-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AN9Wem8f/kh/HMRtowoQsg2ElDvaVM7C5kE5RimjG2pvz8zc7heNc34wHQlXLBJd 9TKKtbp9tNqhaWaTkcOLWA== 0001056288-02-000496.txt : 20020814 0001056288-02-000496.hdr.sgml : 20020814 20020814132217 ACCESSION NUMBER: 0001056288-02-000496 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED INVESTORS INC /PA/ CENTRAL INDEX KEY: 0001056288 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 251111467 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14818 FILM NUMBER: 02733827 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER STREET 2: 5800 CORPORATE DR CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122888141 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222 10-Q 1 form10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------------EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 August 12, 2002, the Registrant had outstanding 9,000 shares of Class A Common Stock and 114,193,971 shares of Class B Common Stock. Table of Contents - -------------------------------------------------------------------------------- Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets at June 30, 2002 and December 3 31, 2001 Consolidated Statements of Income for the Three and Six Months Ended June 30, 4 2002 and 2001 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 5 2002 and 2001 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 16 Risk Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K 18 (b) Reports on Form 8-K 18 Signatures 19 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 19 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, 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. 3 Part I, Item 1. Financial Statements Consolidated Balance Sheets - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (dollars in thousands) (unaudited) June 30, December 31, 2002 2001 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 76,274$ 73,511 Securities available for sale 205 4,602 Receivables, net of reserve of $226 and $315, 29,114 32,581 respectively Accrued revenues 6,547 6,596 Prepaid expenses 6,634 2,633 Current deferred tax asset, net 370 2,025 Other current assets 720 361 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Total current assets 119,864 122,309 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Long-Term Assets: Goodwill, net of accumulated amortization of $24,862 164,931 131,867 Other intangible assets, net 75,532 80,026 Deferred sales commissions, net of accumulated amortization of $54,130 and 58,498 56,875 $47,222, respectively Property and equipment, net of accumulated depreciation of $50,934 and 33,397 34,521 $47,264, respectively Other long-term assets 5,679 5,955 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Total long-term assets 338,037 309,244 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Total assets $ 457,901$ 431,553 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Current Liabilities: Cash overdraft $ 4,405$ 5,085 Current portion of long-term debt - recourse 267 157 Accrued expenses 51,179 58,275 Accounts payable 26,451 29,102 Income taxes payable 598 26,543 Other current liabilities 3,527 5,946 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total current liabilities 86,427 125,108 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Long-Term Liabilities: Long-term debt - recourse 472 0 Long-term debt - nonrecourse 56,476 54,954 Long-term deferred tax liability, net 10,924 7,036 Other long-term liabilities 7,053 6,995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total long-term liabilities 74,925 68,985 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total liabilities 161,352 194,093 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Minority interest 307 363 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shareholders' Equity: Common stock: Class A, no par value, 20,000 shares authorized, 189 189 9,000 shares issued and outstanding Class B, no par value, 900,000,000 shares 82,436 82,299 authorized, 129,505,456 shares issued Additional paid-in capital from treasury stock 3,610 3,543 transactions Retained earnings 504,583 411,447 Treasury stock, at cost, 15,235,885 and 14,144,515 shares Class B common stock, respectively (294,182) (259,626) Employee restricted stock plan (349) (469) Accumulated other comprehensive loss (45) (286) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Total shareholders' equity 296,242 237,097 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Total liabilities, minority $ 457,901$ 431,553 interest, and shareholders' equity - ------------------------------------------------------------------------------- (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 Six Months Ended June 30, June 30, --------------------------------------------------------- --------------------------------------------------------- 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Revenue: Investment-advisory fees, $ 112,548 $ 102,593 $ 226,130 $ 197,052 net-affiliates Investment-advisory fees, net-other 3,351 2,633 6,209 5,176 Administrative-service fees, 30,584 26,560 61,695 51,160 net-affiliates Administrative-service fees, 4,749 5,250 9,881 10,471 net-other Other service fees, net-affiliates 23,145 33,353 44,934 65,797 Other service fees, net-other 6,470 7,040 12,695 13,751 Commission income 1,012 759 1,773 1,826 Other, net 522 543 684 928 - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Total revenue 182,381 178,731 364,001 346,161 - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Operating Expenses: Compensation and related 47,429 43,890 95,965 83,536 Advertising and promotional 18,492 17,335 36,395 33,496 Systems and communications 7,692 7,238 14,010 14,728 Office and occupancy 6,430 7,148 12,718 13,610 Professional service fees 5,610 7,170 11,270 14,150 Travel and related 3,551 3,545 5,985 6,764 Amortization of deferred sales 3,791 11,557 7,542 24,204 commissions Amortization of intangible assets 2,942 4,069 6,003 6,080 Other 2,356 1,699 4,354 2,797 - -------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Total operating expenses 98,293 103,651 194,242 199,365 - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Operating income 84,088 75,080 169,759 146,796 - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Nonoperating Income (Expense): Interest and dividends 509 2,419 1,084 6,917 Loss on sale of securities available (34) (1) (153) (496) for sale, net Debt expense - recourse (108) (1,810) (208) (3,607) Debt expense - nonrecourse (1,063) (5,880) (2,117) (12,027) Other, net (69) (285) (68) (304) - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Total nonoperating expenses, net (765) (5,557) (1,462) (9,517) - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Income before minority interest and 83,323 69,523 168,297 137,279 income taxes Minority interest 2,638 2,710 5,302 5,358 - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Income before income taxes 80,685 66,813 162,995 131,921 Income tax provision 28,074 23,939 58,061 47,403 - ---------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Net income $ 52,611 $ 42,874 $ 104,934 $ 84,518 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.47 $ 0.37 $ 0.93 $ 0.73 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Diluted $ 0.45 $ 0.36 $ 0.89 $ 0.70 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Cash dividends per share $ 0.057 $ 0.046 $ 0.103 $ 0.083 - ----------------------------------------------------------------------------------------------------
(The accompanying notes are an integral part of these consolidated financial statements.) Consolidated Statements of Cash Flows (in thousands) (unaudited)
Six Months Ended June 30, 2002 2001 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 104,934 $ 84,518 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets 6,003 6,080 Depreciation and other amortization 3,667 4,440 Amortization of deferred sales commissions 7,542 24,204 Minority interest 5,302 5,358 Gain on disposal of assets (2,223) (1,763) Provision (benefit) for deferred income taxes 4,535 (197) Tax benefit from exercise of stock options 80 6,703 Deferred sales commissions paid (42,963) (38,632) Contingent deferred sales charges received 381 17,911 Proceeds from sale of certain future revenues 35,792 32,991 Other changes in assets and liabilities: Decrease (increase) in receivables, net 3,467 (3,034) Increase in other assets (2,446) (5,190) Decrease in accounts payable and accrued expenses (9,747) (13,050) Decrease in income taxes payable (25,945) (7,815) (Decrease) increase in other current liabilities (3,475) 3,978 Decrease in other long-term liabilities (817) (908) - -------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 84,087 115,594 - -------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Investing Activities: Additions to property and equipment (1,896) (3,296) Proceeds from disposal of property and equipment 18 25 Business acquisitions (33,494) (171,814) Purchases of securities available for sale (111) (504) Proceeds from redemptions of securities available for 4,529 52,846 sale - -------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Net cash used by investing activities (30,954) (122,743) - -------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Financing Activities: Distributions to minority interest (5,358) (5,782) Dividends paid (11,798) (9,711) Proceeds from exercise of options 218 1,087 Purchase of treasury stock (34,707) (21,771) Proceeds from new borrowings - nonrecourse 7,331 6,747 Payments on debt - nonrecourse (5,809) (39,805) Payments on debt - recourse (247) (14,153) - ----------------------------------------------------------------------------------------------- Net cash used by financing activities (50,370) (83,388) - -------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,763 (90,537) Cash and cash equivalents, beginning of period 73,511 149,920 - -------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 76,274 $ 59,383 - -------------------------------------------------------------------------------------------------- (The accompanying notes are an integral part of these consolidated financial statements.)
Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (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) 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 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 condition. 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 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. The following table shows the balances of identifiable intangible assets as of June 30, 2002 and December 31, 2001, and the related cost and accumulated amortization:
June 30, 2002 December 31, 2001 ----------------------------------- -------------------------------- ----------------------------------- -------------------------------- Accumulated Carrying Accumulated Carrying in thousands Cost Amortization Value Cost Amortization Value - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Investment advisory $ 71,282 $ (8,788) $ 62,494 $ 78,920 $ (13,511) $ 65,409 contracts Noncompete agreements 15,400 (3,679) 11,721 15,400 (2,139) 13,261 Other 1,806 (489) 1,317 1,780 (424) 1,356 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Total identifiable $ 88,488 $ (12,956) $ 75,532 $ 96,100 $ (16,074) $ 80,026 intangible assets - ------------------------------------------------------------------------------------------------
The balance representing goodwill at June 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 six-month periods ended June 30, 2002, was $2.9 million and $6.0 million, respectively as compared to $3.3 million and $4.6 million, respectively for the same periods last year. The following table presents adjusted net income for the three- and six-month periods ended June 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 Six Months Ended June 30, June 30, - ---------------------------------------------------------------------------------- in thousands, except per share data 2002 2001 2002 2001 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Net income $52,611 $42,874 $ 104,934 $84,518 Add back: Goodwill amortization, net 0 1,085 0 1,761 of tax - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Adjusted net income $52,611 $43,959 $ 104,934 $86,279 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Basic earnings per share $0.47 $0.37 $0.93 $0.73 Add back: Goodwill amortization, net 0.00 0.01 0.00 0.02 of tax - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Adjusted basic earnings per share $0.47 $0.38 $0.93 $0.75 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Diluted earnings per share $0.45 $0.36 $0.89 $0.70 Add back: Goodwill amortization, net 0.00 0.00 0.00 0.02 of tax - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Adjusted diluted earnings per share $0.45 $0.36 $0.89 $0.72 - ----------------------------------------------------------------------------------
(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 a new capital lease for computer hardware during the first quarter 2002 and recorded recourse debt which has a balance of $0.7 million as of June 30, 2002. This lease has an interest rate of 4.55% and a term of three years. (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 June 30, 2002, and December 31, 2001, was $56.5 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 7.57% and 7.79% at June 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 six months ended June 30, 2001, included $12.5 million and $26.0 million, $6.9 million and $14.4 million and $4.9 million and $10.1 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 June 30, 2002, approximately $167.9 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 June 30, 2002, approximately $179.6 million was available to repurchase stock under this restriction. Cash dividends of $0.046 and $0.057 per share or approximately $5.3 million and $6.5 million were paid in the first and second quarters of 2002, respectively, to holders of common shares. Additionally, on July 23, 2002, the board of directors of Federated declared a dividend of $0.057 per share to be paid on August 15, 2002 to shareholders of record as of August 7, 2002. As of June 30, 2002, under Federated's current share buyback programs, Federated can repurchase approximately 5.9 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 June 30, 2002, a total of 51,998 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 Six Months Ended Months Ended June 30, June 30, - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- in thousands, except per share data 2002 2001 2002 2001 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Numerator Net income $ 52,611 $42,874 $104,934 $84,518 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Denominator Basic weighted-average shares 112,624 115,389 112,895 115,272 outstanding Dilutive potential shares from 5,087 5,063 5,055 5,112 stock-based compensation - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Diluted weighted-average shares 117,711 120,452 117,950 120,384 outstanding - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Basic earnings per share $ 0.47 $0.37 $ 0.93 $ 0.73 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Diluted earnings per share $ 0.45 $0.36 $ 0.89 $ 0.70 - -----------------------------------------------------------------------------------
(7) Comprehensive Income Comprehensive income was $52.8 million and $42.7 million for the three-month periods ended June 30, 2002 and 2001, respectively, and $105.2 million and $83.1 million for the six-month periods ended June 30, 2002 and 2001, respectively. Part I, Item 2. Management's Discussion and Analysis - -------------------------------------------------------------------------------- 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 June 30, 2002 2001 Change - ---------------------------------------------------------------------------------- By Asset Class Money market $ 140,860 $ 117,810 20% Equity 20,886 24,269 (14%) Fixed-income 23,260 18,695 24% - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Total managed assets $ 185,006 $ 160,774 15% - ---------------------------------------------------------------------------------- By Product Type Funds: Money market $ 127,972 $ 117,035 9% Equity 19,034 22,461 (15%) Fixed-income 19,472 15,179 28% - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Total fund assets $ 166,478 $ 154,675 8% - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Separate Accounts: Money market $ 12,888 $ 775 1,563% Equity 1,852 1,808 2% Fixed-income 3,788 3,516 8% - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Total separate $ 18,528 $ 6,099 204% account assets - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Total managed assets $ 185,006 $ 160,774 15% - ---------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------
Average Managed Assets Three Months Ended Six Months Ended June 30, Percent June 30, Percent in millions Change Change 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Money market $ 145,632 $114,227 27% $142,524 $110,242 29% Equity 22,191 23,812 (7%) 22,283 22,741 (2%) Fixed-income 22,949 18,727 23% 22,346 18,681 20% - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Total average $ 190,772 156,766 22% 187,153 $151,664 23% managed assets - ---------------------------------------------------------------------------------------------- Period-End and Average Administered Assets Three Months Ended Six Months Ended June 30, June 30, Percent Percent in millions Change Change 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Period-end assets $ 32,830 41,841 (22%) $32,830 $41,841 (22%) Average assets $ 39,367 42,200 (7%) $41,458 $42,139 (2%)
Components of Changes in Equity and Fixed-Income Fund Managed Assets
Three Months Six Months Ended Ended June 30, June 30, ---------------------------------------------- ---------------------------------------------- in millions 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Equity Funds Beginning assets $21,125 $18,249 $20,760 $20,641 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Sales 1,527 1,337 3,090 3,005 Redemptions (1,388) (1,446) (2,694) (3,184) - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Net sales 139 (109) 396 (179) (redemptions) Net exchanges (66) 28 (30) (37) Acquisition related - 3,235 - 3,235 Other* (2,164) 1,058 (2,092) (1,199) - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Ending assets $19,034 $22,461 $19,034 $22,461 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Fixed-Income Funds Beginning assets $18,533 $15,112 $17,378 $14,268 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Sales 3,121 1,631 6,303 3,590 Redemptions (2,353) (1,390) (4,522) (2,788) - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Net sales 768 241 1,781 802 Net exchanges 100 (29) 134 (42) Other* 71 (145) 179 151 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Ending assets $19,472 $15,179 $19,472 $15,179 - ----------------------------------------------------------------------------------------
* Includes changes in the market value of securities held by the funds, reinvested dividends and distributions and net investment income. The June 30, 2002, period-end managed assets increased 15% over period-end managed assets at June 30, 2001. Average managed assets for the three months ended June 30, 2002, grew 22% over average managed assets for the three months ended June 30, 2001. These increases in total and average assets primarily reflect strong money market and fixed-income fund sales in 2001 and the first half of 2002 as well as the additions of the Federated Kaufmann Fund in the second quarter 2001 and TexPool, a Texas local government investment pool in the second quarter 2002. Money market products led in average asset growth with a 27% increase for the three months ended June 30, 2002 as compared to the same period in 2001. Market conditions were favorable for growth in money market products as declining short-term interest rates in 2001 gave money market mutual funds a persistent yield advantage as compared to the direct market. Rapid and sustained fluctuations in the equity markets in 2001 and the first half of 2002 also caused investors to increase their allocations to money market investments. Additionally, Federated benefited from the quality and performance of its products, the strength of its relationships 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 six months ended June 30: Relative Contribution to Three Six Total Revenue Months Ended Months Ended June 30, June 30, - -------------------------------------------------------------------------- 2002 2001 2002 2001 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Money market assets 45% 39% 46% 39% % % % % Equity assets 31% 37% 30% 36% Fixed-income assets 17% 18% 17% 18% Other activities 7% 6% 7% 7% - -------------------------------------------------------------------------- The increase in revenue derived from money market assets and decreases in revenue from equity and fixed-income assets reflects not only strong growth in money market assets experienced during 2001 and the first half 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 Net Income. The table below presents the highlights of our operations for the three- and six-month periods ended June 30, 2002 and 2001:
Three Months Ended Six Months Ended June 30, Percent June 30, Percent 2002 2001 Change Change 2002 2001 Change Change - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Net income (in millions) 52.6 $42.9 $ 9.7 23% 104.9 84.5 20.4 24% Earnings per share Basic 0.47 $ 0.37 $ 0.10 27% 0.93 0.73 0.20 27% Diluted 0.45 $ 0.36 $ 0.09 25% 0.89 0.70 0.19 27% Revenue (in millions) Revenue from managed 170.6 $165.9 $ 4.7 3% 340.7 321.0 19.7 6% assets Service-related revenue from 11.8 12.8 (1.0) (8%) 23.3 25.2 (1.9) (8%) Sources other than managed assets - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Total Revenue 182.4 $178.7 $ 3.7 2% 364.0 346.2 17.8 5% - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Operating margin 46.1% 42.0% 4.1% 10% 46.6% 42.4% 4.2% 10% - ----------------------------------------------------------------------------------------------------------
Net income for the three- and six-month periods ended June 30, 2002 increased 23% and 24%, respectively, compared to the same periods last year. The increases reflect increased revenue from managed assets as a result of significant growth in assets, improved operating margins and reduced nonoperating expenses. Diluted earnings per share for the three- and six-month periods ended June 30, 2002 increased 25% and 27%, respectively, compared to 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 half of 2002. Revenue. Total revenue for the three- and six-month periods ended June 30, 2002 increased $3.7 million and $17.8 million, respectively, as compared to the same periods of 2001. Revenue from managed assets for the three- and six-month periods ended June 30, 2001 included $12.5 million and $26.0 million, respectively, in 12b-1 fees associated with Class B shares of Federated's mutual funds. Due to the fourth quarter 2001 sale of Federated's retained interest in residual cash flows associated with the B shares, 2002 revenues do not include these fees (see "B-Share Programs" for a detailed explanation). Excluding the B-share-related 12b-1 fees for 2001, total revenue for the three- and six-month periods ended June 30, 2002, increased $16.2 million or 10% and $43.8 million or 14%, respectively, over the same periods of 2001. These increases are the result of increased revenue from managed assets. Revenue from average assets grew period over period, but to a lesser degree than the growth in 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. Service-related revenue from sources other than managed assets decreased $1.0 million and $1.9 million for the three- and six-month periods ended June 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. Operating expenses for the three- and six-month periods ended June 30, are set forth in the following table:
Three Months Ended Six Months Ended June 30, Percent June 30, Percent (in millions) 2002 2001 Change Change 2002 2001 Change Change - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Compensation and related 47.4 43.9 3.5 8% 96.0 83.5 12.5 15% Advertising and 18.5 17.3 1.2 7% 36.4 33.5 2.9 9% promotional Amortization of deferred sales commissions 3.8 (7.8) (67%) 7.5 24.2 (16.7) (69%) 11.6 Amortization of 2.9 4.1 (1.2) (29%) 6.0 6.1 (0.1) (2%) intangible assets All other 25.7 26.8 (1.1) (4%) 48.3 52.1 (3.8) (7%) - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Total Operating Expenses 98.3 103.7 (5.4) (5%) 194.2 199.4 (5.2) (3%) - ---------------------------------------------------------------------------------------------
Total operating expenses for the three- and six-month periods ended June 30, 2002 decreased $5.5 million and $5.2 million, respectively, as compared to the same periods last year. Compensation and related expense for the three- and six-month periods ended June 30, 2002, increased as compared to the same periods last year as a result of increased variable-based compensation due in part to the acquisition of substantially all of the business of Edgemont Asset Management Corporation in the second quarter 2001 (the Kaufmann Acquisition). The increases in advertising and promotional expense reflects increases in marketing allowances due primarily to significant asset and sales growth. Amortization of deferred sales commissions decreased for both the three- and six-month periods ended June 30, 2002 as compared to the same periods last year primarily 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). Amortization of intangible assets decreased for both periods in 2002 as compared to 2001 as a result of both the discontinuation of goodwill amortization (see Note (2) to the Consolidated Financial Statements) and the full amortization of certain assets during 2001 and the first half of 2002, partially offset by the addition of identifiable intangible assets related to the Kaufmann Acquisition. All other expenses decreased for both periods in 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 the full depreciation of various leasehold improvements. Nonoperating Income (Expense). Net nonoperating expenses for the three- and six-months ended June 30, 2002, decreased $4.8 million and $8.1 million, respectively, compared to the same periods last year. Interest and dividend income decreased in 2002 due to lower investment balances as a result of cash used for the Kaufmann Acquisition in the second quarter 2001 and lower investment yields in 2002. Debt expense decreased in 2002 as a result of lower levels of outstanding debt. Recourse debt levels were lower due to the early retirement of Federated's 7.96% Senior Secured Notes in the fourth quarter of 2001. Nonrecourse debt levels were lower due to the fourth quarter 2001 sale of Federated's retained interest in residual cash flows associated with the B shares of Federated's mutual funds (see "B-Share Programs" for a detailed explanation). Income Taxes. The income tax provision for the three- and six-month periods ended June 30, 2002 were $28.1 million and $58.1 million as compared to $23.9 million and $47.4 million, respectively, for the same periods in 2001. The effective tax rate was 34.8% and 35.8% for the second quarter 2002 and 2001, respectively, and 35.6% and 35.9% for the first half 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 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. "Other service fees, net-affiliates," "Amortization of deferred sales commissions" and "Debt expense - nonrecourse" for the three and six months ended June 30, 2001, included $12.5 million and $26.0 million, $6.9 million and $14.4 million and $4.9 million and $10.1 million, respectively, recorded in connection with the financing accounting treatment of future 12b-1 fees and CDSCs sold under this B-share program. 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 June 30, 2002, liquid assets, consisting of cash and cash equivalents, the current portion of securities available for sale and receivables, totaled $105.6 million as compared to $110.7 million at December 31, 2001. Operating Activities. Net cash provided by operating activities totaled $84.1 million for the six-month period ended June 30, 2002, as compared to $115.6 million for the same period of 2001. This decrease is largely attributable to the effects of certain cash payments made in the first half 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), partially offset by increased profitability in 2002. Cash payments made in the first half 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 half of 2002, Federated made a $33.1 million contingent payment related to the Kaufmann Acquisition, paid $1.9 million to acquire property and equipment and received $4.5 million from redemptions of available-for-sale securities. Financing Activities. During the six months ended June 30, 2002, Federated used $50.4 million for financing activities. Of this amount, $34.7 million was used to repurchase 1,105,370 shares of Class B common stock. As of June 30, 2002, Federated can repurchase an additional 5.9 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 $170.0 million after considering earnings through June 30, 2002, certain stock repurchases through July 31, 2002, and the dividend payment on August 15, 2002 (see Note (5) to the Consolidated Financial Statements). During the first and second quarters of 2002, Federated paid dividends of $5.3 million and $6.5 million or $0.046 and $0.057 per share, respectively. In July 2002, Federated's board of directors declared a dividend of $0.057 per share that will be paid on August 15, 2002, to shareholders of record as of August 7, 2002. After considering earnings through June 30, 2002, certain stock repurchases through July 31, 2002, and the dividend payment on August 15, 2002, Federated, given current debt covenants, has the ability to pay dividends of approximately $159.8 million. Payments on debt-nonrecourse were significantly lower during the first half of 2002 than in the first half 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 half 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, repurchase company stock, fund strategic business acquisitions, pay shareholder dividends, pay incentive compensation, fund property and equipment acquisitions, fund minimum lease payments 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 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 six-month periods ended June 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 June 30, 2002, assets managed by Federated in the CBOs totaled $1.1 billion. 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). Quantitative and Qualitative Disclosures About Market Risk (Continued) - -------------------------------------------------------------------------------- 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 June 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 June 30, 2002. As of June 30, 2002, Federated is also exposed to interest rate and credit risk relating to its investment in asset-backed securities with a $2.5 million investment in the mortgage-backed CBO product. Due to factors including credit risk/ defaults and rising interest rates, the carrying value of the investment may be adversely affected by unfavorable changes in cash flow estimates, declines in the value of the underlying fixed-rate securities, and related expected returns. 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 II, Item 4. Submission of Matters to a Vote of Security Holders - -------------------------------------------------------------------------------- (unaudited) (a) Federated's annual shareholders' meeting was held on April 24, 2002. (b) The board of directors of Federated Investors, Inc. as previously reported to the Securities and Exchange Commission was re-elected in its entirety. (c) The matters voted upon were the Federated Investors, Inc. Stock Incentive Plan and the Federated Investors, Inc. Annual Incentive Plan, as amended. All 9,000 Class A Shares eligible to vote did so affirmatively. Part II, Item 6. Exhibits and Reports on Form 8-K - -------------------------------------------------------------------------------- (a) The following exhibits required to be filed by Item 601 of Regulation S-K are filed herewith and incorporated by reference herein: Exhibit 10.1 Material contracts - Annual Stock Option Agreement dated April 24, 2002 between Federated Investors, Inc. and the independent directors (filed herewith) Exhibit 10.2 Material contracts -Federated Investors, Inc. Stock Incentive Plan as approved by shareholders April 24, 2002 (filed herewith) Exhibit 10.3 Material Contracts - Federated Investors, Inc. Annual Incentive Plan as approved by shareholders April 24, 2002, as amended (filed herewith) (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 August 14, 2002 By: /s/ J. Christopher Donahue J. Christopher Donahue President and Chief Executive Officer Date August 14, 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 June 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 August 14, 2002 By: /s/ J. Christopher Donahue J. Christopher Donahue President and Chief Executive Officer Date August 14, 2002 By: /s/ Thomas R. Donahue Thomas R. Donahue Chief Financial Officer EX-10 3 exhibit101.txt Exhibit 10.1 Note: Following is one copy of the Annual Stock Option Agreement dated April 24, 2002 between Federated Investors, Inc. and each of its three independent directors: Michael J. Farrell, James L. Murdy and Edward G. O'Connor. The three documents differ only in the name of the awardee. FEDERATED INVESTORS, INC. ANNUAL STOCK OPTION AGREEMENT as of April 24, 2002 The parties to this Agreement are Federated Investors, Inc. (the "Company"), a Pennsylvania corporation having its principal place of business in Pittsburgh, Pennsylvania, and, ___________, a non-employee director of the Company (the "Optionee"). The Company desires to have the Optionee serve as a non-employee director of the Company and to provide the Optionee with an incentive to put forth maximum effort for the success of the business. The Company has adopted the Federated Investors, Inc. Stock Incentive Plan (the "Plan") to attract and retain highly competent non-employee directors and to provide an incentive in motivating such directors to achieve long-term corporate objectives. Under Section 10.2 of the Plan, each non-employee director who is continuing in office after the date of each annual meeting of the Company's shareholders is entitled to receive as of such annual meeting date an option (an "Annual Option") to purchase 2,250 shares of the Common Stock of the Company, no par value per share (the "Common Stock"). This Agreement sets forth the terms and conditions applicable to all Annual Options granted to the Optionee under the Plan on and after the date hereof. . Capitalized terms used in this Agreement, unless otherwise defined herein, shall have the meanings given to such terms in the Plan. Accordingly, in consideration of the premises and covenants set forth herein, the parties hereto, intending to be legally bound, agree as follows: 1. Number of Shares and Price. The Optionee's Annual Option for 2,250 shares of Common Stock is granted under the Plan as of the date first above written and has an exercise price of $______ (the Fair Market Value per share of the Common Stock on the date of grant). The Company shall notify the Optionee in writing of further grants of Annual Options under the Plan and the Date of Grant and exercise price of each such Annual Option. The Annual Options are not intended to qualify as incentive stock Annual Options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 2. Term and Exercise. Each Annual Option shall have a term beginning on the Date of Grant of such Annual Option and ending on the tenth anniversary of such Date of Grant, subject to earlier termination as set forth in Section 3 (the "Expiration Date"). Subject to the provisions of Section 3, each Annual Option shall vest and become exercisable immediately. 3. Exercise of Option Upon Termination of Service. In the event of the death or disability of Optionee, the Annual Options shall be exercisable only within the twelve (12) months next succeeding the date of death or disability and only if and to the extent that the Optionee was entitled to exercise the Annual Options at the date of the Optionee's death or disability, as the case may be. If an Optionee's service with the Corporation terminates due to retirement all vested Annual Options may be exercised by the Optionee for a period of ten (10) years from the date of grant; provided, however, that in the event of the death of a retired Optionee, the Annual Options shall be exercisable only within the twelve (12) months next succeeding the date of death. If an Optionee's service with the Company terminates for any reason other than retirement, death or disability, the Annual Options shall be exercisable for thirty (30) days after the date of such termination and only if and to the extent the Optionee was entitled to exercise the Annual Options at the date of such termination. In the case of death, such Annual Options shall be exercisable only by the executor or administrator of the Optionee's estate or by the person or persons to whom the Optionee's rights under the Annual Options shall pass by the Optionee's will or the laws of descent and distribution. Notwithstanding the foregoing, in no event shall any Option be exercisable more than ten (10) years after the date of grant. For purposes of this Agreement, "Disability" means any physical or mental injury or disease of a permanent nature, which renders Optionee incapable of meeting the requirements of service as an Optionee performed by Optionee immediately prior to the commencement of such disability. The determination of whether an Optionee is disabled shall be made by the Committee in its sole and absolute discretion. 4. Exercise Procedures. Annual Options may be exercised, in whole or in part, by the Optionee by delivering to the Company a Notice in the form set forth as Exhibit A hereto, together with the exercise price for such Annual Options payable in U.S. dollars, in cash or by check payable to the order of the Company. 5. Miscellaneous. ------------- (a) In case there shall be a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that the shares of Common Stock are changed into or become exchangeable for a larger or smaller number of shares, thereafter the number of shares subject to the outstanding Annual Options granted hereunder shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason of such change in corporate structure, provided that the number of shares shall always be a whole number, and the exercise price per share of the outstanding Annual Options shall, in the case of an increase in the number of shares, be proportionately reduced, and in the case of a decrease in the number of shares, shall be proportionately increased. Any such adjustment by the Board shall be final and binding on Optionee. (b) Nothing contained in this Agreement shall be deemed to confer upon the Optionee, in his capacity as a holder of Annual Options, any right to prevent or to approve or vote upon any of the corporate actions described in Section 5(a). The existence of the Annual Options granted hereunder shall not affect in any way the right or the power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Class A Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (c) Whenever the term "the Optionee" is used in any provision of this Agreement under circumstances where the provision should logically be construed to apply to the executors, the administrators, or the person or persons to whom Annual Options may be transferred by will or by the laws of descent and distribution, the term "the Optionee" shall be deemed to include such person or persons. (d) The Annual Options granted hereunder are not transferable by the Optionee otherwise than by will or the laws of descent and distribution and are exercisable during the Optionee's lifetime only by him or her. No assignment or transfer of the Annual Options granted hereunder, or of the rights represented thereby, whether voluntary or involuntary, by the operation of law or otherwise (except by will or the laws of descent and distribution), shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon any such assignment or transfer the Annual Options shall terminate and become of no further effect. (e) The Optionee shall not be deemed for any purpose to be a stockholder of the Company in respect of any shares as to which the Annual Options shall not have been exercised as herein provided. (f) Nothing in this Agreement shall confer upon the Optionee any right to continue as a director of the Company. (g) Nothing in this Agreement or otherwise shall obligate the Company to vest any of the Annual Options, to permit the Annual Options to be exercised other than in accordance with the terms hereof or to grant any waivers of the terms of this Agreement, regardless of what actions the Company, the Board or the Committee may take or waivers the Company, the Board or the Committee may grant under the terms of or with respect to any Annual Options now or hereafter granted to any other person or any other Annual Options granted to the Optionee. (h) Notwithstanding any other provision hereof, the Optionee shall not exercise the Annual Options granted hereunder, and the Company shall not be obligated to issue any shares to the Optionee hereunder, if the exercise thereof or the issuance of such shares would constitute a violation by the Optionee or the Company of any provision of any law or regulation of any governmental authority, the terms of any credit agreement or other financing agreement to which the Company is then a party or by which it is bound. Any determination in this connection by the Company shall be final and binding. The Company shall in no event be obligated to register any securities pursuant to the Securities Act of 1933 (as the same shall be in effect from time to time) or to take any other affirmative action in order to cause the exercise of the Annual Options or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. (i) Every notice or other communication relating to this Agreement shall be in writing and shall be mailed to or delivered to the party for whom it is intended at such address as may from time to time be designated by it in a notice mailed or delivered to the other party as herein provided; provided, however, that unless and until some other address be so designated, all notices or communications by the Optionee to the Company shall be mailed or delivered to the Company at its office at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222, Attention: Corporate Secretary, and all notices or communications by the Company to Optionee may be given to the Optionee personally or may be mailed to him or her. (j) This Agreement shall be governed by the laws of the State of Pennsylvania applicable to agreements made and performed wholly within the State of Pennsylvania (regardless of the laws that might otherwise govern under applicable conflicts of laws principles). (k) As used in this Agreement, unless the context otherwise requires (i) references to "Articles" or "Sections" are to articles or sections of this Agreement, (ii) "hereof", "herein", "hereunder" and comparable terms refer to this Agreement in its entirety and not to any particular part of this Agreement, (iii) references to any gender include references to all genders, (iv) "including" means including without limitation, and (v) headings of the various articles and sections are for convenience of reference only. (l) This Agreement sets forth a complete understanding between the parties with respect to its subject matter and supersedes all prior and contemporaneous agreements and understandings with respect thereto. Except as expressly set forth in this Agreement, the Company makes no representations, warranties or covenants the Optionee with respect to this Agreement or its subject matter, including with respect to the current or future value of the shares subject to the Annual Options. Any modification, amendment or waiver to this Agreement will be effective only if it is in writing signed by the Company and the Optionee. The failure of any party to enforce at any time any provision of this Agreement shall not be construed to be a waiver of that or any other provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. FEDERATED INVESTORS, INC. By: __________________________ OPTIONEE ------------------------------ EXHIBIT A EXERCISE OF STOCK OPTION Pursuant to the provisions of the Annual Stock Option Agreement entered into as of April 24, 2002 between Federated Investors, Inc. (the "Company") and _________________ Optionee (the "Agreement"), I hereby exercise the stock option granted under the terms of the Agreement to the extent of _____ shares of the Common Stock of the Company (the "Shares"). I deliver to the Company herewith the following in payment for the Shares: o $_________ in cash o A check payable to Federated Investors, Inc. in the amount of $------------- Date: ______________________ ______________________________ Optionee - ------------------------------ Address - ------------------------------ Social Security Number EX-10 4 exhibit102.txt Exhibit 10.2 FEDERATED INVESTORS, INC. STOCK INCENTIVE PLAN (Adopted as of February 20, 1998) (Amended as of August 26,1998) (Amended as of August 31, 1998) (Amended as of January 26, 1999) (Amended as of May 17, 1999) (Amended as of July 20, 1999) (Amended as of January 29, 2002) (Approved by Shareholders April 24, 2002) 1. Purpose The purpose of the Federated Investors, Inc. Stock Incentive Plan (the "Plan") is to: (a) Facilitate the assumption by Federated Investors, Inc., as the surviving corporation of a merger with its parent corporation, Federated Investors, of certain stock incentive awards previously made by Federated Investors to its employees; and (b) Continue to promote the long-term growth and performance of Federated Investors, Inc. and its affiliates and to attract and retain outstanding individuals by awarding directors, executive officers and key employees stock options, stock appreciation rights, performance awards, restricted stock and/or other stock-based awards. 2. Definitions The following definitions are applicable to the Plan: "Award" means the grant of Options, SARs, Performance Awards, Restricted Stock or other stock-based award under the Plan. "Board" means the Board of Directors of the Company. "Board Committee" means the committee of the Board appointed in accordance with Section 4 to administer the Plan. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Class B Common Stock of the Company, no par value per share. "Company" means Federated Investors, Inc., a Pennsylvania corporation, and its successors and assigns. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means, on any date, the closing sale price of one share of Common Stock, as reported on the New York Stock Exchange or any national securities exchange on which the Common Stock is then listed or on The NASDAQ Stock Market's National Market ("NNM") if the Common Stock is then quoted thereon, as published in the Wall Street Journal or another newspaper of general circulation, as of such date or, if there were no sales reported as of such date, as of the last date preceding such date as of which a sale was reported. In the event that the Common Stock is not listed for trading on a national securities exchange or authorized for quotation on NNM, Fair Market Value shall be the closing bid price as reported by The NASDAQ Stock Market or The NASDAQ SmallCap Market (if applicable), or if no such prices shall have been so reported for such date, on the next preceding date for which such prices were so reported. In the event that the Common Stock is not listed on the New York Stock Exchange, a national securities exchange or NNM, and is not listed for quotation on The NASDAQ Stock Market or The NASDAQ SmallCap Market, Fair Market Value shall be determined in good faith by the Board Committee in its sole discretion, and for this purpose the Board Committee shall be entitled to rely on the opinion of a qualified appraisal firm with respect to such Fair Market Value, but the Board Committee shall in no event be obligated to obtain such an opinion in order to determine Fair Market Value. "Grant Date" means the date on which the grant of an Option under Section 5.1 hereof or a SAR under Section 6.1 hereof becomes effective pursuant to the terms of the Stock Option Agreement or Stock Appreciation Rights Agreement, as the case may be, relating thereto. "Incentive Stock Option" means an option to purchase shares of Common Stock designated as an incentive stock option and which complies with Section 422 of the Code. "Non-Statutory Stock Option" means an option to purchase shares of Common Stock which is not an Incentive Stock Option. "Offering" means the initial public offering of Class B Common Stock by United States and international underwriters. "Option" means any option to purchase shares of Common Stock granted under Sections 5.1 or 10.1 hereof. "Option Price" means the purchase price of each share of Common Stock under an Option. "Outside Director" means a member of the Board who is not an employee of the Company or any Subsidiary. "Participant" means any salaried employee of the Company and its affiliates designated by the Board Committee to receive an Award under the Plan. "Performance Award" means an Award of shares of Common Stock granted under Section 7. "Performance Period" means the period of time established by the Board Committee for achievement of certain objectives under Section 7.1 hereof. "Restriction Period" means the period of time specified in a Performance Share Award Agreement or a Restricted Stock Award Agreement, as the case may be, between the Participant and the Company during which the following conditions remain in effect: (i) certain restrictions on the sale or other disposition of shares of Common Stock awarded under the Plan, and (ii) subject to the terms of the applicable agreement, a requirement of continued employment of the Participant in order to prevent forfeiture of the Award. "Stock Appreciation Rights" or "SARs" means the right to receive a cash payment from the Company equal to the excess of the Fair Market Value of a stated number of shares of Common Stock at the exercise date over a fixed price for such shares. "Subsidiary" means any corporation, business trust or partnership (other than the Company) in an unbroken chain of corporations, business trusts or partnerships beginning with the Company if each of the corporations, business trusts or partnerships (other than the last corporation, business trust or partnership in the chain) owns stock, beneficial interests or partnership interests possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations, business trusts or partnerships in the chain. "Ten Percent Holder" means a person who owns (within the meaning of Section 424(d) of the Code) more than ten percent of the voting power of all classes of stock of the Company or of its parent corporation or Subsidiary. 3 . Shares Subject to Plan 3.1 Shares Reserved under the Plan. Subject to adjustment as provided in Section 3.2, the number of shares of Common Stock cumulatively available under the Plan shall equal 13,500,000 shares. All of such authorized shares of Common Stock shall be available for the grant of Incentive Stock Options under the Plan. No Participant shall receive Awards in respect of more than 600,000 shares of Common Stock in any fiscal year of the Company. In addition, the aggregate Fair Market Value (determined on the Grant Date) of Common Stock with respect to which Incentive Stock Options granted a Participant become exercisable for the first time in any single calendar year shall not exceed $100,000. Any Common Stock issued by the Company through the assumption or substitution of outstanding grants from an acquired corporation or entity shall not reduce the shares available for grants under the Plan. Shares of Common Stock to be issued pursuant to the Plan may be authorized and unissued shares, treasury shares, or any combination thereof. Subject to Section 6.2 hereof, if any shares of Common Stock subject to an Award hereunder are forfeited or any such Award otherwise terminates without the issuance of such shares of Common Stock to a Participant, or if any shares of Common Stock are surrendered by a Participant in full or partial payment of the Option Price of an Option, such shares, to the extent of any such forfeiture, termination or surrender, shall again be available for grant under the Plan. 3.2 Adjustments. The aggregate number of shares of Common Stock which may be awarded under the Plan and the terms of outstanding Awards shall be adjusted by the Board Committee to reflect a change in the capitalization of the Company, including but not limited to, a stock dividend or split, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, spin-off, spin-out or other distribution of assets to shareholders; provided that the number and price of shares subject to outstanding Options granted to Outside Directors pursuant to Section 10 hereof and the number of shares subject to future Options to be granted pursuant to Section 10 shall be subject to adjustment only as set forth in Section 10 hereof. 3.3 Merger With Federated Investors. Notwithstanding the foregoing, the Company's merger with Federated Investors and assumption of its outstanding stock incentive awards will not result in any adjustment to the number of shares available under the Plan and will reduce the number of shares available under this Plan accordingly. For purposes of this Plan, after the merger all such stock incentive awards shall be treated as Awards under this Plan, except that any Grant Date, Performance Period or Restricted Period shall relate back to the date on which the awards were made by Federated Investors. 4 . Administration of Plan 4.1 Administration by the Board Committee. The Plan shall be administered as follows. (a) Prior to an Offering, the Plan shall be administered by either the full Board or by the Board Committee if one is established by the Board. Prior to an Offering, any member of the Board may serve on the Board Committee. (b) After an Offering, the Plan shall be administered by the Board Committee, which shall consist of no fewer than two members of the Board who are (i) "Non-Employee Directors" for purposes of Rule 16b-3 of the Commission under the Exchange Act and (ii) to the extent required to ensure that awards under the Plan are exempt for purposes of Section 162(m) of the Code, "outside directors" for purposes of Section 162(m); provided, however, that the Board Committee may delegate some or all of its authority and responsibility under the Plan with respect to Awards to Participants who are not subject to Section 16 of the Exchange Act to the Chief Executive Officer of the Company. In the event that, after an Offering, the Board does not have two members who qualify as "Non-Employee Directors" for purposes of Rule 16b-3, the Plan shall be administered by the full Board. (c) The Board Committee shall have authority to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan, to prescribe the form of any agreement or instrument executed in connection herewith, and to make all other determinations necessary or advisable for the administration of the Plan. All such interpretations, rules, regulations and determinations shall be conclusive and binding on all persons and for all purposes. In addition, the Board Committee shall have authority, without amending the Plan, to grant Awards hereunder to Participants who are foreign nationals or employed outside the United States or both, on terms and conditions different from those specified herein as may, in the sole judgment and discretion of the Board Committee, be necessary or desirable to further the purpose of the Plan. (d) Notwithstanding the foregoing, the Board Committee shall not have any discretion with respect to Options granted to Outside Directors pursuant to Section 10 hereof. In the event that the Board does not establish a Board Committee for any reason, any reference in this Plan to the Board Committee shall be deemed to refer to the full Board. 4.2 Designation of Participants. Participants shall be selected, from time to time, by the Board Committee, from those executive officers and key employees of the Company and its affiliates who, in the opinion of the Board Committee, have the capacity to contribute materially to the continued growth and successful performance of the Company. Outside Directors shall be Participants only in accordance with Section 10. 5 . Stock Options 5.1 Grants. Options may be granted, from time to time, to such Participants as may be selected by the Board Committee on such terms, not inconsistent with this Plan, as the Board Committee shall determine. The Option Price shall be determined by the Board Committee effective on the Grant Date; provided, however, that (i) in the case of Incentive Stock Options granted to a Participant who on the Grant Date is not a Ten Percent Holder, such price shall not be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the Grant Date, (ii) in the case of an Incentive Stock Option granted to a Participant who on the Grant Date is a Ten Percent Holder, such price shall be not less than one hundred and ten percent (110%) of the Fair Market Value of a share of Common Stock on the Grant Date, and (iii) in the case of Non-Statutory Stock Options, such price shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the Grant Date. The number of shares of Common Stock subject to each Option granted to each Participant, the terms of each Option, and any other terms and conditions of an Option granted hereunder shall be determined by the Board Committee, in its sole discretion, effective on the Grant Date; provided, however, that no Incentive Stock Option shall be exercisable any later than ten (10) years from the Grant Date. Each Option shall be evidenced by a Stock Option Agreement between the Participant and the Company which shall specify the type of Option granted, the Option Price, the term of the Option, the number of shares of Common Stock to which the Option pertains, the conditions upon which the Option becomes exercisable and such other terms and conditions as the Board Committee shall determine. 5.2 Payment of Option Price. No shares of Common Stock shall be issued upon exercise of an Option until full payment of the Option Price therefor by the Participant. Upon exercise, the Option Price may be paid in cash, and, subject to approval by the Board Committee, in shares of Common Stock having a Fair Market Value equal to the Option Price, or in any combination thereof, or in any other manner approved by the Board Committee. 5.3 Rights as Shareholders. Participants shall not have any of the rights of a shareholder with respect to any shares subject to an Option until such shares have been issued upon the proper exercise of such Option. 5.4 Transferability of Options. Options granted under the Plan may not be sold, transferred, pledged, assigned, hypothecated or otherwise disposed of except by will or by the laws of descent and distribution; provided, however, that, if authorized in the applicable Award agreement, a Participant may make one or more gifts of Options granted hereunder to members of the Participant's immediate family or trusts or partnerships for the benefit of such family members. All Options granted to a Participant under the Plan shall be exercisable during the lifetime of such Participant only by such Participant, his agent, guardian or attorney-in-fact; provided, however, that all Options transferred in a manner consistent with the terms of an Award agreement may be exercised by the transferee. 5.5 Termination of Employment. If a Participant ceases to be an employee of either the Company or of any of its affiliates, the Options granted hereunder shall be exercisable in accordance with the Stock Option Agreement between the Participant and the Company. 5.6 Designation of Incentive Stock Options. Except as otherwise expressly provided in the Plan, the Board Committee may, at the time of the grant of an Option, designate such Option as an Incentive Stock Option under Section 422 of the Code. 5.7 Certain Incentive Stock Option Terms. In the case of any grant of an Incentive Stock Option, whenever possible, each provision in the Plan and in any related agreement shall be interpreted in such a manner as to entitle the Option holder to the tax treatment afforded by Section 422 of the Code, and if any provision of this Plan or such agreement shall be held not to comply with requirements necessary to entitle such Option to such tax treatment, then (i) such provision shall be deemed to have contained from the outset such language as shall be necessary to entitle the Option to the tax treatment afforded under Section 422 of the Code, and (ii) all other provisions of this Plan and the agreement relating to such Option shall remain in full force and effect. If any agreement covering an Option designated by the Board Committee to be an Incentive Stock Option under this Plan shall not explicitly include any terms required to entitle such Incentive Stock Option to the tax treatment afforded by Section 422 of the Code, all such terms shall be deemed implicit in the designation of such Option and the Option shall be deemed to have been granted subject to all such terms. 6 . Stock Appreciation Rights 6.1 Grants. Stock Appreciation Rights may be granted, from time to time, to such salaried employees of the Company and its affiliates as may be selected by the Board Committee. SARs may be granted at the discretion of the Board Committee either (i) in connection with an Option or (ii) independent of an Option. The price from which appreciation shall be computed shall be established by the Board Committee at the Grant Date; provided, however, that such price shall not be less than one-hundred percent (100%) of the Fair Market Value of the number of shares of Common Stock subject of the grant on the Grant Date. In the event the SAR is granted in connection with an Option, the fixed price from which appreciation shall be computed shall be the Option Price. Each grant of a SAR shall be evidenced by a Stock Appreciation Rights Agreement between the Participant and the Company which shall specify the type of SAR granted, the number of SARs, the conditions upon which the SARs vest and such other terms and conditions as the Board Committee shall determine. 6.2 Exercise of SARs. SARs may be exercised upon such terms and conditions as the Board Committee shall determine; provided, however, that SARs granted in connection with Options may be exercised only to the extent the related Options are then exercisable. Notwithstanding Section 3.1 hereof, upon exercise of a SAR granted in connection with an Option as to all or some of the shares subject of such Award, the related Option shall be automatically canceled to the extent of the number of shares subject of the exercise, and such shares shall no longer be available for grant hereunder. Conversely, if the related Option is exercised as to some or all of the shares subject of such Award, the related SAR shall automatically be canceled to the extent of the number of shares of the exercise, and such shares shall no longer be available for grant hereunder. 6.3 Payment of Exercise. Upon exercise of a SAR, the holder shall be paid in cash the excess of the Fair Market Value of the number of shares subject of the exercise over the fixed price, which in the case of a SAR granted in connection with an Option shall be the Option Price for such, shares. 6.4 Rights of Shareholders. Participants shall not have any of the rights of a shareholder with respect to any Options granted in connection with a SAR until shares have been issued upon the proper exercise of an Option. 6.5 Transferability of SARs. SARs granted under the Plan may not be sold, transferred, pledged, assigned, hypothecated or otherwise disposed of except by will or by the laws of descent and distribution. All SARs granted to a Participant under the Plan shall be exercisable during the lifetime of such Participant only by such Participant, his agent, guardian, or attorney-in-fact. 6.6 Termination of Employment. If a Participant ceases to be an employee of either the Company or of any of its affiliates, SARs granted hereunder shall be exercisable in accordance with the Stock Appreciation Rights Agreement between the Participant and the Company. 7 . Performance Awards 7.1 Awards. Awards of shares of Common Stock may be made, from time to time, to such Participants as may be selected by the Board Committee. Such shares shall be delivered to the Participant only upon (i) achievement of such corporate, sector, division, individual or any other objectives or criteria during the Performance Period as shall be established by the Board Committee and (ii) the expiration of the Restriction Period. Except as provided in the Performance Share Award Agreement between the Participant and the Company, shares subject to such Awards under this Section 7.1 shall be released to the Participant only after the expiration of the relevant Restriction Period. Each Award under this Section 7.1 shall be evidenced by a Performance Share Award Agreement between the Participant and the Company which shall specify the applicable performance objectives, the Performance Period, the Restriction Period, any forfeiture conditions and such other terms and conditions as the Board Committee shall determine. 7.2 Stock Certificates. Upon an Award of shares of Common Stock under Section 7.1 of the Plan, the Company shall issue a certificate registered in the name of the Participant bearing the following legend and any other legend required by any federal or state securities laws or by the Delaware Business Trust Act: "The sale or other transfer of the shares of stock represented by this certificate is subject to certain restrictions set forth in the Federated Investors, Inc. Stock Incentive Plan, administrative rules adopted pursuant to such Plan and a Performance Share Award Agreement between the registered owner and Federated Investors, Inc. A copy of the Plan, such rules and such Agreement may be obtained from the Secretary of Federated Investors, Inc." Unless otherwise provided in the Performance Share Award Agreement between the Participant and the Company, such certificates shall be retained by the Company until the expiration of the Restriction Period. Upon the expiration of the Restriction Period, the Company shall (i) cause the removal of the legend from the certificates for such shares as to which a Participant is entitled in accordance with the Performance Share Award Agreement between the Participant and the Company and (ii) release such shares to the custody of the Participant. 7.3 Rights as Shareholders. Subject to the provisions of the Performance Share Award Agreement between the Participant and the Company, during the Performance Period, dividends and other distributions paid with respect to all shares awarded thereto under Section 7.1 hereof shall, in the discretion of the Board Committee, either be paid to Participants or held in escrow by the Company and paid to Participants only at such time and to such extent as the related Performance Award is earned. During the period between the completion of the Performance Period and the expiration of the Restriction Period, Participants shall be entitled to receive dividends and other distributions only as to the number of shares determined in accordance with the Performance Share Award Agreement between the Participant and the Company. 7.4 Transferability of Shares. Certificates evidencing the shares of Common Stock awarded under the Plan shall not be sold, exchanged, assigned, transferred, pledged, hypothecated or otherwise disposed of until the expiration of the Restriction Period. 7.5 Termination of Employment. If a Participant ceases to be an employee of either the Company or of one of its affiliates, the number of shares subject of the Award, if any, to which the Participant shall be entitled shall be determined in accordance with the Performance Share Award Agreement between the Participant and the Company. 7.6 Transfer of Employment. If a Participant transfers employment from one business unit of the Company or any of its affiliates to another business unit during a Performance Period, such Participant shall be eligible to receive such number of shares of Common Stock as the Board Committee may determine based upon such factors as the Board Committee in its sole discretion may deem appropriate. 8 . Restricted Stock Awards 8.1 Awards. Awards of shares of Common Stock subject to such restrictions as to vesting and otherwise as the Board Committee shall determine, may be made, from time to time, to Participants as may be selected by the Board Committee. The Board Committee may in its sole discretion at the time of the Award or at any time thereafter provide for the early vesting of such Award prior to the expiration of the Restriction Period. Each Award under this Section 8.1 shall be evidenced by a Restricted Stock Award Agreement between the Participant and the Company which shall specify the vesting schedule, any rights of acceleration, any forfeiture conditions, and such other terms and conditions as the Board Committee shall determine. 8.2 Stock Certificates. Upon an Award of shares of Common Stock under Section 8.1 of the Plan, the Company shall issue a certificate registered in the name of the Participant bearing the following legend and any other legend required by any federal or state securities laws or by the Delaware Business Trust Act. "The sale or other transfer of the shares of stock represented by this certificate is subject to certain restrictions set forth in the Federated Investors, Inc. Stock Incentive Plan, administrative rules adopted pursuant to such Plan and a Restricted Stock Award Agreement between the registered owner and Federated Investors, Inc. A copy of the Plan, such rules and such agreement may be obtained form the Secretary of Federated Investors, Inc." Unless otherwise provided in the Restricted Stock Award Agreement between the Participant and the Company, such certificates shall be retained in custody by the Company until the expiration of the Restriction Period. Upon the expiration of the Restriction Period, the Company shall (i) cause the removal of the legend from the certificates for such shares as to which a Participant is entitled in accordance with the Restricted Stock Award Agreement between the Participant and the Company and (ii) release such shares to the custody of the Participant. 8.3 Rights as Shareholders. During the Restriction Period, Participants shall be entitled to receive dividends and other distributions paid with respect to all shares awarded thereto under Section 8.1 hereof. 8.4 Transferability of Shares. Certificates evidencing the shares of Common Stock awarded under the Plan shall not be sold, exchanged, assigned, transferred, pledged, hypothecated or otherwise disposed of until the expiration of the Restriction Period. 8.5 Termination of Employment. If a Participant ceases to be an employee of either the Company or of any of its affiliates, the number of shares subject of the Award, if any, to which the Participant shall be entitled shall be determined in accordance with the Restricted Stock Award Agreement between the Participant and the Company. All remaining shares as to which restrictions apply at the date of termination of employment shall be forfeited subject to such exceptions, if any, authorized by the Board Committee. 9 . Other Stock-Based Awards Awards of shares of Common Stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Common Stock, may be made, from time to time, to salaried employees of the Company and its affiliates as may be selected by the Board Committee. Such Awards may be made alone or in addition to or in connection with any other Award hereunder. The Board Committee may in its sole discretion determine the terms and conditions of any such Award. Each such Award shall be evidenced by an agreement between the Participant and the Company which shall specify the number of shares of Common Stock subject of the Award, any consideration therefor, any vesting or performance requirements and such other terms and conditions as the Board Committee shall determine. 10 . Outside Directors' Options 10.1 Initial Grants. Effective on the dates set forth below, each category of Outside Director of the Company described below shall be automatically granted an Option to purchase 5,000 shares of Common Stock: (i) for any Outside Director serving on the Board at the effective date of the Offering, the effective date of the Offering; (ii) for any Outside Director elected by the shareholders of the Company subsequent to the effective time of the Offering, the date of such Outside Director's initial election to the Board; and (iii) for any Outside Director appointed by the Board subsequent to the effective time of the Offering, the date such Outside Director's appointment to the Board becomes effective. All such Options shall be Non-Statutory Stock Options. The Option Price for all Options granted pursuant to this Section 10 shall be the greater of (a) $19.00 per share or (b) one hundred percent (100%) of the Fair Market Value per share of Common Stock on the date of grant. 10.2 Annual Grants. Effective on the date of each Annual Meeting of the shareholders of the Company that occurs after the Offering, each Outside Director who will be continuing as a director after such Annual Meeting, but not including any Outside Director who is first elected at such Annual Meeting, shall automatically be granted an Option to purchase 1,500 shares of Common Stock. All such Options shall be Non-Statutory Stock Options. The Option price shall be one-hundred percent (100%) of the Fair Market Value per share of Common Stock on the date of the grant. 10.3 Exercise of Options. Two thousand (2,000) of the initial Options granted pursuant to Section 10.1 shall vest in an Outside Director on the first anniversary of such grant and one thousand five hundred (1,500) of the initial Options shall vest on each subsequent anniversary of such grant until such Options are fully vested at the end of three years. All Options granted pursuant to Section 10.2 shall vest immediately. All vested Options shall be immediately exercisable and may be exercised by the Outside Director for a period of ten (10) years from the date of grant; provided, however, that in the event of the death or disability of an Outside Director, the Options shall be exercisable only within the twelve (12) months next succeeding the date of death or disability and only if and to the extent that the Outside Director was entitled to exercise the Options at the date of the Outside Director's death or disability, as the case may be. If an Outside Director's service with the Corporation terminates due to retirement all vested Options may be exercised by the Outside Director for a period of ten (10) years from the date of grant; provided, however, that in the event of the death of a retired Outside Director, the Options shall be exercisable only within the twelve (12) months next succeeding the date of death. If an Outside Director's service with the Company terminates for any reason other than retirement, death or disability, the Options shall be exercisable for thirty (30) days after the date of such termination and only if and to the extent the Outside director was entitled to exercise the Options at the date of such termination. In the case of death, such Options shall be exercisable only by the executor or administrator of the Outside Director's estate or by the person or persons to whom the Outside Director's rights under the Options shall pass by the Outside Director's will or the laws of descent and distribution. Notwithstanding the foregoing, in no event shall any Option be exercisable more than ten (10) years after the date of grant. 10.4 Payment of Option price. An Option granted to an Outside Director shall be exercisable only upon payment to the Company of the Option price. Payment for the shares shall be in United States dollars, payable in cash or by check. 10.5 Adjustments. In case there shall be a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that the shares of Common Stock are changed into or become exchangeable for a larger or smaller number of shares, thereafter the number of shares subject to outstanding Options granted to Outside Directors and the number of shares subject to Options to be granted to Outside Directors pursuant to the provisions of this Section 10 shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason of such change in corporate structure, provided that the number of shares shall always be a whole number, and the purchase price per share of any outstanding Options shall, in the case of an increase in the number of shares, be proportionately reduced, and in the case of a decrease in the number of shares, shall be proportionately increased. 11 . Amendment or Termination of Plan The Board may amend, suspend or terminate the Plan or any part thereof from time to time, provided that no change may be made which would impair the rights of a Participant to whom shares of Common Stock have theretofore been awarded without the consent of said Participant. 12 . Miscellaneous 12.1 Rights of Employees. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any affiliate to terminate any Participant's employment at any time, nor confer upon any Participant any right to continued employment with the Company or any affiliate. 12.2 Tax Withholding. The Company shall have the authority to withhold, or to require a Participant to remit to the Company, prior to issuance or delivery of any shares or cash hereunder, an amount sufficient to satisfy federal, state and a local tax withholding requirements associated with any Award. In addition, the Company may, in its sole discretion, permit a Participant to satisfy any tax withholding requirements, in whole or in part, by (i) delivering to the Company shares of Common Stock held by such Participant having a Fair Market Value equal to the amount of the tax; (ii) directing the Company to retain shares of Common stock otherwise issuable to the Participant under the Plan; or (iii) any other method approved by the Board Committee. 12.3 Status of Awards. Awards hereunder shall not be deemed compensation for purposes of computing benefits under any retirement plan of the Company or affiliate and shall not affect any benefits under any other benefit plan now or hereafter in effect under which the availability or amount of benefits is related to the level of compensation. 12.4 Waiver of Restrictions. The Board Committee may, in its sole discretion, based on such factors as the Board Committee may deem appropriate, waive in whole or in part, any remaining restrictions or vesting requirements in connection with any Award hereunder. 12.5 Adjustment of Awards. Subject to Section 11, the Board Committee shall be authorized to make adjustments in performance award criteria or in the terms and conditions of other Awards (except Options granted pursuant to Section 10 hereof) in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles; provided however, that no such adjustment shall impair the rights of any Participant without his consent. The Board Committee may also make Awards hereunder in replacement of, or as alternatives to, Awards previously granted to Participants, including without limitation, previously granted Options having higher Option Prices and grants or rights under any other plan of the Company or of any acquired entity. The Board Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Board Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. Notwithstanding the above, only the full Board (and not the Board Committee) shall have the right to make any adjustments in the terms or conditions of Options granted pursuant to Section 10. 12.6 Consideration for Awards. Except as otherwise required in any applicable agreement or by the terms of the Plan, Participants under the Plan shall not be required to make any payment or provide consideration for an Award other than the rendering of services. 12.7 Special Forfeiture Rule. Notwithstanding any other provision of this Plan to the contrary, the Board Committee shall be authorized to impose additional forfeiture restrictions with respect to Awards granted under the Plan, other than Awards pursuant to Section 10 hereof, including, without limitation, provisions for forfeiture in the event the Participant shall engage in competition with the Company or in any other circumstance the Board Committee may determine. 12.8 Effective Date and Term of Plan. The Plan shall be effective as of the date it is approved by the Board, subject to the approval thereof by the shareholders of the Company. Unless terminated under the provisions of Section 11 hereof, the Plan shall continue in effect indefinitely; provided, however, that no Incentive Stock Options shall be granted after the tenth anniversary of the effective date of the Plan. 12.9 Compliance with Section 162(m). It is the Company's intent that compensation payable pursuant to Awards (other than Awards of Restricted Stock which vest based solely on continued employment) to "covered employees" as such term is defined in Regulation 1.162-27(c)(2) promulgated under Section 162(m) of the Code, or any successor provision ("Section 162(m)"), qualify as "performance-based compensation" as defined in Regulation 1.162-27(e) under Section 162(m). If any provision of this Plan or an Award is later found to make compensation intended to be performance-based compensation ineligible for such treatment, the provision shall be deemed null and void, unless otherwise determined by a committee of the Board comprised solely of "outside directors" as such term is defined under Regulation 1.162-27(e)(3) under Section 162(m). EX-10 5 exhibit103.txt Exhibit 10.3 FEDERATED INVESTORS, INC. ANNUAL INCENTIVE PLAN Approved by Shareholders April 24, 2002 Amended as of May 13, 2002 Amended as of July 23, 2002 ARTICLE I - GENERAL PROVISIONS 1.1 Purpose The purpose of the Federated Investors, Inc. Annual Incentive Plan (the "Plan") is to advance the success of Federated Investors, Inc. and to thereby increase shareholder value by promoting the attainment of significant business objectives by the Company and basing a portion of the annual compensation of selected officers on the attainment of such objectives. The Plan is designed to: (i) further align the interests of Participants with the interests of the Company's shareholders, (ii) reward Participants for creating shareholder value as measured by objectively determinable performance goals, and (iii) assist in the attraction and retention of employees vital to the Company's long-term success. 1.2 Definitions For the purpose of the Plan, the following terms shall have the meanings indicated: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended, including any successor law thereto. (c) "Company," means Federated Investors, Inc. and, solely for purposes of determining (i) eligibility for participation in the Plan, (ii) employment, and (iii) the calculation of any performance goal, shall include any corporation, partnership, or other organization of which controls, directly or indirectly, not less than 50 percent of the total combined voting power of all classes of stock or other equity interests or which is otherwise consolidated into the Company's audited financial statements. For purposes of this Plan, the term "Company" shall also include any successor to Federated Investors, Inc. (d) "Committee" means the Compensation Committee of the Board (or any successor committee of the Board performing a similar function or the whole Board if the Board performs such functions) or, with respect to any particular function under the Plan identified by the Committee or the Board, any subcommittee of the whole Committee established by the whole Committee or the Board in order to comply with the definition of outside director under Section 162(m) of the Code. (e) "Common Stock" means the Company's Class B Common Stock, no par value per share. (f) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (g) "Fair Market Value" means, on any date, the closing sale price of one share of Common Stock, as reported on the New York Stock Exchange or any national securities exchange on which the Common Stock is then listed or on the NASDAQ Stock Market's National Market ("NNM") if the Common Stock is then quoted thereon, as published in the Wall Street Journal or another newspaper of general circulation, as of such date or, if there were no sales reported as of such date, as of the last date preceding such date as of which a sale was reported. In the event that the Common Stock is not listed for trading on a national securities exchange or authorized for quotation on NNM, Fair Market Value shall be the closing bid price as reported by the NASDAQ Stock Market or The NASDAQ SmallCap Market (if applicable), or if no such prices shall have been so reported for such date, on the next preceding date for which such prices were so reported. In the event that the Common Stock is not listed on the New York Stock Exchange, a national securities exchange or NNM, and is not listed for quotation on The NASDAQ Stock Market or The NASDAQ SmallCap Market, Fair Market Value shall be determined in good faith by the Committee in its sole discretion, and for this purpose the Committee shall be entitled to rely on the opinion of a qualified appraisal firm with respect to such Fair Market Value, but the Committee shall in no event be obligated to obtain such an opinion in order to determine Fair Market Value. (h) "Participant" means any person who has satisfied the eligibility requirements set forth in Section 1.4 and to whom an award has been made under the Plan. (i) "Operating Profits" means for the applicable Performance Period, the Company's total revenues less distributions to minority interests and less total expenses (excluding amortization of intangible assets, impairment losses and debt expenses, including, without limitation, interest and loan fees) as reflected in the Company's audited or unaudited financial statements as filed with the Securities and Exchange Commission. (j) "Performance Measures" means the criteria upon which awards will be based and, unless otherwise determined by the Committee, shall be any one or more of the following measures: (i) revenues; (ii) operating income; (iii) net income; (iv) earnings per share; (v) operating expenses; (vi) assets under management; (vii) product sales or market share; (viii) the performance of the Common Stock; (ix) the investment performance of Company products; (x) Operating Profits; (xi) identification of business opportunities and (xii) project completion. (k) "Performance Period" means, in relation to any award, the calendar year, or any other period, for which performance is being calculated, with each such period constituting a separate Performance Period. (l) "Performance Threshold" means, in relation to any Performance Period, the minimum level of performance that must be achieved with respect to a Performance Measure in order for an award to become payable pursuant to this Plan. (m) "Plan Pool" means, in relation to each calendar year, the amount, if any, that is available for distribution pursuant to the Plan with respect to such year which amount shall be a percentage of Operating Profits that shall not exceed 7.5% of the Operating Profits for such year. (n) "Target Award" means that percentage of the Plan Pool which the Committee sets as the maximum amount to be awarded to a Participant under the Plan for such Performance Period. 1.3 Administration The Plan shall be administered by the Committee. Subject to the terms of the Plan, the Committee shall, among other things, determine eligibility for participation in the Plan, make awards under the Plan, establish the terms and conditions of such awards (including the Performance Measure(s) to be utilized) and determine whether the Performance Measures and Performance Thresholds for any award has been achieved. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be deemed the acts of the Committee. Subject to the provisions of the Plan and to directions by the Board, the Committee is authorized to interpret the Plan, to adopt administrative rules, regulations, and guidelines for the Plan, and to impose such terms, conditions, and restrictions on awards as it deems appropriate. The Committee may, with respect to Participants who are not subject to Section 162(m) of the Code, delegate such of its powers and authority under the Plan to the Company's Chairman, President or Chief Executive Officer as it deems appropriate. In the event of such delegation, all references to the Committee in this Plan shall be deemed references to such officers as it relates to those aspects of the Plan that have been delegated. 1.4 Eligibility and Participation Participation in the Plan shall be limited to officers, who may also be members of the Board who are determined by the Committee to be eligible for participation in the Plan and unless otherwise determined by the Committee, the Chairman of the Board, the Chief Executive Officer and any executive who is a member of the Board or is designated as a member of the Chief Executive Officer's senior staff shall be eligible to participate in the Plan. ARTICLE II - AWARD TERMS 2.1 Granting of Awards The Committee may, in its discretion, from time to time make awards to persons eligible for participation in the Plan pursuant to which the Participant will earn compensation in the event that the Company achieves the Performance Thresholds established by the Committee. 2.2 Establishment of Performance Thresholds Each award shall be conditioned upon the Company's achievement of one or more Performance Thresholds with respect to the Performance Measure(s) established by the Committee no later than ninety (90) days after the beginning of the applicable Performance Period, provided that for a Performance Period of less than one year, the Performance Measure must be established prior to the lapse of 25% of the Performance Period. The Committee, in its discretion, may establish Performance Thresholds for the Company as a whole or for only the business unit of the Company in which a given Participant is involved, or a combination thereof. In addition to establishing a minimum performance level below which no compensation shall be payable pursuant to an award, the Committee, in its discretion, may create a performance schedule under which an amount less than the Target Award may be paid so long as the Performance Threshold has been exceeded. The Committee may adjust the Performance Thresholds and measurements to reflect significant unforeseen events and other factors; provided, however, that the Committee may not make any such adjustment with respect to any award to an individual who is then a "covered employee" as such term is defined in Regulation 1.162-27(c)(2) promulgated under Section 162(m) of the Code, or any successor provision ("Section 162(m)"), if such adjustment would cause compensation pursuant to such award to cease to be performance-based compensation under Section 162(m). 2.3 Other Award Terms The Committee may, in its sole discretion, establish certain additional performance based conditions that must be satisfied by the Company, a business unit or the Participant as a condition precedent to the payment of all or a portion of any awards. Such conditions precedent may include, among other things, the receipt by a Participant of a specified annual performance rating and the achievement of specified performance goals by the Company, business unit or Participant. Furthermore, the Committee may, in its discretion, reduce the amount of any award to a Participant if it concludes that such reduction is appropriate based upon (i) evaluations of such Participant's performance, (ii) comparisons with compensation received by executive officers of other companies in the Company's industry (iii) the Company's financial results and conditions and (iv) such other business factors deemed relevant by the Committee. In addition, the Committee may establish a minimum Bonus Pool that must be available as a condition precedent to any distribution pursuant to Section 2.5 hereof. 2.4 Certification of Achievement of Bonus Pool Performance Thresholds The Committee shall, prior to any payment under the Plan, certify in writing the extent, if any, that the Performance Threshold(s) has been achieved and the amount, if any, of the Bonus Pool. For purposes of this provision, and for so long as the Code permits, the approved minutes of the Committee meeting in which the certification is made shall be treated as written certification. 2.5 Distribution of Awards Awards under the Plan shall be paid in cash as soon as practicable after financial statements for the Performance Period have been prepared and the Committee has certified (i) the amount, if any, of the Bonus Pool and (ii) that the Performance Threshold(s) has been achieved. Notwithstanding the foregoing, the Committee may, in it sole discretion: (i) elect to pay all or a portion of the award in four equal quarterly installments during the calendar year that the lump sum payment would have been paid; or (ii) permit a Participant to elect to receive all or a portion of the total award value in the form of non-qualified stock options to purchase Common Stock, in lieu of receiving cash. Any options granted as payment of an award shall be granted pursuant to the Federated Investors, Inc. Stock Incentive Plan or any successor thereto and shall have an exercise price equal to the Fair Market Value of the Common Stock on the date of grant. The number of stock options to be granted shall be determined by the Committee and shall be based upon the value of the options as determined under the Black-Scholes option-pricing model or such other option valuation model or calculation that the Committee, in its sole discretion, shall determine is appropriate. 2.6 Termination of Employment Unless otherwise determined by the Committee, a Participant must be actively employed by the Company on the date his or her award (or any portion thereof) is to be paid ("the Payment Date") in order to be entitled to payment of any award (or portion thereof). 2.7 Maximum Amount Available for Awards The maximum amount payable pursuant to the Plan to the Company's Chief Executive Officer for any Performance Period shall be 24% of the Plan Pool. The maximum amount payable pursuant to the Plan to any other Participant shall be 19% of the Plan Pool. ARTICLE III - OTHER PROVISIONS 3.1 Withholding Taxes Whenever payments under the Plan are to be made, the Company will withhold therefrom an amount sufficient to satisfy any applicable governmental withholding tax requirements related thereto. 3.2 Adjustments Awards may be adjusted by the Committee in the manner and to the extent it determines to be appropriate to reflect stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, reclassifications or other relevant changes in capitalization occurring after the date of the award; provided, however, that the Committee may not make any such adjustment with respect to any award to an individual who is then a "covered employee" as such term is defined in Regulation 1.162-27(c)(2) promulgated under Section 162(m) of the Code, or any successor provision ("Section 162(m)"), if such adjustment would cause compensation pursuant to such award to cease to be performance-based compensation under Section 162(m). 3.3 No Right to Employment Nothing contained in the Plan or in any Award shall confer upon any Participant any right with respect to continued employment with the Company or its subsidiaries, nor interfere in any way with the right of the Company or its subsidiaries to at any time reassign the Participant to a different job, change the compensation of the Participant or terminate the Participant's employment for any reason. 3.4 Nontransferability A Participant's rights under the Plan, including the right to amounts payable may not be assigned, pledged, or otherwise transferred except, in the event of a Participant's death, to the Participant's designated beneficiary or, in the absence of such a designation, by will or by the laws of descent and distribution. 3.5 Unfunded Plan Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or separate funds. With respect to any payment not yet made to a Participant, nothing contained herein shall give any Participant any rights that are greater than those of a general creditor of the Company. 3.6 Foreign Jurisdictions The Committee shall have the authority to adopt, amend, or terminate such arrangements, not inconsistent with the intent of the Plan, as it may deem necessary or desirable to make available tax or other benefits of the laws of foreign countries in order to promote achievement of the purposes of the Plan. 3.7 Other Compensation Plans Nothing contained in this Plan shall prevent the Company from adopting other or additional compensation arrangements for employees of the Company. ARTICLE IV - AMENDMENT AND TERMINATION The Board of Directors may modify, amend, or terminate the Plan at any time except that, no modification, amendment, or termination of the Plan shall adversely affect the rights of a Participant under an award previously made to such Participant without the consent of such Participant. ARTICLE V - EFFECTIVE DATE The Plan shall become effective immediately upon the approval and adoption thereof by Board, but is subject to the further approval and adoption by the holders of the Class A Common Stock of the Company. -----END PRIVACY-ENHANCED MESSAGE-----