,414
</TABLE>
* Includes changes in the market value of securities held by the funds,
reinvested dividends and distributions and net investment income.
RESULTS OF OPERATIONS
The table below presents the highlights of our operations for the
three- and nine-month periods ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, Percent September 30, Percent
------------ --------------
2000 1999 ChangeChange 2000 1999Change Change
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (IN MILLIONS) $40.0 $31.2 $8.8 28% $114.3 $88.4 $25.9 29%
Earnings per share**
Basic $0.34 $0.25 $0.09 $0.97 $0.70 $0.27 39%
36%
Diluted $0.33 $0.24 $0.09 38% $0.93 $0.68 $0.25 37%
Revenue (IN MILLIONS)
Revenue from managed$155.6 $136.0 $19.6 14% $456.6 $393.7 $62.9 16%
assets
Service-related 1.1
revenue from 13.1 12.0 1.1 9% 38.9 34.2 4.7 14%
sources other
than managed assets
Other 4.4 4.2 0.2 5% 14.8 15.7 (0.9) (6%)
------ ------ ------ ------ -------------
TOTAL REVENUE $173.1 $152.2 $20.9 14% $510.3 $443.6 $66.7 15%
====== =============
====== ====== ======
Operating margin 42.7% 39.3% 3.4% 9% 41.5% 38.4% 3.1% 8%
</TABLE>
** PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO
STOCK SPLIT PAID ON JULY 17, 2000.
NET INCOME. Net income for the three- and nine-month periods ended
September 2000 increased 28% and 29%, respectively, compared to the same periods
last year. These increases primarily reflect increased revenue from managed
assets as a result of continued growth in fees from equity and money market fund
assets and improved operating margins. Net income for the nine-month period
ended September 1999 included a non-recurring after-tax gain from the sale of
non-earning assets of $2.0 million. Excluding this gain, net income for the
nine-month period ended September 2000 increased 32% compared to the same period
last year.
REVENUE. Total revenue for the three- and nine-month periods ended
September 2000 increased $20.9 million and $66.7 million, respectively, compared
to the same periods last year primarily as a result of increased revenue from
managed assets. Average managed assets continued to climb from $116.9 billion
for the third quarter of 1999 to $129.0 billion for the third quarter of 2000
and from $116.4 billion in the first nine months of 1999 to $126.4 billion for
the first nine months of 2000. These increases included significant asset growth
in equity funds, separate accounts and money market funds. Revenue from managed
assets increased at a rate higher than the rate of average managed asset growth
during these periods due to the continued shift in the managed asset mix towards
equity products that earn higher than average fees per invested dollar. At
September 30, 2000, equity fund assets comprised 18% of total managed assets as
compared to 15% at September 30, 1999.
Service-related revenues from sources other than managed assets increased
by $1.1 million and $4.7 million for the three- and nine-month periods ended
September 2000, respectively, as compared to the same periods last year due
primarily to the growth in average administered assets.
OPERATING EXPENSES. Operating expenses for the three- and nine-month
periods ended September 30, 2000 and 1999 are set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months Percent Nine months Percent of
ended of ended
September Total September Total
30, 30,
------------- -------------
(IN MILLIONS) 2000 1999 Change Change 2000 1999 ChangeChange
------------------------------------------------------------- -------------------------
Operating Expenses
Compensation and related $40.6 $38.8 $1.8 26% $125.4$116.7 $8.7 35%
Advertising and 15.1 14.6 0.5 7% 45.9 40.2 5.7 23%
promotional
Amortization of deferred 15.6 12.5 3.1 46% 45.0 34.3 10.7 42%
sales commissions
Other 27.8 26.4 1.4 21% 82.2 82.1 0.1 0%
TOTAL $99.1 $92.3 $6.8 100% $298.5$273.3$25.2 100%
OPERATING EXPENSES
</TABLE>
Total operating expenses for the three- and nine-month periods ended
September 2000 increased $6.8 million and $25.2 million, respectively, as
compared to the same periods last year. Approximately 69% and 81% of the change
over the three- and nine-month periods of 1999, respectively, is due to the
increase in certain operating expenses that tend to increase with increases in
sales and/or managed assets. These expenses include incentive compensation
(included in Compensation and related), marketing allowances (included in
Advertising and promotional) and the amortization of deferred sales commissions.
Each of these expenses increased over the same periods last year due in large
part to increased sales and/or managed assets. All other expenses combined for
the three- and nine-month periods ended September 2000 have remained relatively
unchanged as compared to the same periods last year.
INCOME TAXES. The income tax provision for the three- and nine-month
periods ended September 2000 was $22.7 million and $64.3 million, respectively,
as compared to $18.0 million and $50.7 million for the same periods of 1999. The
provision increased for both of these periods primarily as a result of the
increases in the level of income before income taxes for the three- and
nine-month periods as compared to the same periods in 1999. The effective tax
rate was 36.2% and 36.6% for the third quarter 2000 and 1999, respectively, and
36.0% and 36.4% for the first nine months of 2000 and 1999, respectively.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. Cash and cash equivalents and the current portion of securities
available for sale totaled $219.2 million at September 30, 2000 as compared to
$237.9 million at December 31, 1999.
Cash provided by operating activities totaled $103.2 million for the
nine-month period ended September 2000, as compared to $82.8 million for the
same period of 1999. This increase is primarily attributable to increased
profitability. Net cash used by investing activities in the first nine months of
2000 included an investment of $16.0 million in three new fluctuating value
funds (performance seeds), $11.6 million paid for business acquisitions
including the purchase of Investment Advisers, Inc.'s mutual fund assets, $11.5
million invested in asset-backed securities, and $8.2 million paid to acquire
property and equipment. Other uses of cash flow from operating activities in the
first nine months of 2000 included the purchase of treasury stock, payments on
debt, dividend payments and distributions to the minority interest partner.
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 marketing programs, we retain certain distribution and servicing fees from
the mutual fund over the outstanding life of such shares.
For non-B-Share-related sales, the up-front commissions Federated pays to
broker/dealers are capitalized, recorded as deferred sales commissions and
amortized over the estimated benefit period not to exceed contingent deferred
sales charge (CDSC) periods. The 12b-1 and shareholder service fees are
recognized in the statements of income over the life of the mutual fund class
share. Any CDSC fees collected are used to reduce the deferred sales commission
asset.
For B-Share-related sales, Federated sold the rights to certain future fee
revenue associated with the deferred sales commissions, pursuant to an agreement
with a third party which expired in October 2000. For B-Share-related sales
occurring on or before September 30, 2000, Federated accounted for the sales of
future cash flows as financings and nonrecourse debt was recorded. Federated has
agreed to the preliminary terms of a new arrangement with a third party to
continue selling the rights to these future revenue streams and anticipates
finalizing the arrangement before December 31, 2000.
The following table presents the effects of the B-Share financing program
on the Consolidated Balance Sheets at September 30, 2000 and December 31, 1999,
and the Consolidated Statements of Income for the three- and nine-month periods
ended September 30, 2000 and 1999, respectively:
(IN MILLIONS)
2000 1999
----------------------------------------------------------------------
SEPTEMBER 30 AND DECEMBER 31, RESPECTIVELY
Assets
Deferred sales commissions, net* $318.8 $288.8
Receivables 8.5 8.4
Other long-term assets 1.6 2.1
Liabilities
Long-term debt - nonrecourse $338.9 $309.7
Accounts payable 6.9 6.2
THREE MONTHS ENDED SEPTEMBER 30
Revenues
Other service fees, net - Federated funds $21.9 $18.6
Expenses
Amortization of deferred sales commissions $13.6 $11.3
Debt expense - nonrecourse 6.7 5.9
Other expenses 0.1 0.2
NINE MONTHS ENDED SEPTEMBER 30
Revenues
Other service fees, net - Federated funds $64.6 $52.7
Expenses
Amortization of deferred sales commissions $40.1 $31.2
Debt expense - nonrecourse 19.2 17.0
Other expenses 0.4 0.5
* EXCLUDES DEFERRED SALES COMMISSIONS RELATED TO B-SHARE REVENUE STREAMS
THAT 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.
Due to the nonrecourse nature of this financing arrangement, the $16.9
million excess of B-Share-related liabilities over the related assets at
September 30, 2000, will be recognized in income over the remaining life of the
B-Share cash flows.
CAPITAL EXPENDITURES. Capital expenditures totaled $4.2 million and $8.6
million for the three- and nine-month periods ended September 2000,
respectively, compared to $1.6 million and $15.6 million for the same periods of
1999. Year-to-date 2000 capital expenditures include cash paid for equipment
purchased in connection with the asset purchase of InvestLink Technologies, Inc.
CASH DIVIDENDS. Federated pays cash dividends on a quarterly basis.
Dividends of $0.028, $0.037 and $0.037 per share were paid in the first, second
and third quarter of 2000, respectively. Federated's board of directors declared
a dividend of $0.037 per share to be paid on November 15, 2000, to shareholders
of record as of November 3, 2000. After considering earnings through September
30, 2000, the dividend payment on November 15, 2000, and certain stock
repurchases, Federated, given current debt covenants, has the ability to pay
dividends of approximately $34.7 million.
DEBT FACILITIES. Federated has the following recourse debt facilities:
SENIOR SECURED CREDIT AGREEMENT: At September 30, 2000, 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 covenants at September 30, 2000. The Senior Secured Credit Agreement
expires on January 31, 2001. Management is currently negotiating a new credit
agreement which we expect to finalize by January 31, 2001.
SENIOR SECURED NOTE PURCHASE AGREEMENTS: The Senior Secured Note Purchase
Agreements debt totaled $84.0 million as of September 30, 2000. The notes are
due in $14.0 million annual installments and mature in June 2006. The first of
these installments was paid on June 27, 2000. Federated was in compliance with
all debt covenants at September 30, 2000.
DISCRETIONARY LINE OF CREDIT: On March 28, 2000, a wholly-owned subsidiary
of Federated, Edgewood Services, Inc., entered into a discretionary line of
credit agreement with a bank under which it can borrow up to $45.0 million for
the payment of obligations associated with daily net settlements of mutual funds
processed through the National Securities Clearing Corporation. Borrowings under
this agreement bear interest at a rate defined by the bank at the time of the
borrowing and are payable on demand. At September 30, 2000, the outstanding
balance under this agreement was zero.
CAPITALIZED LEASE OBLIGATIONS. At September 30, 2000, Federated had
capitalized lease obligations totaling $0.5 million related to certain telephone
equipment. The scheduled principal payments approximate $0.3 million per year
for 2000 through 2002.
SHAREHOLDERS' EQUITY. 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 7.5 million shares of Federated Class B common stock under the second
program. In March 2000, the board of directors approved a third program to
purchase up to 7.5 million shares of Federated Class B common stock. Under 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
and third programs, shares can also be repurchased in private transactions. The
programs authorize executive management to determine the timing and the amount
of shares for each purchase. The repurchased stock is held in treasury to be
used for employee benefit plans, potential acquisitions and other corporate
activities. During the third quarter 2000, Federated purchased an additional
590,500 shares of Class B common stock for approximately $14.0 million under the
programs. As of September 30, 2000, Federated can repurchase an additional
5,072,530 shares through its current authorized programs subject to current
debt-covenant restrictions which limit cash payments for additional stock
repurchases to $149.9 million. This cash payment limit is continuously adjusted
to reflect 50% of net income earned and stock repurchase and dividend payments
made during the period. From October 1, 2000, to November 6, 2000, an additional
624,600 shares of Class B common stock have been repurchased under the programs
for $16.6 million.
In June 2000, the board of directors approved a three-for-two stock split
on Federated's common stock. The stock split was effected as a dividend to
shareholders of record as of July 7, 2000, and new shares were distributed on
July 17, 2000. Earnings and dividends per share, as well as other share data,
have been adjusted to reflect the stock distribution.
FUTURE CASH REQUIREMENTS. Management expects that the principal needs for
cash will be to fund strategic business acquisitions, advance sales commissions,
repurchase company stock, service recourse debt, fund property and equipment
acquisitions, pay shareholder dividends and seed new products. Management
believes that Federated's existing liquid assets, together with the expected
continuing cash flow from operations, its borrowing capacity under current
credit facilities, the B-Share financing arrangement and its ability to issue
stock will be sufficient to meet its present and reasonably foreseeable cash
needs.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION. Certain statements
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in Future Cash Requirements and elsewhere in this
report, constitute forward-looking statements, which involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
levels of activity, performance, achievements, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. For a
discussion of such risk factors, see the section titled Risk Factors and
Cautionary Statements in Federated's Annual Report on Form 10-K for the year
ended December 31, 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 we nor any other person assumes responsibility for the
accuracy and completeness of such statements.
Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investments are primarily in money market and fluctuating value mutual
funds with investments which have a duration of two years or less. In addition,
as of September 30, 2000, we have investments in high yield asset-backed
securities and mortgage-backed securities which are included in "Other long-term
assets" on the Consolidated Balance Sheets. Occasionally, we invest in new
fluctuating value mutual funds (performance seeds) that we sponsor 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 September 30, 2000, the book value of the performance seed
investments and the derivative financial instruments were $31.3 million and
$0.04 million, respectively. All of our debt instruments carry fixed interest
rates and therefore are not subject to market risk.
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits required to be filed by Item 601 of Regulation S-K
are filed herewith and incorporated by reference herein:
Exhibit 27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K:
Form 8-K filed on November 8, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERATED INVESTORS, INC.
(Registrant)
Date NOVEMBER 10, 2000 By: /S/ J. CHRISTOPHER DONAHUE
J. Christopher Donahue
President and
Chief Executive Officer
Date NOVEMBER 10, 2000 By: /S/ THOMAS R. DONAHUE
Thomas R. Donahue
Chief Financial Officer and
Principal Accounting Officer
