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 JUNE 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 FEDERATED INVESTORS, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1111467 (State or other jurisdiction of (IRS Employer incorporation or Identification No.) organization) 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 August 8, 2000, the Registrant had outstanding 9,000 shares of Class A Common Stock and 118,462,609 shares of Class B Common Stock. Federated Investors, Inc. Form 10-Q For the Three Months and Six Months Ended June 30, 2000 Table of Contents PAGE NO. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets at June 30, 2000, and December 31, 1999 3 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Six Months Ended June 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) JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents 122,003 171,490 Securities available for sale 79,678 66,438 Receivables, net of reserve of $78 and $184, respectively 33,052 35,163 Accrued revenues 5,837 6,050 Prepaid expenses 6,080 3,305 Current deferred tax asset, net 1,817 1,382 Other current assets 349 319 --------------- --------------- Total current assets 248,816 284,147 --------------- --------------- LONG-TERM ASSETS: Customer relationships, net of accumulated amortization of $14,998 and $12,800, respectively 7,415 9,613 Goodwill, net of accumulated amortization of $17,430 and $16,013, respectively 33,504 32,856 Other intangible assets, net of accumulated amortization of $125 and $112, respectively 65 78 Deferred sales commissions, net of accumulated amortization of $106,791 and $79,365, respectively 331,631 298,978 Property and equipment, net of accumulated depreciation of $40,391 and $44,605, respectively 32,258 31,305 Other long-term assets 22,709 16,216 Total long-term assets 427,582 389,046 Total assets 676,398 $ 673,193 CURRENT LIABILITIES: Cash overdraft 7,390 $ 9,111 Current portion of long-term debt - recourse 14,270 14,259 Accrued expenses 49,064 58,768 Accounts payable 33,717 29,321 Income taxes payable 1,558 2,865 Other current liabilities 2,558 1,148 Total current liabilities 108,557 115,472 LONG-TERM LIABILITIES: Long-term debt - recourse 70,301 84,446 Long-term debt - nonrecourse 336,529 309,741 Long-term deferred tax liability, net 42,444 37,177 Other long-term liabilities 7,394 6,949 Total long-term liabilities 456,668 438,313 Total liabilities 565,225 553,785 Minority interest 397 596 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 75,175 75,087 Retained earnings 191,103 124,653 Treasury stock, at cost, 11,000,047 and 6,933,540 shares Class B common stock, respectively (152,034) (79,976) Employee restricted stock plan (891) (1,046) Accumulated other comprehensive income (2,766) (95) Total shareholders' equity 110,776 118,812 Total liabilities, minority interest, and shareholders' equity 676,398 $ 673,193 </TABLE> (THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.) <TABLE> <CAPTION> FEDERATED INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS SIX MONTHS ENDED ENDED (dollars in thousands, except per share data) JUNE 30, JUNE 30, (unaudited) 2000 1999 2000 1999 REVENUE: <S> <C> <C> <C> <C> Investment-advisory fees, net-Federated funds $ 90,315 $ 76,208 $ 180,179 $ 150,843 Investment-advisory fees, net-other 3,154 2,857 6,257 5,122 Administrative-service fees, net-Federated funds 21,226 20,171 42,463 39,972 Administrative-service fees, net-other 5,715 5,753 11,743 11,056 Other service fees, net-Federated funds 33,888 31,370 68,730 59,749 Other service fees, net-other 6,906 5,717 14,087 11,077 Commission income 1,758 1,088 3,362 2,078 Interest and dividends 4,351 3,410 9,061 6,489 Gain (loss) on sale of securities available for sale 56 19 (295) 767 Other income 918 3,585 1,574 4,293 Total revenue 168,287 150,178 337,161 291,446 OPERATING EXPENSES: Compensation and related 42,021 38,842 84,852 77,945 Advertising and promotional 15,639 12,725 30,809 25,584 Systems and communications 7,405 6,471 14,234 13,809 Professional service fees 5,980 6,863 12,473 12,813 Office and occupancy 6,309 6,283 12,453 12,698 Travel and related 3,942 3,803 6,953 7,150 Amortization of deferred sales commissions 14,624 11,644 29,423 21,885 Amortization of intangible assets 1,833 3,463 3,628 7,069 Other 2,650 1,561 4,529 1,976 Total operating expenses 100,403 91,655 199,354 180,929 Operating income 67,884 58,523 137,807 110,517 NONOPERATING EXPENSES: Debt expense - recourse 2,201 2,211 4,430 4,431 Debt expense - nonrecourse 6,354 5,667 12,515 11,130 Total nonoperating expenses 8,555 7,878 16,945 15,561 Income before minority interest and income taxes 59,329 50,645 120,862 94,956 Minority interest 2,462 2,591 4,996 5,040 Income before income taxes 56,867 48,054 115,866 89,916 Income tax provision 20,237 17,537 41,588 32,678 Net income $ 36,630 $30,517 $ 74,278 $ 57,238 EARNINGS PER SHARE: Basic 0.31 $ 0.24 $ 0.62 $ 0.45 Diluted 0.30 $ 0.23 $ 0.60 $ 0.44 Cash dividends per share 0.037 $ 0.028 $ 0.065 $ 0.053 </TABLE> PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT ANNOUNCED ON JUNE 22, 2000 AND PAID ON JULY 17, 2000. (THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.) FEDERATED INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED (dollars in thousands) JUNE 30, -------------------- (unaudited) 2000 1999 -------- ----------- OPERATING ACTIVITIES: Net income $ 74,278 $ 57,238 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Amortization of intangible assets 3,628 7,069 Depreciation and other amortization 3,971 3,718 Amortization of deferred sales commissions 29,423 21,885 Minority interest 4,996 5,040 Gain on disposal of property and equipment (44) (2,942) Provision for deferred income taxes 6,291 3,396 Net realized loss (gain) on sale of securities 295 (767) available for sale Deferred sales commissions paid (87,114) (65,786) Contingent deferred sales charges received 25,038 17,570 Other changes in assets and liabilities: Decrease (increase) in receivables, net 2,340 (1,166) Decrease (increase) in accrued revenues 271 (1,248) (Increase) decrease in other current assets (4,744) 2,944 Decrease (increase) in other long-term assets 1,268 (1,458) Decrease in accounts payable and accrued (5,522) (10,622) expenses (Decrease) increase in income taxes payable (1,307) 346 (Decrease) increase in other current (325) 146 liabilities Increase in other long-term liabilities 1,177 2,482 -------- ----------- -------- ----------- Net cash provided by operating activities 53,920 37,845 -------- ----------- INVESTING ACTIVITIES: Additions to property and equipment (4,109) (14,036) Proceeds from disposal of property and equipment 158 4,007 Cash paid for business acquisitions and joint (2,619) (592) venture Purchases of securities available for sale (26,201) (70,684) Proceeds from redemptions of securities available 1,792 17,598 for sale -------- ----------- -------- ----------- Net cash used by investing activities (30,979) (63,707) -------- ----------- FINANCING ACTIVITIES: Distributions to minority interest (5,195) (5,386) Dividends paid (7,829) (6,883) Purchase of treasury stock (72,058) (14,853) Proceeds from new borrowings - nonrecourse 80,636 63,431 Payments on debt - recourse (14,134) (117) Payments on debt - nonrecourse (53,848) (39,654) -------- ----------- Net cash used by financing activities (72,428) (3,462) -------- ----------- Net decrease in cash and cash equivalents (49,487) (29,324) Cash and cash equivalents, beginning of period 171,490 185,581 -------- ----------- Cash and cash equivalents, end of period $122,003 $ 156,257 ======== =========== (THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.) 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 investment in derivative instruments at the time of adoption. Given Federated's current minimal use of derivatives, we do not expect this adoption 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, Federated sells the rights to the future revenue streams associated with the 12b-1 fees, shareholder service fees and contingent deferred sales charges (CDSCs) of the Class B shares of various mutual funds it manages on a continuous basis. For accounting purposes, transactions executed under the agreement are reflected as financings and nonrecourse debt has been recorded at interest rates based on current market conditions at the time of the financings. This agreement expires in October 2000. Prior to expiration, management intends to negotiate an arrangement to continue selling the rights to these future revenue streams. 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: Six Months Ended June 30, 2000 ---------------- (IN THOUSANDS) Deferred B-Share Sales Commissions: Financed balance at December $ 288,844 31, 1999 B-Share sales commissions 78,670 financed CDSCs collected (24,129) Amortization (26,497) ---------------- Financed balance at June 30, $ 316,888 2000 ================ Below is the activity of the nonrecourse debt tranches: (IN THOUSANDS) --------------------------------------------- Interest Balance Additional Balance Tranche Rate 12/31/99 Financings 6/30/00 Payments - ---------------------- -------- ---------- --------- ---------- ---------- 1997-1 Class A 7.44% $ 52,976 $ 0 9,869 $ 43,107 Class B 9.80% 9,700 0 0 9,700 Financings 10/97 through 6/00 6.68% - 247,065 80,636 43,979 283,722 8.60% ---------- --------- ---------- ---------- $ 309,741 $ 80,636 53,848 $ 336,529 ========== ========= ========== ========== (3) Long-Term Debt - Recourse Federated's long-term debt - recourse consisted of the following: Interest June 30, December 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% 571 705 ------------ ---------- Total recourse debt 84,571 98,705 Less current portion 14,270 14,259 ------------ ------------ ---------- Total long-term debt - $ 70,301 $ 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 FEDERATED INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (UNAUDITED) (3) Long-Term Debt - Recourse (continued) 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 June 30, 2000, the outstanding balance under this agreement was zero. (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 to an amount of $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 and $0.037 per share or approximately $3.4 million and $4.4 million were paid in the first and second quarter of 2000, respectively, to holders of common shares. Additionally, on July 18, 2000, the board of directors declared a dividend of $0.037 per share to be paid on August 15, 2000, to shareholders of record as of August 4, 2000. After considering earnings through June 30, 2000, the dividend payment on August 15, 2000, and certain stock repurchase payments, approximately $19.0 million is available to pay dividends under the more restrictive of the two debt covenant limitations. (b) Stock Split On June 22, 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 June 30, 2000, a total of 31,595 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 June 30, 2000, Federated had purchased 10,589,422 shares of Class B common stock for approximately $152.0 million under the programs. Current debt covenants restrict stock repurchases between April 26, 2000, and January 31, 2001, to 7.5 million shares or $160.0 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 Six Months Ended June 30, June 30, -------------------- --------------------- 2000 1999 2000 1999 --------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income $ 36,630 $ 30,517 $ 74,278 $ 57,238 ========= ======== ========= ========= Denominator: Basic weighted-average shares outstanding 117,937 126,626 119,011 127,062 Dilutive potential shares from 4,638 3,789 4,407 3,828 stock-based compensation --------- -------- --------- --------- Diluted weighted-average shares 122,575 130,415 123,418 130,890 outstanding ========= ======== ========= ========= Basic earnings per share $ 0.31 $ 0.24 $ 0.62 $ 0.45 ========= ======== ========= ========= Diluted earnings per share $ 0.30 $ 0.23 $ 0.60 $ 0.44 ========= ======== ========= ========= </TABLE> PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT ANNOUNCED ON JUNE 22, 2000 AND PAID ON JULY 17, 2000. (6) Comprehensive Income Comprehensive income was $34.3 million and $30.3 million for the three-month periods ended June 30, 2000 and 1999, respectively, and $71.6 million and $56.6 million for the six-month periods ended June 30, 2000 and 1999, respectively. (7) Business Combination On June 16, 2000, Federated signed a definitive agreement with Investment Advisers, Inc. (IAI) to purchase the mutual fund assets of IAI. As a result of this transaction, assets of the mutual funds currently advised by IAI, totaling approximately $400 million, are planned to be merged into existing Federated funds on the transaction close date which is anticipated for September 2000. 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 our 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, our 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 MILLIONS) As of June 30, Percent 2000 1999 Change -------- --------- -------- Money market funds $ 83,497 $ 77,894 7% Equity funds 22,512 18,199 24% Fixed-income funds 14,660 16,725 (12%) Separate accounts 5,140 4,516 14% -------- -------- Total managed assets $ 125,809 $ 117,334 7% ======== ======== Total administered assets $ 44,332 $ 34,643 28% ======== ========= <TABLE> <CAPTION> AVERAGE MANAGED AND ADMINISTERED ASSETS (IN MILLIONS) Three Months Six Months Ended Ended June 30, Percent June 30, Percent 2000 1999 Change 2000 1999 Change <S> <C> <C> <C> <C> <C> <C> Money market funds 83,511 79,335 5% 83,391 78,915 6% Equity funds 21,951 17,386 26% 22,011 16,596 33% Fixed-income funds 14,739 16,938 (13%) 15,096 16,874 (11%) Separate accounts 4,690 4,356 8% 4,661 3,707 26% -------- ------- -------- -------- Total average managed 124,891 118,015 6% 125,159 116,092 8% assets Total average 43,442 34,569 26% 43,491 32,012 36% 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 Six Months Ended Ended June 30, June 30, 2000 1999 2000 1999 EQUITY FUNDS Beginning assets $ 23,431 $ 16,126 $ 20,941 $ 15,503 Sales 2,886 1,535 6,635 2,904 Redemptions (1,978) (998) (4,265) (2,005) Net sales 908 537 2,370 899 Net exchanges (14) 68 139 79 Other* (1,813) 1,468 (938) 1,718 Ending assets $ 22,512 $18,199 $ 22,512 $ 18,199 FIXED-INCOME FUNDS Beginning assets $ 15,041 $16,967 $ 15,857 $ 16,437 Sales 963 1,645 1,985 3,421 Redemptions (1,359) (1,496) (3,006) (2,955) Net (396) 149 (1,021) 466 (redemptions) sales Net exchanges (50) (110) (253) 97 Other* 65 (281) 77 (275) Ending assets $ 14,660 $16,725 $ 14,660 $ 16,725 * 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 six-month periods ended June 30, 2000 and 1999: </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> <C> <C> Three months ended Six months ended June 30, Percent June 30, Percent 2000 1999 Change Change 2000 1999 Change Change Net income (IN MILLIONS) $36.6 $30.5 $6.1 20% $74.3 $57.2 $17.1 30% Earnings per share Basic $0.31 $0.24 $0.07 29% $0.62 $0.45 $0.17 38% Diluted $0.30 $0.23 $0.07 30% $0.60 $0.44 $0.16 36% Revenue (IN MILLIONS) Revenue from managed assets $150.4 $131.7 $18.7 14% $301.0 $257.8 $43.2 17% Service-related revenue from 12.6 11.5 1.1 10% 25.8 22.1 3.7 17% sources other than managed assets Other 5.3 7.0 (1.7) (24%) 10.4 11.5 (1.1) (10%) TOTAL REVENUE $168.3 $150.2 $18.1 12% $337.2 $291.4 $45.8 16% Operating margin 40.3% 39.0% 1.3% 3% 40.9% 37.9% 3.0% 8% </TABLE> PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT ANNOUNCED ON JUNE 22, 2000 AND PAID ON JULY 17, 2000. NET INCOME. Net income for the three- and six-month periods ended June 2000 increased 20% and 30%, 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 assets and improved operating margins. Net income for the three- and six-month periods ended June 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 three- and six-month periods ended June 2000 increased 28% and 34%, respectively, compared to the same periods last year. REVENUE. Total revenue for the three- and six-month periods ended June 2000 increased $18.1 million and $45.8 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 $118.0 billion for the second quarter of 1999 to $124.9 billion for the second quarter of 2000 and from $116.1 billion in the first half of 1999 to $125.2 billion for the first half of 2000. These increases included significant asset growth in money market funds, equity funds and separate accounts. Revenue from managed assets increased at a rate higher than the rate of average managed asset growth during these periods due to the shift in the managed asset mix towards equity products that earn higher than average fees per invested dollar. At June 30, 2000, equity fund assets comprised 18% of total managed assets as compared to 16% at June 30, 1999. Service-related revenues from sources other than managed assets increased by $1.1 million and $3.7 million for the three- and six-month periods ended June 2000, respectively, as compared to the same periods last year due primarily to the growth in average administered assets. Other revenue for the three- and six-month periods ended June 2000 decreased compared to the same periods last year due to a $3.0 million non-recurring gain realized on the sale of certain non-earning assets in 1999 partially offset by higher interest earned in 2000 as a result of new investments and a general increase in yields on invested cash since June 1999. OPERATING EXPENSES. Operating expenses for the three- and six-month periods ended June 30, 2000 and 1999 are set forth in the following table: <TABLE> <CAPTION> Three months Percent Six months Percent of ended of ended June 30, Total June 30, Total (IN MILLIONS) 2000 1999 Change Change 2000 1999 ChangeChange <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating Expenses Compensation and related $42.0 $38.8 $3.2 37% $84.9 $77.9 $7.0 38% Advertising and 15.6 12.7 2.9 33% 30.8 25.6 5.2 28% promotional Amortization of deferred 14.6 11.6 3.0 34% 29.4 21.9 7.5 41% sales commissions Other 28.2 28.6 (0.4) (4%) 54.3 55.5 (1.2) (7%) TOTAL $100.4 $91.7 $8.7 100% $199.4$180.9$18.5 100% OPERATING EXPENSES </TABLE> Total operating expenses for the three- and six-month periods ended June 2000 increased as compared to the same periods last year. Approximately 80% and 84% of the change over the three- and six-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 six-month periods ended June 2000 have decreased slightly from the same period last year primarily as a result of the full amortization of certain intangible assets in 1999. INCOME TAXES. The income tax provision for the three- and six-month periods ended June 2000 was $20.2 million and $41.6 million, respectively, as compared to $17.5 million and $32.7 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 six-month periods as compared to the same periods in 1999. Our effective tax rate was 35.6% and 36.5% for the second quarter 2000 and 1999, respectively, and 35.9% and 36.3% for the first half 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 $201.7 million at June 30, 2000 as compared to $237.9 million at December 31, 1999. Cash provided by operating activities totaled $53.9 million for the six-month period ended June 2000, as compared to $37.8 million for the same period of 1999. This increase is primarily due to higher profitability in the first half of 2000. Net cash used by investing activities in the first half of 2000 primarily reflects an investment of $14.0 million in two new fluctuating value funds (performance seeds), $11.5 million invested in asset-backed securities, $4.1 million paid to acquire property and equipment and $2.6 million paid for business acquisitions. Other uses of cash flow from operating activities in the first half 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, Federated retains 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 has agreed to sell, on a regular basis over a three-year contract period terminating in the fourth quarter 2000, the rights associated with certain of the future fee revenue associated with the deferred sales commissions. For accounting purposes, the sales of the future cash flow rights have been accounted for as financings and nonrecourse debt was recorded. The following table presents the effects of the B-Share financing program on the Consolidated Balance Sheets at June 30, 2000 and December 31, 1999, and the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2000 and 1999, respectively: (IN MILLIONS) JUNE 30 AND DECEMBER 31, RESPECTIVELY 2000 1999 Assets Deferred sales commissions, net* $316.9 $288.8 Receivables 8.4 8.4 Other long-term assets 1.7 2.1 Liabilities Long-term debt - nonrecourse $336.5 $309.7 Accounts payable 6.6 6.2 THREE MONTHS ENDED JUNE 30 Revenues Other service fees, net - Federated funds $20.8 $18.0 Expenses Amortization of deferred sales commissions $12.8 $10.7 Debt expense - nonrecourse 6.4 5.7 Other expenses 0.1 0.1 SIX MONTHS ENDED JUNE 30 Revenues Other service fees, net - Federated funds $42.7 $34.1 Expenses Amortization of deferred sales commissions $26.5 $19.9 Debt expense - nonrecourse 12.5 11.1 Other expenses 0.3 0.3 * 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 $16.1 million excess of B-Share-related liabilities over the related assets at June 30, 2000, will be recognized in income over the remaining life of the B-Share cash flows. CAPITAL EXPENDITURES. Capital expenditures totaled $2.3 million and $4.4 million for the three- and six-month periods ended June 2000, respectively, compared to $12.9 million and $14.0 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 and $0.037 per share were paid in the first and second quarter of 2000, respectively. Federated's board of directors declared a dividend of $0.037 per share to be paid on August 15, 2000, to shareholders of record as of August 4, 2000. After considering earnings through June 30, 2000, the dividend payment on August 15, 2000, and certain stock repurchases, Federated, given current debt covenants, has the ability to pay dividends of approximately $19.0 million. DEBT FACILITIES. Federated has the following recourse debt facilities: SENIOR SECURED CREDIT AGREEMENT: At June 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 June 30, 2000. SENIOR SECURED NOTE PURCHASE AGREEMENTS: The Senior Secured Note Purchase Agreements debt totaled $84.0 million as of June 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 June 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 June 30, 2000, the outstanding balance under this agreement was zero. CAPITALIZED LEASE OBLIGATIONS. At June 30, 2000, we had capitalized lease obligations totaling $0.6 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 second quarter 2000, Federated purchased an additional 2,298,600 shares of Class B common stock for approximately $45.1 million under the programs. Current debt covenants restrict stock repurchases between April 26, 2000, and January 31, 2001, to 7.5 million shares or $160.0 million. On June 22, 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 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. 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, or our 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 of two years or less. In addition, as of June 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 June 30, 2000, the book value of the performance seed investments and the derivative financial instruments were $29.3 million and $0.1 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 10.1 Material contracts - Federated Investors, Inc. Supplemental Agreement, dated as of April 20, 2000, amending the Note Purchase Agreements dated as of June 15, 1996 (filed herewith) Exhibit 10.2 Material contracts - Federated Investors, Inc. Amendment No. 8 To Credit Agreement, dated as of April 14, 2000, by and among Federated Investors, Inc. and the Banks set forth therein and PNC Bank, National Association (filed herewith) Exhibit 27.1 Financial Data Schedule (filed herewith) (b) Reports on Form 8-K: Form 8-K filed on July 12, 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 AUGUST 14, 2000 By: /S/ J. CHRISTOPHER DONAHUE J. Christopher Donahue President and Chief Executive Officer Date AUGUST 14, 2000 By: /S/ THOMAS R. DONAHUE Thomas R. Donahue Chief Financial Officer and Principal Accounting Officer FEDERATED INVESTORS, INC. ------------------------ SUPPLEMENTAL AGREEMENT Dated as of April 20, 2000 amending the Note Purchase Agreements dated as of June 15, 1996 ------------------------ 7.96% Senior Secured Notes due 2006 FEDERATED INVESTORS, INC. SUPPLEMENTAL AGREEMENT as of April 20, 2000 Re: 7.96% Senior Secured Notes due 2006 TO THE SEVERAL NOTEHOLDERS WHOSE NAMES APPEAR IN THE ACCEPTANCE FORM AT THE END HEREOF Ladies and Gentlemen: FEDERATED INVESTORS, INC., a Pennsylvania corporation (the "COMPANY"), hereby agrees with you as follows: 1. ORIGINAL NOTE PURCHASE AGREEMENTS AND THE NOTES; PROPOSED AMENDMENTS. Pursuant to the several Note Purchase Agreements dated as of June 15, 1996, as supplemented and amended by a Supplemental Agreement dated as of October 1, 1997 (as so supplemented and amended the "ORIGINAL NOTE PURCHASE AGREEMENTS"), entered into by the Company with the institutional investors named in Schedule A thereto, the Company issued and sold $98,000,000 aggregate principal amount of its 7.96% Senior Secured Notes due 2006 (the "NOTES"), of which Notes in said unpaid principal amount remain outstanding on the date hereof. Unless the context otherwise requires, capitalized terms used herein without definition have the respective meanings ascribed thereto in the Original Note Purchase Agreements. The Company proposes to amend the Original Note Purchase Agreements as hereinafter set forth (the Original Note Purchase Agreements as so amended are sometimes called the "AMENDED NOTE PURCHASE AGREEMENTS"). 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you as of the Effective Date (as below defined) as follows: A. ORGANIZATION, AUTHORIZATION, ETC. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, and has all requisite power and authority to execute, deliver and perform its obligations under this Supplemental Agreement and the Amended Note Purchase Agreements. The execution and delivery of this Supplemental Agreement and the performance of this Supplemental Agreement and the Amended Note Purchase Agreements have been duly authorized by all necessary corporate and, if required, stockholder action on the part of the Company. This Supplemental Agreement and the Amended Note Purchase Agreements are legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. B. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Supplemental Agreement and the Amended Note Purchase Agreements do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. C. NO DEFAULT, ETC. No Event of Default or Default has occurred and is continuing, and neither the Company nor any Subsidiary is in default (whether or not waived) in the performance or observance of any of the terms, covenants or conditions contained in any instrument evidencing any Indebtedness and there is no pending request by the Company (except pursuant to this Supplemental Agreement and the Existing Bank Credit Facility in respect of the transactions contemplated hereby) or any Subsidiary for any amendment or waiver in respect of any contemplated or possible default with respect to such Indebtedness and no event has occurred and is continuing which, with notice or lapse of time or both, would become such a default. D. NO UNDISCLOSED FEES. The Company has not, directly or indirectly, paid or caused to be paid any consideration (as supplemental or additional interest, a fee or otherwise) to any holder of Notes or to any bank party to the Existing Bank Credit Facility in order to induce such holder to enter into this Supplemental Agreement or such bank to modify the Existing Bank Credit Facility or such holder or bank take any other action in connection with the transactions contemplated hereby, nor has the Company agreed to make any such payment. 3. REPRESENTATION OF THE NOTEHOLDER. You represent to the Company that you are the beneficial owner of Notes in the aggregate unpaid principal amount set forth below your name in the acceptance form of this Supplemental Agreement. 4. RELEASE OF COLLATERAL AND CONSENT TO AMENDMENT TO COLLATERAL DOCUMENTS. Subject to the Supplemental Agreement becoming effective as below provided, you (a) authorize the Collateral Agent to release up to 35% of the capital stock of Federated International Management Limited, an Ireland limited liability company, from the Pledge Agreement, subject to receipt of the consent of the Required Creditors (as defined in the Intercreditor Agreement), and (b) consent to the execution and delivery by the Collateral Agent of Amendment No. 1 to Security Agreement attached hereto as Annex I and Amendment No. 1 to Pledge Agreement attached hereto as Annex II. 5. AMENDMENTS OF ORIGINAL NOTE PURCHASE AGREEMENTS, ETC. The Original Note Purchase Agreements are amended pursuant to Section 17.1 thereof as follows: A. Section 10.3 is amended by deleting the word "or" at the end of clause (b) thereof, by deleting the period at the end of clause (c) thereof and inserting ",or" and by adding a new clause (d) to read as follows: "(d) CONSOLIDATED CASH FLOW -- Consolidated Cash Flow for any period of four consecutive fiscal quarters ending in 2000 to be less than $200,000,000." B. Section 10.3 is further amended by changing the phrase "For purposes of clause (c) above" appearing at the beginning of the final sentence thereof to read "For purposes of clause (c) above and, in the case of Consolidated Cash Flow, clause (d) above". C. Section 7.2(a) is amended to read in its entirety as follows: "(a) COVENANT COMPLIANCE -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 10.1 to 10.6, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence, and with respect to Section 10.4, showing the respective numbers of Class B Shares repurchased, and the respective aggregate amounts expended for such repurchases, as contemplated by subclauses (y) and (z) of the final sentence of such Section); and" D. Section 10.4 is amended by changing the final sentence thereof to read as follows: "Notwithstanding the limitations of clause (a) above, (x) no payment made to Aetna Life Insurance Company or any of its affiliates prior to the date of this Agreement or stock redemption in connection therewith prior to the date of this Agreement, in each case in connection with the Repurchase described in the Disclosure Documents, shall be deemed to constitute a Restricted Payment, (y) the Company may from time to time from the date of the Closing until payment in full of all outstanding Notes repurchase Class B Shares issued in accordance with the Federated Investors, Inc. Employees Restricted Stock Plan for an aggregate amount not to exceed $1,000,000, and no such repurchase shall be deemed to constitute a Restricted Payment and (z) the Company may from time to time between April 26, 2000 and January 31, 2001 repurchase up to 5,000,000 outstanding Class B Shares for an aggregate amount not to exceed $160,000,000, primarily on a public stock exchange and in accordance with any stock repurchase plan authorized by the Board from time to time." 6. EFFECTIVENESS OF THIS SUPPLEMENTAL AGREEMENT. This Supplemental Agreement will become effective on the date (the "EFFECTIVE DATE") on which all of the following conditions precedent shall have been satisfied: A. PROCEEDINGS. All proceedings taken by the Company in connection with the transactions contemplated hereby and all documents and papers incident thereto shall be satisfactory to you, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents and papers, all in form and substance satisfactory to you, as you or they may reasonably request in connection therewith. B. EXECUTION OF THIS SUPPLEMENTAL AGREEMENT. Counterparts of this Supplemental Agreement shall have been executed and delivered by the Company and the Required Holders. C. OPINION OF COUNSEL. You shall have received an opinion, dated the Effective Date, addressed to you and otherwise satisfactory in scope and substance to you, from Joseph M. Huber, Esq., Corporate Counsel for the Company, as to the matters described in Annex III hereto, and covering such other matters incident to the transactions contemplated hereby as you may reasonably request. D. PAYMENT OF FEES. The Company shall have paid the fees and disbursements of your special counsel as contemplated by Section 8 of this Supplemental Agreement. 7. NOTATION OF NOTES. Prior to any transfer of an outstanding Note by the holder thereof, such holder shall either make a notation on said Note to reflect the transactions contemplated by this Supplemental Agreement and the amendment to such Note or surrender such Note for a new Note (the text of which may make reference to this Supplemental Agreement) in accordance with Section 13.2 of the Amended Note Purchase Agreements. 8. EXPENSES. Without limiting the generality of Section 15.1 of the Amended Note Purchase Agreements, the Company agrees, whether or not the transactions contemplated hereby are consummated, to pay the reasonable fees and disbursements of Willkie Farr & Gallagher, your special counsel, for their services rendered in connection with such transactions and with respect to this Supplemental Agreement and any other document delivered pursuant to this Supplemental Agreement and reimburse you for your out-of-pocket expenses in connection with the foregoing. In furtherance of the foregoing, on the Effective Date the Company will pay or cause to be paid the reasonable fees and disbursements of Willkie Farr & Gallagher which are reflected in the statement of Willkie Farr & Gallagher delivered to the Company on or prior to the Effective Date. The Company will also pay promptly upon receipt of supplemental statements therefor, reasonable additional fees, if any, and disbursements of Willkie Farr & Gallagher in connection with the transactions contemplated hereby (including disbursements unposted as of the Effective Date). 9. RATIFICATION. Except as amended hereby, the Original Note Purchase Agreements are in all respects ratified and confirmed and the provisions thereof shall remain in full force and effect. 10. COUNTERPARTS. This Supplemental Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11. GOVERNING LAW. This Supplemental Agreement shall be governed by and construed in accordance with the laws of the State of New York. If you are in agreement with the foregoing, please sign the form of acceptance in the space below provided, whereupon this Supplemental Agreement shall become a binding agreement between you and the Company, subject to becoming effective as hereinabove provided. FEDERATED INVESTORS, INC. By /S/ THOMAS R. DONAHUE Title: ACCEPTED AND AGREED: NOTEHOLDERS: THE TRAVELERS INSURANCE COMPANY By SIGNATURE ILLEGIBLE Title: Investment Officer Principal Amount of Notes Held: $25,000,000 CONNECTICUT GENERAL LIFE INSURANCE COMPANY By CIGNA INVESTMENTS, INC. By /S/ JAMES R. KUZEMCHAK Title: Managing Director Principal Amount of Notes Held: $9,000,000 CONNECTICUT GENERAL LIFE INSURANCE COMPANY, on behalf of one or more separate accounts By CIGNA INVESTMENTS, INC. By /S/ JAMES R. KUZEMCHAK Title: Managing Director Principal Amount of Notes Held: $7,540,000 ALLSTATE LIFE INSURANCE COMPANY By SIGNATURE ILLEGIBLE Title: By SIGNATURE ILLEGIBLE Title: Principal Amount of Notes Held: $12,500,000 ALLSTATE INSURANCE COMPANY By SIGNATURE ILLEGIBLE Title: By SIGNATURE ILLEGIBLE Title: Principal Amount of Notes Held: $7,500,000 NORTHERN LIFE INSURANCE COMPANY By___________________________ Title: Principal Amount of Notes Held: $6,000,000 NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY By___________________________ Title: Principal Amount of Notes Held: $4,000,000 PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY By___________________________ Title: Principal Amount of Notes Held: $10,000,000 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By___________________________ Title: By___________________________ Title: Principal Amount of Notes Held: $8,000,000 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: Lincoln Investment Management, Inc., Attorney-in-fact By SIGNATURE ILLEGIBLE Title: Vice President Principal Amount of Notes Held: $3,000,000 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK By: Lincoln Investment Management, Inc., Attorney-in-fact By SIGNATURE ILLEGIBLE Title: Vice President Principal Amount of Notes Held: $2,460,000 FIRST TRENTON INDEMNITY COMPANY By TRAVELERS ASSET MANAGEMENT INTERNATIONAL COMPANY By___________________________ Title: Principal Amount of Notes Held: $3,000,000 ANNEX I Amendment No. 1 to Security Agreement ANNEX II Amendment No. 1 to Pledge Agreement ANNEX III (to Supplemental Agreement) OPINION OF COUNSEL FOR THE COMPANY The following opinions are to be provided by counsel for the Company, subject to customary assumptions, limitations and qualifications. All capitalized terms used herein without definition shall have the meanings ascribed thereto in the Supplemental Agreement. 1. The Company is a corporation validly existing under the laws of the Commonwealth of Pennsylvania and has all requisite power and authority to execute and deliver the Supplemental Agreement and to perform the provisions thereof. 2. The Supplemental Agreement has been duly authorized, executed and delivered by the Company and the Amended Note Purchase Agreements constitute legal, valid and binding agreements of the Company, enforceable against the Company in accordance with their terms. 3. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required on the part of the Company for the validity of the execution and delivery or for the performance by the Company of the Supplemental Agreement. AMENDMENT NO. 8 TO CREDIT AGREEMENT THIS AMENDMENT NO. 8 TO CREDIT AGREEMENT (this "AMENDMENT") is dated as of April 14, 2000, and is by and among FEDERATED INVESTORS, INC., a Pennsylvania corporation (the "BORROWER"), the BANKS set forth therein (collectively, the "Banks"), and PNC BANK, NATIONAL ASSOCIATION, as agent for the Banks (the "AGENT"). WHEREAS, the Borrower, the Banks and the Agent are parties to that certain Senior Secured Credit Agreement dated as of January 31, 1996, as amended by Amendment No. 1 to Credit Agreement dated as of June 27, 1996, Amendment No. 2 to Credit Agreement dated as of December 13, 1996, Amendment No. 3 to Credit Agreement dated as of October 1, 1997, Amendment No. 4 to Credit Agreement dated as of May 11, 1998, Amendment No. 5 to Credit Agreement dated as of July 17, 1998, Amendment No. 6 to Credit Agreement dated as of December 3, 1998 and Amendment No. 7 to Credit Agreement dated as of February 22, 1999 (the "CREDIT AGREEMENT"); WHEREAS, capitalized terms used herein and not otherwise defined herein shall have the same meanings given to them in the Credit Agreement; and WHEREAS, the Borrower, the Banks and the Agent wish to amend the Credit Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereto, intending to be legally bound, agree as follows: 12. 1. DEFINITIONS. Defined terms used herein unless otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement as amended by this Amendment. 13. 2. AMENDMENT OF CREDIT AGREEMENT. (a) Section 1.1 [Certain Definitions] of the Credit Agreement is hereby amended by deleting the definitions of "Certain Fixed Charges," "Debt Service Coverage Ratio" and "EBDA" in their entirety. (b) The definition of "Permitted Investments" in Section 1.1 [Certain Definitions] of the Credit Agreement is hereby amended by inserting the following immediately before the end of such definition: ; and (ix) any money market fund with minimum investment amounts of not less than $250,000. (c) Section 1.1 [Certain Definitions] of the Credit Agreement is hereby amended by inserting the following new definitions in alphabetical order: "DOMESTIC SUBSIDIARIES" shall mean any Subsidiary of the Borrower that is organized or incorporated under the Laws of any state or commonwealth in the United States of America. "FOREIGN SUBSIDIARIES" shall mean any Subsidiary of the Borrower that is not a Domestic Subsidiary. (d) Section 8.1(l) [New Subsidiaries] of the Credit Agreement is hereby amended by deleting such Section in its entirety and inserting in lieu thereof the following: (l) NEW SUBSIDIARIES. The Borrower shall pledge, and shall cause each of its Subsidiaries as applicable to pledge, to the Agent for the benefit of the Banks, all of the capital stock of any Domestic Subsidiaries hereafter created or acquired by any of the Companies and 65% of the capital stock of any Foreign Subsidiaries hereafter created or acquired by any of the Companies, and shall cause each such Subsidiary to enter into the Intercompany Subordination Agreement and (other than registered investment adviser or broker-dealer Subsidiaries or Foreign Subsidiaries) the Security Agreement and shall cause to be delivered a legal opinion of such outside counsel reasonably acceptable to the Agent and its counsel in form and substance satisfactory to the Agent and its counsel as to the matters set forth on EXHIBIT K. (e) Section 8.2(a) [Minimum Debt Service Coverage Ratio] of the Credit Agreement is hereby amended by deleting such Section in its entirety and inserting in lieu thereof the following: (a) MINIMUM CASH FLOW FROM OPERATIONS. The Borrower shall not permit Cash Flow From Operations as of the end of each fiscal quarter for the four (4) fiscal quarters then ended to be less than $200,000,000. (f) Section 8.2(h)(ii) and (iii) [Loans and Investments] of the Credit Agreement is hereby amended by deleting such clauses in their entirety and inserting in lieu thereof the following: (ii) investments in wholly owned Subsidiaries existing on the date hereof and wholly owned Subsidiaries hereafter created or acquired, PROVIDED the Borrower and each of its Subsidiaries shall comply with the requirements of Section 8.1(l), PROVIDED, FURTHER, that notwithstanding the foregoing, only Limited Investments not greater than $1,000,000 in the aggregate shall be permitted to be made by the Companies in the Insurance Subsidiaries; (iii)investments in (A) Subsidiaries other than Passport, which are less than wholly owned, but over which the Borrower maintains control, and (B) corporate entities in which the Borrower does not maintain control but for which none of the Companies has any liability greater than its initial investment in such entity and where the activities in which such entity engages are consistent with the activities set forth in Section 6.1(aa), PROVIDED, that (1) the investments permitted by clauses (A) or (B) of this Section 8.2(h)(iii), together with any other acquisitions permitted under Section 8.2(j)(iii), shall not exceed the Permitted Acquisition Payment, (2) the stock of any such Subsidiary or corporate entity which is owned by the Borrower or another Subsidiary shall be pledged to the Agent for the benefit of the Banks under the Pledge Agreement PROVIDED THAT, notwithstanding the foregoing, in no event shall the Borrower or another Subsidiary be required to pledge more than 65% of the capital stock of any Foreign Subsidiary, PROVIDED, FURTHER, however, with respect to investments pursuant to clause (B) above, such stock must be pledged only upon the request of the Agent, upon the occurrence of an Event of Default or Potential Default, and (3) no investments in the Insurance Subsidiaries shall be permitted under this clause (iii) of Section 8.2(h), since the last proviso in clause (ii) of Section 8.2(h) shall govern all investments in the Insurance Subsidiaries; (g) Section 8.2(i)(ii) [Dividends and Related Distributions] of the Credit Agreement is hereby amended by deleting such clause in its entirety and inserting in lieu thereof the following: (ii) in addition to repurchases of Unpledged Shares permitted pursuant to Section 8.2(i)(iv) below, so long as no Event of Default or Potential Default has occurred and is continuing, the Borrower may repurchase not in excess of (a) from and after April 26, 2000 through the term of the Agreement, primarily on a public stock exchange and in accordance with any stock repurchase plan authorized by the Borrower's Board of Directors from time to time, up to $250,000,000 of Unpledged Shares but in no event more than the lesser of (1) 10,000,000 Unpledged Shares in the aggregate under this Section 8.2(i)(ii)(a) or (2) the amount permitted under the note purchase agreements executed in connection with the Senior Notes, and (b) during the term of this Agreement, $1,000,000 of Restricted Stock; and at any time, the Borrower may repurchase up to $1,900,000 of the Unpledged Shares held by Mellon Bank, N.A., as trustee of the Westinghouse Electric Corporation Master Trust Agreement for the Westinghouse Pension Plan, or any successor trustee; (h) Section 3 of Exhibit L [Form of Compliance Certificate] to the Credit Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof: (3) MINIMUM CASH FLOW FROM OPERATIONS. (Section 8.2(a)). Cash Flow From Operations, for the four (4) fiscal quarters ending as of the Report Date, is $__________ (see item 4(A)(iv) below), which is not less than $200,000,000. (i) Section 10 of Exhibit L [Form of Compliance Certificate] to the Credit Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof: (10) DIVIDENDS AND RELATED DISTRIBUTIONS (Section 8.2(i)). The Companies have not made or paid or agreed to make or pay any dividends or other distributions on account of any shares of Borrower's capital stock or the purchase, redemption or retirement of any such shares (or warrants, rights or options therefor) during the quarter ending on the Report Date except for purchases of Unpledged Shares in the amount of $________ or purchases of Restricted Stock in the amount of $____________ made in compliance with Section 8.2(i)(ii) and (iv) of the Agreement and dividends on Borrower's Common Shares in the amount of $________ made in compliance with Section 8.2(i)(iv) of the Agreement. (A) PURCHASE OF UNPLEDGED SHARES AND RESTRICTED STOCK (Subsection (ii) of 8.2(i)). The Borrower has purchased Unpledged Shares (net of purchases of Restricted Stock) from and after April 14, 2000 through the Report Date, primarily on the open market and in accordance with any stock repurchase plan authorized by the Board of Directors from time to time, in an amount of $__________ which is not more than $250,000,000 and the number of Unpledged Shares purchased is _________ which does not exceed the lesser of 10,000,000 or the amount permitted under the note purchase agreements executed in connection with the Senior Notes. The Borrower has purchased Restricted Stock during the term of the Agreement in the amount of $__________ which does not exceed the permitted amount of $1,000,000. (B) Dividends and Repurchases (Subsection (iv) of Section 8.2(i)). Borrower has paid dividends on its Common Shares and, in addition to repurchases of Unpledged Shares permitted pursuant to Section 8.2(i)(ii) above, made repurchases of Unpledged Shares during its current fiscal year in the amount of $_________ which does not exceed on a cumulative basis the permitted amount of $20,000,000 plus 50% of any net income (or minus 100% of any net loss) of the Borrower and its Subsidiaries from January 1, 1998 through the date of payment. (i) Dividends paid by Borrower on its $________ Common Shares and purchases of Unpledged Shares (in addition to repurchases permitted pursuant to Section 8.2(i)(ii) above) from January 1, 1998 through the quarter preceding the quarter ending on Report Date (ii) Dividends paid by Borrower on $________ its Common Shares and repurchases of Unpledged Shares (in addition to repurchases permitted pursuant to Section 8.2(i)(ii) above) during the quarter ending on the Report Date (iii) $20,000,000 plus 50% of any net $________ income (or minus 100% of any net loss) of the Borrower and its Subsidiaries from January 1, 1998 through the date of payment. (iv) Sum of clauses (i) and (ii) (may $________ not exceed amount in line (iii)) 3. RELEASE OF COLLATERAL AND CONSENT TO AMENDMENT TO COLLATERAL DOCUMENTS. THE BANKS HEREBY (A) AUTHORIZE PNC BANK, NATIONAL ASSOCIATION, AS COLLATERAL AGENT UNDER THE INTERCREDITOR AGREEMENT (SENIOR NOTES) (THE "COLLATERAL AGENT"), TO RELEASE FEDERATED INTERNATIONAL MANAGEMENT LIMITED, AN IRELAND LIMITED LIABILITY COMPANY ("FIM"), FROM THE SECURITY AGREEMENT AND TO RELEASE FROM THE PLEDGE AGREEMENT 35% OF THE CAPITAL STOCK OF FIM, SUBJECT TO RECEIPT OF THE CONSENT OF THE REQUIRED CREDITORS (AS DEFINED IN THE INTERCREDITOR AGREEMENT (SENIOR NOTES)) AND(B) CONSENT TO THE EXECUTION AND DELIVERY BY THE COLLATERAL AGENT OF AMENDMENT NO. 1 TO SECURITY AGREEMENT ATTACHED HERETO AS EXHIBIT 2 AND AMENDMENT NO. 1 TO PLEDGE AGREEMENT ATTACHED HERETO AS EXHIBIT 3. 4. CONDITIONS OF EFFECTIVENESS OF AMENDMENT OF CREDIT AGREEMENT. THE EFFECTIVENESS OF THIS AMENDMENT OF THE CREDIT AGREEMENT IS EXPRESSLY CONDITIONED UPON SATISFACTION OF EACH OF THE FOLLOWING CONDITIONS PRECEDENT ON THE DATE HEREOF: (a) REPRESENTATIONS AND WARRANTIES; NO DEFAULTS. The representations and warranties of the Borrower contained in Article VI of the Credit Agreement shall be true and accurate on the date thereof with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein), and the Borrower shall have performed and complied with all covenants and conditions under the Senior Loan Documents and hereof; and no Event of Default or Potential Default under the Credit Agreement and the other Senior Loan Documents shall have occurred and be continuing or shall exist. (b) AUTHORIZATION AND INCUMBENCY. There shall be delivered to the Agent for the benefit of each Bank a certificate, dated as of the date hereof, and signed by the Secretary or an Assistant Secretary of the Borrower, certifying as appropriate as to: (i) all action taken by the Borrower in connection with this Amendment and the other Senior Loan Documents; and (ii) the names of the officer or officers authorized to sign this Amendment and the other documents executed and delivered in connection herewith and described in this Section 3 and the true signatures of such officer or officers. (c) ACKNOWLEDGMENT. There shall be delivered to the Agent for the benefit of each Bank the Confirmation in the form attached hereto as EXHIBIT 1 hereto executed by each of the Loan Parties (other than the Borrower). (d) AMENDMENT TO COLLATERAL DOCUMENTS. There shall be delivered to the Agent for the benefit of each Bank Amendment No. 1 to the Security Agreement in the form attached hereto as EXHIBIT 2 and Amendment No. 1 to the Pledge Agreement in the form attached hereto as EXHIBIT 3, in each case executed by the parties thereto. (e) CONSENT AND SUPPLEMENTAL AGREEMENT TO NOTE PURCHASE AGREEMENT. There shall be delivered to the Agent for the benefit of each Bank a consent executed by the Majority Holders (as defined in the Intercreditor Agreement (Senior Notes)) consenting to the amendments to the collateral documents described in clause (d) above and a copy of the Supplemental Agreement to Note Purchase Agreement amending Section 10.4 [Restricted Payments] of the Note Purchase Agreement. (f) LEGAL DETAILS; COUNTERPARTS. All legal details and proceedings in connection with the transactions contemplated by this Amendment shall be in form and substance satisfactory to the Agent, the Agent shall have received from the Borrower and the Banks an executed original of this Amendment and the Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Agent. 5. FEES AND EXPENSES. THE BORROWER HEREBY AGREES TO REIMBURSE THE AGENT AND THE BANKS ON DEMAND FOR ALL LEGAL COSTS, EXPENSES AND DISBURSEMENTS RELATING TO THIS AMENDMENT WHICH ARE PAYABLE BY THE BORROWER AS PROVIDED IN SECTIONS 10.5 AND 11.3 OF THE CREDIT AGREEMENT. 6. FORCE AND EFFECT. EXCEPT AS EXPRESSLY MODIFIED BY THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER SENIOR LOAN DOCUMENTS ARE HEREBY RATIFIED AND CONFIRMED AND SHALL REMAIN IN FULL FORCE AND EFFECT AFTER THE DATE HEREOF. 7. GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO ITS CONFLICT OF LAWS PRINCIPLES. [SIGNATURE PAGES FOLLOW] SIGNATURE PAGE 1 OF 3 TO AMENDMENT NO. 8 TO CREDIT AGREEMENT IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Amendment No. 8 to Credit Agreement as of the date first above written. FEDERATED INVESTORS, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------ Title: VICE PRESIDENT ------------------------------------ PNC BANK, NATIONAL ASSOCIATION individually and as Agent By: /S/ THOMAS V. KONDRAT -------------------------------------- Name: THOMAS V. KONDRAT ------------------------------------- Title: MANAGING DIRECTOR ----------------------------------- BANK OF AMERICA, NATIONAL ASSOCIATION By: /S/ MEHUL MEHTA --------------------------------------- Name: MEHUL MEHTA ------------------------------------- Title: VICE PRESIDENT ----------------------------------- STATE STREET BANK AND TRUST COMPANY By: /S/ JOHN T. DALEY -------------------------------------- Name: JOHN T. DALEY ------------------------------------- Title: VICE PRESIDENT ----------------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /S/ ROBERT BOTTAMEDI --------------------------------------- Name: ROBERT BOTTAMEDI ------------------------------------- Title: VICE PRESIDENT ----------------------------------- SIGNATURE PAGE 2 OF 3 TO AMENDMENT NO. 8 TO CREDIT AGREEMENT COMMERZBANK AKTIENGESELLSCHAFT NEW YORK BRANCH By: /S/ MICHAEL P. MCCARTHY /S/ HENRY SPARK ------------------------------------------ Name: MICHAEL P. MCCARTHY HENRY SPARK Title: VICE PRESIDENT ASSISTANT TREASURER THE BANK OF NEW YORK By: /S/ SCOTT H. BUITEKANT --------------------------------------- Name: SCOTT H. BUITEKANT ------------------------------------- Title: VICE PRESIDENT ------------------------------------ THE BANK OF NOVA SCOTIA By: /S/ F.C.H. ASHBY --------------------------------------- Name: F.C.H. ASHBY ------------------------------------- Title: SENIOR MANAGER - LOAN OPERATIONS ------------------------------------- FIRST UNION NATIONAL BANK By: /S/ WALTER PRINGLE --------------------------------------- Name: WALTER PRINGLE ------------------------------------- Title: VICE PRESIDENT ----------------------------------- NATIONAL CITY BANK OF PENNSYLVANIA By: /S/ PAUL A. SAKALIK --------------------------------------- Name: PAUL A. SAKALIK ------------------------------------ Title: VICE PRESIDENT ----------------------------------- FIRSTAR BANK, N.A. By: /S/ DAVID J. DANNEMILLER --------------------------------------- Name: DAVID J. DANNEMILLER ------------------------------------ Title: VICE PRESIDENT ----------------------------------- SIGNATURE PAGE 3 OF 3 TO AMENDMENT NO. 8 TO CREDIT AGREEMENT THE CHASE MANHATTAN BANK By: /S/ ELISABETH H. SCHWABE --------------------------------------- Name: ELISABETH H. SCHWABE ------------------------------------- Title: MANAGING DIRECTOR ------------------------------------ CONFIRMATION Reference is hereby made to that certain Senior Secured Credit Agreement by and between FEDERATED INVESTORS, INC. (successor by merger to Federated Investors), the BANKS set forth therein and PNC BANK, NATIONAL ASSOCIATION, as Agent for the Banks dated as of January 31, 1996, as amended (the "CREDIT AGREEMENT"). All terms used herein unless otherwise defined herein shall have the meanings given to them in the Credit Agreement. On the date hereof, the Borrower, the Banks and the Agent are entering into that certain Amendment No. 8 to Credit Agreement (the "AMENDMENT"), a copy of which has been provided to the undersigned. This Confirmation is delivered to the Bank pursuant to Section 3(c) of the Amendment. Pursuant to the Credit Agreement, on the Closing Date (i) the Borrower, the Pledging Subsidiaries and the holders of the Class A Shares entered into that certain Pledge Agreement in favor of the Agent for the benefit of the Banks (as amended by Amendment No. 1 to Pledge Agreement dated as of April 14, 2000, the "PLEDGE Agreement"), (ii) the Grantors entered into that certain Security Agreement in favor of the Agent for the benefit of the Banks (as amended by Amendment No. 1 to Security Agreement dated as of April 14, 2000, the "SECURITY AGREEMENT") and (iii) the Borrower and its Subsidiaries entered into that certain Intercompany Subordination Agreement in favor of the Agent for the benefit of the Banks (the "INTERCOMPANY SUBORDINATION AGREEMENT"). This Confirmation will confirm to the Agent and the Banks that the undersigned Pledging Subsidiaries, holders of the Class A Shares, Grantors and Subsidiaries of the Borrower have read and understand the Amendment which amends various covenants. The Pledging Subsidiaries and the holders of the Class A Shares hereby ratify and confirm the Pledge Agreement. The Grantors hereby ratify and confirm the Security Agreement. The Subsidiaries of the Borrower hereby ratify and confirm the Intercompany Subordination Agreement. [SIGNATURE PAGES FOLLOW] [SIGNATURE PAGE 1 OF 4 OF CONFIRMATION] IN WITNESS WHEREOF, intending to be legally bound hereby, the undersigned, by their duly authorized officers, have executed this Confirmation as of April 14, 2000. EDGEWOOD SERVICES, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: EXECUTIVE VICE PRESIDENT ----------------------------------- FEDERATED ADMINISTRATIVE SERVICES By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ----------------------------------- FEDERATED ADMINISTRATIVE SERVICES, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED INVESTORS TRUST CO. By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED FINANCIAL SERVICES, INC. By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: EXECUTIVE VICE PRESIDENT ------------------------------------ [SIGNATURE PAGE 2 OF 4 OF CONFIRMATION] FEDERATED GLOBAL INVESTMENT MANAGEMENT CORP. (formerly Federated Global Research Corp.) By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ----------------------------------- FEDERATED INTERNATIONAL MANAGEMENT LIMITED By: /S/ J. CHRISTOPHER DONAHUE -------------------------------------- Name: J. CHRISTOPHER DONAHUE ------------------------------------- Title: ----------------------------------- FEDERATED INVESTMENT COUNSELING By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED INVESTORS MANAGEMENT COMPANY By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: PRESIDENT ------------------------------------ FEDERATED SECURITIES CORP. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: EXECUTIVE VICE PRESIDENT ----------------------------------- [SIGNATURE PAGE 3 OF 4 OF CONFIRMATION] FEDERATED SERVICES COMPANY By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED SHAREHOLDER SERVICES COMPANY By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ----------------------------------- FII HOLDINGS, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: PRESIDENT ------------------------------------ PASSPORT RESEARCH, LTD. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ----------------------------------- RETIREMENT PLAN SERVICE COMPANY OF AMERICA By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED INVESTMENT MANAGEMENT COMPANY (formerly Federated Advisors) By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ [SIGNATURE PAGE 4 OF 4 OF CONFIRMATION] INVESTLINK TECHNOLOGIES INC. By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED PRIVATE ASSET MANAGEMENT, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: EXECUTIVE VICE PRESIDENT ------------------------------------ FEDERATED INTERNATIONAL HOLDINGS BV By: /S/ J. CHRISTOPHER DONAHUE --------------------------------------- Name: J. CHRISTOPHER DONAHUE ------------------------------------- Title: ----------------------------------- FEDERATED FONDS-SERVICE GmbH By: /S/ J. CHRISTOPHER DONAHUE --------------------------------------- Name: J. CHRISTOPHER DONAHUE ------------------------------------- Title: ----------------------------------- THE VOTING SHARES IRREVOCABLE TRUST By: /S/ J. CHRISTOPHER DONAHUE --------------------------------------- J. Christopher Donahue, Trustee By: /S/ JOHN F. DONAHUE --------------------------------------- John F. Donahue, Trustee By: /S/ RHODORA J. DONAHUE --------------------------------------- Rhodora J. Donahue, Trustee AMENDMENT NO. 1 TO SECURITY AGREEMENT THIS AMENDMENT NO. 1 TO SECURITY AGREEMENT (the "AMENDMENT") is dated as of April 14, 2000, and is made by and among Federated Investors, Inc. (the "BORROWER"), each of the Subsidiaries of Borrower set forth on the signature page hereof (the "GRANTOR SUBSIDIARIES") (the Borrower and the Grantor Subsidiaries being collectively referred to herein as the "GRANTORS" and each as a "GRANTOR"), and PNC Bank, National Association (the "COLLATERAL AGENT"), as collateral agent for (i) the banks (the "BANKS") referred to in Section 1.1 of the Senior Secured Credit Agreement dated as of January 31, 1996 among the Borrower, the Banks and PNC Bank, National Association, as Agent for the Banks (the "AGENT") (as it has been and may hereafter be amended or otherwise modified from time to time, the "CREDIT AGREEMENT") and (ii) the holders from time to time of the Borrower's 7.96% Senior Secured Notes due 2006 (the "NOTEHOLDERS" and, together with the Agent and the Banks, sometimes collectively referred to as the "CREDITORS") issued pursuant to the Note Purchase Agreements dated as of June 15, 1996 between the Borrower and each of the purchasers named in Schedule A thereto (as it has been and may hereafter be amended or otherwise modified from time to time, the "NOTE PURCHASE AGREEMENTS"). WITNESSETH THAT: WHEREAS, the Grantors and the Collateral Agent are parties to that certain Security Agreement dated as of June 15, 1996 (the "SECURITY AGREEMENT"); and WHEREAS, the parties hereto wish to amend the Security Agreement as set forth herein. NOW, THEREFORE, intending to be legally bound hereby and for value received, the parties hereto covenant and agree to amend the Security Agreement as follows: 1. DEFINITIONS. ----------- Defined terms used herein unless otherwise defined herein shall have the meanings given to them in the Security Agreement. 2. AMENDMENT OF SECURITY AGREEMENT. ------------------------------- Section 5(j) of the Security Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof: (j) it will cause each of its Subsidiaries which may hereafter be created or acquired (other than registered investment advisor or broker-dealer Subsidiaries or any Subsidiary that is not organized or incorporated under the Laws of any state or commonwealth in the United States of America) to enter into and become a party and signatory to this Security Agreement and do all such acts and things and execute, deliver and file all such documents and instruments as the Collateral Agent may deem necessary and desirable to create and perfect a first priority perfected security interest in the Collateral of such Subsidiary. 3. CONDITIONS OF EFFECTIVENESS OF THIS AMENDMENT. --------------------------------------------- The effectiveness of this Amendment is expressly conditioned upon the receipt by the Collateral Agent for the benefit of the Creditors of (a) a fully executed Amendment and (b) the consent of the Banks and the Majority Holders as required by Section 14 of the Security Agreement and Section 5(a) of the Intercreditor Agreement. 4. LEGAL DETAILS. ------------- All legal details and proceedings in connection with the transactions contemplated by this Amendment shall be in form and substance satisfactory to the Collateral Agent. 5. FULL FORCE AND EFFECT; NO NOVATION. ---------------------------------- The Security Agreement, as amended by this Amendment, is hereby ratified and confirmed and is and shall remain in full force and effect, taking into account this Amendment. No novation, suspension of continuity, satisfaction, discharge of prior duties or termination of the security interest, or collateral therefor is intended or consented to by the parties hereto except as expressly set forth herein. 6. COUNTERPARTS. ------------ This Amendment may be executed by different parties hereto in any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all of such counterparts shall together constitute one and the same instrument. 7. GOVERNING LAW. ------------- This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. [SIGNATURE PAGES FOLLOW] [SIGNATURE PAGE 1 OF 2 TO AMENDMENT NO. 1 TO SECURITY AGREEMENT] WITNESS the due execution hereof as of the day and year first above written. PNC BANK, NATIONAL ASSOCIATION, as Agent for the Banks and as Collateral Agent for the Banks and the Noteholders By: /S/ THOMAS V. KONDRAT --------------------------------------- Name: THOMAS V. KONDRAT ------------------------------------- Title: MANAGING DIRECTOR ----------------------------------- FEDERATED INVESTORS, INC. By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: VICE PRESIDENT ---------------------------------- FEDERATED ADMINISTRATIVE SERVICES, INC. By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ----------------------------------- FEDERATED INVESTORS MANAGEMENT COMPANY By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: PRESIDENT ----------------------------------- [SIGNATURE PAGE 2 OF 2 TO AMENDMENT NO. 1 TO SECURITY AGREEMENT] FEDERATED SERVICES COMPANY By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ----------------------------------- FEDERATED SHAREHOLDER SERVICES COMPANY By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FII HOLDINGS, INC. By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: PRESIDENT ----------------------------------- RETIREMENT PLAN SERVICE COMPANY OF AMERICA By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ INVESTLINK TECHNOLOGIES, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED PRIVATE ASSET MANAGEMENT, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: EXECUTIVE VICE PRESIDENT ------------------------------------ AMENDMENT NO. 1 TO PLEDGE AGREEMENT THIS AMENDMENT NO. 1 TO PLEDGE AGREEMENT (the "PLEDGE AMENDMENT") is dated as of April 14, 2000, and is made by and among Federated Investors, Inc. (the "Borrower"), FII Holdings, Inc., Federated Services Company, Federated Shareholders Services Company and FS Holdings, Inc., subsidiaries of the Borrower (the "PLEDGING SUBSIDIARIES") (the Borrower and the Pledging Subsidiaries being the owners of the Subsidiaries listed on SCHEDULE 1 to the Pledge Agreement (as defined herein), the shareholders of the Borrower which are signatories hereto and are listed on Schedule 1 to the Pledge Agreement (the "SHAREHOLDERS") (the Borrower, the Pledging Subsidiaries and the Shareholders being collectively referred to herein as the "PLEDGORS" and each as a "PLEDGOR"), and PNC Bank, National Association (the "COLLATERAL AGENT"), as collateral agent for (i) the banks (the "BANKS") referred to in Section 1.1 of the Senior Secured Credit Agreement dated as of January 31, 1996 among the Borrower, the Banks and PNC Bank, National Association, as Agent for the Banks (as it has been and may hereafter be amended or otherwise modified from time to time, the "CREDIT AGREEMENT") and (ii) the holders from time to time of the Borrower's 7.96% Senior Secured Notes due 2006 (the "NOTEHOLDERS" and, together with the Agent and the Banks, sometimes collectively referred to as the "CREDITORS") issued pursuant to the Note Purchase Agreements dated as of June 15, 1996 between the Borrower and each of the purchasers named in Schedule A thereto (as it has been and may hereafter be amended or otherwise modified from time to time, the "NOTE PURCHASE AGREEMENTS"). WITNESSETH THAT: WHEREAS, the Pledgors and the Collateral Agent are parties to that certain Pledge Agreement dated as of June 15, 1996 (the "PLEDGE AGREEMENT"); and WHEREAS, the parties hereto wish to amend the Pledge Agreement as set forth herein. NOW, THEREFORE, intending to be legally bound hereby and for value received, the parties hereto covenant and agree to amend the Pledge Agreement as follows: 1. DEFINITIONS. ----------- Defined terms used herein unless otherwise defined herein shall have the meanings given to them in the Pledge Agreement. 2. AMENDMENT OF PLEDGE AGREEMENT. ----------------------------- Clause (1) of Section 6(b) of the Pledge Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof: (1) it will pledge or cause to be pledged hereunder any shares of capital stock or beneficial or partnership interests of any Subsidiary organized or incorporated under the Laws of any state or commonwealth in the United States of America ("DOMESTIC SUBSIDIARY") hereafter created or acquired by the Borrower or any of the Subsidiaries and 65% of the capital stock of any Subsidiary that is not a Domestic Subsidiary hereafter created or acquired by the Borrower or any of the Subsidiaries, and that it will have good and marketable title to and the right to pledge such shares of capital stock or beneficial or partnership interests of any Subsidiary hereafter created or acquired. 3. RELEASE. ------- The Collateral Agent hereby releases from the lien of the Pledge Agreement 35% of the capital stock of Federated International Management Limited, an Ireland limited liability company, and agrees to take such further action as is necessary to effectuate such release. 4. CONDITIONS OF EFFECTIVENESS OF THIS AMENDMENT. --------------------------------------------- The effectiveness of this Amendment is expressly conditioned upon the receipt by the Collateral Agent for the benefit of the Creditors of (a) a fully executed Amendment and (b) the consent of the Banks and the Majority Holders as required by Section 15 of the Pledge Agreement and Section 5(a) of the Intercreditor Agreement. 5. LEGAL DETAILS. ------------- All legal details and proceedings in connection with the transactions contemplated by this Amendment shall be in form and substance satisfactory to the Collateral Agent. 6. FULL FORCE AND EFFECT; NO NOVATION. ---------------------------------- The Pledge Agreement, as amended by this Amendment, is hereby ratified and confirmed and is and shall remain in full force and effect, taking into account this Amendment. No novation, suspension of continuity, satisfaction, discharge of prior duties or termination of the security interest, or collateral therefor is intended or consented to by the parties hereto except as expressly set forth herein. 7. COUNTERPARTS. ------------ This Amendment may be executed by different parties hereto in any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all of such counterparts shall together constitute one and the same instrument. 8. GOVERNING LAW. ------------- This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. [SIGNATURE PAGES FOLLOW] [SIGNATURE PAGE 1 OF 2 TO AMENDMENT NO. 1 TO PLEDGE AGREEMENT] WITNESS the due execution hereof as of the day and year first above written. PNC BANK, NATIONAL ASSOCIATION, as Agent for the Banks and Collateral Agent for the Banks and the Noteholders By: /S/ THOMAS V. KONDRAT --------------------------------------- Name: THOMAS V. KONDRAT ------------------------------------- Title: MANAGING DIRECTOR ----------------------------------- FEDERATED INVESTORS, INC. By: /S/ THOMAS R. DONAHUE -------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: VICE PRESIDENT ----------------------------------- FEDERATED SERVICES COMPANY By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: TREASURER ------------------------------------ FEDERATED INTERNATIONAL HOLDING BV By: /S/ J. CHRISTOPHER DONAHUE -------------------------------------- Name: J. CHRISTOPHER DONAHUE ------------------------------------- Title: ----------------------------------- FII HOLDINGS, INC. By: /S/ THOMAS R. DONAHUE --------------------------------------- Name: THOMAS R. DONAHUE ------------------------------------- Title: PRESIDENT ------------------------------------ [SIGNATURE PAGE 2 OF 2 TO AMENDMENT NO. 1 TO PLEDGE AGREEMENT] THE VOTING SHARES IRREVOCABLE TRUST By: /S/ J. CHRISTOPHER DONAHUE --------------------------------------- J. Christopher Donahue, Trustee By: /S/ JOHN F. DONAHUE --------------------------------------- John F. Donahue, Trustee By: /S/ RHODORA J. DONAHUE --------------------------------------- Rhodora J. Donahue, Trustee