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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, 2002
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, 2002, the
Registrant had outstanding 9,000 shares of Class A Common Stock and 113,647,571
shares of Class B Common Stock.
Table of Contents
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Page
No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market 19
Risk
Item 4. Controls and Procedures 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K 20
(b) Reports on Form 8-K 20
Signatures 21
Certifications 22
Special Note Regarding Forward-Looking Information
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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, 2001, and other reports on file with the Securities
and Exchange Commission. Many of these factors may be more likely to occur as a
result of the ongoing threat of terrorism. 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 1. Financial Statements
Consolidated Balance Sheets
(dollars in thousands)
(unaudited) September 30, December 31,
2002 2001
Current Assets:
Cash and cash equivalents $122,738 $73,511
Marketable securities 1,472 4,602
Receivables, net of reserve of $238 and
$315, respectively 28,657 32,581
Accrued revenues 6,658 6,596
Prepaid expenses 5,456 2,633
Current deferred tax asset, net 390 2,025
Other current assets 622 361
Total current assets 165,993 122,309
Long-Term Assets:
Goodwill, net of accumulated
amortization of $24,862 164,934 131,867
Other intangible assets, net 73,391 80,026
Deferred sales commissions, net of accumulated
amortization of $53,924 and $47,222,
respectively 58,894 56,875
Property and equipment, net of accumulated
depreciation of $51,149 and $47,264, respectively 35,680 34,521
Other long-term assets 3,341 5,955
Total long-term assets 336,240 309,244
Total assets $502,233 $431,553
Current Liabilities:
Cash overdraft $2,804 $5,085
Current portion of long-term debt - recourse 776 157
Accrued expenses 60,224 58,275
Accounts payable 26,305 29,102
Income taxes payable 1,084 26,543
Other current liabilities 4,369 5,946
Total current liabilities 95,562 125,108
Long-Term Liabilities:
Long-term debt - recourse 1,338 0
Long-term debt - nonrecourse 57,152 54,954
Long-term deferred tax liability, net 11,757 7,036
Other long-term liabilities 7,180 6,995
Total long-term liabilities 77,427 68,985
Total liabilities 172,989 194,093
Minority interest 455 363
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 82,506 82,299
Additional paid-in capital from treasury stock
transactions 3,610 3,54
Retained earnings 548,000 411,447
Treasury stock, at cost, 15,622,885 and 14,144,515
shares Class B common stock,
respectively (305,165) (259,626)
Employee restricted stock plan (290) (469)
Accumulated other comprehensive loss (61) (286)
Total shareholders' equity 328,789 237,097
Total liabilities, minority interest, and
shareholders' equity $502,233 $431,553
(The accompanying notes are an integral part of these consolidated financial
statements.)
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenue:
Investment-advisory fees,
net-affiliates $107,350 $105,968 $333,480 $303,019
Investment-advisory fees, net-other 3,265 2,647 9,474 7,823
Administrative-service fees,
net-affiliates 30,812 28,072 92,507 79,232
Administrative-service fees,
net-other 3,782 5,184 13,663 15,655
Other service fees,
net-affiliates 20,909 34,521 65,843 100,318
Other service fees, net-other 5,896 7,105 18,591 20,856
Commission income 778 595 2,551 2,422
Other, net 443 654 1,127 1,582
Total revenue 173,235 184,746 537,236 530,907
Operating Expenses:
Compensation and related 40,473 45,590 136,438 129,126
Advertising and promotional 19,197 16,630 55,592 50,126
Systems and communications 6,851 7,196 20,861 21,925
Office and occupancy 6,563 6,654 19,281 20,264
Professional service fees 4,946 6,235 16,216 20,384
Travel and related 3,152 3,146 9,137 9,910
Amortization of deferred sales
commissions 3,460 10,355 11,001 34,559
Amortization of intangible
assets 2,651 6,078 8,655 12,158
Other 2,224 2,123 6,578 4,920
Total operating expenses 89,517 104,007 283,759 303,372
Operating income 83,718 80,739 253,477 227,535
Nonoperating Income (Expenses):
Interest and dividends 652 1,408 1,736 8,326
Loss on securities, net (640) 0 (793) (496)
Debt expense - recourse (130) (1,493) (338) (5,100)
Debt expense - nonrecourse (1,104) (5,647) (3,221) (17,673)
Other, net (1,876) (4,987) (1,944) (5,292)
Total nonoperating
expenses, net (3,098) (10,719) (4,560) (20,235)
Income before minority interest
and income taxes 80,620 70,020 248,917 207,300
Minority interest 2,973 2,773 8,274 8,132
Income before income taxes 77,647 67,247 240,643 199,168
Income tax provision 27,720 24,056 85,782 71,459
Net income $49,927 $43,191 $154,861 $127,709
Earnings per share:
Basic $0.45 $0.37 $1.37 $1.11
Diluted $0.43 $0.36 $1.32 $1.06
Cash dividends per share $0.057 $0.046 $0.160 $0.129
(The accompanying notes are an integral part of these consolidated financial
statements.)
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30, 2002 2001
Operating Activities:
Net income $154,861 $127,709
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets 8,655 12,158
Depreciation and other amortization 5,768 6,632
Amortization of deferred sales commissions 11,001 34,559
Minority interest 8,274 8,132
Net gain on disposal of assets (2,585) (2,611)
Provision (benefit) for deferred income taxes 5,357 (1,583)
Tax benefit from exercise of stock options 82 6,703
Deferred sales commissions paid (61,534) (53,772)
Purchases of trading securities (16,053) 0
Proceeds from redemptions of trading
securities 14,662 0
Contingent deferred sales charges received 587 25,034
Proceeds from sale of certain future revenues 51,340 46,179
Other changes in assets and liabilities:
Decrease (increase) in receivables, net 4,029 (366)
Decrease in other assets 696 2,617
Decrease in accounts payable and accrued
expenses (997) (4,396)
(Decrease) increase in income taxes payable (25,459) 15,498
(Decrease) increase in other current
liabilities (4,182) 1,632
Decrease in other long-term liabilities (835) (2,480)
Net cash provided by operating activities 153,667 221,645
Investing Activities:
Additions to property and equipment (5,013) (5,220)
Proceeds from disposal of property and equipment 18 43
Business acquisitions (33,657) (172,606)
Purchases of securities available for sale (113) (25,504)
Proceeds from redemptions of securities
available for sale 4,530 53,297
Net cash used by investing activities (34,235) (149,990)
Financing Activities:
Distributions to minority interest (8,182) (8,430)
Dividends paid (18,308) (15,108)
Proceeds from exercise of options 218 1,087
Purchase of treasury stock (45,690) (48,529)
Proceeds from new borrowings - nonrecourse 10,515 9,458
Payments on debt - nonrecourse (8,317) (56,838)
Payments on debt - recourse (441) (14,224)
Net cash used by financing activities (70,205) (132,584)
Net increase (decrease) in cash and cash equivalents 49,227 (60,929)
Cash and cash equivalents, beginning of period 73,511 149,920
Cash and cash equivalents, end of period $122,738 $88,991
(The accompanying notes are an integral part of these consolidated financial
statements.)
Notes to Consolidated Financial Statements
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(unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The unaudited 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, 2001. Certain items
previously reported have been reclassified to conform with the current year's
presentation.
(b) Marketable Securities
Marketable securities include available-for-sale and trading securities held by
Federated. An investment is classified as a trading security when it is
management's intent at the time of purchase to sell the security within a short
period of time. Trading securities are carried at fair value based on quoted
market prices. The unrealized and realized gains and losses on trading
securities are recognized in "Loss on securities, net" in the Consolidated
Statements of Income. At September 30, 2002, "Marketable securities" included a
$0.6 million investment in a restricted corporate bond, which was classified as
a trading security. There were no trading securities held at December 31, 2001.
"Loss on securities, net" for the three- and nine-month periods ended September
30, 2002 included a $0.4 million charge for unrealized losses on trading
securities.
(c) Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, Statement 145 eliminates the requirement under FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt" to
report gains and losses from extinguishment of debt as extraordinary items in
the income statement. Similarly, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements" has been rescinded. Accordingly,
gains or losses from extinguishments of debt for fiscal years beginning after
May 15, 2002 shall not be reported as extraordinary items unless the
extinguishment qualifies as an extraordinary item under the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Statement 145 also amends FASB Statement No. 13 to require that certain
modifications to capital leases be treated as a sale-leaseback and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
(or guarantor). The adoption of Statement 145 is not expected to have a material
impact on Federated's results of operations or financial position.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities."
Statement 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between Statement 146 and Issue No. 94-3 relates to its requirements
for recognition of a liability for a cost associated with an exit or disposal
activity. Statement 146 requires that such a liability be recognized when the
liability is incurred as opposed to the date of an entity's commitment to an
exit plan, as defined in Issue No. 94-3. The provisions of Statement 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of Statement 146 is not
expected to have a material impact on Federated's results of operations or
financial position.
(2) Intangible Assets and Goodwill
On January 1, 2002, Federated adopted the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 142 states that goodwill and other intangible assets with indefinite useful
lives should no longer be amortized but rather tested at least annually for
impairment. This statement requires that goodwill be tested for impairment
annually or when indicators of potential impairment exist using a two-step
process that begins with an estimation of the fair value of a reporting unit.
This first step is a screen for potential impairment, and if impairment has
occurred, the second step measures the amount of impairment. Management has
identified and determined the fair value of its reporting unit for purposes of
completing this first step of the transitional impairment test and has concluded
that no impairment has occurred.
Federated continues to amortize identifiable intangible assets, including
investment advisory contracts and noncompete agreements, over their useful
lives, which range from one to 14 years. Federated reverses the cost and
accumulated amortization balances for all fully amortized intangible assets. The
following table shows the balances of identifiable intangible assets as of
September 30, 2002 and December 31, 2001, and the related cost and accumulated
amortization:
September 30, 2002 December 31, 2001
Accumulated Carrying Accumulated Carrying
in thousands Cost Amortization Value Cost Amortization Value
Investment advisory
contracts $71,803 $(10,539) $61,264 $78,920 $(13,511) $65,409
Noncompete agreements 15,400 (4,449) 10,951 15,400 (2,139) 13,261
Other 1,795 (619) 1,176 1,780 (424) 1,356
Total identifiable intangible assets
$88,998 $15,607) $73,391 $96,100 $(16,074) $80,026
Following is a schedule of expected aggregate annual amortization expense for
intangible assets in each of the five years following December 31, 2002 assuming
no new acquisitions or impairments:
in thousands
2003 $10,557
2004 $10,427
2005 $10,204
2006 $7,843
2007 $6,876
The balance representing goodwill at September 30, 2002, was $164.9 million
as compared to $131.9 million at December 31, 2001. The $33.0 million increase
in goodwill reflects the first contingent purchase price payment for the
acquisition of substantially all of the business of Edgemont Asset Management
Corporation completed in the second quarter 2001. The first contingent purchase
price payment was made on May 8, 2002, and represented approximately 20% of the
total amount of contingent purchase price available to be paid over the first
six years following the closing date of the acquisition, provided certain
revenue targets are met.
Amortization expense for identifiable intangible assets for the three- and
nine-month periods ended September 30, 2002, was $2.7 million and $8.7 million,
respectively as compared to $4.1 million and $8.1 million, respectively for the
same periods last year. The following table presents adjusted net income for the
three- and nine-month periods ended
September 30, 2002 and 2001, reflecting prior year net income and basic and
diluted earnings per share as though Federated had adopted the provisions of
SFAS 142 on January 1, 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
in thousands, except per share data 2002 2001 2002 2001
Net income $49,927 $43,191 $154,861 $127,709
Add back: Goodwill amortization,
net of tax 0 1,480 0 3,241
Adjusted net income $49,927 $44,671 $154,861 $130,950
Basic earnings per share $0.45 $0.37 $1.37 $1.11
Add back: Goodwill amortization,
net of tax 0.00 0.02 0.00 0.03
Adjusted basic earnings per share $0.45 $0.39 $1.37 $1.14
Diluted earnings per share $0.43 $0.36 $1.32 $1.06
Add back: Goodwill amortization,
net of tax 0.00 0.01 0.00 0.03
Adjusted diluted earnings per share $0.43 $0.37 $1.32 $1.09
(3) Long-Term Debt - Recourse
During the first quarter 2002, Federated repaid all outstanding liabilities
on the capital leases held as of December 31, 2001. Federated entered into two
new capital leases for computer hardware during the first nine months of 2002
and recorded recourse debt which has a balance of $2.1 million as of September
30, 2002. These leases had an average interest rate of 4.40% for the nine months
ended September 30, 2002, and will expire in 2006.
(4) B-Share Programs and Long-Term Debt - Nonrecourse
Federated sells its rights to future cash flow streams associated with
B-share deferred sales commissions [distribution and servicing fees as well as
contingent deferred sales charges (CDSCs)] to an independent third party. For
accounting purposes, sales of these distribution fees and CDSCs from inception
of the first program in 1997 through September 2000 were accounted for as
financings as a result of Federated's retained interest in any residual cash
flows in this program. Sales of servicing fees under the first program were also
accounted for as financings due to the same retained interest as well as
Federated's ongoing involvement in performing shareholder-servicing activities.
Accordingly, nonrecourse debt was recorded. As a result, "Other service fees,
net - affiliates" in the Consolidated Statements of Income reflected
distribution and servicing fees earned on B shares sold through September 2000.
In addition, debt expense associated with the nonrecourse debt, amortization of
deferred sales commissions and other program-related expenses were recorded for
sales through September 2000.
Beginning in October 2000, pursuant to the terms of a second sales program
with an independent third party, Federated accounted for the sales of its rights
to future distribution fees and CDSCs as sales. Sales of Federated's rights to
future servicing fees continued to be accounted for as financings due to
Federated's ongoing involvement in performing shareholder-servicing activities.
Accordingly, nonrecourse debt has been recorded. Total nonrecourse debt at
September 30, 2002, and December 31, 2001, was $57.2 million and $55.0 million,
respectively. The nonrecourse debt carries interest rates ranging from 5.80% to
8.60% with weighted average interest rates of 7.46% and 7.79% at September 30,
2002 and December 31, 2001, respectively. The current B-share program allows
Federated to sell its rights to future cash flow streams associated with B-share
deferred sales commissions through December 2003.
On December 31, 2001, Federated sold its retained interest in the residual
cash flows under its first B-share program to an independent third party. As a
result, Federated recognized sale treatment accounting for B-share 12b-1 fees
and CDSCs sold under this program. The recognition of sale treatment resulted in
the reversal of certain asset and liability balances associated with this
program as of December 31, 2001. Beginning January 1, 2002, Federated no longer
recognizes revenue and expense items in its Consolidated Statements of Income
for these sold 12b-1 fees and CDSCs or the related asset and liability balances.
Federated continues to account for the prior sale of rights to future servicing
fees as financings. "Other service fees, net-affiliates," "Amortization of
deferred sales commissions" and "Debt expense - nonrecourse" for the three and
nine months ended September 30, 2001, included $11.5 million and $37.5 million,
$6.3 million and $20.6 million and $4.6 million and $14.7 million, respectively,
recorded in connection with the financing accounting treatment of future 12b-1
fees and CDSCs sold under this B-share program.
(5) Common Stock
(a) Cash Dividends and Stock Repurchases
Federated's Second Amended and Restated Credit Agreement (Credit Facility)
contains restrictions on cash payments of dividends and purchases of treasury
stock. The Credit Facility limits cash payments for dividends to 50% of net
income earned during the period from January 1, 2000, to and including the
payment date, less certain payments for dividends and stock repurchases. As of
September 30, 2002, approximately $175.3 million was available to pay dividends
under this restriction. The Credit Facility limits cash payments for purchases
of treasury stock to $125.0 million plus the amount allowable for dividend
payments less certain additional stock repurchases. As of September 30, 2002,
approximately $176.1 million was available to repurchase stock under this
restriction.
Federated paid cash dividends of $5.3 million or $0.046 per share in the
first quarter of 2002 and $6.5 million or $0.057 per share in both the second
and third quarters of 2002 to holders of common shares. Additionally, on October
22, 2002, the board of directors of Federated declared a dividend of $0.057 per
share to be paid on November 15, 2002 to shareholders of record as of November
7, 2002.
Under Federated's share buyback programs, Federated purchased 1.5 million
shares of Class B common stock for $45.7 million during the first nine months of
2002. As of September 30, 2002, Federated can repurchase approximately 5.5
million additional shares subject to the cash payment limit imposed by its
Credit Facility.
(b) 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, 2002, a total of 54,318 shares had been purchased by
employees in this plan.
(6) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
in thousands, except per share data 2002 2001 2002 2001
Numerator
Net income $49,927 $43,191 $154,861 $127,709
Denominator
Basic weighted-average shares outstanding 112,161 115,297 112,649 115,281
Dilutive potential shares from
stock-based compensation 5,016 4,876 5,041 5,033
Diluted weighted-average shares
outstanding 117,177 120,173 117,690 120,314
Basic earnings per share $ 0.45 $0.37 $1.37 $1.11
Diluted earnings per share $ 0.43 $0.36 $1.32 $1.06
(7) Comprehensive Income
Comprehensive income was $49.9 million and $42.8 million for the three-month
periods ended September 30, 2002 and 2001, respectively, and $155.1 million and
$125.9 million for the nine-month periods ended September 30, 2002 and 2001,
respectively.
Part I, Item 2. Management's Discussion and Analysis
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of Financial Condition and Results of Operations
(unaudited)
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 Federated's Annual Report on Form 10-K for
the year ended December 31, 2001.
General
Federated is a leading provider of investment management products and
related financial services. The majority of our revenue is derived from
advising, distributing and servicing Federated mutual 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 Assets at Period End
Percent
in millions as of September 30, 2002 2001 Change
By Asset Class
Money market $138,552 $123,203 12%
Fixed-income 25,277 19,945 27%
Equity 17,097 20,497 (17%)
Total managed assets $180,926 $163,645 11%
By Product Type
Mutual Funds:
Money market $126,292 $122,263 3%
Fixed-income 21,310 16,410 30%
Equity 15,506 18,840 (18%)
Total mutual fund assets $163,108 $157,513 4%
Separate Accounts:
Money market $12,260 $940 1,204%
Fixed-income 3,967 3,535 12%
Equity 1,591 1,657 (4%)
Total separate account assets $17,818 $6,132 191%
Total managed assets $180,926 $163,645 11%
Average Managed Assets
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
in millions 2002 2001 Change 2002 2001 Change
By Asset Class
Money market $147,174 $120,811 22% $144,074 $113,765 27%
Fixed-income 24,333 19,536 25% 23,008 18,966 21%
Equity 18,515 22,705 (18%) 21,028 22,729 (7%)
Total average managed
assets $190,022 $163,052 17% $188,110 $155,460 21%
By Product Type
Mutual Funds:
Money market $134,747 $119,892 12% $135,367 $112,969 20%
Fixed-income 20,461 15,959 28% 19,196 15,373 25%
Equity 16,838 20,841 (19%) 19,210 20,895 (8%)
Total average mutual
fund assets $172,046 $156,692 10% $173,773 $149,237 16%
Separate Accounts:
Money market $12,427 $919 1,252% $8,707 $796 994%
Fixed-income 3,872 3,577 8% 3,812 3,593 6%
Equity 1,677 1,864 (10%) 1,818 1,834 (1%)
Total average separate
account assets $17,976 $6,360 183% 14,337 $6,223 130%
Total average managed
assets $190,022 $163,052 17% $188,110 $155,460 21%
Period-End and Average Administered Assets
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
in millions 2002 2001 Change 2002 2001 Change
Period-end assets $31,485 $40,070 (21%) $31,485 $40,070 (21%)
Average assets $32,319 $41,400 (22%) $38,412 $41,892 (8%)
Components of Changes in Equity Mututal Fund Managed Assets
Three Months Ended Nine Months Ended
September 30, September 30,
in millions 2002 2001 2002 2001
Equity Funds
Beginning assets $19,034 $22,461 $20,760 $20,641
Sales 1,380 1,033 4,470 4,038
Redemptions (1,604) (1,387) (4,299) (4,571)
Net (redemptions) sales (224) (354) 171 (533)
Net exchanges (177) (117) (207) (154)
Acquisition related 41 - 41 3,235
Other* (3,168) (3,150) (5,259) (4,349)
Ending assets $15,506 $18,840 $15,506 $18,840
* Includes changes in the market value of securities held by the funds,
reinvested dividends and distributions and net investment income.
Components of Changes in Fixed-Income Mututal Fund Managed Assets
Three Months Ended Nine Months Ended
September 30, September 30,
in millions 2002 2001 2002 2001
Fixed-Income Funds
Beginning assets $19,472 $15,179 $17,378 $14,268
Sales 4,325 2,261 10,629 5,851
Redemptions (2,788) (1,230) (7,310) (4,018)
Net sales 1,537 1,031 3,319 1,833
Net exchanges 68 66 202 24
Other* 233 134 411 285
Ending assets $21,310 $16,410 $21,310 $16,410
* Includes changes in the market value of securities held by the funds,
reinvested dividends and distributions and net investment income.
The September 30, 2002, period-end managed assets increased 11% over
period-end managed assets at September 30, 2001. Average managed assets for the
three months ended September 30, 2002 grew 17% over average managed assets for
the three months ended September 30, 2001. These increases in total and average
assets primarily reflect strong money market and fixed-income fund sales in the
fourth quarter 2001 and strong fixed-income sales in the first nine months of
2002 as well as the additions of the Federated Kaufmann Fund in the second
quarter 2001 and TexPool, a local government investment pool in Texas, in the
second quarter 2002. As interest rates have decreased, yields on money market
funds have decreased leading to increased use of short-term bond funds. Equity
market fluctuations have also contributed to higher use of bond and money market
products. Federated benefited from the quality and performance of its products,
the strength of its relationships with intermediaries and institutions and an
increase in cash-management relationships with corporations, universities,
government entities and broker/dealer organizations.
Changes in Federated's average asset mix period over period, which reflect
shifts in investor demands, have a direct impact on Federated's total revenue
per dollar of assets managed as money market and fixed-income products generally
carry lower management fees per invested dollar than equity products. The
following table shows the percent of total revenue derived from each asset type
for the three and nine months ended September 30:
Relative Contribution to Total Revenue
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Money market assets 48% 41% 47% 40%
Equity assets 27% 35% 30% 36%
Fixed-income assets 19% 17% 17% 18%
Other activities 6% 7% 6% 6%
The increase in revenue derived from money market and fixed-income assets
and decrease in revenue from equity assets for the third quarter 2002 as
compared to 2001, reflect not only strong growth in money market and
fixed-income assets experienced during the fourth quarter 2001 and the first
nine months of 2002, but also a change to sale-treatment accounting beginning
January 1, 2002 for the 12b-1 cash flows associated with Class B shares of
Federated mutual funds (see "B-Share Programs" for a detailed explanation).
Results of Operations
The table below presents the highlights of our operations for the three-
and nine-month periods ended September 30, 2002 and 2001. The operating
highlights for the third quarter 2001 and first nine months of 2001 have been
adjusted as footnoted to reflect the change in Federated's B-share program (see
"B-Share Programs" for a detailed explanation) and for the change in accounting
for goodwill (see footnote (2) to the Consolidated Financial Statements) as if
these changes were effective at the beginning of 2001.
Three Months Nine Months
Ended Ended
September 30, Percent September 30, Percent
---------------------- ---------------------
dollars in millions, 2002 2001 Change Change 2002 2001 Change Change
except per share data
Net income1 $49.9 $44.3 $5.6 13% $154.9 $129.7 $25.2 19%
Earnings per share1
Basic $0.45 $0.38 $0.07 18% $1.37 $1.13 $0.24 21%
Diluted $0.43 $0.37 $0.06 16% $1.32 $1.08 $0.24 22%
Revenue
Revenue from managed
assets2 $163.1 $160.3 $2.8 2% $503.8 $455.3 $48.5 11%
Service-related revenue from
sources other than managed
assets
10.1 12.9 (2.8) (22%) 33.4 38.1 (4.7) (12%)
Total Revenue $173.2 $173.2 $0.0 0% $537.2 $493.4 $43.8 9%
Operating expenses
Compensation and related $40.5 $45.6 $(5.1) (11%) $136.4 $129.1 $7.3 6%
Advertising and promotional
19.2 16.6 2.6 16% 55.6 50.1 5.5 11%
Amortization of deferred
sales commissions2 3.5 4.1 (0.6) (15%) 11.0 13.9 (2.9) (21%)
Amortization of
intangible assets3 2.7 4.1 (1.4) (34%) 8.7 8.1 0.6 7%
All other 23.6 25.3 (1.7) (7%) 72.1 77.1 (5.0) (6%)
Total Operating Expenses $89.5 $95.7$ (6.2) (6%) $283.8 $278.3 $5.5 2%
Operating margin 48.3% 44.8% 3.5% 8% 47.2% 43.6% 3.6% 8%
Nonoperating Expenses,
Net2 $3.1 $6.1 (3.0) (49%) $4.6 $5.5 (0.9) (16%)
1 Net income and earnings per share reflect the after-tax effect of the
adjustments described in footnotes 2 and 3 below.
2 "Other service fees, net-affiliates," "Amortization of deferred sales
commissions" and "Debt expense - nonrecourse" for the three and nine months
ended September 30, 2001, have been adjusted to exclude $11.5 million and
$37.5 million, $6.3 million and $20.6 million, and $4.6 million and $14.7
million, respectively, recorded in connection with the financing accounting
treatment of future 12b-1 fees and CDSCs sold under the B-share program.
3 "Amortization of intangible assets" for the third quarter and first nine
months of 2001 have been adjusted to exclude $2.0 million and $4.1 million
in goodwill amortization expense, respectively.
Net Income. Net income for the three- and nine-month periods ended September 30,
2002 increased 13% and 19%, respectively, compared to adjusted net income for
the same periods last year. The increases primarily reflect improved operating
margins. Diluted earnings per share for the three- and nine-month periods ended
September 30, 2002 increased 16% and 22%, respectively, compared to adjusted
diluted earnings per share for the same periods of 2001 due to increased net
income and reduced weighted-average diluted shares outstanding resulting from
stock repurchases during 2001 and the first nine months of 2002.
Revenue. Total revenue for the three-month period ended September 30, 2002
remained unchanged as compared to adjusted total revenue for the same period of
2001. Federated's managed assets experienced a change in composition period over
period. Equity assets declined 18% on average largely as a result of market
depreciation. Money market and fixed income assets each increased quarter over
quarter as a result of strong sales growth. Revenue from managed assets grew
period over period, but to a lesser degree than the overall 17% growth in
average assets due to a higher composition of money market and fixed-income
products, which earn, on average, lower fees per invested dollar than equity
products. Total revenue for the third quarter 2002 was also impacted by a 22%
reduction in average administered assets.
Total revenue for the nine-month period ended September 30, 2002 increased $43.8
million as compared to adjusted total revenue for the prior year period. Revenue
from managed assets in the first nine months of 2002 increased over adjusted
revenue from managed assets for the prior year period as significant asset and
sales growth in money market and fixed-income products more than offset
decreases in equity assets resulting from market declines. Revenue from managed
assets grew period over period, but to a lesser degree than the 21% growth in
average assets due once again to a higher composition of money market and
fixed-income products.
Service-related revenue from sources other than managed assets decreased $2.8
million and $4.7 million for the three- and nine-month periods ended September
30, 2002, respectively, as compared to the same periods last year. The decreases
were due largely to the internalization of administrative services and other
changes in services provided to certain bank customers. These revenues
represented 1.5% of Federated's total revenue in 2001.
Operating Expenses. Total operating expenses for the three-month period ended
September 30, 2002, decreased $6.2 million or 6% as compared to adjusted
operating expenses for the same period last year. Compensation and related
expense for third quarter 2002 decreased as compared to the same period last
year as a result of decreased variable-based compensation. The increase in
advertising and promotional expense reflects increases in marketing allowances
due primarily to significant asset and sales growth, partially offset by a
decrease in costs associated with Federated's advertising campaign. Amortization
of deferred sales commissions decreased for third quarter 2002 as compared to
adjusted amortization of deferred sales commissions for the same period last
year primarily as a result of a decrease in B-share assets and associated cash
flows. Amortization of intangible assets decreased for third quarter 2002 as
compared to adjusted amortization of intangible assets for 2001 as a result of
the full amortization of certain assets during 2001 and 2002. All other expenses
decreased in the third quarter 2002 as compared to 2001 primarily as a result of
reductions to professional service fees due to the change in services provided
to certain bank customers.
Total operating expenses for the nine-month period ended September 30, 2002,
increased $5.5 million or 2% as compared to adjusted operating expenses for the
same period last year. Compensation and related expense for the first nine
months of 2002 increased as compared to the same period last year as a result of
increased variable-based compensation due to higher sales and assets and the
acquisition of substantially all of the business of Edgemont Asset Management
Corporation in the second quarter 2001 (the Kaufmann Acquisition). The increase
in advertising and promotional expense reflects increases in marketing
allowances due primarily to significant asset and sales growth, partially offset
by a decrease in costs associated with Federated's advertising campaign.
Amortization of deferred sales commissions decreased for the nine-month period
ended September 30, 2002 as compared to adjusted amortization of deferred sales
commissions for the same period last year primarily as a result of a decrease in
B-share assets and associated cash flows. Amortization of intangible assets
increased for the first nine months of 2002 as compared to adjusted amortization
expense for 2001 as a result of the amortization of intangible assets acquired
in connection with the Kaufmann Acquisition in 2001, partially offset by the
full amortization of certain assets during 2001 and 2002. All other expenses
decreased for 2002 as compared to 2001 primarily as a result of reductions to
professional service fees due to the change in services provided to certain bank
customers and a general reduction in consulting and legal fees.
Nonoperating Income (Expenses). Net nonoperating expenses for the three- and
nine-months ended September 30, 2002, decreased $3.0 million and $0.9 million,
respectively, compared to adjusted net nonoperating expenses for the same
periods last year. Interest and dividend income decreased in 2002 due to lower
investment yields and, for the year-to-date comparison, lower investment
balances as a result of cash used for the Kaufmann Acquisition in the second
quarter 2001. Recourse debt expense decreased in 2002 as a result of lower
levels of outstanding debt due to the early retirement of Federated's 7.96%
Senior Secured Notes in the fourth quarter of 2001. "Other, net" for the third
quarter and first nine months of 2002 included a $1.8 million non-cash charge to
write-down the carrying value of Federated's mortgage-backed collateralized bond
obligation (CBO) investment to $0.7 million. The fair value of this investment
decreased as a result of significant declines in the value of the underlying
securities held by the CBO. "Other, net" for the three- and nine-month periods
ended September 30, 2001, included non-cash charges equal to $5.0 million and
$5.2 million, respectively, to write-down the carrying values of Federated's
investments in high-yield CBO products and certain Federated-sponsored mutual
funds also as a result of depreciated fair values.
Income Taxes. The income tax provision for the three- and nine-month periods
ended September 30, 2002 were $27.7 million and $85.8 million as compared to
$24.1 million and $71.5 million, respectively, for the same periods in 2001. The
effective tax rate was 35.7% and 35.8% for the third quarters of 2002 and 2001,
respectively, and 35.6% and 35.9% for the first nine months of 2002 and 2001,
respectively.
B-Share Programs. Federated funds upfront commissions paid to broker/dealers on
the sale of Class B shares of Federated mutual funds (B shares) through the sale
of the rights to future cash flow streams associated with B-share commissions to
an independent third party. Rights to future 12b-1 fees and contingent deferred
sales charges (CDSCs) sold through September 2000 were accounted for as
financings for financial reporting purposes as a result of Federated's retained
interest in the residual cash flows under this program. Rights to future
shareholder service fees were also accounted for as financings due to the same
retained interest as well as Federated's ongoing involvement in performing
shareholder-servicing activities. Accordingly, sales commissions paid were
capitalized and nonrecourse debt was recorded.
On December 31, 2001, Federated sold its retained interest in the residual cash
flows under this B-share program to an independent third party. As a result,
Federated recognized sale treatment accounting for B-share 12b-1 fees and CDSCs
sold under this program. The recognition of sale treatment resulted in the
reversal of certain asset and liability balances associated with this program as
of December 31, 2001. Beginning January 1, 2002, Federated no longer recognizes
revenue and expense items in its Consolidated Statements of Income for these
sold 12b-1 fees and CDSCs or the related asset and liability balances. Federated
continues to account for the prior sale of rights to future shareholder service
fees as financings as a result of Federated's ongoing involvement in performing
shareholder-servicing activities.
Rights to future B-share-related 12b-1 fees and CDSCs sold subsequent to
September 2000 have been and continue to be accounted for as sales and gains on
these sales are recorded in "Other service fees, net-affiliates" in the
Consolidated Statements of Income. The sale of rights to future shareholder
service fees continues to be accounted for as financings.
Liquidity and Capital Resources
At September 30, 2002, liquid assets, consisting of cash and cash equivalents,
the current portion of marketable securities and receivables, totaled $152.9
million as compared to $110.7 million at December 31, 2001.
Operating Activities. Net cash provided by operating activities totaled $153.7
million for the nine-month period ended September 30, 2002, as compared to
$221.6 million for the same period of 2001. This decrease is largely
attributable to increased income taxes paid in the first nine months of 2002 as
compared to 2001 due to a one-time extension in the third quarter 2001 of the
federal government's deadline for paying quarterly tax estimates, the effects of
certain cash payments made in the first nine months of 2002 and the elimination
of 12b-1 fees and CDSCs received on Class B shares of Federated's mutual funds
as a result of the fourth quarter 2001 sale of Federated's retained interest in
residual cash flows associated with the B shares (see "B-Share Programs" for a
detailed explanation). Cash payments made in the first nine months of 2002
included taxes paid on the sale of Federated's retained interest in the residual
cash flows and the payment of normal operating expenses accrued as of the end of
2001.
Investing Activities. During the first nine months of 2002, Federated made a
$33.1 million contingent payment related to the Kaufmann Acquisition, paid $5.0
million to acquire property and equipment and to develop internally-used
software and received $4.5 million from redemptions of available-for-sale
securities.
Financing Activities. During the nine months ended September 30, 2002, Federated
used $70.2 million for financing activities. Of this amount, $45.7 million was
used to repurchase 1.5 million shares of Class B common stock. As of September
30, 2002, Federated can repurchase an additional 5.5 million shares through its
authorized programs. Repurchases under these programs are subject to
restrictions under Federated's Second Amended and Restated Credit Agreement,
which limit cash payments for additional stock repurchases to $160.4 million
after considering earnings through September 30, 2002, certain stock repurchases
through October 31, 2002, and the planned dividend payment on November 15, 2002
(see Note (5) to the Consolidated Financial Statements).
Federated paid dividends of $5.3 million or $0.046 per share in the first
quarter 2002 and $6.5 million or $0.057 per share in both the second and third
quarters of 2002. In October 2002, Federated's board of directors declared a
dividend of $0.057 per share that will be paid on November 15, 2002, to
shareholders of record as of November 7, 2002. After considering earnings
through September 30, 2002, certain stock repurchases through October 31, 2002,
and the planned dividend payment on November 15, 2002, Federated, given current
debt covenants, has the ability to pay dividends of approximately $164.2
million.
Payments on debt-nonrecourse were significantly lower during the first nine
months of 2002 than in the first nine months of 2001 as a result of the fourth
quarter 2001 sale of Federated's retained interest in residual cash flows
associated with the B shares (see "B-Share Programs" for a detailed
explanation). Payments on debt-recourse were lower during the first nine months
of 2002 than amounts for the same period in 2001 due to the early retirement of
Federated's 7.96% Senior Secured Notes in the fourth quarter 2001.
Future Cash Requirements. Management expects that the principal uses of cash
will be to advance sales commissions, fund marketing allowances, repurchase
company stock, fund strategic business acquisitions, including potential future
contingent payments relating to the Kaufmann Acquisition, pay shareholder
dividends, pay incentive compensation, fund property and equipment acquisitions
and initiatives to develop internally-used software, fund minimum lease payments
and seed new products. Federated has experienced increases in the cost of
insurance and management expects these increases, including the assumption of
additional risk, to be significant going forward. Management believes that
Federated's existing liquid assets, together with the expected continuing cash
flow from operations, its borrowing capacity under the current credit facility,
the B-share program and its ability to issue stock will be sufficient to meet
its present and reasonably foreseeable cash needs.
Alternative Products
Federated acts as the investment manager for two high-yield collateralized bond
obligation (CBO) products and a mortgage-backed CBO product pursuant to the
terms of an investment management agreement between Federated and each CBO. The
CBO products are structured using special-purpose entities. The financial
condition and results of operations of these CBOs are not included in
Federated's Consolidated Financial Statements as of and for the three- and
nine-month periods ended September 30, 2002, or for any prior period. In each
case, there exists a majority owner(s) that is an independent third party from
Federated owning at least three percent equity in the CBO. Federated has not
guaranteed nor has any recourse related to any of the notes issued by the CBOs.
As of September 30, 2002, assets managed by Federated in the CBOs totaled $1.0
billion.
The Financial Accounting Standards Board is currently deliberating new rules
regarding the consolidation of certain special purpose entities. As of the date
of this report, it is unclear what effect, if any, the new rules will have on
Federated's accounting for the CBOs. Management will explore all of its options
relating to its relationship with the CBOs in the event that application of the
final rules, which are expected to be issued in the fourth quarter 2002, would
require the consolidation of the CBOs in Federated's Consolidated Financial
Statements.
Critical Accounting Policies
Federated's Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Of the significant accounting policies
described in Federated's Annual Report on Form 10-K for the year ended December
31, 2001, management believes that its policy regarding the identification,
valuation and impairment of intangible assets involves a high degree of judgment
and complexity due to the significant use of assumptions. Significant
differences between actual results and the assumptions used in the valuation and
impairment analyses could have a significant impact on the carrying value of the
assets. (See Note (1) to the Consolidated Financial Statements included in
Federated's Annual Report on Form 10-K for the year ended December 31, 2001, and
Note (2) to the Consolidated Financial Statements included herein).
Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------------------
(unaudited)
In the normal course of our business, Federated is exposed to the risk of loss
due to fluctuations in the securities market and general economy. Management is
responsible for identifying, assessing and managing market and other risks.
Federated's investments are primarily money market funds and mutual funds with
investments which have a duration of two years or less. Federated also invests
in mutual funds sponsored by Federated (performance seeds) 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. At September 30, 2002, Federated was exposed to price risk with
regard to its $0.1 million of performance seed investments in fluctuating-value
mutual funds. Price risk is the risk that the fair value of the investments will
decline and ultimately result in the recognition of a loss for Federated.
Federated did not hold any derivative investments to hedge its performance seeds
at September 30, 2002.
At September 30, 2002, Federated held an investment in a restricted corporate
bond with a carrying value of $0.6 million. This investment exposes Federated to
interest rate and credit risk. In order to limit its exposure relative to these
risks, Federated completed a short sale of a similar unrestricted bond with an
independent third party during the third quarter 2002. This hedge was recorded
in "Other current liabilities" on the Consolidated Balance Sheets with a
carrying value of $0.7 million as of September 30, 2002.
During the third quarter 2002, Federated recorded a $1.8 million pre-tax
impairment charge related to an other-than-temporary decline in the fair value
of its investment in its mortgage-backed CBO product. Federated's remaining
investment in this product, which totaled $0.7 million at September 30, 2002, is
subject to interest rate risk and may be adversely affected by increases in
interest rates.
It is also important to note that a significant portion of Federated's revenue
is based on the market value of managed and administered assets. Declines in the
market values of assets as a result of changes in market or other conditions
will therefore negatively impact revenue and net income.
Part I, Item 4. Controls and Procedures
- --------------------------------------------------------------------------------
(unaudited)
Within 90 days prior to the date of this report, Federated carried out an
evaluation, under the supervision and with the participation of management,
including Federated's President and Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Federated's
disclosure controls and procedures. Based upon that evaluation, the President
and Chief Executive Officer and the Chief Financial Officer concluded that
Federated's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the registrant in the reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. During the period covered by this report,
there have not been any significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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:
None
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the period
subject to this Quarterly Report on Form 10-Q.
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 8, 2002 By: /s/ J. Christopher Donahue
J. Christopher Donahue
President and
Chief Executive Officer
Date November 8, 2002 By: /s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer
CERTIFICATIONS
I, J. Christopher Donahue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federated Investors,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 8, 2002 By: /s/ J. Christopher Donahue
J. Christopher Donahue
President and
Chief Executive Officer
CERTIFICATIONS
I, Thomas R. Donahue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federated Investors,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 8, 2002 By: /s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Federated Investors, Inc. (the
"Company") on Form 10-Q for the quarterly period ended September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), each of the undersigned, in the capacities and on the dates indicated
below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Date November 8, 2002 By: /s/ J. Christopher Donahue
J. Christopher Donahue
President and
Chief Executive Officer
Date November 8, 2002 By: /s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer