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