<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
---------------
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR QUARTER ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number 001-15361
------------------------
NEUBERGER BERMAN INC.
(Exact Name of Registrant As Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 06-1523639
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
605 THIRD AVENUE, NEW YORK, NY 10158
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
Registrant's telephone number, including area code (212) 476-9000
------------------------
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock,
as of the latest practicable date.
48,762,862 shares of Common Stock, par value $.01 per share, were outstanding on
November 10, 2000
--------------------------------------------------------------------------------
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<PAGE>
NEUBERGER BERMAN INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1.--Financial Statements............................... 3
Condensed Consolidated Statements of Financial
Condition As of September 30, 2000 (Unaudited) and
December 31, 1999................................... 3
Condensed Consolidated Statements of Income
(Unaudited) For the Three and Nine Months Ended
September 2000 and 1999............................. 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Nine Months Ended September 2000
and 1999............................................ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)......................................... 6
Item 2.--Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 10
Item 3.--Quantitative and Qualitative Disclosures About
Risk...................................................... 19
PART II--OTHER INFORMATION
Item 1.--Legal Proceedings.................................. 20
Item 6.--Exhibits and Reports on Form 8-K................... 20
Signatures.................................................. 21
Exhibit Index............................................... 22
</TABLE>
NOTE: FORWARD LOOKING STATEMENTS
Statements regarding the Company's expectations and beliefs as to its future
operations, plans or financial condition and certain other information contained
in this Form 10-Q or in documents incorporated herein by reference, constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations and beliefs are based on reasonable assumptions within the bounds
of its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations or beliefs.
Factors which could cause actual results to differ from expectations or beliefs
include, without limitation, the adverse effect from a decline in the securities
markets or if the Company's products' performance declines, a general downturn
in the economy, changes in government policy or regulation, inability of the
Company to attract or retain key employees and unforeseen costs and other
effects related to legal proceedings or investigations by governmental and
self-regulatory organizations.
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 82,310 $ 91,010
Cash and securities segregated for the exclusive benefit of
clients................................................... 304,459 777,341
Cash and securities deposited with clearing organizations... 5,894 3,910
Securities purchased under agreements to resell............. 12,088 530,300
Receivable from brokers, dealers and clearing
organizations............................................. 2,334,065 1,873,259
Receivable from clients..................................... 869,570 432,814
Securities owned, at market value........................... 69,644 20,266
Fees receivable............................................. 26,629 23,149
Furniture, equipment and leasehold improvements, at cost,
net of accumulated depreciation and amortization of
$23,687 and $16,195 at September 30, 2000 and
December 31, 1999, respectively........................... 41,355 32,192
Other assets................................................ 70,336 63,367
---------- ----------
Total assets............................................ $3,816,350 $3,847,608
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans................................................ $ 151,000 $ --
Securities sold under agreements to repurchase............ 324,109 531,762
Payable to brokers, dealers and clearing organizations.... 1,419,786 1,017,483
Payable to clients........................................ 1,431,174 1,871,323
Securities sold but not yet purchased, at market value.... 26,650 34,172
Other liabilities and accrued expenses.................... 100,934 109,066
---------- ----------
3,453,653 3,563,806
---------- ----------
Subordinated liability...................................... 35,000 35,000
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued at September 30, 2000 and
December 31, 1999....................................... -- --
Common stock, $.01 par value; 250,000,000 shares
authorized; 50,021,920 shares issued; 48,920,216 and
49,716,220 shares outstanding at September 30, 2000 and
December 31, 1999, respectively......................... 500 500
Paid-in capital........................................... 331,077 331,077
Retained earnings (deficit)............................... 29,699 (74,701)
---------- ----------
361,276 256,876
Less: treasury stock, at cost, of 1,101,704 and 305,700
shares at September 30, 2000 and December 31, 1999,
respectively............................................ (33,579) (8,074)
---------- ----------
Total stockholders' equity.............................. 327,697 248,802
---------- ----------
Total liabilities and stockholders' equity.............. $3,816,350 $3,847,608
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Investment advisory and administrative fees.......... $101,108 $97,696 $298,639 $286,867
Commissions.......................................... 33,179 32,921 106,248 107,169
Interest............................................. 54,294 37,601 162,128 114,340
Principal transactions in securities................. 1,774 882 10,548 5,998
Clearance fees....................................... 3,193 2,945 10,091 8,159
Other income......................................... 1,782 683 4,233 3,536
-------- ------- -------- --------
Gross revenues................................... 195,330 172,728 591,887 526,069
Interest expense..................................... 43,680 31,401 133,015 96,554
-------- ------- -------- --------
Net revenues after interest expense.............. 151,650 141,327 458,872 429,515
-------- ------- -------- --------
OPERATING EXPENSES:
Employee compensation and benefits................... 59,228 41,766 186,468 128,522
Information technology............................... 5,503 4,885 16,729 13,832
Rent and occupancy................................... 4,523 4,654 13,141 11,211
Brokerage, clearing and exchange fees................ 2,446 2,636 7,491 7,813
Advertising and sales promotion...................... 1,311 755 4,965 6,878
Distribution and fund administration................. 5,343 4,599 14,183 14,885
Professional fees.................................... 2,774 1,903 7,870 6,837
Depreciation and amortization........................ 2,907 2,940 7,427 7,831
Other expenses....................................... 5,637 6,290 16,798 15,175
-------- ------- -------- --------
Total operating expenses......................... 89,672 70,428 275,072 212,984
-------- ------- -------- --------
Net income before taxes.......................... 61,978 70,899 183,800 216,531
Taxes................................................ 26,713 10,492 69,589 15,044
-------- ------- -------- --------
Net income....................................... $ 35,265 $60,407 $114,211 $201,487
======== ======= ======== ========
Net income per share of common stock
Net income per share -- Basic...................... $ 0.72 $ 1.42 $ 2.32 $ 4.72
======== ======= ======== ========
Net income per share -- Diluted.................... $ 0.71 $ 1.42 $ 2.31 $ 4.72
======== ======= ======== ========
Weighted average common shares outstanding --
Basic.............................................. 48,945 42,675 49,197 42,710
======== ======= ======== ========
Weighted average common shares outstanding --
Diluted............................................ 49,695 42,675 49,548 42,710
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................. $114,211 $201,487
Adjustments to reconcile net income to net cash provided by
operating
activities --
Depreciation and amortization............................. 7,427 7,831
Benefit for deferred taxes................................ (9,750) --
(Increase) decrease in operating assets --
Cash and securities segregated for the exclusive benefit
of clients.............................................. 472,882 (34,241)
Cash and securities deposited with clearing
organizations........................................... (1,984) (1,571)
Securities purchased under agreements to resell........... 518,212 420,369
Receivable from brokers, dealers and clearing
organizations........................................... (460,806) 214,501
Receivable from clients................................... (436,756) (25,060)
Securities owned, at market value......................... (49,378) (4,110)
Fees receivable........................................... (3,480) 4,795
Other assets.............................................. 2,781 485
Increase (decrease) in operating liabilities --
Bank loans................................................ 151,000 (14,000)
Securities sold under agreements to repurchase............ (207,653) (470,159)
Payable to brokers, dealers and clearing organizations.... 402,303 (100,513)
Payable to clients........................................ (440,149) 11,845
Securities sold but not yet purchased, at market value.... (7,522) 12,540
Other liabilities and accrued expenses.................... (8,132) 11,644
-------- --------
Net cash provided by operating activities............. 43,206 235,843
-------- --------
CASH FLOWS FROM INVESTING ACTIVITY:
Payments for purchases of furniture, equipment and
leasehold improvements.................................. (16,590) (11,805)
-------- --------
Cash used in investing activity....................... (16,590) (11,805)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital contributions....................... -- 525
Payments for capital withdrawals.......................... -- (525)
Payments for capital distributions........................ -- (199,102)
Payments for dividends -- Neuberger Berman Management
Inc..................................................... -- (23,320)
Payments for dividends -- Neuberger Berman Inc............ (9,811) --
Repurchase and retirement of common stock................. -- (134)
Proceeds from subordinated liability...................... -- 35,000
Repayment of subordinated liability....................... -- (35,000)
Purchase of treasury stock -- Neuberger Berman Inc........ (25,505) --
-------- --------
Net cash used in financing activities................. (35,316) (222,556)
-------- --------
Net increase (decrease) in cash and cash
equivalents......................................... (8,700) 1,482
CASH AND CASH EQUIVALENTS, beginning of period.............. 91,010 50,383
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 82,310 $ 51,865
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. $132,516 $ 93,833
Taxes................................................. 94,349 6,185
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Neuberger Berman Inc. ("NBI") was organized as a Delaware corporation on
August 13, 1998. NBI was formed to be the holding company for Neuberger Berman,
LLC ("NB, LLC") and Neuberger Berman Management Inc. ("NBMI"), and to allow for
the issuance of its common stock (the "Common Stock"). On October 7, 1999, the
principals of NB, LLC and the shareholders of NBMI exchanged their ownership
interests for shares of NBI and on October 13, 1999, NBI completed its initial
public offering.
The condensed consolidated financial statements include the accounts of NBI
and its subsidiaries. NBI's wholly owned subsidiaries are NB, LLC, a Delaware
limited liability company, and its subsidiaries, and NBMI, a New York
corporation (collectively, the "Company"). NB, LLC's significant wholly owned
subsidiaries are Neuberger Berman Trust Company, a non-depository trust company
chartered under the New York Banking Law, Neuberger Berman Trust Company of
Delaware, a non-depository limited purpose trust company chartered under the
Delaware Banking Code and Neuberger Berman Trust Company of Florida, a Florida
corporation authorized to engage in trust business chartered under the Florida
Banking Law. Material intercompany transactions and balances have been
eliminated in consolidation.
The Company is a registered investment adviser providing investment
management services to high net worth clients, mutual funds and institutional
clients. As a registered investment adviser, the Company manages equity, fixed
income, balanced, socially responsive and international portfolios for
individuals, families, endowments, foundations, trusts and employee benefit
plans. In addition, the Company advises the Neuberger Berman family of funds. As
a registered broker-dealer, the Company executes securities transactions for its
clients and others and provides prime brokerage and correspondent clearing
services to other firms.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements do
not include all of the information and notes required by generally accepted
accounting principles for complete consolidated financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation of condensed consolidated financial condition and results of
operations for the periods presented have been included. All adjustments are of
a normal and recurring nature. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and the related notes included in the Company's 1999 Annual Report on
Form 10-K and the condensed consolidated financial statements and the related
notes included in the Company's Quarterly Reports on Form 10-Q for the periods
ended March 31 and June 30, 2000. Certain prior period amounts have been
reclassified to conform to the presentation for the three and nine months ended
September 30, 2000.
3. EMPLOYEE COMPENSATION AND BENEFITS
Prior to the initial public offering completed on October 13, 1999, the
Company historically distributed substantially all of its net income to its
principals and shareholders in the form of capital distributions and dividends,
respectively. Certain shareholders of NBMI were also paid through compensation
expense. Accordingly, for the three and nine months ended September 30, 1999,
employee compensation and benefits include approximately $7,274,000 and
$22,965,000, respectively, of payments made to NBMI shareholders.
6
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. EMPLOYEE COMPENSATION AND BENEFITS (CONTINUED)
On July 18, 2000, the Board of Directors of NBI adopted, upon the
recommendation of the Board's compensation committee, two plans that will
facilitate employee stock ownership, an Employee Stock Purchase Plan (the
"ESPP") and the Wealth Accumulation Plan (the "Plan").
The ESPP provides that employees may elect to acquire the Common Stock
through payroll deductions, on an after tax basis, at a 15% discount from market
value of NBI Common Stock. Employees may not transfer the Common Stock acquired
through the ESPP for one year from purchase date. In accordance with the terms
and provisions of the ESPP, employees are precluded from acquiring, on an annual
basis, shares of Common Stock that have an aggregate purchase price (as defined
in the ESPP documentation) in excess of $10,000. The ESPP, which has a term of
ten years, became effective during September 2000.
The Plan provides that on an annual basis, employees who are eligible for a
bonus may elect to defer all or a portion of their bonus and employees who
receive commissions and other direct pay, may elect to defer a portion of such
compensation. In each case, up to 20% of total compensation may be deferred with
a maximum deferral of up to $500,000; provided that employees who receive an
annual bonus may, in any event, defer no more than 100% of any bonus, as the
case may be. Amounts deferred by employees will be used to acquire, on a pretax
basis, Common Stock at a 25% discount from the market value of the NBI Common
Stock. Any Common Stock so acquired is restricted with respect to transfer or
sale for a period of three years (during which time the employee is required to
render service to the Company) from the respective bonus payment or commission
payment date, as such terms are defined in the Plan. All benefits of ownership,
including the payment of any dividends declared during the restricted period,
belong to the employees. Unlike the ESPP, cash amounts credited to a
participant's deferral account and shares of Common Stock acquired through the
Plan are subject to forfeiture in certain events of termination of employment.
Unearned compensation expense associated with the restricted stock represents
the market value of NBI Common Stock at the date of purchase, and is recognized
as a charge to income ratably over the vesting period. The Plan, which has an
unlimited term, became effective during September 2000.
4. NET CAPITAL
NB, LLC and NBMI, as registered broker-dealers and member firms of the New
York Stock Exchange, Inc. ("NYSE") and the National Association of Securities
Dealers, Inc., respectively, are subject to the Uniform Net Capital Rule 15c3-1
(the "Rule") of the Securities Exchange Act of 1934, which requires that
broker-dealers maintain a minimum level of net capital, as defined. As of
September 30, 2000, NB, LLC and NBMI had net capital of approximately
$183,995,000 and $30,386,000, respectively, which exceeded their requirements by
approximately $152,275,000 and $30,136,000, respectively.
The Rule also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital of a broker-dealer would be less
than the amount required under the Rule. Accordingly, at September 30, 2000, the
payments of dividends and advances to the Company by NB, LLC and NBMI is limited
to approximately $104,695,000 and $30,086,000, respectively, under the most
restrictive of these requirements.
5. NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed using the weighted average
number of shares of common stock and potential common stock outstanding.
Potential common stock is comprised of
7
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. NET INCOME PER SHARE OF COMMON STOCK (CONTINUED)
stock issuable under stock options. The treasury stock method is used in
computing the potential common stock for the computation of diluted earnings per
share of common stock. Basic earnings per share differs from diluted earnings
per share in that dilution for potential common stock is excluded.
For purposes of determining weighted average shares outstanding for the
periods prior to the Company's reorganization in October 1999, the outstanding
shares were determined based upon the conversion ratio to effect the exchange of
principals' capital and shareholders' equity for Common Stock. Pro rata
distributions of earnings and capital to the principals were not considered to
effect outstanding shares.
6. CONTINGENCIES
In the normal course of business, the Company is subject to various legal
proceedings. In the opinion of management, based on discussions with legal
counsel, the resolution of pending proceedings will not have a material adverse
effect on the consolidated financial condition, results of operations or
liquidity of the Company.
7. INCOME TAXES
Upon completion of NBI's initial public offering, it became subject to U.S.
federal, state and local corporate income taxes. Accordingly, the Company
accounts for taxes in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred income taxes
reflect the net effects of temporary differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when such differences are expected to
reverse. The Company's net deferred tax asset as of September 30, 2000, is
primarily attributable to deferred tax assets resulting from compensation and
benefits and depreciation and amortization and deferred tax liabilities
resulting from unrealized gains on marketable securities. Management of the
Company has not established a valuation allowance for its net deferred tax asset
because they conclude that it is more likely than not the benefit will be
realized.
The Company's effective tax rate for the period ended September 30, 2000,
includes a benefit related to the upward movement in the price of the Common
Stock for the respective measurement dates through the period ended June 30,
2000, as applied to the unvested shares in the Company's employee defined
contribution stock incentive plan (the "Stock Incentive Plan"). The final
benefit will be determined when the restricted shares vest. For the period ended
September 30, 1999, the Company's effective tax rate includes a rate benefit
attributable to the Company generally not being subject to corporate taxes on
its earnings prior to its conversion to corporate form.
In March 2000, the Financial Accounting Standards Board (the "FASB") issued
FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB Opinion No. 25 ("FIN 44"). During the
first two quarters of this year, the Company adjusted, based upon the price of
the Common Stock at the close of business on the last day of each quarter, the
carrying value of the deferred tax asset that relates to unvested shares in the
Stock Incentive Plan. The adjustments were made based upon quarter to quarter
comparisons. FIN 44 became effective on July 1, 2000 (except for certain aspects
which require earlier implementation) and no longer requires a corporation to
adjust the deferred tax carrying value. FIN 44 now requires that the deferred
tax asset be determined by the compensation expense recognized for financial
reporting purposes. Accordingly, at June 30, 2000, the Company fixed the
carrying value of its deferred tax asset
8
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. INCOME TAXES (CONTINUED)
for unvested shares in its Stock Incentive Plan, based upon the price of NBI's
Common Stock at the close of business that day.
8. SEGMENT INFORMATION
Under the provisions of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has three reportable segments:
Private Asset Management, Mutual Fund and Institutional and Professional
Securities Services. The Private Asset Management segment provides asset
management services to high net worth individuals, families and smaller
institutions. Its revenues are principally investment advisory fees and
commissions. The Mutual Fund and Institutional segment provides advisory and
administrative services to mutual funds, institutional clients and wrap fee
programs. Its revenues are principally investment advisory and administrative
fees and commissions. The Professional Securities Services segment generates
income primarily by providing services to third party investment advisers and
professional investors. These services include professional investor clearing
services, research sales, market maker trading and trust services. The revenues
derived by this segment are principally commissions, net interest income and
clearance fees.
The Company does not record revenue from transactions between segments
(referred to as intersegment revenues).
The Company evaluates the performance of its segments based on profit or
loss from operations before taxes. No single client accounted for more than 10%
of the Company's combined revenues. Information on statement of financial
condition data by segment is not disclosed because it is not used for evaluating
segment performance and deciding how to allocate resources to segments.
Substantially all of the Company's revenues and assets are attributable to or
located in the United States.
Summarized financial information for the Company's reportable segments is
presented in the following tables (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
PRIVATE ASSET MANAGEMENT
Net revenues after interest expense.......... $ 68,745 $ 65,271 $214,286 $194,398
Net income before taxes...................... $ 32,802 $ 45,148 $103,796 $137,991
MUTUAL FUND & INSTITUTIONAL
Net revenues after interest expense.......... $ 59,448 $ 59,559 $169,791 $179,781
Net income before taxes...................... $ 22,160 $ 22,002 $ 57,123 $ 64,156
PROFESSIONAL SECURITIES SERVICES
Net revenues after interest expense.......... $ 23,457 $ 16,497 $ 74,795 $ 55,336
Net income before taxes...................... $ 7,016 $ 3,749 $ 22,881 $ 14,384
TOTAL
Net revenues after interest expense.......... $151,650 $141,327 $458,872 $429,515
Net income before taxes...................... $ 61,978 $ 70,899 $183,800 $216,531
</TABLE>
9. SUBSEQUENT EVENT
On October 17, 2000, the Board of Directors of NBI declared a quarterly cash
dividend on its Common Stock in the amount of $0.10 per share. The dividend will
be payable on November 14, 2000, to stockholders of record at the close of
business on October 31, 2000.
9
<PAGE>
ITEM 2.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS ENVIRONMENT
Following a lackluster second quarter, domestic equity indexes produced
mixed results in the third quarter. The Dow Jones Industrial Average climbed
over 2%, but the Standard & Poor's 500 Index declined 1%. Investors responded to
good news on the economic front and to stable interest rates, although a
declining Euro and the threat of higher oil prices cast a cloud on the market
near quarter-end. The Nasdaq Composite Index declined over 7%, starting with a
dismal July, rebounding in August, only to fall back into negative territory in
September. Investors' concerns over slowing rates of earnings gains,
particularly in the technology sector, weighed heavily on the Nasdaq.
Stock market volatility, signs of moderating economic growth and steady
inflation numbers helped contribute to good performance for Treasury bonds.
Bonds stumbled briefly towards the end of September on the threat of higher oil
prices, which sparked longer-term inflation concerns. Economic data released in
the quarter provided additional evidence of slower economic growth, leading
investors to conclude that the Fed is unlikely to raise interest rates in the
near-term.
Neuberger Berman Inc. ("NBI"), and its subsidiaries on a consolidated basis
(the "Company"), recorded a positive cash flow of $224 million in its Mutual
Fund and Institutional segment, reversing a two-year trend. This represents a
substantial improvement from net cash outflows of almost $1 billion in last
year's quarter and $209 million in the previous quarter. The marked improvement
in this segment is attributable to the advancements made in diversifying the
product line and improving investment performance. In addition, over 70% of the
Company's equity mutual funds have outperformed their benchmarks thus far this
year.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 2000 AND 1999
The Company is segregated into three major business segments: Private Asset
Management, Mutual Fund and Institutional and Professional Securities Services.
The Private Asset Management segment provides asset management services to high
net worth individuals, families and smaller institutions. The Mutual Fund and
Institutional segment provides advisory and administrative services to mutual
funds, institutional clients and wrap fee programs. The Professional Securities
Services segment generates income primarily by providing services to third party
investment advisers and professional investors. These services include
professional investor clearing services, research sales, market maker trading
and trust services. Each business segment represents a grouping of financial
activities and products with similar characteristics. These segments result in
revenues that are recognized in multiple categories contained in the Company's
condensed consolidated statements of income. The following tables of selected
financial data, which includes pro forma data (adjusted as if the initial public
offering, reorganization and other related transactions had taken place at the
beginning of 1999), present the Company's segments in a manner consistent with
the method the Company applies to manage its businesses.
10
<PAGE>
RESULTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
THREE MONTHS ENDED SEPTEMBER 30, 2000 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $68,745 $59,448 $23,457 $151,650
Operating expenses.............................. 35,943 37,288 16,441 89,672
------- ------- ------- --------
Net income before taxes......................... $32,802 $22,160 $ 7,016 $ 61,978
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
THREE MONTHS ENDED SEPTEMBER 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $65,271 $59,559 $16,497 $141,327
Operating expenses.............................. 20,123 37,557 12,748 70,428
------- ------- ------- --------
Net income before taxes......................... $45,148 $22,002 $ 3,749 $ 70,899
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
PRO FORMA RESULTS FOR THE ASSET FUND AND SECURITIES
THREE MONTHS ENDED SEPTEMBER 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $65,271 $59,559 $17,328 $142,158
Operating expenses.............................. 33,679 37,022 14,154 84,855
------- ------- ------- --------
Net income before taxes......................... $31,592 $22,537 $ 3,174 $ 57,303
======= ======= ======= ========
</TABLE>
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 MANAGEMENT(1) INSTITUTIONAL(1)(2) TOTAL
--------------------------------------------- ------------- ------------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $21,796 $32,610 $54,406
------- ------- -------
Net additions (withdrawals)........................... (161) 224 63
Market appreciation................................... 651 1,380 2,031
------- ------- -------
Net increase.......................................... 490 1,604 2,094
------- ------- -------
Assets under management, end of period................ $22,286 $34,214 $56,500
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 MANAGEMENT(1) INSTITUTIONAL(1) TOTAL
--------------------------------------------- ------------- ---------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $20,833 $35,931 $56,764
------- ------- -------
Net additions (withdrawals)........................... 137 (995) (858)
Market depreciation................................... (1,356) (3,094) (4,450)
------- ------- -------
Net decrease.......................................... (1,219) (4,089) (5,308)
------- ------- -------
Assets under management, end of period................ $19,614 $31,842 $51,456
======= ======= =======
</TABLE>
------------------------
NOTE 1: Segment assets under management and related market flows for prior
periods have been reclassified to reflect presentation consistent with
current period segment reporting.
NOTE 2: As of September 30, 2000, Mutual Fund and Institutional includes
$95 million of client assets invested in the Fund Advisory Service wrap
mutual fund program with third party funds.
11
<PAGE>
The Company reported net income before taxes of $62.0 million for the third
quarter ended September 2000, which represents a decrease of $8.9 million or
12.6% from the actual results for the comparable period in 1999. Net income
before taxes of $62.0 million for the third quarter of 2000 represents an
increase of $4.7 million or 8.2% when compared to the pro forma results for the
third quarter ended September 1999. Private Asset Management and Professional
Securities Services had respective net income before taxes of $32.8 million and
$7.0 million for the third quarter of 2000, increasing 3.8% and 121.0%
respectively, when compared to the pro forma results for the prior year period.
Net income before taxes for the Mutual Fund and Institutional segment was
$22.2 million, which reflects a decrease of 1.7% when compared to the pro forma
results for the prior year's period.
Net revenues after interest expense increased by $10.3 million for the third
quarter of 2000, to $151.7 million, an increase of 7.3% compared to the actual
results for the third quarter ended September 1999. Net revenues after interest
expense of $151.7 million for the third quarter of 2000 represent an increase of
$9.5 million or 6.7% when compared to the pro forma results for the third
quarter ended September 1999.
PRIVATE ASSET MANAGEMENT. Private Asset Management net revenues after
interest expense increased 5.3% to $68.7 million for the third quarter of 2000
from $65.3 million on a pro forma basis for the third quarter of 1999.
Investment advisory fees increased 7.2% to $47.6 million for the third quarter
of 2000 from $44.4 million for the pro forma prior year period due to increased
billable assets under management. Net interest income increased 25.6% to
$1.2 million for the third quarter of 2000 from $1.0 million for the pro forma
prior year period due to a reduction in client credit balances.
MUTUAL FUND AND INSTITUTIONAL. Mutual Fund and Institutional net revenues
after interest expense decreased 0.2% to $59.4 million for the third quarter of
2000 from $59.6 million on a pro forma basis for the third quarter of 1999.
Investment advisory and administrative fees increased 0.3% to $53.3 million for
the third quarter of 2000 from $53.2 million for the pro forma prior year period
as a result of increased average assets under management, due to a combination
of net cash inflows and market appreciation. Commissions decreased by
$0.8 million or 13.0% as a result of a decrease in transaction volume, while
interest income increased by $0.4 million as a result of higher cash balances.
PROFESSIONAL SECURITIES SERVICES. Professional Securities Services net
revenues after interest expense increased 35.4% to $23.5 million for the third
quarter of 2000 from $17.3 million on a pro forma basis for the third quarter of
1999. Commissions increased by $1.2 million or 16.9% as a result of increased
transaction volume. Principal transactions in securities increased by
$0.8 million or 81.2% due to appreciation in non-market maker activity. Net
interest income increased by $2.7 million or 44.1% primarily due to higher
margin balances, while capital markets transactions increased by $0.8 million.
OPERATING EXPENSES (ACTUAL). Total operating expenses were $89.7 million
for the third quarter ended September 2000, an increase of $19.2 million or
27.3% from $70.4 million for the third quarter of 1999. Employee compensation
and benefits increased to $59.2 million for the third quarter ended
September 2000, up $17.5 million or 41.8% from $41.8 million for the same period
in 1999. As a result of the Company's reorganization, principals who previously
received distributions of capital are now compensated as employees. Compensation
that was not previously reported as such for employees who were principals was
$14.4 million for the third quarter of 2000. Increases in salary and benefits
and incentive compensation were partially offset by the compensation deferral
associated with the implementation of the Wealth Accumulation Plan (see Note 3
to the Condensed Consolidated Financial Statements). Information technology
expenses increased to $5.5 million in the third quarter of 2000, up
$0.6 million or 12.7% from $4.9 million for the same period in 1999, due
primarily to increases in third party processing fees from increased securities
transactions, as well as increases in software licenses and maintenance. Rent
and occupancy costs decreased to $4.5 million in the third quarter of 2000, down
$0.1 million or 2.8% from $4.7 million for the same period in 1999. Advertising
and sales promotion costs increased to $1.3 million in the third quarter of
2000, up $0.6 million or
12
<PAGE>
73.6% from $0.8 million for the same period in 1999, due to increased print
campaigns. Distribution and fund administration expenses increased to
$5.3 million in the third quarter of 2000, up $0.7 million or 16.2% from
$4.6 million for the same period in 1999, as a result of increased third party
distributor expenses resulting from higher average mutual fund assets under
management. For the quarter ended September 1999, the Company reclassified to a
gross basis from a net presentation, administrative fees received from its
mutual funds, as well as fund administration expense paid to third party
administrators. Professional fees increased to $2.8 million in the third quarter
of 2000, up $0.9 million or 45.8% from $1.9 million for the same period in 1999,
primarily due to the impact of outsourcing mutual fund administration coupled
with an increase in employment agency fees. Other expenses decreased to
$5.6 million in the third quarter of 2000, down $0.7 million or 10.4% from
$6.3 million for the same period of 1999.
OPERATING EXPENSES (PRO FORMA). Total operating expenses were
$89.7 million for the third quarter ended September 2000, an increase of
$4.8 million or 5.7% from $84.9 million for the third quarter of 1999. Employee
compensation and benefits increased to $59.2 million for the third quarter ended
September 2000, up $3.0 million or 5.4% from $56.2 million for the same period
in 1999 attributable to increases in salary and benefits and incentive
compensation partially offset by the compensation deferral associated with the
implementation of the Wealth Accumulation Plan (see Note 3 to the Condensed
Consolidated Financial Statements).
TAXES (ACTUAL). Taxes increased to $26.7 million in the third quarter of
2000, up $16.2 million from $10.5 million in the third quarter of 1999. This
increase is a result of the Company's reorganization in October 1999. The third
quarter provision for income taxes includes federal, state and local taxes at
the Company's effective tax rate as a corporation of approximately 43%. Taxes
for the third quarter of 1999 reflect unincorporated business taxes incurred as
a partnership, as well as state and local taxes.
TAXES (PRO FORMA). Taxes increased to $26.7 million in the third quarter of
2000, up $1.9 million or 7.7% attributable to the increase in net income before
taxes.
13
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 2000 AND 1999
RESULTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
NINE MONTHS ENDED SEPTEMBER 30, 2000 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------------ ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $214,286 $169,791 $74,795 $458,872
Operating expenses.............................. 110,490 112,668 51,914 275,072
-------- -------- ------- --------
Net income before taxes......................... $103,796 $ 57,123 $22,881 $183,800
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
NINE MONTHS ENDED SEPTEMBER 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------------ ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $194,398 $179,781 $55,336 $429,515
Operating expenses.............................. 56,407 115,625 40,952 212,984
-------- -------- ------- --------
Net income before taxes......................... $137,991 $ 64,156 $14,384 $216,531
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
PRO FORMA RESULTS FOR THE ASSET FUND AND SECURITIES
NINE MONTHS ENDED SEPTEMBER 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------------ ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $194,398 $179,781 $58,452 $432,631
Operating expenses.............................. 97,656 112,740 45,835 256,231
-------- -------- ------- --------
Net income before taxes......................... $ 96,742 $ 67,041 $12,617 $176,400
======== ======== ======= ========
</TABLE>
Assets Under Management
(in millions)
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 MANAGEMENT(1) INSTITUTIONAL(1)(2) TOTAL
-------------------------------------------- ------------- ------------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $21,538 $32,861 $54,399
------- ------- -------
Net additions (withdrawals)........................... 72 (1,180) (1,108)
Market appreciation................................... 676 2,533 3,209
------- ------- -------
Net increase.......................................... 748 1,353 2,101
------- ------- -------
Assets under management, end of period................ $22,286 $34,214 $56,500
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 MANAGEMENT(1) INSTITUTIONAL(1) TOTAL
-------------------------------------------- ------------- ---------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $18,266 $37,321 $55,587
------- ------- -------
Net additions (withdrawals)........................... 353 (5,533) (5,180)
Market appreciation................................... 995 54 1,049
------- ------- -------
Net increase (decrease)............................... 1,348 (5,479) (4,131)
------- ------- -------
Assets under management, end of period................ $19,614 $31,842 $51,456
======= ======= =======
</TABLE>
------------------------
NOTE 1: Segment assets under management and related market flows for prior
periods have been reclassified to reflect presentation consistent with
current period segment reporting.
NOTE 2: As of September 30, 2000, Mutual Fund and Institutional includes
$95 million of client assets invested in the Fund Advisory Service wrap
mutual fund program with third party funds.
14
<PAGE>
The Company reported net income before taxes of $183.8 million for the nine
months ended September 2000, which represents a decrease of $32.7 million or
15.1% from the actual results for the comparable period in 1999. Net income
before taxes of $183.8 million for the first nine months of 2000 represents an
increase of $7.4 million or 4.2% when compared to the pro forma results for the
nine months ended September 1999. Private Asset Management and Professional
Securities Services had respective net income before taxes of $103.8 and
$22.9 million for the first nine months of 2000, increasing 7.3% and 81.4%,
respectively, when compared to the pro forma results for the prior year period.
Net income before taxes for the Mutual Fund and Institutional segment was
$57.1 million, which reflects a decrease of 14.8% when compared to the pro forma
results for the prior year's period.
Net revenues after interest expense increased by $29.4 million for the first
nine months of 2000, to $458.9 million, an increase of 6.8% compared to the
actual results for the nine months ended September 1999. Net revenues after
interest expense of $458.9 million for the first nine months of 2000 represent
an increase of $26.2 million or 6.1% when compared to the pro forma results for
the nine months ended September 1999.
PRIVATE ASSET MANAGEMENT. Private Asset Management net revenues after
interest expense increased 10.2% to $214.3 million for the first nine months of
2000 from $194.4 million on a pro forma basis for the nine months ended
September 1999. Investment advisory fees, which account for the majority of the
increase, rose 15.1% to $142.7 million for the first nine months of 2000 from
$124.0 million for the pro forma prior year period due to increased billable
assets under management. Net interest income increased 56.8% to $3.9 million for
the nine months ended September 2000 from $2.5 million for the pro forma prior
year period due to higher margin balances.
MUTUAL FUND AND INSTITUTIONAL. Mutual Fund and Institutional net revenues
after interest expense decreased 5.6% to $169.8 million for the first nine
months of 2000 from $179.8 million on a pro forma basis for the nine months
ended September 1999. Investment advisory and administrative fees decreased 4.4%
to $154.9 million for the first nine months of 2000 from $162.0 million for the
pro forma prior year period. The decrease is attributable to a higher average
asset base in the first six months of 1999 relative to the comparable period in
2000. The three month period ended September 30, 2000, resulted in an increase
in average assets of $1.6 billion, due to a combination of net cash inflows and
market appreciation. This compares favorably to the three month period ended
September 30, 1999, where average assets decreased by $4.1 billion, resulting
from net cash outflows and market depreciation. Commissions decreased by
$3.8 million or 22.5% as a result of a decrease in transaction volume, while
interest income increased by $0.8 million as a result of higher cash balances.
PROFESSIONAL SECURITIES SERVICES. Professional Securities Services net
revenues after interest expense increased 28.0% to $74.8 million for the first
nine months of 2000 from $58.5 million on a pro forma basis for the nine months
ended September 1999. Commissions increased by $3.3 million or 14.7% as a result
of increased transaction volume. Principal transactions in securities increased
by $4.5 million or 74.3% primarily due to market maker activity. Clearance fees
increased $1.9 million or 23.7% due to increased volume from new and existing
clients, while net interest income increased $6.1 million or 33.3% primarily due
to higher margin balances.
OPERATING EXPENSES (ACTUAL). Total operating expenses were $275.1 million
for the nine months ended September 2000, an increase of $62.1 million or 29.2%
from $213.0 million for the nine months ended September 1999. Employee
compensation and benefits increased to $186.5 million for the nine months ended
September 2000 up $57.9 million or 45.1% from $128.5 million for the same period
in 1999. As a result of the Company's reorganization, principals who previously
received distributions of capital are now compensated as employees. Compensation
that was not previously reported as such for employees who were principals was
$43.2 million for the nine months ended September 2000. Increases in salary and
benefits and incentive compensation were partially offset by the compensation
deferral associated with the implementation of the Wealth Accumulation Plan (see
Note 3 to the Condensed Consolidated Financial Statements). Information
technology expenses increased to $16.7 million for the
15
<PAGE>
nine months ended September 2000, up $2.9 million or 20.9% from $13.8 million
for the same period in 1999, due primarily to increases in third party
processing fees from increased securities transactions, as well as increases in
communication services and software licenses. Rent and occupancy costs increased
to $13.1 million for the nine months ended September 2000, up $1.9 million or
17.2% from $11.2 million for the same period in 1999, primarily due to the
rental of additional space in the head office as well as the opening of two new
branch offices. Advertising and sales promotion costs decreased to $5.0 million
for the nine months ended September 2000, down $1.9 million or 27.8% from
$6.9 million for the same period in 1999. Distribution and fund administration
expenses decreased to $14.2 million for the nine months ended September 2000,
down $0.7 million or 4.7% from $14.9 million for the same period of 1999,
primarily due to decreased third party distributor expenses resulting from lower
average mutual fund assets under management. For the nine months ended
September 1999, the Company reclassified to a gross basis from a net
presentation, administrative fees received from its mutual funds, as well as
fund administration expense paid to third party administrators. Professional
fees increased to $7.9 million for the nine months ended September 2000, up
$1.0 million or 15.1% from $6.8 million for the same period of 1999, primarily
due to the impact of outsourcing mutual fund administration coupled with an
increase in employment agency fees. Other expenses increased to $16.8 million
for the nine months ended September 2000, up $1.6 million or 10.7% from
$15.2 million for the same period in 1999, due primarily to increases in travel
and entertainment and office expenses.
OPERATING EXPENSES (PRO FORMA). Total operating expenses were
$275.1 million for the nine months ended September 2000, an increase of
$18.8 million or 7.4% from $256.2 million for the same period of 1999. Employee
compensation and benefits increased to $186.5 million for the nine months ended
September 2000, up $14.7 million or 8.6% from $171.8 million for the same period
in 1999 attributable to increases in salary and benefits and incentive
compensation partially offset by the compensation deferral associated with the
implementation of the Wealth Accumulation Plan (see Note 3 to the Condensed
Consolidated Financial Statements).
TAXES (ACTUAL). Taxes increased to $69.6 million for the nine months ended
September 2000, up $54.5 million from $15.0 million for the same period in 1999.
This increase is a result of the Company's reorganization in October 1999. The
nine months ended September 2000 provision for income taxes includes federal,
state and local taxes at the Company's effective tax rate as a corporation of
approximately 43%, less a financial statement tax benefit of $9.8 million
related to the change in the price of the Company's stock from December 31, 1999
to June 30, 2000, in connection with its defined contribution stock incentive
plan (the "Stock Incentive Plan"). Taxes for the period ended September 1999
reflect unincorporated business taxes incurred as a partnership and state and
local taxes. In March 2000, the Financial Accounting Standards Board (the
"FASB") issued FASB Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB Opinion No. 25 ("FIN
44"). During the first two quarters of this year, the Company adjusted, based
upon the price of the Common Stock at the close of business on the last day of
each quarter, the carrying value of the deferred tax asset that relates to
unvested shares in the Stock Incentive Plan. The adjustments were made based
upon quarter to quarter comparisons. FIN 44 became effective on July 1, 2000
(except for certain aspects, which require earlier implementation) and no longer
requires a corporation to adjust the deferred tax carrying value. FIN 44 now
requires that the deferred tax asset be determined by the compensation expense
recognized for financial reporting purposes. Accordingly, at June 30, 2000, the
Company fixed the carrying value of it deferred tax asset for unvested shares in
its Stock Incentive Plan, based upon the price of NBI's Common Stock at the
close of business that day.
TAXES (PRO FORMA). Taxes decreased to $69.6 million for the nine months
ended September 2000, down $6.8 million or 8.9% primarily due to the
$9.8 million financial statement tax benefit related to the change in the price
of the Common Stock in connection with its Stock Incentive Plan offset by a
$3.2 million increase in provision for income taxes attributable to the increase
in net income before taxes.
16
<PAGE>
ACTUAL AND PRO FORMA OPERATING RESULTS
The following table sets forth the Company's actual and pro forma condensed
consolidated statements of income for the three and nine months ended
September 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
2000 1999 2000 1999
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Investment advisory and administrative fees......... $101,108 $ 97,696 $298,639 $286,867
Commissions......................................... 33,179 32,921 106,248 107,169
Interest............................................ 54,294 37,601 162,128 114,340
Principal transactions in securities................ 1,774 882 10,548 5,998
Clearance fees...................................... 3,193 2,945 10,091 8,159
Other income........................................ 1,782 683 4,233 3,536
-------- -------- -------- --------
GROSS REVENUES.................................. 195,330 172,728 591,887 526,069
Interest expense.................................... 43,680 30,570(1) 133,015 93,438(1)
-------- -------- -------- --------
NET REVENUES AFTER INTEREST EXPENSE............. 151,650 142,158 458,872 432,631
-------- -------- -------- --------
OPERATING EXPENSES:
Employee compensation and benefits.................. 59,228 56,193(2) 186,468 171,769(2)
Information technology.............................. 5,503 4,885 16,729 13,832
Rent and occupancy.................................. 4,523 4,654 13,141 11,211
Brokerage, clearing and exchange fees............... 2,446 2,636 7,491 7,813
Advertising and sales promotion..................... 1,311 755 4,965 6,878
Distribution and fund administration................ 5,343 4,599 14,183 14,885
Professional fees................................... 2,774 1,903 7,870 6,837
Depreciation and amortization....................... 2,907 2,940 7,427 7,831
Other expenses...................................... 5,637 6,290 16,798 15,175
-------- -------- -------- --------
TOTAL OPERATING EXPENSES........................ 89,672 84,855 275,072 256,231
-------- -------- -------- --------
NET INCOME BEFORE TAXES......................... 61,978 57,303 183,800 176,400
Provision for income taxes.......................... 26,713 24,812(3) 69,589 76,381(3)
-------- -------- -------- --------
NET INCOME...................................... $ 35,265 $ 32,491 $114,211 $100,019
======== ======== ======== ========
NET INCOME PER SHARE OF COMMON STOCK
Net income per share--Basic..................... $ 0.72 $ 0.65(4) $ 2.32 $ 2.00(4)
======== ======== ======== ========
Net income per share--Diluted................... $ 0.71 $ 0.65(4) $ 2.31 $ 2.00(4)
======== ======== ======== ========
Weighted average common shares
outstanding--Basic............................ 48,945 50,022 49,197 50,022
======== ======== ======== ========
Weighted average common shares outstanding--
Diluted....................................... 49,695 50,022 49,548 50,022
======== ======== ======== ========
</TABLE>
See accompanying notes to actual and pro forma condensed consolidated statements
of income.
17
<PAGE>
BASIS OF PRESENTATION
The 1999 pro forma condensed consolidated statements of income were prepared
as if the Company's reorganization and related transactions had taken place at
the beginning of 1999. The pro forma condensed consolidated statements of income
are not necessarily indicative of the results that would have been achieved had
the pro forma adjustments occurred on this date or that may be achieved in the
future.
These actual and pro forma condensed consolidated statements of income and
notes should be read in conjunction with the pro forma condensed consolidated
statements of income and the related notes included in the Company's Annual
Report on Form 10-K.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(1) Reflects decrease in interest expense related to the use of proceeds to
repay a portion of a subordinated note and other short-term borrowings. In
addition, the amount reflects the change in interest expense related to the
financing of the remaining portion of such subordinated liability.
(2) Because Neuberger Berman, LLC ("NB, LLC") had operated as a partnership,
there was no actual historical measure of the compensation and benefits that
would have been paid, in corporate form, to the principals for services
rendered prior to October 7, 1999. Accordingly, this adjustment is made to
reflect compensation amounts, based on the new employment agreements for
principals, which became effective on October 8, 1999. The pro forma
adjustment for principals' compensation and benefits for the periods ended
September 30, 1999 has been determined as if the new employment agreements
had been in place during those periods.
(3) Reflects a provision for federal, state and local taxes in corporate form at
an effective rate of approximately 43% and reverses actual unincorporated
business tax and state and local taxes.
(4) Pro forma basic and diluted earnings per share were calculated by dividing
pro forma net income by weighted average basic and diluted common shares
outstanding.
Certain prior period amounts have been reclassified to conform with the
current periods' financial statement presentation.
CAPITAL RESOURCES AND LIQUIDITY
The Company's investment advisory business does not require it to maintain
significant capital balances. However, as a result of the Company's
broker-dealer activities, its condensed consolidated statements of financial
condition include higher levels of assets and liabilities than is typical for an
investment adviser of its size. The Company's broker-dealer activities provide
financing, trade execution, clearing and custody services for clients of the
Private Asset Management, Mutual Fund and Institutional and Professional
Securities Services segments.
The Company's financial condition is highly liquid, with the significant
majority of its assets readily convertible to cash. Receivables from and
payables to brokers, dealers and clearing organizations represent either current
open transactions that settle within a few days or the activity of securities
lending that is collateralized and normally can be closed out within a few days.
Receivables from and payables to clients arise in the normal course of business
in connection with cash and margin securities transactions. Client receivables
are secured by securities held as collateral.
It is the Company's policy to continuously monitor and evaluate the adequacy
of its capital. The Company has consistently maintained net capital in excess of
the regulatory requirements prescribed by the Securities and Exchange Commission
(the "SEC") and other regulatory authorities. At September 30, 2000, the
Company's regulatory net capital exceeded the minimum requirement by
approximately $182.4 million. The SEC net capital rule imposes financial
restrictions, which are more
18
<PAGE>
severe than those imposed on most other businesses. In addition, the debt
covenants related to NB, LLC's subordinated note include certain covenants that
limit the percentage by which the aggregate unpaid principal amount of
subordinated liabilities may exceed total regulatory capital and impose a dollar
amount below which total ownership equity cannot fall. The Company believes that
its cash flow from operations and existing committed and uncommitted lines of
credit will be more than adequate to meet its anticipated capital requirements
and debt and other obligations as they come due.
On October 28, 1999, the Company's Board of Directors authorized a
discretionary repurchase of up to $50 million of the Company's common stock. The
authorization stated that purchases may be made from time to time in the open
market and in negotiated transactions, subject to market conditions. As of
September 30, 2000, 1,101,704 shares had been repurchased for approximately
$34 million. The source of the funds for these purchases was internally
generated.
ITEM 3.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK
The Company's risk management policies and procedures have been established
to continually identify, monitor and manage risk. The major types of risk that
the Company faces include credit risk and market risk.
Credit risk is the potential for loss due to a client or counterparty
failing to perform its contractual obligations. In order to mitigate risk, the
Company's policy is to monitor the credit standing of its clients and maintain
collateral to support margin loans to clients.
A significant portion of the Company's revenues are based upon the market
value of assets under management. Accordingly, a decline in the prices of
securities generally, or client withdrawals of assets under management, may
cause the Company's revenues and income to decline.
Interest rate risk is the possibility of a loss in the value of financial
instruments from changes in interest rates. The Company's primary exposure to
interest rate risk arises from its interest earning assets (mainly securities
purchased under agreements to resell and receivables from brokers, dealers and
clearing organizations) and funding sources (bank loans, subordinated
liabilities and payables to brokers, dealers and clearing organizations).
Equity price risk generally means the risk of loss that may result from the
potential change in the value of a financial instrument as a result of absolute
and relative price movements, price volatility or changes in liquidity, over
which the Company has no control. The Company's market making activities expose
its capital to potential equity price risk. To mitigate this risk, strict limits
are imposed on both the trading desk and individual traders. In addition, the
Company's monthly average net long position for its market making activities
were $1.3 million and $2.0 million during the three months ended September 30,
2000 and 1999, respectively, and $1.6 million and $1.9 million during the nine
months ended September 30, 2000 and 1999, respectively.
19
<PAGE>
PART II--OTHER INFORMATION
ITEM 1.--LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various legal
proceedings. However, in management's opinion, based on currently available
information, there are no legal proceedings pending against the Company or any
of its subsidiaries that would have a material adverse effect on the Company's
financial position, results of operations or liquidity.
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. Form 8-K filed August 2, 2000, Items 5 and 7.
Financial Statements:
<TABLE>
<S> <C>
Exhibit 99.1 Consolidated and Pro Forma Condensed Statements of Income
(Three Months Ended June 30, 2000)
(Unaudited)
Consolidated and Pro Forma Condensed Statements of Income
(Six Months Ended June 30, 2000)
(Unaudited)
Selected Segment Data
Actual and Pro Forma
(Three Months Ended June 30, 2000)
(Unaudited)
Selected Segment Data
Actual and Pro Forma
(Six Months Ended June 30, 2000)
(Unaudited)
</TABLE>
2. Form 8-K filed October 20, 2000, Items 5 and 7.
Financial Statements:
<TABLE>
<S> <C>
Exhibit 99.2 Consolidated and Pro Forma Condensed Statements of Income
(Three Months Ended September 30, 2000)
(Unaudited)
Consolidated and Pro Forma Condensed Statements of Income
(Nine Months Ended September 30, 2000)
(Unaudited)
Selected Segment Data
Actual and Pro Forma
(Three Months Ended September 30, 2000)
(Unaudited)
Selected Segment Data
Actual and Pro Forma
(Nine Months Ended September 30, 2000)
(Unaudited)
</TABLE>
3. Form 8-K filed November 2, 2000, Items 5 and 7.
20
<PAGE>
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.
<TABLE>
<S> <C> <C>
NEUBERGER BERMAN INC.
By: /s/ Robert Matza
-----------------------------------------
Name: Robert Matza
Title: Chief Administrative Officer
November 14, 2000
By: /s/ Matthew S. Stadler
-----------------------------------------
Name: Matthew S. Stadler
Title: Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
November 14, 2000
</TABLE>
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
22
