<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 JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 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.
48,920,216 shares of Common Stock, par value $.01 per share, were
outstanding on July 31, 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 June 30, 2000 (Unaudited) and December 31, 1999... 3
Condensed Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 2000 and 1999... 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Six Months Ended June 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................ 11
Item 3.--Quantitative and Qualitative Disclosures About
Risk...................................................... 20
PART II--OTHER INFORMATION
Item 1.--Legal Proceedings.................................. 20
Item 6.--Exhibits and Reports on Form 8-K................... 21
Signatures.................................................. 22
Exhibit Index............................................... 23
Exhibits
</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>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 101,086 $ 91,010
Cash and securities segregated for the exclusive benefit of
clients................................................... 456,558 777,341
Cash and securities deposited with clearing organizations... 3,974 3,910
Securities purchased under agreements to resell............. 10,030 530,300
Receivable from brokers, dealers and clearing
organizations............................................. 2,175,938 1,873,259
Receivable from clients..................................... 839,535 432,814
Securities owned, at market value........................... 21,725 20,266
Fees receivable............................................. 25,854 23,149
Furniture, equipment and leasehold improvements, at cost,
net of accumulated depreciation and amortization of
$20,782 and $16,195 at June 30, 2000 and December 31,
1999, respectively........................................ 40,566 32,192
Other assets................................................ 69,643 63,367
---------- ----------
Total assets............................................ $3,744,909 $3,847,608
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans................................................ $ 171,000 $ --
Securities sold under agreements to repurchase............ 309,818 531,762
Payable to brokers, dealers and clearing organizations.... 1,336,945 1,017,483
Payable to clients........................................ 1,426,958 1,871,323
Securities sold but not yet purchased, at market value.... 69,718 34,172
Other liabilities and accrued expenses.................... 93,120 109,066
---------- ----------
3,407,559 3,563,806
---------- ----------
Subordinated liability...................................... 35,000 35,000
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued at June 30, 2000 and December
31, 1999................................................ -- --
Common stock, $.01 par value; 250,000,000 shares
authorized; 50,021,920 shares issued; 49,027,440 and
49,716,220 shares outstanding at June 30, 2000 and
December 31, 1999, respectively......................... 500 500
Paid-in capital........................................... 331,077 331,077
Retained (deficit)........................................ (674) (74,701)
---------- ----------
330,903 256,876
Less: treasury stock, at cost, of 994,480 and 305,700 shares
at June 30, 2000 and December 31, 1999, respectively...... (28,553) (8,074)
---------- ----------
Total stockholders' equity.............................. 302,350 248,802
---------- ----------
Total liabilities and stockholders' equity.............. $3,744,909 $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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Investment advisory and administrative fees.......... $100,580 $94,565 $197,531 $189,171
Commissions.......................................... 33,241 35,897 73,069 74,248
Interest............................................. 56,809 36,488 107,834 76,739
Principal transactions in securities................. 3,698 3,031 8,774 5,115
Clearance fees....................................... 3,276 2,401 6,898 5,214
Other income......................................... 1,613 1,784 2,451 2,854
-------- ------- -------- --------
GROSS REVENUES................................... 199,217 174,166 396,557 353,341
Interest expense..................................... 47,407 30,565 89,335 65,153
-------- ------- -------- --------
NET REVENUES AFTER INTEREST EXPENSE.............. 151,810 143,601 307,222 288,188
-------- ------- -------- --------
OPERATING EXPENSES:
Employee compensation and benefits................... 61,307 43,494 127,240 86,755
Information technology............................... 6,005 4,765 11,226 8,947
Rent and occupancy................................... 4,454 3,412 8,618 6,557
Brokerage, clearing and exchange fees................ 2,202 2,156 5,045 5,177
Advertising and sales promotion...................... 1,202 3,407 3,654 6,123
Distribution and fund administration................. 4,448 5,067 8,840 10,286
Professional fees.................................... 2,819 2,570 5,096 4,934
Depreciation and amortization........................ 2,060 2,796 4,520 4,891
Other expenses....................................... 5,709 4,521 11,161 8,885
-------- ------- -------- --------
TOTAL OPERATING EXPENSES......................... 90,206 72,188 185,400 142,555
-------- ------- -------- --------
NET INCOME BEFORE TAXES.......................... 61,604 71,413 121,822 145,633
Taxes................................................ 22,899 2,132 42,876 4,552
-------- ------- -------- --------
NET INCOME....................................... $ 38,705 $69,281 $ 78,946 $141,081
======== ======= ======== ========
NET INCOME PER SHARE OF COMMON STOCK
Net income per share--Basic........................ $ 0.79 $ 1.62 $ 1.60 $ 3.30
======== ======= ======== ========
Net income per share--Diluted...................... $ 0.78 $ 1.62 $ 1.60 $ 3.30
======== ======= ======== ========
Weighted average common shares
outstanding--Basic............................... 49,174 42,727 49,325 42,727
======== ======= ======== ========
Weighted average common shares
outstanding--Diluted............................. 49,473 42,727 49,475 42,727
======== ======= ======== ========
</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 SIX MONTHS
ENDED JUNE 30,
--------------------
2000 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 78,946 $ 141,081
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization............................. 4,520 4,891
Benefit for deferred taxes................................ (9,750) --
(Increase) decrease in operating assets--
Cash and securities segregated for the exclusive benefit
of clients.............................................. 320,783 87,615
Cash and securities deposited with clearing
organizations........................................... (64) (32)
Securities purchased under agreements to resell........... 520,270 400,369
Receivable from brokers, dealers and clearing
organizations........................................... (302,679) 466,381
Receivable from clients................................... (406,721) (195,079)
Securities owned, at market value......................... (1,459) (5,154)
Fees receivable........................................... (2,705) 1,053
Other assets.............................................. 3,474 1,821
Increase (decrease) in operating liabilities--
Bank loans................................................ 171,000 4,000
Securities sold under agreements to repurchase............ (221,944) (386,246)
Payable to brokers, dealers and clearing organizations.... 319,462 (266,108)
Payable to clients........................................ (444,365) (53,285)
Securities sold but not yet purchased, at market value.... 35,546 (31,868)
Other liabilities and accrued expenses.................... (15,946) (7,358)
-------- ---------
Net cash provided by operating activities............... 48,368 162,081
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITY:
Payments for purchases of furniture, equipment and
leasehold improvements.................................. (12,894) (6,818)
-------- ---------
Cash used in investing activity......................... (12,894) (6,818)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital contributions....................... -- 525
Payments for capital withdrawals.......................... -- (525)
Payments for capital distributions........................ -- (143,085)
Payments for dividends--Neuberger Berman Management
Inc..................................................... -- (15,957)
Payments for dividends--Neuberger Berman Inc.............. (4,919) --
Purchase of treasury stock--Neuberger Berman Inc.......... (20,479) --
-------- ---------
Net cash used in financing activities................... (25,398) (159,042)
-------- ---------
Net increase (decrease) in cash and cash equivalents.... 10,076 (3,779)
CASH AND CASH EQUIVALENTS, beginning of period.............. 91,010 50,383
-------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $101,086 $ 46,604
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 88,456 $ 65,263
Taxes................................................... 62,881 1,276
</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 Report on Form 10-Q for the period
ended March 31, 2000. Certain prior period amounts have been reclassified to
conform to the presentation for the three and six months ended June 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 six months ended June 30, 1999, employee
compensation and benefits include approximately $7,786,000 and $15,690,000,
respectively, of payments made to NBMI shareholders.
6
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
June 30, 2000, NB, LLC and NBMI had net capital of approximately $171,797,000
and $22,620,000, respectively, which exceeded their requirements by
approximately $140,770,000 and $22,370,000, 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 June 30, 2000, the
payments of dividends and advances to the Company by NB, LLC and NBMI is limited
to $94,229,000 and $22,320,000, 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 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 June 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.
7
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. INCOME TAXES (CONTINUED)
The Company's effective tax rate for the period ended June 30, 2000,
includes a benefit related to the upward movement in the price of the Common
Stock from the last measurement date as applied to the unvested shares in the
Company's defined contribution stock incentive plan (the "Stock Incentive
Plan"). The final benefit will be determined when the restricted shares vest.
For the period ended June 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 is effective on or after 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 has
fixed the carrying value of its 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.
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.
8
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
PRIVATE ASSET MANAGEMENT
Net revenues after interest expense........ $ 72,002 $ 66,027 $145,541 $129,127
Net income before taxes.................... $ 34,821 $ 47,048 $ 70,994 $ 92,991
MUTUAL FUND & INSTITUTIONAL
Net revenues after interest expense........ $ 54,589 $ 57,716 $110,343 $120,222
Net income before taxes.................... $ 18,459 $ 19,637 $ 34,963 $ 42,223
PROFESSIONAL SECURITIES SERVICES
Net revenues after interest expense........ $ 25,219 $ 19,858 $ 51,338 $ 38,839
Net income before taxes.................... $ 8,324 $ 4,728 $ 15,865 $ 10,419
TOTAL
Net revenues after interest expense........ $151,810 $143,601 $307,222 $288,188
Net income before taxes.................... $ 61,604 $ 71,413 $121,822 $145,633
</TABLE>
9. SUBSEQUENT EVENTS
On July 18, 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 August 15, 2000, to stockholders of record at the close of
business on August 1, 2000.
In addition, on July 18, 2000, the Board of Directors of NBI adopted, upon
the recommendation of its 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. There are 500,000 shares of
Common Stock currently available for purchase during the term of the ESPP, which
is ten years. It is expected that NBI will acquire shares to fund the ESPP
through open market transactions. The ESPP will be voted upon by stockholders of
NBI at their Annual Meeting in 2001.
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, with a maximum
deferral of up to the lesser of $500,000 or 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 stock so acquired is restricted with respect to transfer or sale for a
9
<PAGE>
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
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. 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. There are 1,000,000 shares of Common Stock currently available for
purchase during the term of the Plan (which is of unlimited duration). The Plan
is intended to be "broadly-based" within the meaning of certain of the rules of
the NYSE Listed Company Manual and therefore, participation by officers of the
Company may be limited. Unearned compensation expense associated with the
restricted stock grants represents the market value of NBI Common Stock at the
date of grant, and is recognized as a charge to income ratably over the vesting
period.
It is anticipated that the ESPP and the Plan will become effective during
September 2000.
10
<PAGE>
ITEM 2.-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
Reversing generally strong performance from January through March, equities
generally declined in the second quarter. The NASDAQ composite was the worst
performing broad index (-13.3%), driven by a downturn in technology stocks.
Small and medium capitalization growth stocks fared more poorly than their value
counterparts, although in the large capitalization spectrum growth stocks
continued to outpace value stocks. As spotty evidence developed of a slowing
domestic economy, fixed income markets were firm in the period.
For the first time in several quarters, mutual funds, including sub-advised
accounts, had positive net cash inflows totaling $98 million. Institutional
separate accounts showed net outflows, primarily in our fixed income business,
but at $257 million for the quarter, the rate was significantly reduced from
first quarter levels of $640 million. Consulting services experienced net
outflows of $50 million for the quarter. In private asset management, our
national sales force introduced net new assets in the quarter of $222 million,
slightly ahead of the pace in the first quarter of $206 million.
Overall, investment performance was mixed in the quarter but strong year to
date. Despite the challenging equity markets, 9 out of our 11 equity funds,
representing 97% of equity mutual fund assets, outperformed their respective
benchmarks in the first half of the year.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 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 and assess
profitability.
11
<PAGE>
RESULTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
THREE MONTHS ENDED JUNE 30, 2000 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
-------------------------------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $72,002 $54,589 $25,219 $151,810
Operating expenses.............................. 37,181 36,130 16,895 90,206
------- ------- ------- --------
Net income before taxes......................... $34,821 $18,459 $ 8,324 $ 61,604
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
THREE MONTHS ENDED JUNE 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
-------------------------------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $66,027 $57,716 $19,858 $143,601
Operating expenses.............................. 18,979 38,079 15,130 72,188
------- ------- ------- --------
Net income before taxes......................... $47,048 $19,637 $ 4,728 $ 71,413
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
PRO FORMA RESULTS FOR THE ASSET FUND AND SECURITIES
THREE MONTHS ENDED JUNE 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
-------------------------------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $66,027 $57,716 $21,114 $144,857
Operating expenses.............................. 33,238 36,990 16,737 86,965
------- ------- ------- --------
Net income before taxes......................... $32,789 $20,726 $ 4,377 $ 57,892
======= ======= ======= ========
</TABLE>
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE THREE MONTHS ENDED JUNE 30, 2000 MANAGEMENT(1) INSTITUTIONAL(1)(2) TOTAL
---------------------------------------- ------------- ------------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $22,213 $33,257 $55,470
------- ------- -------
Net additions (withdrawals)........................... 196 (209) (13)
Market depreciation................................... (613) (438) (1,051)
------- ------- -------
Net decrease.......................................... (417) (647) (1,064)
------- ------- -------
Assets under management, end of period................ $21,796 $32,610 $54,406
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE THREE MONTHS ENDED JUNE 30, 1999 MANAGEMENT(1) INSTITUTIONAL(1) TOTAL
---------------------------------------- ------------- ---------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $19,335 $35,628 $54,963
------- ------- -------
Net additions (withdrawals)........................... 192 (2,451) (2,259)
Market appreciation................................... 1,307 2,753 4,060
------- ------- -------
Net increase.......................................... 1,499 302 1,801
------- ------- -------
Assets under management, end of period................ $20,834 $35,930 $56,764
======= ======= =======
</TABLE>
NOTE 1: Segment assets under management and related market flows for prior
periods have been classified to reflect presentation consistent with
current period segment reporting.
NOTE 2: For the three months ended June 30, 2000, Mutual Fund and Institutional
includes $76 million of client assets invested in the Fund Advisory
Service wrap mutual fund program with third party funds.
12
<PAGE>
The Company reported net income before taxes of $61.6 million for the second
quarter ended June 2000, which represents a decrease of $9.8 million or 13.7%
from the actual results for the comparable period in 1999. Net income before
taxes of $61.6 million for the second quarter of 2000 represents an increase of
$3.7 million or 6.4% when compared to the pro forma results for the second
quarter ended June 1999. Private Asset Management and Professional Securities
Services had respective net income before taxes of $34.8 and $8.3 million for
the second quarter of 2000, increasing 6.2% and 90.2% 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 $18.5 million, which
reflects a decrease of 10.9% when compared to the pro forma results for the
prior year's period, and offset some of the increases in net income before taxes
of the Private Asset Management and Professional Securities Services segments.
Net revenues after interest expense increased by $8.2 million for the second
quarter of 2000, to $151.8 million, an increase of 5.7% compared to the actual
results for the second quarter ended June 1999. Net revenues after interest
expense of $151.8 million for the second quarter of 2000 represent an increase
of $7.0 million or 4.8% when compared to the pro forma results for the second
quarter ended June 1999. The strong results in Private Asset Management and
Professional Securities Services are primarily attributable to increased
investment advisory fees and clearance income and principal transactions,
respectively. Mutual Fund and Institutional net revenues after interest expense
decreased due to lower investment advisory and administrative fees and
commissions.
PRIVATE ASSET MANAGEMENT. Private Asset Management net revenues after
interest expense increased 9.0% to $72.0 million for the second quarter of 2000
from $66.0 million on a pro forma basis for the second quarter of 1999.
Investment advisory fees increased 19.4% to $48.6 million for the second quarter
of 2000 from $40.7 million for the pro forma prior year period due to increased
average assets under management. Commissions decreased 9.6% to $22.1 million for
the second quarter of 2000 from $24.5 million for the pro forma prior year
period, due to a decrease in transaction volume.
MUTUAL FUND AND INSTITUTIONAL. Mutual Fund and Institutional net revenues
after interest expense decreased 5.4% to $54.6 million for the second quarter of
2000 from $57.7 million on a pro forma basis for the second quarter of 1999.
Investment advisory and administrative fees decreased 4.3% to $51.5 million for
the second quarter of 2000 from $53.8 million for the pro forma prior year
period as a result of decreased average assets under management, primarily due
to net asset withdrawals. Commissions decreased by $1.0 million or 26.5% as a
result of a decrease in transaction volume.
PROFESSIONAL SECURITIES SERVICES. Professional Securities Services net
revenues after interest expense increased 19.4% to $25.2 million for the second
quarter of 2000 from $21.1 million on a pro forma basis for the second quarter
of 1999. Principal transactions in securities increased by $0.8 million or 26.6%
while net interest income increased by $1.8 million or 28.3% and commissions
increased by $0.7 million or 8.3%.
OPERATING EXPENSES (ACTUAL). Total operating expenses were $90.2 million
for the second quarter ended June 2000, an increase of $18.0 million or 25.0%
from $72.2 million for the second quarter of 1999. Employee compensation and
benefits increased to $61.3 million for the second quarter ended June 2000, up
$17.8 million or 41.0% from $43.5 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
$18.1 million for the second quarter of 2000. Information technology expenses
increased to $6.0 million in the second quarter of 2000, up $1.2 million or
26.0% from $4.8 million for the same period in 1999 due primarily to increases
in third party processing from increased securities transactions, as well as
increased communication costs and technology related leases. Rent and occupancy
costs increased to $4.5 million in the second quarter of 2000, up $1.0 million
or 30.5% from $3.4 million for the same period in 1999, primarily due to the
rental of additional space in the head office as well as for the opening of two
new branch offices. Advertising and sales promotion costs decreased to
$1.2 million in the second quarter of 2000, down $2.2 million or 64.7% from
$3.4 million for the same period in 1999. Distribution and fund
13
<PAGE>
administration expenses decreased to $4.4 million in the second quarter of 2000,
down $0.6 million or 12.2% from $5.1 million for the same period in 1999, as a
result of decreased average mutual fund assets under management. For the quarter
ended June 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. Depreciation and
amortization decreased to $2.1 million in the second quarter of 2000, down
$0.7 million or 26.3% from $2.8 million for the same period in 1999, due
primarily to accelerated asset write-offs in the prior period. Other expenses
increased to $5.7 million in the second quarter of 2000, up $1.2 million or
26.3% from $4.5 million for the same period of 1999, due primarily to increases
in travel and entertainment and office expenses.
OPERATING EXPENSES (PRO FORMA). Total operating expenses were
$90.2 million for the second quarter ended June 2000, an increase of
$3.2 million or 3.7% from $87.0 million for the second quarter of 1999. Employee
compensation and benefits increased to $61.3 million for the second quarter
ended June 2000, up $3.0 million or 5.2% from $58.3 million for the same period
in 1999.
TAXES (ACTUAL). Taxes increased to $22.9 million in the second quarter of
2000, up $20.8 million from $2.1 million in the second quarter of 1999. This
increase is a result of the Company's reorganization in October 1999. The second
quarter 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 $3.7 million related to the change in the
price of the Company's stock from March 31, 2000 to June 30, 2000, in connection
with its Stock Incentive Plan. Taxes for the second quarter of 1999 reflect
unincorporated business taxes incurred as a partnership, as well as 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"). For the three months ended June 30, 2000, the Company adjusted,
based upon the price of the Common Stock at the close of business on the last
day of the 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 is effective on or after 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 has fixed the carrying value of its 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 $22.9 million in the second quarter
of 2000, down $2.2 million or 8.6% primarily due to the $3.7 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 $1.6 million increase in
provision for income taxes attributable to the increase in net income before
taxes.
14
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 2000 AND 1999
RESULTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
SIX MONTHS ENDED JUNE 30, 2000 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------ ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $145,541 $110,343 $51,338 $307,222
Operating expenses.............................. 74,547 75,380 35,473 185,400
-------- -------- ------- --------
Net income before taxes......................... $ 70,994 $ 34,963 $15,865 $121,822
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
ACTUAL RESULTS FOR THE ASSET FUND AND SECURITIES
SIX MONTHS ENDED JUNE 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------ ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $129,127 $120,222 $38,839 $288,188
Operating expenses.............................. 36,136 77,999 28,420 142,555
-------- -------- ------- --------
Net income before taxes......................... $ 92,991 $ 42,223 $10,419 $145,633
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL PROFESSIONAL
PRO FORMA RESULTS FOR THE ASSET FUND AND SECURITIES
SIX MONTHS ENDED JUNE 30, 1999 MANAGEMENT INSTITUTIONAL SERVICES TOTAL
------------------------------ ---------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net revenues after interest expense............. $129,127 $120,222 $41,124 $290,473
Operating expenses.............................. 63,977 75,718 31,681 171,376
-------- -------- ------- --------
Net income before taxes......................... $ 65,150 $ 44,504 $ 9,443 $119,097
======== ======== ======= ========
</TABLE>
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 MANAGEMENT INSTITUTIONAL(1)(2) TOTAL
-------------------------------------- ------------ ------------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $21,538 $32,861 $54,399
------- ------- -------
Net additions (withdrawals)........................... 233 (1,404) (1,171)
Market appreciation................................... 25 1,153 1,178
------- ------- -------
Net increase (decrease)............................... 258 (251) 7
------- ------- -------
Assets under management, end of period................ $21,796 $32,610 $54,406
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MUTUAL
ASSET FUND AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 MANAGEMENT(1) INSTITUTIONAL(1) TOTAL
-------------------------------------- ------------- ---------------- --------
<S> <C> <C> <C>
Assets under management, beginning of period.......... $18,267 $37,320 $55,587
------- ------- -------
Net additions (withdrawals)........................... 216 (4,538) (4,322)
Market appreciation................................... 2,351 3,148 5,499
------- ------- -------
Net increase (decrease)............................... 2,567 (1,390) 1,177
------- ------- -------
Assets under management, end of period................ $20,834 $35,930 $56,764
======= ======= =======
</TABLE>
NOTE 1: Segment assets under management and related market flows for prior
periods have been classified to reflect presentation consistent with
current period segment reporting.
NOTE 2: For the six months ended June 30, 2000, Mutual Fund and Institutional
includes $76 million of client assets invested in the Fund Advisory
Service wrap mutual fund program with third party funds.
15
<PAGE>
The Company reported net income before taxes of $121.8 million for the six
months ended June 2000, which represents a decrease of $23.8 million or 16.4%
from the actual results for the comparable period in 1999. Net income before
taxes of $121.8 million for the first six months of 2000 represents an increase
of $2.7 million or 2.3% when compared to the pro forma results for the six
months ended June 1999. Private Asset Management and Professional Securities
Services had respective net income before taxes of $71.0 and $15.9 million for
the first six months of 2000, increasing 9.0% and 68.0%, 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 $35.0 million, which
reflects a decrease of 21.4% when compared to the pro forma results for the
prior year's period, and offset some of the increases in net income before taxes
of the Private Asset Management and Professional Securities Services segments.
Net revenues after interest expense increased by $19.0 million for the first
six months of 2000, to $307.2 million, an increase of 6.6% compared to the
actual results for the six months ended June 1999. Net revenues after interest
expense of $307.2 million for the first six months of 2000 represent an increase
of $16.7 million or 5.8% when compared to the pro forma results for the six
months ended June 1999. Strong results were noted in investment advisory fees
for Private Asset Management and in commissions, principal trading, clearance
fees and net interest income for Professional Securities Services. Mutual Fund
and Institutional net revenues after interest expense decreased due to lower
investment advisory and administrative fees and commissions.
PRIVATE ASSET MANAGEMENT. Private Asset Management net revenues after
interest expense increased 12.7% to $145.5 million for the first six months of
2000 from $129.1 million on a pro forma basis for the six months ended
June 1999. Investment advisory fees, which account for the majority of the
increase, rose 19.5% to $95.1 million for the first six months of 2000 from
$79.6 million for the pro forma prior year period due to increased average
assets under management.
MUTUAL FUND AND INSTITUTIONAL. Mutual Fund and Institutional net revenues
after interest expense decreased 8.2% to $110.3 million for the first six months
of 2000 from $120.2 million on a pro forma basis for the six months ended
June 1999. Investment advisory and administrative fees decreased 6.6% to
$101.6 million for the first six months of 2000 from $108.8 million for the pro
forma prior year period as a result of decreased average assets under
management, primarily due to net asset withdrawals. Commissions decreased by
$3.0 million or 27.9% as a result of a decrease in transaction volume.
PROFESSIONAL SECURITIES SERVICES. Professional Securities Services net
revenues after interest expense increased 24.8% to $51.3 million for the first
six months of 2000 from $41.1 million on a pro forma basis for the six months
ended June 1999. Principal transactions in securities increased by $3.7 million
or 73.0%, net interest income increased by $3.5 million or 28.0%, commissions
increased by $2.1 million or 13.8% and clearance fees increased by $1.7 million
or 32.3%.
OPERATING EXPENSES (ACTUAL). Total operating expenses were $185.4 million
for the six months ended June 2000, an increase of $42.9 million or 30.1% from
$142.5 million for the six months ended June 1999. Employee compensation and
benefits increased to $127.2 million for the six months ended June 2000, up
$40.5 million or 46.7% from $86.8 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
$33.5 million for the six months ended June 2000. In addition, incentive based
compensation increased by $2.4 million as a result of increased production for
the period. Also included in employee compensation and benefits in the six
months ended June 2000 is a $750,000 restructuring charge for employee
termination benefits related to a decision to outsource certain administrative
activities in the Mutual Fund and Institutional segment. Information technology
expenses increased to $11.2 million for the six months ended June 2000, up
$2.3 million or 25.5% from $8.9 million for the same period in 1999, due
primarily to increases in third party processing from increased securities
transactions, as well as increases in communication services and software
licenses. Rent and occupancy costs increased to $8.6 million for the six months
16
<PAGE>
ended June 2000, up $2.1 million or 31.4% from $6.6 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 $3.7 million for the six months ended June 2000, down
$2.5 million or 40.3% from $6.1 million for the same period in 1999.
Distribution and fund administration expenses decreased to $8.8 million for the
six months ended June 2000, down $1.4 million or 14.1% from $10.3 million for
the same period of 1999, as a result of decreased average mutual fund assets
under management. For the six months ended June 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. Other expenses increased to $11.2 million for the six months
ended June 2000, up $2.3 million or 25.6% from $8.9 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
$185.4 million for the six months ended June 2000, an increase of $14.0 million
or 8.2% from $171.4 million for the same period of 1999. Employee compensation
and benefits increased to $127.2 million for the six months ended June 2000, up
$11.7 million or 10.1% from $115.6 million for the same period in 1999.
TAXES (ACTUAL). Taxes increased to $42.9 million for the six months ended
June 2000, up $38.3 million from $4.6 million for the same period in 1999. This
increase is a result of the Company's reorganization in October 1999. The six
months ended June 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 Stock Incentive Plan. Taxes for the
period ended June 1999 reflects 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"). For the six months ended June 30, 2000, 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 is effective on or after
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 has fixed the carrying value of its 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 $42.9 million for the six months
ended June 2000, down $8.7 million or 16.9% 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 $1.2 million
increase in provision for income taxes attributable to the increase in net
income before taxes.
17
<PAGE>
ACTUAL AND PRO FORMA OPERATING RESULTS
The following table sets forth the Company's consolidated and pro forma
condensed consolidated statements of income for the three and six months ended
June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 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.... $100,580 $ 94,565 $197,531 $189,171
Commissions.................................... 33,241 35,897 73,069 74,248
Interest....................................... 56,809 36,488 107,834 76,739
Principal transactions in securities........... 3,698 3,031 8,774 5,115
Clearance fees................................. 3,276 2,401 6,898 5,214
Other income................................... 1,613 1,784 2,451 2,854
-------- -------- -------- --------
GROSS REVENUES............................. 199,217 174,166 396,557 353,341
Interest expense............................... 47,407 29,309(1) 89,335 62,868(1)
-------- -------- -------- --------
NET REVENUES AFTER INTEREST EXPENSE........ 151,810 144,857 307,222 290,473
-------- -------- -------- --------
OPERATING EXPENSES:
Employee compensation and benefits............. 61,307 58,271(2) 127,240 115,576(2)
Information technology......................... 6,005 4,765 11,226 8,947
Rent and occupancy............................. 4,454 3,412 8,618 6,557
Brokerage, clearing and exchange fees.......... 2,202 2,156 5,045 5,177
Advertising and sales promotion................ 1,202 3,407 3,654 6,123
Distribution and fund administration........... 4,448 5,067 8,840 10,286
Professional fees.............................. 2,819 2,570 5,096 4,934
Depreciation and amortization.................. 2,060 2,796 4,520 4,891
Other expenses................................. 5,709 4,521 11,161 8,885
-------- -------- -------- --------
TOTAL OPERATING EXPENSES................. 90,206 86,965 185,400 171,376
-------- -------- -------- --------
NET INCOME BEFORE TAXES.................. 61,604 57,892 121,822 119,097
Provision for income taxes..................... 22,899 25,067(3) 42,876 51,569(3)
-------- -------- -------- --------
NET INCOME............................... $ 38,705 $ 32,825 78,946 67,528
======== ======== ======== ========
NET INCOME PER SHARE OF COMMON STOCK
Net income per share--Basic................ $ 0.79 $ 0.66(4) $ 1.60 $ 1.35(4)
======== ======== ======== ========
Net income per share--Diluted.............. $ 0.78 $ 0.66(4) $ 1.60 $ 1.35(4)
======== ======== ======== ========
Weighted average common shares
outstanding--Basic....................... 49,174 50,022 49,325 50,022
======== ======== ======== ========
Weighted average common shares
outstanding--Diluted..................... 49,473 50,022 49,475 50,022
======== ======== ======== ========
</TABLE>
See accompanying notes to actual and pro forma condensed consolidated statements
of income.
18
<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 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 June 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 June 30, 2000, the Company's
regulatory net capital exceeded the minimum requirement by approximately
$163.1 million. The SEC net capital rule imposes financial restrictions, which
are more severe than those imposed on most other businesses. In addition, the
debt covenants related to NB, LLC's subordinated note include certain
19
<PAGE>
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, as well as the net proceeds from its IPO, 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
June 30, 2000, 994,480 shares had been repurchased for approximately
$28.6 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 June 30, 2000
and 1999, respectively, and $1.7 million and $1.8 million during the six months
ended June 30, 2000 and 1999, respectively.
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.
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<PAGE>
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
10.1 Amendment No.1 to the 1999 Neuberger Berman Inc. Directors
Stock Incentive Plan (filed herewith)
10.2 Amendment No.1 to the 1999 Neuberger Berman Inc. Long-Term
Incentive Plan (filed herewith)
10.3 Amendment No.1 to the 1999 Neuberger Berman Inc. Annual
Incentive Plan (filed herewith)
10.5 Amendment No.1 to the Neuberger Berman Employee Defined
Contribution Stock Incentive Plan (filed herewith)
10.15 Neuberger Berman Inc. Wealth Accumulation Plan (filed
herewith)
10.16 Neuberger Berman Inc. Employee Stock Purchase Plan (filed
herewith)
11 Computation of Net Income per Common Share
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
1. Form 8-K filed April 17, 2000. On April 13, 2000, Neuberger
Berman Inc. reported results of operations for the three months ended
March 31, 2000.
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<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.
August 11, 2000 By: /s/ ROBERT MATZA
-------------------------------------
Name: Robert Matza
Title: Chief Administrative Officer
August 11, 2000 By: /s/ MATTHEW S. STADLER
-------------------------------------
Name: Matthew S. Stadler
Title: Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
Exhibit 10.1 Amendment No. 1 to 1999 Neuberger Berman Inc. Directors
Stock Incentive Plan (filed herewith)
Exhibit 10.2 Amendment No. 1 to 1999 Neuberger Berman Inc. Long-Term
Incentive Plan (filed herewith)
Exhibit 10.3 Amendment No. 1 to 1999 Neuberger Berman Inc. Annual
Incentive Plan (filed herewith)
Exhibit 10.5 Amendment No. 1 to 1999 Neuberger Berman Employee Defined
Contribution Stock Incentive Plan (filed herewith)
Exhibit 10.15 Neuberger Berman Inc. Wealth Accumulation Plan (filed
herewith)
Exhibit 10.16 Neuberger Berman Inc. Employee Stock Purchase Plan (filed
herewith)
Exhibit 11 Computation of Net Income Per Share of Common Stock
Exhibit 27 Financial Data Schedule
</TABLE>
23
