UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- ---------------- Commission File Number 001-14818 ----------- FEDERATED INVESTORS, INC. ------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1111467 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA 15222-3779 ------------------------ ---------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 412-288-1900 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ______. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: As of November 6, 2000, the Registrant had outstanding 9,000 shares of Class A Common Stock and 117,290,309 shares of Class B Common Stock. Federated Investors, Inc. Form 10-Q For the Three Months and Nine Months Ended September 30, 2000 Table of Contents PAGE NO. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets at September 30, 2000, and December 31, 1999 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K 15 (b) Reports on Form 8-K 15 Signatures 16 Part I, Item I. Financial Statements <TABLE> <CAPTION> FEDERATED INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited) SEPTEMBER DECEMBER 30, 31, 2000 1999 <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents 137,249 171,490 Securities available for sale 81,950 66,438 Receivables-Federated funds Receivables, net of reserve of $60 and $184, respectively 34,974 35,163 Accrued revenues 7,450 6,050 Prepaid expenses 4,764 3,305 Current deferred tax asset, net 1,792 1,382 Other current assets 302 319 Total current assets 268,481 284,147 LONG-TERM ASSETS: Customer relationships, net of accumulated amortization of $16,192 and $12,800, respectively 15,425 9,613 Goodwill, net of accumulated amortization of $18,204 and $16,013, respectively 32,843 32,856 Other intangible assets, net of accumulated amortization of $129 and $112, respectively 51 78 Deferred sales commissions, net of accumulated amortization of $122,351 and $79,365, respectively 331,704 298,978 Deferred tax asset, net Property and equipment, net of accumulated depreciation of $37,519 and $44,605, respectively 34,296 31,305 Other long-term assets 21,996 16,216 Total long-term assets 436,315 389,046 704,796 673,193 CURRENT LIABILITIES: Cash overdraft 6,398 9,111 Current portion of long-term debt - recourse 14,275 14,259 Accrued expenses 57,107 58,768 Accounts payable 29,558 29,321 Income taxes payable 1,522 2,865 Other current liabilities 4,067 1,148 Total current liabilities 112,927 115,472 LONG-TERM LIABILITIES: Long-term debt - recourse 70,230 84,446 Long-term debt - nonrecourse 338,906 309,741 Long-term deferred tax liability, net 43,472 37,177 Other long-term liabilities 6,298 6,949 Total long-term liabilities 458,906 438,313 Total liabilities 571,833 553,785 Minority interest 472 596 SHAREHOLDERS' EQUITY : Common stock : Class A, no par value, 20,000 shares authorized, 9,000 shares issued and outstanding 189 189 Class B, no par value, 900,000,000 shares authorized, 129,505,456 shares issued 75,227 75,087 Class A, $1.00 stated value, 99,000 shares authorized, 0 and 6,000 shares issued and outstanding, respectively - - Class B, $.01 stated value, 149,700,000 shares authorized, 0 and 90,093,758 shares issued, respectively - - Additional paid-in capital - - Retained earnings 226,729 124,653 Treasury stock, at cost, 11,590,547 and 6,933,540 shares Class B common stock, respectively (166,052) (79,976) Employee restricted stock plan (813) (1,046) Accumulated other comprehensive income (2,789) (95) ------------ ------------ Total shareholders' equity 132,491 118,812 ------------ ------------ Total liabilities, minority interest, and $ $ shareholders' equity 704,796 673,193 ============ ============ </TABLE> December 31, 1997 share amounts have been restated to reflect the one for one stock dividend paid on April 15, 1998 and the one for two stock dividend paid on April 30, 1998. <TABLE> <CAPTION> FEDERATED INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED NINE MONTHS ENDED (dollars in thousands, except per share data) SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------------- (unaudited) 2000 1999 2000 1999 ------------ ------------ ------------ --------------- <S> <C> <C> <C> <C> REVENUE: Investment-advisory fees, net-Federated $ $ $ funds 93,203 80,033 273,381 230,876 Investment-advisory fees, net-other 3,754 3,025 10,011 8,147 Administrative-service fees, net-Federated funds 21,901 20,178 64,364 60,150 Administrative-service fees, net-other 5,624 6,025 17,367 17,080 Other service fees, net-Federated funds 35,392 31,632 104,122 91,381 Other service fees, net-other 7,428 6,032 21,516 17,109 Commission income 1,398 1,112 4,760 3,190 Interest and dividends 4,340 3,475 13,401 9,964 Gain (loss) on sale of securities available for sale (228) 83 (523) 851 Other income 288 602 1,862 4,895 ------------ ------------ ------------ --------------- Total revenue 173,100 152,197 510,261 443,643 ------------ ------------ ------------ --------------- OPERATING EXPENSES: Compensation and related 40,570 38,803 125,422 116,748 Advertising and promotional 15,079 14,594 45,888 40,177 Systems and communications 7,753 6,991 21,987 20,800 Professional service fees 6,258 6,304 18,711 19,002 Office and occupancy 6,731 5,650 19,205 18,463 Travel and related 3,449 3,485 10,401 10,634 Amortization of deferred sales commissions 15,560 12,456 44,983 34,341 Amortization of intangible assets 1,982 1,668 5,610 8,737 Other 1,762 2,395 6,291 4,372 ------------ ------------ ------------ --------------- Total operating expenses 99,144 92,346 298,498 273,274 ------------ ------------ ------------ --------------- Operating income 73,956 59,851 211,763 170,369 ------------ ------------ ------------ --------------- NONOPERATING EXPENSES: Debt expense - recourse 1,942 2,212 6,372 6,643 Debt expense - nonrecourse 6,721 5,881 19,236 17,012 ------------ ------------ ------------ --------------- Total nonoperating expenses 8,663 8,093 25,608 23,655 ------------ ------------ ------------ --------------- Income before minority interest and income taxes 65,293 51,758 186,155 146,714 Minority interest 2,564 2,588 7,560 7,628 ------------ ------------ ------------ --------------- Income before income taxes 62,729 49,170 178,595 139,086 Income tax provision 22,717 18,006 64,305 50,684 ------------ ------------ ------------ --------------- Net income $ $ $ 40,012 31,164 114,290 88,402 ============ ============ ============ =============== EARNINGS PER SHARE: Basic 0.34 $ 0.25 $ 0.97 $ 0.70 ============ ============ ============ =============== Diluted 0.33 $ 0.24 $ 0.93 $ 0.68 ============ ============ ============ =============== Cash dividends per share 0.037 $ 0.028 $ 0.102 $ 0.081 ============ ============ ============ =============== PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT PAID ON JULY 17, 2000. </TABLE> FEDERATED INVESTORS, INC. <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED (dollars in thousands) SEPTEMBER 30, ------------------ (unaudited) 2000 1999 -------- -------- <S> <C> <C> OPERATING ACTIVITIES: Net income $114,290 $ 88,402 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Amortization of intangible assets 5,610 8,737 Depreciation and other amortization 6,076 5,559 Amortization of deferred sales commissions 44,983 34,341 Minority interest 7,560 7,628 Loss (gain) on disposal of property and equipment 173 (2,973) Provision for deferred income taxes 7,356 3,962 Net realized loss (gain) on sale of securities available for sale 523 (851) Deferred sales commissions paid (113,900) (96,104) Contingent deferred sales charges received 36,193 28,298 Other changes in assets and liabilities: Decrease (increase) in receivables, net 418 (1,012) Increase in accrued revenues (1,341) (2,109) (Increase) decrease in other current assets (3,492) 5,122 Decrease (increase) in other long-term assets 1,620 (1,190) (Decrease) increase in accounts payable and accrued expenses (1,939) 1,957 Decrease in income taxes payable (1,344) (1,456) Increase in other current liabilities 193 578 Increase in other long-term liabilities 214 3,884 -------- -------- Net cash provided by operating activities 103,193 82,773 -------- -------- INVESTING ACTIVITIES: Additions to property and equipment (8,238) (15,603) Proceeds from disposal of property and equipment 158 4,007 Cash paid for business acquisitions and joint venture (11,636) (1,398) Purchases of securities available for sale (28,429) (88,743) Proceeds from redemptions of securities available for sale 1,720 24,459 -------- -------- Net cash used by investing activities (46,425) (77,278) -------- -------- FINANCING ACTIVITIES: Distributions to minority interest (7,684) (7,847) Dividends paid (12,214) (10,446) Purchase of treasury stock (56,370) (86,076) Proceeds from new borrowings - nonrecourse 107,580 93,309 Payments on debt - recourse (14,200) (178) Payments on debt - nonrecourse (78,415) (62,569) -------- -------- Net cash used by financing activities (91,009) (44,101) -------- -------- Net decrease in cash and cash equivalents (34,241) (38,606) Cash and cash equivalents, beginning of period 171,490 185,581 -------- -------- Cash and cash equivalents, end of period $137,249 $146,975 ======== ======== </TABLE> FEDERATED INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Summary of Significant Accounting Policies (a) BASIS OF PRESENTATION The interim consolidated financial statements of Federated Investors, Inc. (Federated) included herein have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the financial statements reflect all adjustments which are of a normal recurring nature and necessary for a fair statement of the results for the interim periods presented. In preparing the unaudited interim consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from such estimates and such differences may be material to the financial statements. These financial statements should be read in conjunction with Federated's Annual Report on Form 10-K for the year ended December 31, 1999. Certain items previously reported have been reclassified to conform with the current year's presentation. (b) RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133), requires that all derivatives, including hedges, be recorded at fair value and that all changes in the fair value or cash flow of both the hedge and the hedged item be recognized in earnings in the same period. SFAS 133 is effective for years beginning after June 15, 2000. Federated intends to adopt SFAS 133 effective January 1, 2001. The impact of adopting the provisions of this statement on Federated's earnings and financial position will depend on the nature and extent of Federated's investments in derivative instruments at the time of adoption. Given Federated's current minimal use of derivatives and based on our analysis, we do not anticipate the adoption of SFAS 133 to have a significant effect on our earnings or financial position. (2) Securitization of B-Share Future Revenue Streams and Nonrecourse Debt Pursuant to an agreement with a third party that expired in October 2000, Federated sold, on a continuous basis, the rights to future revenue streams associated with 12b-1 fees, shareholder service fees and contingent deferred sales charges (CDSCs) of Class B shares of various mutual funds it manages. For accounting purposes, transactions executed under the agreement were reflected as financings and nonrecourse debt was recorded at interest rates based on market conditions at the time of the financings. Federated has agreed to the preliminary terms of a new arrangement with a third party to continue selling the rights to these future revenue streams and anticipates finalizing the arrangement before December 31, 2000. FEDERATED INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (UNAUDITED) (2) Securitization of B-Share Future Revenue Streams and Nonrecourse Debt (continued) The following tables summarize the changes in the deferred sales commissions related to this agreement: Nine Months Ended September 30, 2000 ---------------- (IN THOUSANDS) Deferred B-Share Sales Commissions: Financed balance at December $ 288,844 31, 1999 B-Share sales commissions 104,965 financed CDSCs collected (34,888) Amortization (40,072) ---------------- Financed balance at September $ 318,849 30, 2000 ================ Below is the activity of the nonrecourse debt tranches: (IN THOUSANDS) Interest Balance Additional Balance Tranche Rate 12/31/99 Financings 9/30/00 Payments 1997-1 Class A 7.44% $ 52,976 $ 0 $ 12,645 $ 40,331 Class B 9.80% 9,700 0 0 9,700 Financings 10/97 through 9/00 6.68% - 247,065 107,580 65,770 288,875 8.60% --------- ----------- ---------- --------- $ 309,741 $ 107,580 $ 78,415 $ 338,906 ========= =========== ========== ========= (3) Long-Term Debt - Recourse Federated's long-term debt - recourse consisted of the following: Interest September December 30, 31, Rate 2000 1999 --------- ------------ ---------- (IN THOUSANDS) Recourse Debt: Senior Secured Note 7.96% $ 84,000 $ 98,000 Purchase Agreement Capitalized leases 7.1%-8.5% 505 705 ------------ ---------- Total recourse debt 84,505 98,705 Less current portion 14,275 14,259 ------------ ------------ ---------- Total long-term debt - $ 70,230 $ 84,446 recourse ============ ========== On March 28, 2000, a wholly-owned subsidiary of Federated, Edgewood Services, Inc., entered into a discretionary line of credit agreement with a bank under which it can borrow up to $45.0 million for the payment of obligations associated with daily net settlements of mutual funds processed through the National Securities Clearing Corporation. Borrowings under this agreement bear interest at a rate defined by the bank at the time of the borrowing and are payable on demand. At September 30, 2000, the outstanding balance under this agreement was zero. FEDERATED INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (UNAUDITED) (4) Common Stock (a) Cash Dividends Federated's Senior Secured Credit Agreement allows dividends in an amount not to exceed $20 million plus 50% of any net income (less 100% of any loss) of Federated during the period from January 1, 1998, to and including the date of payment, less certain stock repurchase payments. The Senior Secured Note Purchase Agreements allow dividends in an amount not to exceed $5 million plus 50% of any net income (less 100% of any loss) of Federated during the period from January 1, 1996, to and including the date of payment, less certain stock repurchase payments. Cash dividends of $0.028, $0.037 and $0.037 per share or approximately $3.4 million, $4.4 million and $4.4 million were paid in the first, second and third quarter of 2000, respectively, to holders of common shares. Additionally, on October 17, 2000, the board of directors declared a dividend of $0.037 per share to be paid on November 15, 2000, to shareholders of record as of November 3, 2000. After considering earnings through September 30, 2000, the dividend payment on November 15, 2000, and certain stock repurchase payments, approximately $34.7 million is available to pay dividends under the more restrictive of the two debt covenant limitations. (b) Stock Split In June 2000, the board of directors approved a three-for-two stock split on Federated's common stock. The stock split was effected as a dividend to shareholders of record as of July 7, 2000 and new shares were distributed on July 17, 2000. Earnings and dividends per share, as well as other share data, have been adjusted to reflect the stock distribution. (c) Employee Stock Purchase Plan Federated offers an Employee Stock Purchase Plan which allows employees to purchase a maximum of 750,000 shares of Class B common stock. Employees may contribute up to 10% of their salary to purchase shares of Federated's Class B common stock on a quarterly basis at the market price. The shares under the plan may be newly issued shares, treasury shares or shares purchased on the open market. As of September 30, 2000, a total of 34,134 shares have been purchased by employees in this plan. (d) Stock Repurchase Program In 1999, the board of directors approved two separate share repurchase programs authorizing Federated to purchase up to $20.0 million of Federated Class B common stock under the first program and up to 7.5 million shares of Federated Class B common stock under the second program. In March 2000, the board of directors approved a third program to purchase up to 7.5 million shares of Federated Class B common stock. Under the programs, shares can be repurchased in open market transactions over a period of 12 months from the date of the board resolution. In addition, under the second and third programs, shares can also be repurchased in private transactions. The programs authorize executive management to determine the timing and the amount of shares for each purchase. The repurchased stock is held in treasury to be used for employee benefit plans, potential acquisitions and other corporate activities. As of September 30, 2000, Federated had purchased 11,179,922 shares of Class B common stock for approximately $166.0 million under the programs and can repurchase an additional 5,072,530 shares subject to current debt-covenant restrictions which limit cash payments for additional stock repurchases to $149.9 million. This cash payment limit is continuously adjusted to reflect 50% of net income earned and stock repurchase and dividend payments made during the period. From October 1, 2000, to November 6, 2000, an additional 624,600 shares of Class B common stock have been repurchased under the programs for $16.6 million. FEDERATED INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (UNAUDITED) (5) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> <S> <C> <C> <C> <C> Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2000 1999 2000 1999 --------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income 40,012 $ 31,164 $ 114,290 $ 88,402 ========= ======== ========= ========= Denominator: Basic weighted-average shares 126,233 outstanding 124,604 118,201 116,598 Dilutive potential shares from 4,926 3,858 4,579 3,839 stock-based compensation --------- -------- --------- --------- Diluted weighted-average shares 121,524 128,462 122,780 130,072 outstanding ========= ======== ========= ========= Basic earnings per share 0.34 $ 0.25 $ 0.97 $ 0.70 ========= ======== ========= ========= Diluted earnings per share 0.33 $ 0.24 $ 0.93 $ 0.68 ========= ======== ========= ========= </TABLE> PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT PAID ON JULY 17, 2000. (6) Comprehensive Income Comprehensive income was $40.0 million and $31.2 million for the three-month periods ended September 30, 2000 and 1999, respectively, and $111.6 million and $87.8 million for the nine-month periods ended September 30, 2000 and 1999, respectively. (7) Business Combination On September 15, 2000, Federated completed the acquisition of the mutual fund assets of Investment Advisers, Inc. (IAI). As a result of this transaction, Federated assumed the investment management, distribution and shareholder servicing responsibilities for 11 former IAI funds totaling $346.0 million in primarily equity assets as of the transaction date. This acquisition was accounted for using the purchase method of accounting. The entire purchase price, including direct costs, was allocated to customer relationships which will be amortized over 14 years. (8) Subsequent Event On October 20, 2000, Federated signed a definitive agreement to acquire the business of New York-based Edgemont Asset Management Corporation, the advisor for the $3.7 billion Kaufmann Fund (Fund). The offer has been approved by Federated's corporate and fund boards. The transaction, which is expected to close during the first quarter 2001, includes an upfront payment due at the transaction closing date, 95% of which is payable in cash and 5% of which is payable with the issuance of Federated Class B common stock. Federated may also make a series of additional cash payments over six years contingent upon revenue growth. The upfront purchase price and the maximum available contingent payments will be set on the closing date based on the level of average assets of the Fund 30 days before closing. Based on assets at September 30, 2000, the upfront purchase price would approximate $200 million and, if revenue targets are met, the contingent payments, consisting of both additional purchase price and incentive compensation, could aggregate to as much as $220 million. This acquisition will be accounted for using the purchase method of accounting. Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis below should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. We have presumed that the readers of this interim financial information have read or have access to management's discussion and analysis of financial condition and results of operations appearing in our Annual Report on Form 10-K for the year ended December 31, 1999. GENERAL The majority of our revenue is derived through advising, distributing and servicing the Federated funds, separately managed accounts and other related products, in both domestic and international markets. We also derive revenue through servicing third-party mutual funds. Investment advisory, distribution and the majority of our servicing fees are based on the net asset value of investment portfolios that we manage or administer. As such, these revenues are dependent upon factors including market conditions and the ability to attract and maintain assets. Accordingly, revenues will fluctuate with changes in the total value and composition of the assets under management or administration. ASSET HIGHLIGHTS MANAGED AND ADMINISTERED ASSETS AT PERIOD END (IN As of September Percent MILLIONS) 30, 2000 1999 Change -------- --------- -------- Money market funds $ 87,139 $ 77,006 13% Equity funds 23,222 17,289 34% Fixed-income funds 14,340 16,414 (13%) Separate accounts 5,669 4,504 26% -------- -------- Total managed assets $ 130,370 $ 115,213 13% ======== ======== Total administered assets $ 38,905 $ 37,445 4% ======== ========= <TABLE> <CAPTION> AVERAGE MANAGED AND ADMINISTERED ASSETS (IN MILLIONS) Three Months Ended Nine Months Ended September 30, Percent September 30, Percent <S> <C> <C> <C> <C> <C> <C> ---------------- ----------------- 2000 1999 Change 2000 1999 Change -------- ------- ------ -------- -------- -------- Money market funds 85,528 77,748 10% 84,055 78,526 7% Equity funds 23,261 17,965 29% 22,428 17,052 32% Fixed-income funds 14,548 16,669 (13%) 14,913 16,806 (11%) Separate accounts 5,677 4,511 26% 5,000 3,975 26% -------- ------- -------- -------- Total average managed 129,014 116,893 10% 126,396 116,359 9% assets Total average 41,403 36,824 12% 42,795 33,616 27% administered assets ======== ======= ======== ======== </TABLE> COMPONENTS OF CHANGES IN EQUITY AND FIXED-INCOME FUND MANAGED ASSETS (IN MILLIONS) <TABLE> <CAPTION> <S> <C> <C> <C> <C> Three Months Nine Months Ended Ended September 30, September 30, 2000 1999 2000 1999 EQUITY FUNDS Beginning assets $ 22,512 18,199 $ 20,941 $ 15,503 -------- -------- -------- -------- Sales 1,949 1,504 8,584 4,408 Redemptions (1,503) (1,275) (5,768) (3,280) Net sales 446 229 2,816 1,128 Net exchanges (70) 17 69 96 Acquisition related 319 0 319 0 Other* 15 (923) 562 (1,156) Ending assets $ 23,222 $ 23,222 $ 17,289 17,289 FIXED-INCOME FUNDS Beginning assets $ 14,660 16,725 $ 15,857 $ 16,437 Sales 882 1,282 2,867 4,703 Redemptions (1,168) (1,456) (4,174) (4,411) Net (286) (174) (1,307) 292 (redemptions) sales Net exchanges (156) 39 (409) 136 Acquisition related 11 0 11 0 Other* 111 (176) 188 (451) Ending assets $ 14,340 16,414 $ 14,340 $ 16,414 </TABLE> * Includes changes in the market value of securities held by the funds, reinvested dividends and distributions and net investment income. RESULTS OF OPERATIONS The table below presents the highlights of our operations for the three- and nine-month periods ended September 30, 2000 and 1999: <TABLE> <CAPTION> Three months ended Nine months ended September 30, Percent September 30, Percent ------------ -------------- 2000 1999 ChangeChange 2000 1999Change Change <S> <C> <C> <C> <C> <C> <C> <C> <C> Net income (IN MILLIONS) $40.0 $31.2 $8.8 28% $114.3 $88.4 $25.9 29% Earnings per share** Basic $0.34 $0.25 $0.09 $0.97 $0.70 $0.27 39% 36% Diluted $0.33 $0.24 $0.09 38% $0.93 $0.68 $0.25 37% Revenue (IN MILLIONS) Revenue from managed$155.6 $136.0 $19.6 14% $456.6 $393.7 $62.9 16% assets Service-related 1.1 revenue from 13.1 12.0 1.1 9% 38.9 34.2 4.7 14% sources other than managed assets Other 4.4 4.2 0.2 5% 14.8 15.7 (0.9) (6%) ------ ------ ------ ------ ------------- TOTAL REVENUE $173.1 $152.2 $20.9 14% $510.3 $443.6 $66.7 15% ====== ============= ====== ====== ====== Operating margin 42.7% 39.3% 3.4% 9% 41.5% 38.4% 3.1% 8% </TABLE> ** PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT PAID ON JULY 17, 2000. NET INCOME. Net income for the three- and nine-month periods ended September 2000 increased 28% and 29%, respectively, compared to the same periods last year. These increases primarily reflect increased revenue from managed assets as a result of continued growth in fees from equity and money market fund assets and improved operating margins. Net income for the nine-month period ended September 1999 included a non-recurring after-tax gain from the sale of non-earning assets of $2.0 million. Excluding this gain, net income for the nine-month period ended September 2000 increased 32% compared to the same period last year. REVENUE. Total revenue for the three- and nine-month periods ended September 2000 increased $20.9 million and $66.7 million, respectively, compared to the same periods last year primarily as a result of increased revenue from managed assets. Average managed assets continued to climb from $116.9 billion for the third quarter of 1999 to $129.0 billion for the third quarter of 2000 and from $116.4 billion in the first nine months of 1999 to $126.4 billion for the first nine months of 2000. These increases included significant asset growth in equity funds, separate accounts and money market funds. Revenue from managed assets increased at a rate higher than the rate of average managed asset growth during these periods due to the continued shift in the managed asset mix towards equity products that earn higher than average fees per invested dollar. At September 30, 2000, equity fund assets comprised 18% of total managed assets as compared to 15% at September 30, 1999. Service-related revenues from sources other than managed assets increased by $1.1 million and $4.7 million for the three- and nine-month periods ended September 2000, respectively, as compared to the same periods last year due primarily to the growth in average administered assets. OPERATING EXPENSES. Operating expenses for the three- and nine-month periods ended September 30, 2000 and 1999 are set forth in the following table: <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> <C> <C> Three months Percent Nine months Percent of ended of ended September Total September Total 30, 30, ------------- ------------- (IN MILLIONS) 2000 1999 Change Change 2000 1999 ChangeChange ------------------------------------------------------------- ------------------------- Operating Expenses Compensation and related $40.6 $38.8 $1.8 26% $125.4$116.7 $8.7 35% Advertising and 15.1 14.6 0.5 7% 45.9 40.2 5.7 23% promotional Amortization of deferred 15.6 12.5 3.1 46% 45.0 34.3 10.7 42% sales commissions Other 27.8 26.4 1.4 21% 82.2 82.1 0.1 0% TOTAL $99.1 $92.3 $6.8 100% $298.5$273.3$25.2 100% OPERATING EXPENSES </TABLE> Total operating expenses for the three- and nine-month periods ended September 2000 increased $6.8 million and $25.2 million, respectively, as compared to the same periods last year. Approximately 69% and 81% of the change over the three- and nine-month periods of 1999, respectively, is due to the increase in certain operating expenses that tend to increase with increases in sales and/or managed assets. These expenses include incentive compensation (included in Compensation and related), marketing allowances (included in Advertising and promotional) and the amortization of deferred sales commissions. Each of these expenses increased over the same periods last year due in large part to increased sales and/or managed assets. All other expenses combined for the three- and nine-month periods ended September 2000 have remained relatively unchanged as compared to the same periods last year. INCOME TAXES. The income tax provision for the three- and nine-month periods ended September 2000 was $22.7 million and $64.3 million, respectively, as compared to $18.0 million and $50.7 million for the same periods of 1999. The provision increased for both of these periods primarily as a result of the increases in the level of income before income taxes for the three- and nine-month periods as compared to the same periods in 1999. The effective tax rate was 36.2% and 36.6% for the third quarter 2000 and 1999, respectively, and 36.0% and 36.4% for the first nine months of 2000 and 1999, respectively. CAPITAL RESOURCES AND LIQUIDITY CASH FLOW. Cash and cash equivalents and the current portion of securities available for sale totaled $219.2 million at September 30, 2000 as compared to $237.9 million at December 31, 1999. Cash provided by operating activities totaled $103.2 million for the nine-month period ended September 2000, as compared to $82.8 million for the same period of 1999. This increase is primarily attributable to increased profitability. Net cash used by investing activities in the first nine months of 2000 included an investment of $16.0 million in three new fluctuating value funds (performance seeds), $11.6 million paid for business acquisitions including the purchase of Investment Advisers, Inc.'s mutual fund assets, $11.5 million invested in asset-backed securities, and $8.2 million paid to acquire property and equipment. Other uses of cash flow from operating activities in the first nine months of 2000 included the purchase of treasury stock, payments on debt, dividend payments and distributions to the minority interest partner. DEFERRED SALES COMMISSIONS AND NONRECOURSE DEBT. Certain subsidiaries of Federated pay commissions to broker/dealers (deferred sales commissions) to promote investments in certain mutual funds. For mutual fund shares sold under such marketing programs, we retain certain distribution and servicing fees from the mutual fund over the outstanding life of such shares. For non-B-Share-related sales, the up-front commissions Federated pays to broker/dealers are capitalized, recorded as deferred sales commissions and amortized over the estimated benefit period not to exceed contingent deferred sales charge (CDSC) periods. The 12b-1 and shareholder service fees are recognized in the statements of income over the life of the mutual fund class share. Any CDSC fees collected are used to reduce the deferred sales commission asset. For B-Share-related sales, Federated sold the rights to certain future fee revenue associated with the deferred sales commissions, pursuant to an agreement with a third party which expired in October 2000. For B-Share-related sales occurring on or before September 30, 2000, Federated accounted for the sales of future cash flows as financings and nonrecourse debt was recorded. Federated has agreed to the preliminary terms of a new arrangement with a third party to continue selling the rights to these future revenue streams and anticipates finalizing the arrangement before December 31, 2000. The following table presents the effects of the B-Share financing program on the Consolidated Balance Sheets at September 30, 2000 and December 31, 1999, and the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2000 and 1999, respectively: (IN MILLIONS) 2000 1999 ---------------------------------------------------------------------- SEPTEMBER 30 AND DECEMBER 31, RESPECTIVELY Assets Deferred sales commissions, net* $318.8 $288.8 Receivables 8.5 8.4 Other long-term assets 1.6 2.1 Liabilities Long-term debt - nonrecourse $338.9 $309.7 Accounts payable 6.9 6.2 THREE MONTHS ENDED SEPTEMBER 30 Revenues Other service fees, net - Federated funds $21.9 $18.6 Expenses Amortization of deferred sales commissions $13.6 $11.3 Debt expense - nonrecourse 6.7 5.9 Other expenses 0.1 0.2 NINE MONTHS ENDED SEPTEMBER 30 Revenues Other service fees, net - Federated funds $64.6 $52.7 Expenses Amortization of deferred sales commissions $40.1 $31.2 Debt expense - nonrecourse 19.2 17.0 Other expenses 0.4 0.5 * EXCLUDES DEFERRED SALES COMMISSIONS RELATED TO B-SHARE REVENUE STREAMS THAT HAVE NOT BEEN FINANCED AS OF THE END OF THE PERIOD DUE TO THE TIMING OF THE SALE OF THE REVENUE STREAMS TO THE THIRD PARTY. Due to the nonrecourse nature of this financing arrangement, the $16.9 million excess of B-Share-related liabilities over the related assets at September 30, 2000, will be recognized in income over the remaining life of the B-Share cash flows. CAPITAL EXPENDITURES. Capital expenditures totaled $4.2 million and $8.6 million for the three- and nine-month periods ended September 2000, respectively, compared to $1.6 million and $15.6 million for the same periods of 1999. Year-to-date 2000 capital expenditures include cash paid for equipment purchased in connection with the asset purchase of InvestLink Technologies, Inc. CASH DIVIDENDS. Federated pays cash dividends on a quarterly basis. Dividends of $0.028, $0.037 and $0.037 per share were paid in the first, second and third quarter of 2000, respectively. Federated's board of directors declared a dividend of $0.037 per share to be paid on November 15, 2000, to shareholders of record as of November 3, 2000. After considering earnings through September 30, 2000, the dividend payment on November 15, 2000, and certain stock repurchases, Federated, given current debt covenants, has the ability to pay dividends of approximately $34.7 million. DEBT FACILITIES. Federated has the following recourse debt facilities: SENIOR SECURED CREDIT AGREEMENT: At September 30, 2000, the outstanding balance under the Senior Secured Credit Agreement was zero with an amount available to borrow of $150.0 million. The Senior Secured Credit Agreement contains various financial and other covenants. Federated was in compliance with all debt covenants at September 30, 2000. The Senior Secured Credit Agreement expires on January 31, 2001. Management is currently negotiating a new credit agreement which we expect to finalize by January 31, 2001. SENIOR SECURED NOTE PURCHASE AGREEMENTS: The Senior Secured Note Purchase Agreements debt totaled $84.0 million as of September 30, 2000. The notes are due in $14.0 million annual installments and mature in June 2006. The first of these installments was paid on June 27, 2000. Federated was in compliance with all debt covenants at September 30, 2000. DISCRETIONARY LINE OF CREDIT: On March 28, 2000, a wholly-owned subsidiary of Federated, Edgewood Services, Inc., entered into a discretionary line of credit agreement with a bank under which it can borrow up to $45.0 million for the payment of obligations associated with daily net settlements of mutual funds processed through the National Securities Clearing Corporation. Borrowings under this agreement bear interest at a rate defined by the bank at the time of the borrowing and are payable on demand. At September 30, 2000, the outstanding balance under this agreement was zero. CAPITALIZED LEASE OBLIGATIONS. At September 30, 2000, Federated had capitalized lease obligations totaling $0.5 million related to certain telephone equipment. The scheduled principal payments approximate $0.3 million per year for 2000 through 2002. SHAREHOLDERS' EQUITY. In 1999, the Federated board of directors approved two separate share repurchase programs authorizing Federated to purchase up to $20.0 million of Federated Class B common stock under the first program and up to 7.5 million shares of Federated Class B common stock under the second program. In March 2000, the board of directors approved a third program to purchase up to 7.5 million shares of Federated Class B common stock. Under the programs, shares can be repurchased in open market transactions over a period of 12 months from the date of the board resolution. In addition, under the second and third programs, shares can also be repurchased in private transactions. The programs authorize executive management to determine the timing and the amount of shares for each purchase. The repurchased stock is held in treasury to be used for employee benefit plans, potential acquisitions and other corporate activities. During the third quarter 2000, Federated purchased an additional 590,500 shares of Class B common stock for approximately $14.0 million under the programs. As of September 30, 2000, Federated can repurchase an additional 5,072,530 shares through its current authorized programs subject to current debt-covenant restrictions which limit cash payments for additional stock repurchases to $149.9 million. This cash payment limit is continuously adjusted to reflect 50% of net income earned and stock repurchase and dividend payments made during the period. From October 1, 2000, to November 6, 2000, an additional 624,600 shares of Class B common stock have been repurchased under the programs for $16.6 million. In June 2000, the board of directors approved a three-for-two stock split on Federated's common stock. The stock split was effected as a dividend to shareholders of record as of July 7, 2000, and new shares were distributed on July 17, 2000. Earnings and dividends per share, as well as other share data, have been adjusted to reflect the stock distribution. FUTURE CASH REQUIREMENTS. Management expects that the principal needs for cash will be to fund strategic business acquisitions, advance sales commissions, repurchase company stock, service recourse debt, fund property and equipment acquisitions, pay shareholder dividends and seed new products. Management believes that Federated's existing liquid assets, together with the expected continuing cash flow from operations, its borrowing capacity under current credit facilities, the B-Share financing arrangement and its ability to issue stock will be sufficient to meet its present and reasonably foreseeable cash needs. SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION. Certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Future Cash Requirements and elsewhere in this report, constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance, achievements, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For a discussion of such risk factors, see the section titled Risk Factors and Cautionary Statements in Federated's Annual Report on Form 10-K for the year ended December 31, 1999, and other reports on file with the Securities and Exchange Commission. As a result of the foregoing and other factors, no assurance can be given as to future results, levels of activity, performance or achievements, and neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk Our investments are primarily in money market and fluctuating value mutual funds with investments which have a duration of two years or less. In addition, as of September 30, 2000, we have investments in high yield asset-backed securities and mortgage-backed securities which are included in "Other long-term assets" on the Consolidated Balance Sheets. Occasionally, we invest in new fluctuating value mutual funds (performance seeds) that we sponsor in order to provide investable cash to the fund allowing the fund to establish a performance history. Federated may use derivative financial instruments to hedge these investments. As of September 30, 2000, the book value of the performance seed investments and the derivative financial instruments were $31.3 million and $0.04 million, respectively. All of our debt instruments carry fixed interest rates and therefore are not subject to market risk. Part II, Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits required to be filed by Item 601 of Regulation S-K are filed herewith and incorporated by reference herein: Exhibit 27.1 Financial Data Schedule (filed herewith) (b) Reports on Form 8-K: Form 8-K filed on November 8, 2000 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FEDERATED INVESTORS, INC. (Registrant) Date NOVEMBER 10, 2000 By: /S/ J. CHRISTOPHER DONAHUE J. Christopher Donahue President and Chief Executive Officer Date NOVEMBER 10, 2000 By: /S/ THOMAS R. DONAHUE Thomas R. Donahue Chief Financial Officer and Principal Accounting Officer