As filed with the Securities and Exchange Commission on July 22, 2002
Registration No. 333-91738
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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Neuberger Berman Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1523639
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
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605 Third Avenue
New York, N.Y. 10158
(212) 476-9000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Kevin Handwerker, Esq.
General Counsel
605 Third Avenue
New York, N.Y. 10158
(212) 476-9000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with a copy to:
David K. Boston, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
(212) 728-8000
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Approximate date of commencement of proposed sale of the securities to the
public:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE AMOUNT TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE (1) FEE
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Common Stock,
$0.01 par value(2) 5,000,000 Shares $35.97 $179,850,000 $16,546.20(3)
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(1)Estimated pursuant to Rule 457(c) solely for the purpose of computing the
registration fee, based upon the average high and low prices per share of
common stock on the New York Stock Exchange as of June 26, 2002.
(2)Common stock offered by the selling stockholders. Such common stock may be
sold from time to time through public or private transactions, at prevailing
market prices, or at privately negotiated prices.
(3)Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated July 22, 2002
PROSPECTUS
[NEUBERGER BERMAN LOGO]
5,000,000 Shares
Neuberger Berman Inc.
Common Stock
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Stockholders of Neuberger Berman Inc. are offering and selling up to
5,000,000 shares of Neuberger Berman common stock. These selling stockholders
are former principals of Neuberger Berman and their affiliates, and employees
of Neuberger Berman who hold their stock through the Neuberger Berman Employee
Defined Contribution Stock Incentive Plan Trust. Neuberger Berman will not
receive any of the proceeds from any sale of the shares.
The shares trade on the New York Stock Exchange under the symbol "NEU." The
last sale price of the shares as reported on the New York Stock Exchange on
July 19, 2002 was $30.68 per share.
The selling stockholders may offer their shares of common stock from time
to time through public or private transactions, at prevailing market prices, or
at privately negotiated prices.
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , 2002.
TABLE OF CONTENTS
Page
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Prospectus Summary......................................................... 3
Risk Factors............................................................... 9
Forward Looking Statements................................................. 15
Use of Proceeds............................................................ 16
Price Range of Our Common Stock and Dividends.............................. 16
Capitalization............................................................. 17
Selected Consolidated Financial Data....................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business................................................................... 36
Management................................................................. 48
Principal and Selling Stockholders......................................... 51
Description of Capital Stock............................................... 55
Plan of Distribution....................................................... 60
Legal Matters.............................................................. 61
Experts.................................................................... 61
Independent Public Accountants............................................. 62
Where You Can Find Additional Information.................................. 62
Index to Consolidated Financial Statements................................. F-1
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may have changed since
that date.
PROSPECTUS SUMMARY
This following summary is qualified in its entirety by the more detailed
information included elsewhere or incorporated by reference in this prospectus.
This summary does not contain all of the information that may be important to
you. You should read the entire prospectus, as well as the information
incorporated by reference, before making an investment decision. See
"Forward-Looking Statements" for information relating to statements contained
in this prospectus that are not historical facts.
When we use the terms "Neuberger Berman," the "firm," "we," "us" and "our,"
we mean, for the period prior to our October 1999 initial public offering,
Neuberger Berman, LLC, a Delaware limited liability company, and its
consolidated subsidiaries, and Neuberger Berman Management Inc., a New York
corporation, and their predecessors. When we use these terms for the period
after our initial public offering, we mean Neuberger Berman Inc., a Delaware
corporation, and its consolidated subsidiaries.
When we use the term "Trust Companies," we mean Neuberger Berman Trust
Company, N.A. (formerly Neuberger Berman National Trust Company), which holds a
national bank charter, and Neuberger Berman Trust Company of Delaware, a
non-depository limited purpose trust company chartered under the Delaware
Banking Code. However, in certain circumstances, as the context may require,
the term "Trust Companies" includes Neuberger Berman Trust Company of Florida
and Neuberger Berman Trust Company, which, as the result of the consolidation
of our trust business under the framework of our national trust company, were
liquidated with a related transfer of certain assets to, and merged with and
into, Neuberger Berman Trust Company, N.A., respectively, during the third and
fourth quarters of 2001.
Our Business
Neuberger Berman Inc., through its subsidiaries, is an investment advisory
firm with approximately $61.9 billion in assets under management as of March
31, 2002. For over 60 years, the firm and its predecessor companies have
provided clients with a wide array of investment products, services and
strategies. Our business is conducted primarily through our subsidiaries,
Neuberger Berman, LLC and Neuberger Berman Management Inc., both of which are
registered investment advisers and broker-dealers, and Neuberger Berman Trust
Company, N.A. Neuberger Berman, LLC is also a member of the New York Stock
Exchange, Inc. As of March 31, 2002, we conducted our business from 18 offices
in 16 cities.
We were founded in 1939 to be a premier provider of investment products and
services to high net worth individuals. We have built upon the qualities that
have made us successful in the high net worth market to establish a strong
presence in the mutual fund and institutional marketplaces, and to provide
estate planning and trust services through our national and Delaware trust
companies. Our clients include individuals, institutions, corporations, pension
funds, foundations and endowments.
We believe that one of our chief competitive advantages is our dedication
to asset management, and in particular, our focus on asset management for high
net worth individuals. To continue to build on this competitive advantage, we
are actively pursuing new hires and acquisitions, including the addition of
money management teams with existing client relationships, as well as expanding
our national sales force.
In October 1999, we completed an initial public offering of our common
stock. As of June 30, 2002, our employees and our former principals and their
affiliates held approximately 74% of our outstanding common stock. If the
maximum number of shares of common stock covered by this prospectus were
offered and sold, our employees and our former principals and their affiliates
would have held approximately 66% of our outstanding common stock as of that
date.
3
Our Principal Business Segments
Our principal business segments include Private Asset Management, Mutual
Fund and Institutional and Professional Securities Services. A fourth segment,
"Corporate," reflects certain corporate results that are not directly related
to the day-to-day operations of our principal business.
Private Asset Management
Our Private Asset Management segment includes money management, advisory
services and trust services. This segment provides customized discretionary
investment management services for high net worth individuals, families and
smaller institutions. It represented 48% of net revenues after interest expense
in 2001 and 51% of net revenues after interest expense in the first quarter of
2002.
Assets under management in this segment were approximately $25.7 billion as
of March 31, 2002, including assets managed for clients of the Trust Companies.
In this segment, we managed approximately 16,600 accounts, through
approximately 6,500 relationships, with an average relationship size of
approximately $3.9 million, as of March 31, 2002. Net revenues after interest
expense for 2001 were $295.7 million. This included $88.2 million in commission
revenue, derived principally from listed equity trades executed as broker, on
behalf of clients. Net revenues after interest expense for the first quarter of
2002 were $81.5 million, including $26.0 million in commission revenue.
Mutual Fund and Institutional
Our Mutual Fund and Institutional segment includes our family of mutual
funds, institutional separate account products and wrap products sponsored by
third party brokerage firms and banks, which we offer to a wide array of
clients, from the smallest individual investors to the largest institutions.
The mutual funds and separate accounts in this segment cover a broad spectrum
of asset types, investment styles and market capitalization ranges. Our equity
products include large-cap, mid-cap and small-cap equity offerings, generally
incorporating value, growth and blend investment styles as well as
international and socially responsive products. Our fixed income products
include domestic taxable and tax-exempt offerings of various duration, as well
as global portfolios. We also offer balanced portfolios and money market
products. We make our funds available directly to investors, without a sales
load, and through third parties and sub-advisory relationships. We are actively
seeking opportunities to expand into new distribution channels. For example, we
recently added a team of experienced professionals to initiate an institutional
real estate securities effort. The Mutual Fund and Institutional segment
generated net revenues after interest expense of $223.7 million, which
represented 36% of our net revenues after interest expense in 2001, and net
revenues after interest expense of $56.7 million, which represented 35% of our
net revenues after interest expense in the first quarter of 2002.
For the year ended December 31, 2001, assets under management in this
segment increased by $1.1 billion to approximately $34.0 billion. Our Mutual
Fund and Sub-Advised Account business and our Consultant Services Group
business each contributed $1.1 billion in positive net cash inflows, which, in
each case, represented markedly stronger net cash flow activity compared to the
previous year. These positive net cash inflows were partially offset by net
cash outflows of $0.4 billion in our Institutional Separate Accounts business.
For the quarter ended March 31, 2002, assets under management in this segment
increased by $2.1 billion to approximately $36.1 billion. We continued to
experience net cash inflows in our Mutual Fund and Sub-Advised Account business
and our Consultant Services Group business, contributing $0.9 billion and $0.5
billion during the first quarter of 2002, respectively. Our Institutional
Separate Accounts business contributed an additional $65 million in positive
net cash inflows during the first quarter of 2002.
4
Professional Securities Services
Our Professional Securities Services segment includes professional investor
clearing services, research sales and other activities. We leverage our asset
management infrastructure to provide services to the professional investment
community and ultra affluent individuals and families. Our Professional
Securities Services clients call upon us for trade execution, clearing,
custody, margin financing, portfolio reporting and trust services. We act as a
market maker for approximately 170 securities traded primarily on the Nasdaq
National Market System. We also provide our research to about 200 outside
investment managers. Because these services are based upon the capabilities and
resources developed for our asset management businesses, we generally can
provide these services at a modest incremental cost. Our Professional
Securities Services segment represented 16% of net revenues after interest
expense in 2001 and 14% of net revenues after interest expense in the first
quarter of 2002.
Investment Process and Research
Our portfolio managers generally base their decisions on fundamental
research, attempting to make knowledgeable judgments about the investment
merits of industry groups and specific companies. Our centralized research
department supports all of our investment professionals. Organized primarily by
industry, our securities analysts are responsible for understanding
developments within the companies and industries they follow. To do this, they
meet with senior management of companies they follow and interview customers
and competitors of those companies. In some cases, they employ specialized
consultants and develop earnings and cash flow estimates. As of March 31, 2002,
we employed 14 analysts in the research department, supported by 19 associate
analysts, who followed approximately 500 companies.
Our Strategy
Capitalize on Opportunities in the Growing High Net Worth Market. Managing
wealth is one of the fastest growing segments of the financial services
industry. According to the Merrill Lynch/Gemini Consulting World Wealth Report
2002, the high net worth market in North America, defined as individuals with
more than $1 million in liquid financial assets, totaled $7.6 trillion in 2001
and is expected to increase to $11.2 trillion by year end 2006, which implies
an annual compound rate of 8.1%. With our brand name, the broad spectrum of our
investment styles and our commitment to personalized service, we believe that
we are well positioned to take advantage of growth in this market. Our
principal initiatives to generate growth are:
. Grow Assets Under Management Through Expanded National Sales
Force. Having expanded our national sales force to 40 professionals and
increased the number of our regional offices to 13, we seek to continue
to grow assets under management through this experienced and larger sales
force. In 2000 and 2001, our national sales force generated $807 million
and approximately $1.7 billion, respectively, of new assets under
management. For the first quarter of 2002, our sales force added $473
million in new assets under management.
. Selectively Continue to Add Experienced Money Management Teams Through
Direct Hiring and Acquisitions. To expand our investment capabilities
and continue to increase our assets under management, we continually seek
opportunities to add experienced money managers with long-standing client
relationships, time-tested investment performance and business styles
well suited to the Neuberger Berman culture. Over the past two years, we
have capitalized on such opportunities by hiring six money management
teams and experienced individual managers, with the most recent two hires
occurring in the first half of 2002. In addition, during the past two
years, two acquisitions resulted in the hiring of private asset
5
management teams and the successful conversion of a total of $1.3 billion
of client assets at closing. We have also recently announced the hiring
of a real estate investment management team through which we expect to
develop new investment products attractive to high net worth investors.
. Build Our Wealth Management Business. We seek to promote asset retention
from generation to generation through our national trust capabilities and
to provide related products and services in the highly specialized market
of upper echelon wealth. In addition, wealth management is a relationship
focused business that increasingly relies on providing clients with
access to non-affiliated money managers and financial products. We are
endeavoring to extend our money manager database and sophisticated
multi-manager reporting, which we believe are differentiating factors in
delivering valued services to this market. Executive Monetary Management,
Inc., acquired in February 2001, specializes in wealth management by
serving as an independent counselor to upper echelon high net worth
clients to assist them in preserving and enhancing their financial
position. As of March 31, 2002, clients for whom Executive Monetary
Management performs various services had approximately $1.8 billion of
investable assets.
Expand Mutual Fund and Institutional Distribution Capabilities. We believe
that sustained growth in the mutual fund and institutional arenas is dependent
on providing strong relative investment performance, expanding distribution
capabilities and delivering a variety of investment products. To this end our
initiatives include:
. Establish New Relationships with Defined Contribution Plan
Administrators. We seek to establish new relationships with defined
contribution plan administrators. With Congress' passage of the 2001 tax
bill, which allows for increased contributions to retirement accounts, we
expect growth from our existing relationships. As of March 31, 2002, we
had strategic alliances with 96 third-party administrators of defined
contribution plans.
. Expand Relationships with Providers of Variable Insurance Products. We
also seek to expand our relationships with insurance companies that offer
variable annuity and variable life insurance products that invest in our
mutual funds. As of March 31, 2002, we had relationships with 45
insurance companies offering these variable products.
. Build Wrap Fee Program Participation. We seek to continue to broaden our
participation in wrap programs sponsored by third-party banks and
brokerages, as well as to increase the variety of our investment styles
available through this distribution channel. We manage assets for 13
sponsors of wrap fee programs, including three of the four largest
programs. We believe that wrap fee programs represent significant asset
growth opportunities.
. Further Diversify Product and Service Offerings. We continue to enhance
our existing product offerings through the internal development or
acquisition of new investment capabilities. In the past, we have relied
primarily on our domestic equity products. Currently, we offer equity,
international equity, balanced, domestic and international fixed income
and money market products. Historically, we have primarily followed the
value style of investing, but we now have portfolio managers who follow
growth or blended styles of investing. In May 2002, we launched the
Neuberger Berman Real Estate Fund, which is managed by a team of REIT
specialists who joined the firm in January 2002. Additionally, we have
entered into an agreement that is expected to result in a team of high
yield fixed income professionals joining Neuberger Berman during the
third quarter of 2002, which we anticipate will enhance our current high
yield fixed income offerings. We believe a broader array of products will
increase our ability to grow assets under management by attracting new
clients and providing existing clients with a greater variety of
investment options.
6
Continue to Grow Professional Securities Services. Using our
infrastructure, net revenues after interest expense of our Professional
Securities Services segment have grown by 23% from 1999 through 2001. We seek
to continue to leverage our asset management infrastructure to provide
additional fee-earning services to the professional investment community
without a commensurate increase in expenses.
. Increase the Number of Correspondent Clearing and Prime Brokerage
Clients. We view the Correspondent Clearing and Prime Brokerage Client
business as an incremental revenue opportunity, and will continue using
our systems to provide correspondent clearing and prime brokerage
services to the professional investment community. Our dedicated
marketing group continues to target high quality, established, registered
investment advisers and hedge funds, as well as broker-dealers with
clientele similar to ours.
. Increase Research Sales. Our dedicated research group provides its
independent research reports to our Private Asset Management and Mutual
Fund and Institutional businesses and makes these reports available to
third-party investment managers, who generally place trades through us if
they decide to buy or sell securities based upon our research. We believe
that our long-standing dedication to unbiased, fundamental research
distinguishes us from many of our competitors.
Pursue Strategic Acquisition and Joint Venture Opportunities. In addition
to seeking to add investment teams, we will continue to evaluate strategic
acquisitions of, or joint ventures with, companies that would add new products
and services, investment capabilities or broaden our current distribution
channels. It is our intent that any transaction that we consummate be both
strategic and accretive to earnings.
Our Headquarters
Our headquarters are located at 605 Third Avenue, New York, New York 10158,
telephone (212) 476-9000. Our website address is www.nb.com. We do not intend
the information on our website to be incorporated in this prospectus.
Why We Are Registering the Shares
We are registering the shares covered by this prospectus to address three
important objectives:
. increased public float;
. broader ownership of our common stock; and
. the orderly entry of shares into the market.
7
Summary Historical Financial Data
The summary consolidated financial data presented below is derived from our
financial statements and accompanying notes. Our financial statements as of
December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and
2001 have been audited by Arthur Andersen LLP, independent public accountants.
These financial statements are included elsewhere in this prospectus. The
summary income statement presented below for the years ended December 31, 1997
and 1998 have been derived from audited financial statements that are not
included in this prospectus. The summary income statement for the three-month
periods ended March 31, 2001 and 2002 have been taken from our unaudited
interim condensed consolidated financial statements included elsewhere in this
prospectus and, in the opinion of management, have been prepared on the same
basis as our audited consolidated financial statements included herein and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such data. The results of operations for
an interim period are not necessarily indicative of the results for the full
year or any other interim period. The data presented below should be read in
conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and accompanying notes included elsewhere
in this prospectus.
As of and for the
Three Months Ended
As of and for the Years Ended December 31, March 31,
---------------------------------------------- -----------------
Pre-IPO Post-IPO
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1997(1) 1998(1) 1999(1)(2) 2000(3) 2001 2001 2002
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Income Statement Data
(in thousands):
Net revenues after interest
expense..................... $502,525 $582,134 $572,912 $616,347 $613,282 $154,832 $160,195
-------- -------- -------- -------- -------- -------- --------
Employee compensation and
benefits.................... 148,301 173,379 325,310 245,445 253,365 65,572 68,439
Other operating expenses..... 80,385 114,298 124,230 123,981 130,858 30,204 33,935
-------- -------- -------- -------- -------- -------- --------
Total operating expenses..... 228,686 287,677 449,540 369,426 384,223 95,776 102,374
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Net income before taxes...... 273,839 294,457 123,372 246,921 229,059 59,056 57,821
Tax (benefit) expense........ 8,857 9,506 (12,195) 96,565 96,391 24,822 24,574
-------- -------- -------- -------- -------- -------- --------
Net income................... $264,982 $284,951 $135,567 $150,356 $132,668 $ 34,234 $ 33,247
======== ======== ======== ======== ======== ======== ========
Per Share Data(4):
Net income per share--Basic.. $4.05 $4.45 $2.04 $2.04 $1.85 $0.47 $0.48
Net income per share--Diluted $4.05 $4.45 $2.04 $2.02 $1.82 $0.46 $0.47
Assets Under Management
(in millions)............... $53,511 $55,587 $54,399 $55,486 $59,048 $54,802 $61,873
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(1)On October 7, 1999, the principals of Neuberger Berman, LLC and the
shareholders of Neuberger Berman Management Inc. exchanged their ownership
interests for 64.1 million shares of our common stock. Prior to this
exchange, we operated as a partnership and, as a result, the principals were
compensated through the receipt of distributions of capital. In addition,
Neuberger Berman, LLC did not pay United States federal and state taxes as
it was treated as a partnership for tax purposes. Neuberger Berman
Management Inc., as an S-Corporation, also did not pay United States federal
taxes.
(2)In connection with our IPO on October 8, 1999, we incurred pre-tax
reorganization and IPO charges totaling $150.1 million. These charges were
principally comprised of an initial, irrevocable non-cash contribution of
common stock to our employee defined contribution stock incentive plan trust
of $134.3 million (included in employee compensation and benefits), a cash
contribution to the Neuberger Berman Foundation of $10.0 million (included
in other operating expenses) and severance and other charges of $5.8 million
($5.6 million of which is included in employee compensation and benefits and
the remainder in other operating expenses).
(3)Tax expense for the year ended December 31, 2000 reflects a financial
statement tax benefit of $9.8 million related to the change in the price of
our common stock held in our stock incentive plan trust. For purposes of
comparability, exclusive of the financial statement tax benefit, tax expense
would have been $106.3 million and net income would have been $140.6 million.
(4)Per share data has been retroactively adjusted to reflect a three-for-two
stock split of our common stock effective August 16, 2001.
8
RISK FACTORS
An investment in our common stock involves a number of risks, some of
which, including market, operational, legal and regulatory risks, could be
substantial and are inherent in our businesses. You should carefully consider
the following information about these risks, together with the other
information in this prospectus, before buying shares of common stock.
A decline in the prices of securities generally could lead to a decline in our
assets under management, revenues and earnings.
A large portion of our revenues are derived from investment advisory
contracts with our clients. Under these contracts, the investment advisory fees
we receive are typically based on the market value of assets under management.
Accordingly, a decline in the prices of securities generally may cause our
revenues and income to decline by:
. causing the value of our assets under management to decrease, which would
result in lower investment advisory fees; or
. causing our clients to withdraw funds in favor of investments they
perceive offer greater opportunity or lower risk, which would also result
in lower investment advisory fees.
If our revenues decline without a commensurate reduction in our expenses,
our net income will be reduced.
We could lose clients and suffer a decline in our revenues and earnings if the
investments we choose perform poorly, regardless of the trend in the prices of
securities.
We believe that investment performance is one of the most important factors
for the growth of our assets under management. Poor investment performance
could impair our revenues and growth because:
. existing clients might withdraw funds in favor of better performing
products, which would result in lower investment advisory fees;
. our ability to attract funds from existing and new clients might
diminish; or
. firms with which we have strategic alliances may terminate their
relationships with us, and future strategic alliances may be unavailable.
If our revenues decline without a commensurate reduction in our expenses,
our net income will be reduced.
Even when securities prices are rising, performance can be affected by
investment style. In certain recent years, growth stocks outperformed value
stocks as measured by the S&P/BARRA growth and value indices. However, because
of our historical emphasis on the value style of investing, our clients'
portfolios were less invested in growth stocks. As a result, we experienced
some loss of institutional accounts and increased repurchases of shares of the
Neuberger Berman mutual funds in those years.
Our clients can remove the assets we manage on short notice.
Our investment advisory and administrative contracts are generally
terminable at will or upon 30 to 60 days' notice, and mutual fund investors may
redeem their investments in the funds at any time without prior notice.
Institutional and individual clients, and firms with which we have strategic
alliances,
9
can terminate their relationship with us, reduce the aggregate amount of assets
under management, or shift their funds to other types of accounts with
different rate structures for any of a number of reasons, including investment
performance, changes in prevailing interest rates and financial market
performance. In a declining stock market the pace of mutual fund repurchases
could accelerate. Poor performance relative to other investment management
firms tends to result in decreased purchases of fund shares, increased
redemptions of fund shares, and the loss of institutional or individual
accounts or strategic alliances. The decrease in revenues that could result
from any such event could have a material adverse effect on our business.
The investment management business is intensely competitive.
We face substantial competition in every aspect of our business. Factors
affecting our business include brand recognition, business reputation,
investment performance, quality of service and the continuity of both client
relationships and assets under management. Fee competition also affects the
business, as do expenses, commissions, compensation, administration and/or
other expenses paid to intermediaries.
We compete with a large number of investment management firms. These
include global and domestic investment management companies, commercial banks,
brokerage firms and broker-dealers, insurance companies and other financial
institutions. Many competing firms are parts of larger financial services
companies and attract business through numerous avenues including retail bank
offices, investment banking and underwriting contacts, insurance agencies and
broker-dealers. A number of our competitors have greater capital and other
resources, and offer more comprehensive lines of products and services, than we
do.
The affiliation of U.S. banks and insurance companies with securities firms
has accelerated consolidation within the money management and financial
services industries. It has also increased the variety of competition for
traditional money management firms, which businesses are limited to investing
assets on behalf of institutional and individual clients. Foreign banks and
investment firms have entered the U.S. money management industry, either
directly or through partnerships or acquisitions.
Our competitors seek to expand their market share in many of the same areas
that we serve. Financial intermediaries that provide our products to their
clients may also provide competing products from competing firms, many of which
employ such advisers. Many current and potential competitors have greater brand
name recognition and more extensive client bases, which could be used to our
disadvantage.
We face significant competition from other registered open-end investment
companies. They vary both in size and investment philosophy. Their shares are
offered to the public on a load and no-load basis. Advertising, sales
promotions, the type and quality of services offered, and investment
performance influence competition for mutual fund sales.
Our business may be adversely affected by an inability to recruit, retain
and motivate key employees.
Our ability to attract and retain clients and mutual fund shareholders and
compete effectively in our businesses is dependent on our ability to attract
and retain highly skilled investment management, research, client service,
legal, fiduciary and sales professionals.
The market for such professionals is very competitive and has grown more so
in recent periods as the investment management industry has experienced
substantial growth. Our policy has been to
10
provide our professionals with compensation and benefits that we believe to be
competitive with other leading investment management firms. The inability to
continue to provide competitive compensation and benefits could affect our
ability to attract or retain skilled professionals.
While we have historically experienced little turnover among our
professionals, we cannot be sure that we will continue to be successful in
retaining our key personnel or in attracting highly qualified professionals. We
do not maintain "key person" insurance on any of our personnel.
We may be unable to continue successfully our strategic initiative of acquiring
companies or adding experienced investment management teams.
As one of our strategic initiatives to generate growth, we intend to
continue to acquire companies and add experienced investment management teams
where such additions would be both strategic and accretive to earnings.
However, we may not be able to identify suitable acquisition targets or
investment teams to add to our firm. In addition, if we do identify suitable
candidates, we may not be able to complete any such acquisition or addition of
teams in a timely manner or on terms that are commercially acceptable to us.
Our management may need to devote significant time and effort to pursuing these
acquisitions or the addition of teams. If we are unable to identify or complete
successfully these acquisitions or additions, we may fail to maintain or
increase assets under management.
We depend on accessing clients through intermediaries.
Our ability to market our mutual funds and subadvisory services is highly
dependent on access to the client base of national and regional securities
firms, banks, insurance companies, defined contribution plan administrators and
other intermediaries which generally offer competing investment products. To a
lesser extent, our Private Asset Management business depends on referrals from
accountants, lawyers, financial planners and other professional advisors.
Although we have historically been successful in gaining access to these
channels, we cannot be sure that we will continue to be able to do so. The
inability to have this access could have a material adverse effect on our
ability to maintain or increase assets under management.
We are subject to extensive regulation; violations of regulatory requirements
could impair our ability to operate or result in fines or damage to our
reputation.
As with all investment management companies and broker-dealers, we and our
mutual fund business are heavily regulated. Noncompliance with applicable
statutes or regulations could result in sanctions including:
. the revocation of licenses to operate certain businesses;
. the suspension or expulsion from a particular jurisdiction or market of
our business organizations or key personnel;
. the imposition of fines and censures; and
. reputational loss.
Any of these events could have a material adverse effect on our business.
Our business and the securities industry in general are subject to
extensive regulation in the United States at both the federal and state level,
as well as by self-regulatory organizations. The financial services industry is
one of the nation's most extensively regulated industries. The Securities and
Exchange Commission is responsible for enforcing the federal securities laws
and serves as a
11
supervisory body for all investment advisers to mutual funds, as well as for
national securities exchanges and associations. Our subsidiaries, Neuberger
Berman, LLC and Neuberger Berman Management Inc., are registered
broker-dealers. The regulation of broker-dealers has, to a large extent, been
delegated by the federal securities laws to self-regulatory organizations,
including the national securities and commodities exchanges and NASD Inc., or
the NASD. In addition, these subsidiaries are subject to regulation under the
laws of the fifty states, the District of Columbia and certain foreign
countries in which they are registered to conduct securities, investment
advisory or commodities businesses.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales practices, market making and trading among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure, recordkeeping and the conduct of directors, officers and employees.
Violation of applicable regulations can result in the revocation of
broker-dealer licenses, the imposition of censures or fines and the suspension
or expulsion of a firm, its officers or employees. Neuberger Berman, LLC and
Neuberger Berman Management Inc. are also subject to "Risk Assessment Rules"
imposed by the SEC which require, among other things, that certain
broker-dealers maintain and preserve certain information, describe risk
management policies and procedures and report on the financial condition of
certain affiliates whose financial and securities activities are reasonably
likely to have a material impact on the financial and operational condition of
broker-dealers.
Our trust company subsidiaries are supervised by federal or relevant state
banking authorities, which regulate such matters as policies and procedures
relating to conflicts of interest, account administration and overall
governance and supervisory procedures.
Additional legislation and regulations, including those relating to the
activities of investment advisers and broker-dealers, changes in rules imposed
by the SEC or other U.S. or foreign regulatory authorities and self-regulatory
organizations or changes in the interpretation or enforcement of existing laws
and rules may adversely affect our business and profitability. Our businesses
may be materially affected not only by regulations applicable to it as an
investment adviser or broker-dealer, but also by regulations of general
application. For example, the volume of our principal investment advisory
business in a given time period could be affected by, among other things,
existing and proposed tax legislation and other governmental regulations and
policies (including the interest rate policies of the Federal Reserve Board)
and changes in the interpretation or enforcement of existing laws and rules
that affect the business and financial communities.
We are subject to net capital rules that could limit our ability to repay debt
or pay dividends on our common stock.
As registered broker-dealers and members of the NYSE and NASD, Neuberger
Berman, LLC and Neuberger Berman Management Inc. are subject to the SEC's
Uniform Net Capital Rule 15c3-1 which could limit our ability to repay debt or
pay dividends on our common stock. Rule 15c3-1 specifies the minimum level of
net capital a broker-dealer must maintain and also requires that part of its
assets be kept in relatively liquid form. Neuberger Berman, LLC is also subject
to the net capital requirements of various securities and other self-regulatory
organizations.
The SEC and various self-regulatory organizations impose rules that require
notification when net capital falls below certain predefined criteria, dictate
the ratio of subordinated debt to equity in the regulatory capital composition
of a broker-dealer and constrain the ability of a broker-dealer to expand its
business under certain circumstances. Additionally, Rule 15c3-1 imposes certain
requirements that may have the effect of prohibiting a broker-dealer from
distributing or withdrawing capital and requiring prior notice to the SEC for
certain withdrawals of capital. Since our principal assets are our ownership of
our broker-dealer subsidiaries, the rules governing net capital and
restrictions on capital withdrawals could limit our ability to repay debt or
pay dividends on our common stock.
12
As of March 31, 2002, Neuberger Berman, LLC was required to maintain
minimum net capital of approximately $21.0 million and had total excess net
capital of approximately $195.1 million. As of March 31, 2002, Neuberger Berman
Management Inc. was required to maintain minimum net capital of $250,000 and
had total excess net capital of approximately $5.2 million.
Our business is heavily dependent upon computer-based systems to process
transactions; systems failures may disrupt our business and limit our growth.
Our business is highly dependent on communications and information systems
and those of our key service vendors. Any failure or interruption of such
systems could have a material adverse effect on our operating results.
Operational risk arises from mistakes made in the confirmation or settlement of
transactions or from the improper recording or accounting of transactions. We
are highly dependent on our ability to process a large number of transactions
on a daily basis, and rely heavily on financial, accounting and other data
processing systems. If any of these do not function properly, we could suffer
financial loss, business disruption, liability to clients, regulatory
intervention or damage to our reputation. If systems are unable to accommodate
an increasing volume of transactions, our ability to expand could be affected.
Although we have back-up systems in place, we cannot be sure that any such
systems failure or interruption, whether caused by a fire, other natural
disaster, power or telecommunications failure, act of war or otherwise will not
occur, or that back-up procedures and capabilities in the event of any such
failure or interruption will be adequate.
The securities brokerage business has inherent risks.
The securities brokerage business is, by its nature, subject to numerous
and substantial risks, particularly in volatile or illiquid markets, and in
markets influenced by sustained periods of low or negative economic growth,
including the risk of losses resulting from the ownership of securities,
trading, principal activities, counterparty failure to meet commitments, client
fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders), failures in connection with the processing of
securities transactions and litigation. Our trading activities for our own
account are limited. Therefore, the principal risks of trading are those
relating to counterparty failure and unauthorized trading. We have risk
management procedures and internal controls to address these risks but we
cannot be certain that these procedures and controls will prevent losses from
occurring.
Our former principals are parties to a stockholders agreement that gives them
significant influence over us, and they may have interests that differ from
those of other stockholders.
As of June 30, 2002, the former Neuberger Berman principals who are
currently employed by us and their affiliates held approximately 42% of our
outstanding common stock. If the maximum number of shares of common stock held
by such principals and their affiliates specifically named in this prospectus
and identified as being offered by them under this prospectus were offered and
sold, such principals and their affiliates would have held approximately 38% of
our outstanding common stock as of June 30, 2002. Neuberger Berman is a party
to a Stockholders Agreement with the former Neuberger Berman principals and
certain family limited partnerships and trusts formed by them providing that:
. before every stockholders' meeting, the former Neuberger Berman
principals who are currently employed by us and their affiliates will
take a separate preliminary vote on all the issues that will be presented
at the stockholders' meeting; and
. all shares held by them must be voted as a block in accordance with the
majority of shares voted in such preliminary vote.
As a result, the former Neuberger Berman principals who are currently employed
by us and their affiliates have significant influence on our board of
directors, and, therefore, our business, policies and affairs including certain
corporate transactions that require stockholder approval, such as mergers and
sales of our assets. The influence exerted by these former Neuberger Berman
principals and their affiliates and the transfer restrictions in the
Stockholders Agreement could preclude any unsolicited acquisition of Neuberger
Berman and, consequently, adversely affect the market price of the common stock
or prevent our stockholders from realizing a premium on their shares. See
"Description of Capital Stock--Stockholders Agreement."
13
Provisions of our organizational documents and Delaware law may discourage an
acquisition of Neuberger Berman and prevent our stockholders from realizing a
premium on their shares.
Our organizational documents contain provisions that may discourage a third
party from making a proposal to acquire us. For example, the Board of Directors
may, without the consent of our stockholders, issue preferred stock with
greater voting rights than those associated with our common stock. In addition,
the Delaware corporation law imposes restrictions on mergers and other business
combinations between us and any holder of 15% or more of our voting stock. See
"Description of Capital Stock" for a more detailed description of our capital
stock and relevant Delaware corporation law. These provisions could preclude
any unsolicited acquisition of Neuberger Berman and, consequently, adversely
affect the market price of the common stock or prevent our stockholders from
realizing a premium on their shares.
Our share price may decline due to the large number of shares eligible for
future sale.
As of June 30, 2002, 70,164,694 shares of our common stock were issued and
outstanding. Sales, or the possibility of sales, of substantial amounts of
common stock by the former Neuberger Berman principals and their affiliates may
materially adversely affect the market price of the common stock prevailing
from time to time. The Stockholders Agreement limits the number of shares the
former principals and their affiliates may sell in any calendar year. The
restrictions on the disposition of shares contained in the Stockholders
Agreement can be waived by our Board of Directors or its designee without
notice to or consent of our stockholders. The 3,816,926 shares of common stock
that may be offered and sold by our former principals and their affiliates
under this prospectus are subject to the transfer restrictions contained in the
Stockholders Agreement that prevent their sale prior to January 1, 2003. Our
Board of Directors or its designee may waive these restrictions to permit the
sale of all of these shares prior to January 1, 2003 in one or more
transactions. After giving effect to the sale of all of the shares held by our
former principals and their affiliates under this prospectus, an additional
1,490,956 shares of common stock may be sold by such principals and their
affiliates beginning on January 1, 2003.
The Neuberger Berman Employee Defined Contribution Stock Incentive Plan
Trust holds an aggregate of 4,502,050 shares of common stock on behalf of
participants in our Employee Defined Contribution Stock Incentive Plan. The
right of a participant to receive shares allocated to his or her account
generally becomes vested, and the shares become distributable to the
participant, in three equal installments on the second, third and fourth
anniversaries of the allocation to the participant, subject to the satisfaction
of certain conditions. Accordingly, in July 2001, 1,856,274 shares of common
stock became vested under the plan and 1,856,230 shares of common stock held by
the Employee Trust are scheduled to vest in October 2002. All of the 1,183,074
shares of common stock held by the Employee Trust and covered by this
prospectus are scheduled to vest in October 2002 and may not be sold prior to
the vesting date unless Neuberger Berman accelerates the vesting of such
shares. Neuberger Berman may accelerate the vesting of such shares to permit
their sale in an offering prior to October 2002.
You may have no effective remedy against Arthur Andersen LLP in connection with
a material misstatement or omission in our 1999, 2000 and 2001 financial
statements included in this prospectus.
On June 15, 2002, Arthur Andersen LLP, which audited our financial
statements included in this prospectus for the years ended December 31, 1999,
2000 and 2001, was convicted by a jury in Houston, Texas, of obstruction of
justice in connection with the government's investigation of Enron Corp. Arthur
Andersen LLP has consented to the inclusion of their report relating to those
financial statements in the registration statement containing this prospectus
as filed with the SEC. You may have no effective remedy against Arthur Andersen
LLP in connection with any material misstatement or omission in these financial
statements, particularly in the event that Arthur Andersen LLP ceases to exist
or becomes insolvent as a result of the indictment or other proceedings against
Arthur Andersen LLP.
14
FORWARD LOOKING STATEMENTS
Our disclosure and analysis in this prospectus or in documents that are
incorporated in this prospectus by reference contain some forward looking
statements. Forward looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe,"
and other words and terms of similar meaning in connection with any discussion
of future operating or financial performance. In particular, these include
statements relating to future actions, future performance of our products,
expenses, the outcome of any legal proceedings, and financial results. Although
we believe that our expectations and beliefs are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
there can be no assurance that our actual results will not differ materially
from our expectations or beliefs. Some of the factors that could cause our
actual results to differ from our expectations or beliefs include, without
limitation, the adverse effect from a decline in the securities markets or if
our products' performance declines, a general downturn in the economy, changes
in government policy or regulation, our inability to attract or retain key
employees and unforeseen costs and other effects related to legal proceedings
or investigations of governmental and self-regulatory organizations, as well as
the factors discussed under the heading "Risk Factors." These statements are
provided as permitted by the Private Litigation Reform Act of 1995. We
undertake no obligation to update publicly any forward looking statements,
whether as a result of new information, future events or otherwise.
15
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders.
PRICE RANGE OF OUR COMMON STOCK AND DIVIDENDS
The following table sets forth, for the calendar quarters indicated, the
high and low closing prices per share of our common stock as reported by the
NYSE. The table gives effect to the three-for-two stock split in our common
stock in the form of a 50% dividend on August 16, 2001.
Price Range of
Common Stock Dividends Dividends
--------------- Declared Paid Per
Period High Low Per Share Share
------ ------- ------- --------- ---------
2000
First Quarter........................ $19.250 $15.917 $ -- $0.067
Second Quarter....................... 31.667 18.333 0.067 0.067
Third Quarter........................ 42.250 29.959 0.067 0.067
Fourth Quarter....................... 56.000 38.583 0.067 0.067
2001
First Quarter........................ $55.207 $40.247 $0.067 $0.067
Second Quarter....................... 55.347 38.027 0.067 0.067
Third Quarter........................ 46.667 31.850 0.075 0.075
Fourth Quarter....................... 44.720 33.350 0.075 0.075
2002
First Quarter........................ $47.670 $40.740 $0.075 $0.075
Second Quarter....................... 48.410 36.400 0.075 0.075
Third Quarter (through July 19, 2002) 36.050 30.680 -- --
On July 19, 2002, the closing sales price per share for our common stock on
the NYSE was $30.68. There were approximately 99 stockholders of record of our
common stock as of February 15, 2002. As of February 15, 2002, there were
approximately 2,500 beneficial stockholders whose shares are held in street
name.
The declaration of dividends by Neuberger Berman is subject to the
discretion of our Board of Directors. Our Board of Directors will take into
account such matters as general business conditions, our financial results,
capital requirements, contractual, legal and regulatory restrictions on the
payment of dividends by us to our stockholders or by our subsidiaries to us,
and such other factors as our Board of Directors may deem relevant.
To the extent that assets are used to meet minimum net capital requirements
of Neuberger Berman, LLC and Neuberger Berman Management Inc. under Rule
15c3-1, they are not available for distribution to stockholders as dividends.
See "Risk Factors--We are subject to net capital rules that could limit our
ability to repay debt or pay dividends on our common stock" for a discussion of
certain limitations on our receipt of funds from our regulated subsidiaries. In
addition, the debt covenants related to Neuberger Berman, LLC's outstanding $35
million subordinated note and $100 million committed line of credit include
certain covenants that may further restrict our ability to pay dividends to
stockholders.
Our Board of Directors has authorized the repurchase of our common stock in
the open market and/or private purchases. The acquired shares may be used for
corporate purposes, including shares issued to employees under our employee
stock purchase plans. Since the inception of our common stock repurchase
program, we have repurchased 5,946,595 shares of common stock for $220.1
million, including 2,400,900 shares which were repurchased from a limited
number of former principals in a transaction that followed the secondary
offering in July 2001. We used cash flows from operations and the proceeds from
our convertible notes offering to fund the purchases of these shares. As of
March 31, 2002, authorizations for the repurchase of up to $29.9 million of our
common stock remained in effect. On April 22, 2002, our Board of Directors
approved a $75 million increase to the existing authorization.
16
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March
31, 2002.
This table should be read in conjunction with our consolidated financial
statements and notes therein included in this prospectus.
March 31, 2002
----------------------
(Amounts in thousands,
except share data)
Subordinated Liability........................................................ $ 35,000
Convertible Senior Notes(1) (net of $23,296 discount)......................... 151,704
---------
Total long term debt................................................... 186,704
---------
Stockholders' Equity:
Preferred Stock, par value $.01 per share; 5,000,000 shares authorized; no
shares issued and outstanding............................................ --
Common Stock, par value $.01 per share; 250,000,000 shares authorized;
75,680,379 shares issued; 70,442,722 shares outstanding(2)............... 757
Paid-in capital............................................................ 349,660
Retained earnings.......................................................... 201,210
Less: Treasury stock, at cost, 5,237,657 shares............................ (196,906)
Unearned compensation(3).............................................. (14,932)
---------
Total stockholders' equity............................................. 339,789
---------
Total capitalization................................................... $ 526,493
=========
--------
(1) On May 6, 2002, we repurchased $8.7 million principal amount at maturity of
our convertible notes at their accreted value of $867.42 per $1,000
principal amount at maturity.
(2) Does not include 2,430,382 shares of common stock reserved for issuance
upon conversion of our convertible notes and 5,989,280 shares of common
stock reserved for issuance upon the exercise of options outstanding under
the 1999 Neuberger Berman Inc. Long-Term Incentive Plan and the 1999
Neuberger Berman Inc. Directors Stock Incentive Plan. Also, does not give
effect to any repurchases by us of our common stock under our share
repurchase program after March 31, 2002.
(3) Relates to 408,451 shares of common stock reserved for issuance in
connection with our Wealth Accumulation Plan, Long-Term Incentive Plan and
the Directors Stock Incentive Plan.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below is derived from
our financial statements and accompanying notes. Our financial statements as of
December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and
2001 have been audited by Arthur Andersen LLP, independent public accountants.
These financial statements are included elsewhere in this prospectus. The
selected income statement and balance sheet data presented below as of December
31, 1997, 1998 and 1999 and for the years ended December 31, 1997 and 1998 have
been derived from audited financial statements that are not included in this
prospectus. The selected income statement and balance sheet data as of March
31, 2002 and for the three-month periods ended March 31, 2001 and 2002 have
been taken from our unaudited interim condensed consolidated financial
statements included elsewhere in this prospectus. The March 31, 2001 selected
balance sheet data has been taken from our unaudited interim condensed
consolidated financial statements included in our Form
10-Q for the quarter ended March 31, 2001. In the opinion of management, this
information has been prepared on the same basis as our audited consolidated
financial statements included herein and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
data. The results of operations for an interim period are not necessarily
indicative of the results for the full year or any other interim period. The
data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and accompanying notes included elsewhere in this
prospectus.
18
Pre-IPO Post-IPO
--------------------- -------------------------------------------
As of and for the
Three Months Ended
As of and for the Years Ended December 31, March 31,
------------------------------------------------------- ---------------------
1997(1) 1998(1) 1999(1)(2) 2000(3) 2001 2001 2002
---------- ---------- ---------- ---------- ---------- ---------- ----------
Assets Under Management (in
millions)...................... $ 53,511 $ 55,587 $ 54,399 $ 55,486 $ 59,048 $ 54,802 $ 61,873
========== ========== ========== ========== ========== ========== ==========
Income Statement Data (in
thousands):
Revenues:
Investment advisory and
administrative fees.......... $ 327,898 $ 389,238 $ 379,434 $ 399,907 $ 413,601 $ 103,292 $ 108,912
Commissions................... 124,911 145,969 142,082 146,589 144,667 36,693 39,598
Interest...................... 154,280 164,782 160,022 223,709 157,768 57,708 19,378
Principal transactions in
securities................... 7,838 6,324 10,003 9,623 2,788 559 502
Clearance fees................ 8,332 9,146 11,081 13,532 13,450 3,814 2,931
Other income.................. 3,796 4,004 4,059 6,428 4,146 577 2,835
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross revenues............... 627,055 719,463 706,681 799,788 736,420 202,643 174,156
Interest expense.............. 124,530 137,329 133,769 183,441 123,138 47,811 13,961
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net revenues after interest
expense..................... 502,525 582,134 572,912 616,347 613,282 154,832 160,195
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses:
Employee compensation and
benefits..................... 148,301 173,379 325,310 245,445 253,365 65,572 68,439
Information technology........ 13,642 15,634 19,172 22,925 22,492 5,450 5,797
Rent and occupancy............ 9,882 12,182 15,313 17,796 20,828 4,625 5,503
Brokerage, clearing and
exchange fees................ 12,727 10,245 10,164 10,514 12,022 2,702 3,039
Advertising and sales
promotion.................... 12,659 14,707 9,259 9,251 9,372 2,546 2,193
Distribution and fund
administration............... 10,031 22,832 19,437 18,977 19,424 4,371 5,820
Professional fees............. 5,165 11,550 9,276 11,205 10,934 1,964 2,542
Depreciation and amortization. 6,445 8,716 10,532 10,638 13,063 2,771 3,697
Other expenses................ 9,834 18,432 31,077 22,675 22,723 5,775 5,344
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..... 228,686 287,677 449,540 369,426 384,223 95,776 102,374
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before taxes...... 273,839 294,457 123,372 246,921 229,059 59,056 57,821
Tax (benefit) expense......... 8,857 9,506 (12,195) 96,565 96,391 24,822 24,574
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................... $ 264,982 $ 284,951 $ 135,567 $ 150,356 $ 132,668 $ 34,234 $ 33,247
========== ========== ========== ========== ========== ========== ==========
Balance Sheet Data (in
thousands):
Total assets.................. $2,410,213 $3,829,435 $3,847,608 $4,421,763 $4,382,487 $4,431,205 $4,519,268
Total liabilities and debt.... 2,251,182 3,720,236 3,598,806 4,071,624 $4,056,097 4,053,680 4,179,479
Total principals' capital and
stockholders' equity......... 159,031 109,199 248,802 350,139 326,390 377,525 339,789
--------
(1) On October 7, 1999, the principals of Neuberger Berman, LLC and the
shareholders of Neuberger Berman Management Inc. exchanged their ownership
interests for 64.1 million shares of our common stock. Prior to this
exchange, we operated as a partnership and, as a result, the principals
were compensated through the receipt of distributions of capital. In
addition, Neuberger Berman, LLC did not pay United States federal and state
taxes as it was treated as a partnership for tax purposes. Neuberger Berman
Management Inc., as an S-Corporation, also did not pay United States
federal taxes.
(2) In connection with our IPO on October 8, 1999, we incurred pre-tax
reorganization and IPO charges totaling $150.1 million. These charges were
principally comprised of an initial, irrevocable non-cash contribution of
common stock to our employee defined contribution stock incentive plan
trust $134.3 million (included in employee compensation and benefits), a
cash contribution to the Neuberger Berman Foundation of $10.0 million
(included in other operating expenses) and severance and other charges of
$5.8 million ($5.6 million of which is included in employee compensation
and benefits and the remainder in other operating expenses).
(3) Tax expense for the year ended December 31, 2000, reflects a financial
statement tax benefit of $9.8 million related to the change in the price of
our common stock held in our stock incentive plan trust. For purposes of
comparability, exclusive of the financial statement tax benefit, tax
expense would have been $106.3 million and net income would have been
$140.6 million.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following management's discussion and analysis of the results of
operations for the three months ended March 31, 2001 and 2002 and for the years
ended December 31, 1999, 2000 and 2001 should be read in conjunction with our
consolidated financial statements together and accompanying notes included
elsewhere in this prospectus.
Forward Looking Statements
Our disclosure and analysis in this prospectus or in documents that are
incorporated in this prospectus by reference contain some forward looking
statements. Forward looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe,"
and other words and terms of similar meaning in connection with any discussion
of future operating or financial performance. In particular, these include
statements relating to future actions, future performance of our products,
expenses, the outcome of any legal proceedings, and financial results. Although
we believe that our expectations and beliefs are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
there can be no assurance that our actual results will not differ materially
from our expectations or beliefs. Some of the factors that could cause our
actual results to differ from our expectations or beliefs include, without
limitation, the adverse effect from a decline in the securities markets or if
our products' performance declines, a general downturn in the economy, changes
in government policy or regulation, our inability to attract or retain key
employees and unforeseen costs and other effects related to legal proceedings
or investigations of governmental and self-regulatory organizations. These
statements are provided as permitted by the Private Litigation Reform Act of
1995. We undertake no obligation to update publicly any forward looking
statements, whether as a result of new information, future events or otherwise.
Business Environment
The financial markets were marked by significant turbulence in 2001, in
part due to the September 11/th /tragedy. The September 11/th/ tragedy resulted
in a sharp drop in consumer and business spending and created additional
negative momentum in an already difficult year in the financial markets. The
U.S. economy had entered a recession starting in March 2001 and the equity
markets remained far below their peak levels reached in March 2000. Due to
weakening investor confidence, the Standard & Poor's 500 Index, or S&P 500,
fell 13.0% in 2001, its second negative annual return in a row. Almost every
major equity index yielded negative returns for the year.
Late in 2001, it appeared an economic recovery began to emerge, due in part
to fiscal and monetary stimuli. Throughout 2001, the Federal Reserve Board
engaged in an aggressive interest-rate cutting campaign, lowering short-term
interest rates to 1.75%, the lowest level in the last 40 years. In Washington,
D.C., a new administration also enacted major tax law changes to boost
investments and cut taxes for investors. Although the S&P 500 steeply declined
after September 11/th/, hitting a low point of 965.80 on September 21/st/, it
rallied in December and ended 2001 at 1,148.08. The S&P 500, however, remained
well below its record level of 1,527.46, achieved on March 24, 2000.
While equity markets suffered in 2001, fixed income markets rallied, due in
part to the Federal Reserve Board's rate-cutting actions as well as significant
investors' interest in safe investments. The Lehman Brothers Aggregate Bond
Index rose 8.4% during the year. Additionally, the U.S. Treasury Department
halted issuance of 30-year bonds, resulting in demand for long-term fixed-income
20
securities in other areas of the bond market. The U.S. agency market performed
well as buyers sought high-quality issues. Corporate bonds also performed well
as a class, despite record supply and rising credit quality concerns. Credit
downgrades in 2001 outnumbered upgrades by a ratio of 2.9 to 1, marking the
steepest decline in corporate credit since 1991. The bankruptcy filing of Enron
Corp. in December of 2001 heightened volatility in the energy sector, while
ripple effects spread to other sectors, particularly among conglomerates and
companies with complex financing structures.
During 2001, developments in the market were mostly unfavorable for the
securities industry. Declining asset values and narrowing interest rate spreads
led to reduced profits from client financings. Also, the implementation of
decimal-based pricing in the stock market squeezed profit margins in the market
making and trading businesses.
U.S. equity markets struggled to gain momentum in the first quarter of
2002. The markets were negatively influenced by the investigation and
accounting issues related to Enron Corp. as well as mixed signals on the
economy. On a total return basis, the major indices turned in mixed results for
the first quarter as the Dow Jones Industrial Average rose 4.3%, the S&P 500
gained 0.3%, and the Nasdaq Composite lost 5.4%.
During the first quarter of 2002, signs of economic recovery began to
emerge as manufacturing activity increased, productivity levels improved, and
consumer confidence rose to its highest level since August of 2001. In
response, investors turned to cyclical sectors of the market, avoiding
growth-oriented stocks in the technology and healthcare sectors. Despite
positive economic news, the Federal Reserve Board held interest rates steady,
but adopted a neutral stance on the economy and inflation. Small-cap stocks
continued to outperform larger stocks, and the value style of investing
outpaced the growth style. Near the end of the quarter, violence in the Middle
East sent oil prices higher, resulting in concern over rising inflation and
interest rates.
The increase in our assets under management during the above-mentioned
periods supports our belief that difficult market conditions tend to convince
more investors--both individual and institutional--of the real value, over the
long term, of seeking professional advice and active management of their money.
While we offer all styles of investing, we believe our longstanding expertise
in value investing will serve us well in a difficult market environment. Our
investment performance was strong in a difficult market environment. Assets
under management reached an all-time high of $61.9 billion at March 31, 2002 an
increase of 12.9% from $54.8 billion at March 31, 2001 and up 4.8% from $59.0
billion at December 31, 2001. Assets under management in our Private Asset
Management segment also hit an all-time high of approximately $25.7 billion at
March 31, 2002. This represents an increase of 2.9% from $25.0 billion at
December 31, 2001 and a rise of 13.0% from $22.8 billion at March 31, 2001.
Relative investment performance in this segment continued to be excellent,
outperforming the rate of return of the S&P 500 in the same quarter. Assets
under management in our Mutual Fund and Institutional segment was approximately
$36.1 billion at March 31, 2002, up 12.9% from $32.0 billion at March 31, 2001
and up 6.2% from $34.0 billion at December 31, 2001. Additionally, mutual fund
performance was good, with the four largest of our equity funds outperforming
the S&P 500.
Recent Developments
On April 22, 2002, we announced that we entered into an agreement which
would result in the high yield bond team from Lipper & Company becoming our
employees. The team manages in excess of $500 million in assets, including the
Lipper High Income Bond Fund, investment partnerships and separate accounts for
both institutional and high net worth clients. The transactions contemplated by
this agreement are subject to the satisfaction of customary closing conditions
and have not yet been consummated.
On April 23, 2002, we announced that our Board of Directors has appointed
KPMG LLP as our independent auditors replacing Arthur Andersen LLP. The
decision to change auditors was not the
21
result of any disagreement between Arthur Andersen LLP and us on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
On May 1, 2002, we announced the launch of our Real Estate Fund, a mutual
fund that seeks capital growth and current income by investing in real estate
securities.
On May 2, 2002, we amended the terms of our senior convertible notes to
permit the holders, at their option, to cause us to repurchase the convertible
securities on November 4, 2002, at their then accreted value of $870.67 per
$1,000 principal amount at maturity. We also announced that each holder
electing not to require us to repurchase our convertible securities as of May
4, 2002, would receive a one-time payment of $4.34 for every $1,000 aggregate
principal amount at maturity of the convertible securities held. As of the
close of business May 3, 2002, holders of approximately 5% or $8.7 million
principal amount at maturity of the convertible securities exercised their
option to cause us to repurchase their convertible securities. We paid $7.6
million for these repurchases in cash on May 6, 2002. On May 8, 2002, we made a
one-time payment of $4.34 for every $1,000 aggregate principal amount at
maturity to each holder of our convertible securities as of the close of
business on May 7, 2002.
General
Our revenues are recorded in the business segments in which they are
earned. We derive our revenues primarily from fees for investment advisory and
administrative services provided to our private asset management, mutual fund,
institutional and wrap fee clients. Investment advisory and administrative fees
that we earn are generally based on the total market value and composition of
assets under management. As a result, fluctuations in financial markets and
client asset additions and withdrawals have a direct effect on our net revenues
and net income. Our fees vary with the type of assets managed, with higher fees
earned on actively managed equity accounts and lower fees earned on
fixed-income and cash management accounts.
Through our broker-dealer, Neuberger Berman, LLC, we earn commissions by
executing equity securities transactions for private asset management, mutual
fund and institutional clients as well as for third parties in professional
investor clearing services and research sales transactions. The majority of our
commissions are earned from transactions for private asset management clients.
Our commissions, derived from all business segments, may fluctuate based on
general market conditions. Also, through Neuberger Berman, LLC, we earn
clearance fees for the settlement of securities transactions for various
introducing brokers.
We generate additional income by managing cash balances available as a
result of our broker-dealer activities. The three principal areas from which we
generate net interest income are treasury management (managing overnight cash
balances), global securities lending activities and client cash and margin
balances. We evaluate these activities by focusing on net interest income. Net
interest income fluctuates based on general market conditions, prevailing
interest rates and the amount of client cash and margin balances.
Our operating expenses include direct expenses, such as employee
compensation and benefits, information technology and rent and occupancy, and
indirect expenses, such as general and administrative, research, execution and
clearance expenses. Direct expenses are charged to the business segment in
which they are incurred while indirect expenses are allocated to each business
segment based upon various methodologies determined by management.
Our largest operating expense is employee compensation and benefits, the
most significant component being variable compensation for portfolio managers
and sales personnel, which is based
22
largely on commissions and advisory fees. Historically, because we had operated
as a partnership, substantially all payments to our principals were accounted
for as distributions from principals' capital and not recorded as compensation
expense.
On October 7, 1999, the members of Neuberger Berman, LLC and the
shareholders of Neuberger Berman Management Inc. exchanged their ownership
interests for 64.1 million shares of our common stock (the "Exchange"). On
October 13, 1999, we completed our initial public offering (the "IPO"). In that
offering, we sold 4.5 million shares of common stock and received net proceeds
after expenses of approximately $88 million. In addition, certain of our
stockholders who received our common stock in the Exchange sold 6,329,545
shares of that stock in the IPO. We did not receive the proceeds from the sale
of that stock. In connection with our IPO, we incurred pre-tax reorganization
and IPO charges totaling approximately $150.1 million (the "Reorganization and
IPO Charges"). The Reorganization and IPO Charges were principally comprised of
an initial, irrevocable non-cash contribution of common stock to our employee
defined contribution stock incentive plan trust (the "Stock Incentive Plan") of
$134.3 million, a cash contribution to the Neuberger Berman Foundation of $10.0
million and severance and other charges of $5.8 million. To allow for a more
consistent analysis of expenses, these Reorganization and IPO Charges have not
been directly considered in the discussion of results of operations.
Prior to the Exchange, Neuberger Berman, LLC did not pay United States
federal and state taxes because, as a limited liability company, it was treated
as a partnership for tax purposes, and its members were taxed on their
proportionate share of Neuberger Berman, LLC's taxable income or loss.
Neuberger Berman Management Inc., as an S-Corporation, also did not pay United
States federal taxes prior to the Exchange, but was subject to certain state
and local taxes, and its shareholders were responsible for their own federal
income taxes. Effective with the Exchange, we became subject to federal, state
and local income taxes and we file a consolidated federal income tax return.
Results of Operations
Our business is divided functionally into three major business segments:
Private Asset Management, Mutual Fund and Institutional and Professional
Securities Services. Our Private Asset Management segment provides customized
investment management services for high net worth individuals, families and
smaller institutions through money management, advisory services and trust
services. The investment advisory and administrative services that we provide
through our Mutual Fund and Institutional segment include: the management of
the Neuberger Berman family of mutual funds, investment management of
institutional separate account products and wrap products sponsored by third
party brokerage firms and banks. Our Professional Securities Services segment
provides trade execution, clearing, custody, margin financing, portfolio
reporting and trust services through professional investor clearing services,
wealth management services, research sales and other activities, including
market making, global securities lending, custody and recordkeeping services
and treasury management. The Corporate segment reflects certain corporate
results that are not directly related to the day-to-day operations of our
principal business. These include results from investments in our mutual funds,
corporate marketing expense, interest on long-term debt and goodwill
amortization. Prior periods have been revised to conform with the presentation
for the year ended December 31, 2001 and the three months ended March 31, 2002.
Each of our business segments represents a grouping of financial activities and
products with similar characteristics. The following tables of selected
financial data present our business segments in a manner consistent with the
way that we manage our businesses.
23
RESULTS OF OPERATIONS
(in thousands)
Private Mutual Professional
Asset Fund and Securities
For the Three Months Ended March 31, 2002 Management Institutional Services Corporate Total
----------------------------------------- ---------- ------------- ------------ --------- --------
Net revenues (loss) after interest
expense............................. $ 81,493 $ 56,737 $ 22,674 $ (709) $160,195
Operating expenses.................... 43,120 35,088 19,055 5,111 102,374
-------- -------- -------- -------- --------
Net income (loss) before taxes........ $ 38,373 $ 21,649 $ 3,619 $ (5,820) $ 57,821
======== ======== ======== ======== ========
Private Mutual Professional
Asset Fund and Securities
For the Three Months Ended March 31, 2001 Management Institutional Services Corporate Total
----------------------------------------- ---------- ------------- ------------ --------- --------
Net revenues (loss) after interest
expense............................. $ 75,850 $ 55,165 $ 25,681 $ (1,864) $154,832
Operating expenses.................... 38,945 35,404 17,170 4,257 95,776
-------- -------- -------- -------- --------
Net income (loss) before taxes........ $ 36,905 $ 19,761 $ 8,511 $ (6,121) $ 59,056
======== ======== ======== ======== ========
Private Mutual Professional
Asset Fund and Securities
For the Year Ended December 31, 2001 Management Institutional Services Corporate Total
------------------------------------ ---------- ------------- ------------ --------- --------
Net revenues (loss) after interest
expense............................. $295,738 $223,700 $ 98,925 $ (5,081) $613,282
Operating expenses.................... 154,069 140,641 71,833 17,680 384,223
-------- -------- -------- -------- --------
Net income (loss) before taxes........ $141,669 $ 83,059 $ 27,092 $(22,761) $229,059
======== ======== ======== ======== ========
Private Mutual Professional
Asset Fund and Securities
For the Year Ended December 31, 2000 Management Institutional Services Corporate Total
------------------------------------ ---------- ------------- ------------ --------- --------
Net revenues (loss) after interest
expense............................. $290,746 $224,064 $104,981 $ (3,444) $616,347
Operating expenses.................... 144,034 147,455 63,523 14,414 369,426
-------- -------- -------- -------- --------
Net income (loss) before taxes........ $146,712 $ 76,609 $ 41,458 $(17,858) $246,921
======== ======== ======== ======== ========
Private Mutual Professional
Asset Fund and Securities
For the Year Ended December 31, 1999 Management Institutional Services Corporate Total
------------------------------------ ---------- ------------- ------------ --------- --------
Net revenues (loss) after interest
expense............................. $260,114 $233,609 $ 80,709 $ (1,520) $572,912
Operating expenses(1)................. 86,847 150,362 51,494 10,783 299,486
-------- -------- -------- -------- --------
Net income (loss) before
Reorganization and IPO charges
and taxes........................... $173,267 $ 83,247 $ 29,215 $(12,303) $273,426
======== ======== ======== ======== ========
--------
(1) Total operating expenses on a pro forma basis, which assumes the Exchange
had taken place at the beginning of the year, would have been higher by
$44,157 for the year ended December 31, 1999. The pro forma adjustment is
made to recognize as compensation expense distributions of capital made
prior to the Exchange.
24
ASSETS UNDER MANAGEMENT
(in millions)
As Of and
For The Three
Months Ended
------------------
March 31, March 31,
2002 2001
--------- ---------
PRIVATE ASSET MANAGEMENT
Assets under management, beginning of period................ $25,004 $22,510
------- -------
Net additions............................................ 32 1,412
Market appreciation (depreciation)....................... 695 (1,145)
------- -------
Total increase........................................... 727 267
------- -------
Assets under management, end of period (1).................. $25,731 $22,777
======= =======
MUTUAL FUND & INSTITUTIONAL
Equity Separate Accounts
Assets under management, beginning of period................ $ 6,290 $ 6,402
------- -------
Net additions (withdrawals).............................. (28) 356
Market appreciation (depreciation)....................... 280 (343)
------- -------
Total increase........................................... 252 13
------- -------
Assets under management, end of period...................... $ 6,542 $ 6,415
======= =======
Fixed Income Separate Accounts
Assets under management, beginning of period................ $ 5,229 $ 5,298
------- -------
Net additions (withdrawals).............................. 93 (81)
Market appreciation (depreciation)....................... (60) 93
------- -------
Total increase........................................... 33 12
------- -------
Assets under management, end of period...................... $ 5,262 $ 5,310
======= =======
Consultant Services Group
Assets under management, beginning of period................ $ 3,037 $ 1,796
------- -------
Net additions............................................ 452 205
Market appreciation...................................... 55 1
------- -------
Total increase........................................... 507 206
------- -------
Assets under management, end of period...................... $ 3,544 $ 2,002
======= =======
Mutual Fund and Sub-Advised Accounts
Assets under management, beginning of period................ $19,488 $19,480
------- -------
Net additions............................................ 896 425
Market appreciation (depreciation)....................... 410 (1,607)
------- -------
Total increase (decrease)................................ 1,306 (1,182)
------- -------
Assets under management, end of period (2).................. $20,794 $18,298
======= =======
Sub-Total Mutual Fund & Institutional
Assets under management, beginning of period................ $34,044 $32,976
------- -------
Net additions............................................ 1,413 905
Market appreciation (depreciation)....................... 685 (1,856)
------- -------
Total increase (decrease)................................ 2,098 (951)
------- -------
Assets under management, end of period...................... $36,142 $32,025
======= =======
TOTAL
Assets under management, beginning of period................ $59,048 $55,486
------- -------
Net additions............................................ 1,445 2,317
Market appreciation (depreciation)....................... 1,380 (3,001)
------- -------
Total increase (decrease)................................ 2,825 (684)
------- -------
Assets under management, end of period...................... $61,873 $54,802
======= =======
Equity component of assets under management................. 71% 72%
======= =======
--------
(1) As of March 31, 2002 and 2001, Private Asset Management included $51 and
$49 of assets invested in EMM's hedge fund products, respectively.
(2) As of March 31, 2002 and 2001, Mutual Fund and Sub-Advised Accounts
included $144 and $79 of client assets invested in the Fund Advisory
Service wrap mutual fund program with third party funds, respectively.
25
ASSETS UNDER MANAGEMENT
(in millions)
As Of and For The Years Ended
-------------------------------------
December 31, December 31, December 31,
2001 2000 1999
- ------------ ------------ ------------
PRIVATE ASSET MANAGEMENT
Assets under management, beginning of year.................. $22,510 $21,539 $18,267
------- ------- -------
Net additions............................................ 2,734 1,154 324
Market appreciation (depreciation)....................... (240) (183) 2,948
------- ------- -------
Total increase........................................... 2,494 971 3,272
------- ------- -------
Assets under management, end of year (1).................... $25,004 $22,510 $21,539
======= ======= =======
MUTUAL FUND & INSTITUTIONAL
Equity Separate Accounts
Assets under management, beginning of year.................. $ 6,402 $ 6,458 $ 7,800
------- ------- -------
Net withdrawals.......................................... (45) (494) (2,592)
Market appreciation (depreciation)....................... (67) 438 1,250
------- ------- -------
Total decrease........................................... (112) (56) (1,342)
------- ------- -------
Assets under management, end of year........................ $ 6,290 $ 6,402 $ 6,458
======= ======= =======
Fixed Income Separate Accounts
Assets under management, beginning of year.................. $ 5,298 $ 5,924 $ 6,949
------- ------- -------
Net withdrawals.......................................... (382) (1,084) (932)
Market appreciation (depreciation)....................... 313 458 (93)
------- ------- -------
Total decrease........................................... (69) (626) (1,025)
------- ------- -------
Assets under management, end of year........................ $ 5,229 $ 5,298 $ 5,924
======= ======= =======
Consultant Services Group
Assets under management, beginning of year.................. $ 1,796 $ 1,839 $ 1,671
------- ------- -------
Net additions (withdrawals).............................. 1,147 (158) 133
Market appreciation...................................... 94 115 35
------- ------- -------
Total increase (decrease)................................ 1,241 (43) 168
------- ------- -------
Assets under management, end of year........................ $ 3,037 $ 1,796 $ 1,839
======= ======= =======
Mutual Fund and Sub-Advised Accounts
Assets under management, beginning of year.................. $19,480 $18,639 $20,900
------- ------- -------
Net additions (withdrawals).............................. 1,094 546 (4,257)
Market appreciation (depreciation)....................... (1,086) 295 1,996
------- ------- -------
Total increase (decrease)................................ 8 841 (2,261)
------- ------- -------
Assets under management, end of year (2).................... $19,488 $19,480 $18,639
======= ======= =======
Sub-Total Mutual Fund & Institutional
Assets under management, beginning of year.................. $32,976 $32,860 $37,320
------- ------- -------
Net additions (withdrawals).............................. 1,814 (1,190) (7,648)
Market appreciation (depreciation)....................... (746) 1,306 3,188
------- ------- -------
Total increase (decrease)................................ 1,068 116 (4,460)
------- ------- -------
Assets under management, end of year........................ $34,044 $32,976 $32,860
======= ======= =======
TOTAL
Assets under management, beginning of year.................. $55,486 $54,399 $55,587
------- ------- -------
Net additions (withdrawals).............................. 4,548 (36) (7,324)
Market appreciation (depreciation)....................... (986) 1,123 6,136
------- ------- -------
Total increase (decrease)................................ 3,562 1,087 (1,188)
------- ------- -------
Assets under management, end of year........................ $59,048 $55,486 $54,399
======= ======= =======
Equity component of assets under management................. 71% 73% 71%
======= ======= =======
--------
(1) As of December 31, 2001, Private Asset Management included $49 of assets
invested in EMM's hedge fund products.
(2) As of December 31, 2001 and 2000, Mutual Fund and Institutional included
$121 and $88 of client assets invested in the Fund Advisory Service wrap
mutual fund program with third party funds, respectively.
26
Three Months Ended March 31, 2002 Compared with Three Months Ended March 31,
2001
We reported net income before taxes of $57.8 million for the first quarter
ended March 31, 2002, representing a decrease of $1.2 million or 2.1%, compared
to $59.1 million for the first quarter ended March 31, 2001. Our net revenues
after interest expense were $160.2 million for the first quarter of 2002, an
increase of $5.4 million or 3.5% compared to the same period in 2001. Our first
quarter results for 2002 reflect increases in net revenues after interest
expense in Private Asset Management and Mutual Fund and Institutional,
partially offset by a decrease in net revenues after interest expense in
Professional Securities Services, and a smaller net loss after interest expense
in our Corporate segment. Assets under management increased to $61.9 billion at
March 31, 2002, up $7.1 billion or 12.9% when compared to $54.8 billion at
March 31, 2001. The increase in assets under management of $3.0 billion in
Private Asset Management is due to net asset additions of $1.4 billion coupled
with market appreciation of $1.6 billion. The increase in assets under
management of $4.1 billion in Mutual Fund and Institutional is due to net asset
additions of $2.3 billion coupled with market appreciation of $1.8 billion.
Private Asset Management. Our net revenues after interest expense
increased 7.4% to $81.5 million for the first quarter of 2002, from $75.9
million for the first quarter of 2001. Our investment advisory fees increased
6.5% to $54.5 million for the first quarter of 2002, from $51.1 million for the
same period in 2001, due to an increase in assets under management to $25.0
billion at December 31, 2001 (the billable base for the first quarter of 2002)
from $22.5 billion at December 31, 2000 (the billable base for the first
quarter of 2001). Because investment advisory fees from Private Asset
Management are based on the previous quarter's asset levels, we expect an
increase in advisory fees for the second quarter of 2002 commensurate with the
increased asset levels at March 31, 2002. Our commissions increased 11.5% to
$26.0 million in the first quarter of 2002, from $23.3 million in the first
quarter of 2001, resulting from an increase in commission generating share
transactions. Our net interest income decreased 34.2% to $0.9 million in the
first quarter of 2002, from $1.3 million in the first quarter of 2001, due to a
combination of lower average balances related to client financing and narrowing
interest spreads.
Mutual Fund and Institutional. Our net revenues after interest expense
increased 2.8% to $56.7 million for the first quarter of 2002, from $55.2
million for the first quarter of 2001. Our investment advisory and
administrative fees increased 1.7% to $52.4 million for the first quarter of
2002, from $51.5 million for the same period in 2001, due primarily to
increases in fees in our wrap and mutual fund businesses as a result of higher
asset levels and an increase in average daily assets under management,
respectively, partially offset by a decrease in fees from our institutional
separate account business. Our commissions increased 16.2% to $4.3 million in
the first quarter of 2002, from $3.7 million in the first quarter of 2001, as a
result of an increase in commission generating share transactions.
Professional Securities Services. Our net revenues after interest expense
decreased 11.7% to $22.7 million in the first quarter of 2002, from $25.7
million in the first quarter of 2001. Our investment advisory fees increased to
$2.0 million in the first quarter of 2002, from $0.6 million for the same
period in 2001, due primarily to an increase in fees from our wealth management
services resulting from the acquisition of Executive Monetary Management, Inc.
Our commissions decreased 3.8% to $9.4 million in the first quarter of 2002,
from $9.7 million in the first quarter of 2001, as a result of an increase in
overall commission generating shares in our prime brokerage business which was
more than offset by lower commission activity in certain accounts. Our net gain
resulting from principal transactions decreased 58.9% to $0.7 million in the
first quarter of 2002, from $1.6 million in the same period of 2001, primarily
due to a decline in market making activity related to a combination of the drop
in the Nasdaq market and narrowing of transaction spreads as a result of the
decimalization program. Our net interest income decreased 43.0% to $5.4 million
in the first quarter of 2002, from $9.5 million in
27
the first quarter of 2001, primarily due to lower average balances related to
client financing and narrowing interest spreads resulting from the decrease in
absolute interest rates. This was partially offset by a reduction in bank loan
interest expense due to the increased cash generation from our business. Our
clearance fees decreased 23.2% to $2.9 million in the first quarter of 2002,
from $3.8 million for the same period in 2001. Our other income increased to
$2.3 million in the first quarter of 2002, from $0.4 million in the first
quarter of 2001, primarily as a result of an increase in syndicate activity.
Corporate. Our net loss after interest expense decreased to $0.7 million
in the first quarter of 2002, from $1.9 million in the first quarter of 2001,
primarily as a result of an increase in value of our investment in our mutual
funds.
Operating Expenses. Our total operating expenses were $102.4 million in
the first quarter of 2002, an increase of $6.6 million or 6.9% when compared to
$95.8 million in the first quarter of 2001. Employee compensation and benefits
increased to $68.4 million in the first quarter of 2002, from $65.6 million in
the first quarter of 2001. This was primarily due to increases in salaries
attributable to employees related to our recent acquisitions and an increase in
the amortization of unearned compensation. Our rent and occupancy costs
increased to $5.5 million in the first quarter of 2002, up $0.9 million or
19.0% from $4.6 million in the same period of 2001, primarily due to additional
costs associated with expansion in our principal place of business and
escalations. Our brokerage, clearing and exchange fees increased to $3.0
million in the first quarter of 2002, up $0.3 million or 12.5% from $2.7
million in the same period of 2001, primarily due to increased exchange fees
commensurate with higher transaction volume. Our advertising and sales
promotion expenses decreased to $2.2 million in the first quarter of 2002, down
$0.4 million or 13.9% from $2.5 million in the same period of 2001, primarily
due to reduced expenditures on media advertising and print campaigns, partially
offset by an increase in promotional activities in Private Asset Management.
Our distribution and fund administration expenses increased to $5.8 million in
the first quarter of 2002, up $1.4 million or 33.2% from $4.4 million in the
same period of 2001, primarily due to an increase in average mutual fund
assets, which directly affects payments to third parties. Our professional fees
increased to $2.5 million for the first quarter of 2002, up $0.6 million or
29.4% from $2.0 million in the first quarter of 2001, primarily due to an
increase in legal fees. Depreciation and amortization increased to $3.7 million
in the first quarter of 2002, up $0.9 million or 33.4% from $2.8 million for
the same period in 2001, primarily due to amortization of new leasehold
improvements, as well as depreciation resulting from expenditures on technology
related equipment.
Taxes. Our taxes decreased to $24.6 million in the first quarter of 2002,
down $0.2 million or 1.0% from $24.8 million for the same period in 2001, due
to lower net income before taxes, partially offset by a slightly higher
effective tax rate.
2001 Compared with 2000
We reported net income before taxes of $229.1 million for the year ended
December 31, 2001, representing a decrease of $17.9 million or 7.2%, compared
to $246.9 million for the year ended December 31, 2000. Our net revenues after
interest expense were $613.3 million for the year ended December 31, 2001, a
decrease of $3.1 million or 0.5%, compared to $616.3 million for the same
period in 2000. Our results for 2001 reflect an increase in net revenues after
interest expense in Private Asset Management, which was more than offset by
decreases in net revenues after interest expense in Mutual Fund and
Institutional and Professional Securities Services and by a larger net loss
after interest expense in our Corporate segment. Assets under management
increased to $59.0 billion at December 31, 2001, up $3.6 billion or 6.4% when
compared to $55.5 billion at December 31, 2000. Net asset additions during 2001
in Private Asset Management and Mutual Fund and Institutional of $2.7 billion
and $1.8 billion, respectively, were partially offset by market depreciation in
Private Asset
28
Management and Mutual Fund and Institutional of $0.2 billion and $0.7 billion,
respectively. The closing of the U.S. equity markets for four trading days as a
result of the September 11th tragedy did not significantly impact our brokerage
related revenue.
Private Asset Management. Our net revenues after interest expense
increased 1.7% to $295.7 million for 2001, from $290.7 million for 2000. Our
investment advisory fees increased 5.5% to $202.0 million for 2001, from $191.4
million for 2000, primarily due to increases in average quarterly billable
assets under management from $22.0 billion in 2000 to $ 22.8 billion in 2001.
Assets under management at December 31, 2001, which included approximately $900
million related to our acquisition of certain of the assets of Oscar Capital
Management, LLC, reached a record level of $25.0 billion, up 11.1% from $22.5
billion at the end of the year 2000. As a result, we expect our investment
advisory fees, which are based on the previous quarter's ending asset levels,
to increase in the first quarter of 2002. Higher transaction volume resulted in
an increase in overall commission generating shares, although this was more
than offset by lower commission activity in certain accounts. As a result, our
commissions decreased 6.1% to $88.2 million in 2001, from $94.0 million in 2000.
Mutual Fund and Institutional. Our net revenues after interest expense
decreased 0.2% to $223.7 million for 2001, from $224.1 million for 2000. Our
investment advisory and administrative fees decreased 0.5% to $205.9 million
for 2001, from $207.0 million for 2000, due primarily to decreases in fees from
our institutional separate account and mutual fund businesses, partially offset
by an increase in fees due to higher asset levels in our wrap business as well
as a full year's fees from our Advisory Services product. Our commissions
increased 4.2% to $17.7 million in 2001, from $17.0 million for 2000, as a
result of an increase in commission generating share transactions.
Professional Securities Services. Our net revenues after interest expense
decreased 5.8% to $98.9 million for 2001, from $105.0 million for 2000. Our
investment advisory fees increased to $5.7 million for 2001, from $1.5 million
for 2000, due primarily to an increase in our wealth management services
resulting from the acquisition of Executive Monetary Management, Inc. Our
commissions increased 8.7% to $38.8 million in 2001, from $35.7 million in
2000, as a result of an increase in commission generating share transactions in
our prime brokerage and research sales businesses. Our net gain resulting from
principal transactions decreased 63.4% to $3.9 million in 2001, from $10.7
million in 2000, primarily due to a decline in market making activity related
to a combination of the drop in the Nasdaq market and the narrowing of
transaction spreads as a result of the continued implementation of the
decimalization program. Our net interest income decreased 11.8% to $33.8
million in 2001, from $38.3 million in 2000, primarily due to lower average
balances related to client financing and narrowing interest spreads resulting
from the decrease in absolute interest rates. This was partially offset by
increases in net interest attributable to our global securities lending
business, dividend and interest income related to excess cash positions and our
investment in municipal bonds, as well as a reduction in interest expense due
to lower bank loan requirements. Our other income decreased 37.8% to $3.3
million in 2001, from $5.3 million in 2000, primarily due to a decrease in
syndicate activity.
Corporate. Our net loss after interest expense increased to $5.1 million
in 2001, from $3.4 million in 2000, primarily as a result of interest expense
related to our long-term debt.
Operating Expenses. Our total operating expenses were $384.2 million in
2001, an increase of $14.8 million or 4.0% when compared to $369.4 million for
2000. Employee compensation and benefits increased to $253.4 million in 2001,
up $7.9 million or 3.2% from $245.4 million for 2000. This was primarily due to
increases in salaries, benefits and production compensation, which were
partially offset by a decrease in incentive compensation. Our rent and
occupancy costs increased to $20.8 million in 2001, up $3.0 million or 17.0%
from $17.8 million in 2000, primarily due to additional costs associated with
expansion in our principal place of business coupled with the full year of rent
expense
29
for the branch offices opened during 2000. Our brokerage, clearing and exchange
fees increased to $12.0 million in 2001, up $1.5 million or 14.3% from $10.5
million in 2000, primarily due to an increase in exchange fees resulting from a
higher proportion of orders with smaller share amounts as well as increased
dues and assessments and registration fees. Depreciation and amortization
increased to $13.1 million in 2001, up $2.4 million or 22.8% from $10.6 million
in 2000, primarily due to amortization of goodwill, as well as depreciation
resulting from technology related expenditures.
Taxes. Our taxes decreased to $96.4 million for 2001, down $0.2 million or
0.2% from $96.6 million in the same period for 2000. The 2000 provision
includes a financial statement tax benefit of $9.8 million related to the
change in the price of our common stock from December 31, 1999 to June 30,
2000, in connection with our Stock Incentive Plan. 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"). Based upon the price of our
common stock at the close of business on June 30, 2000, we adjusted the
carrying value of the deferred tax asset that related to unvested shares in our
Stock Incentive Plan. FIN 44 became effective on July 1, 2000, and requires
that the deferred tax asset be determined by the compensation expense
recognized for financial reporting purposes. Accordingly, at June 30, 2000, we
fixed the carrying value of our deferred tax asset for unvested shares in our
Stock Incentive Plan, based upon the price of our common stock at the close of
business that day. The 2001 and 2000 provision for income taxes included
federal, state, and local taxes at an effective tax rate of approximately 42%
and 43%, respectively.
2000 Compared with 1999
We reported net income before taxes of $246.9 million for the year ended
December 31, 2000, representing a decrease of $26.5 million or 9.7%, compared
to $273.4 million (as adjusted for the $150.1 million of Reorganization and IPO
Charges) for the year ended December 31, 1999. Our net revenues after interest
expense were $616.3 million for 2000, an increase of $43.4 million or 7.6%,
compared to 1999. Our operating results for 2000 reflect overall increases in
net revenues after interest expense in Private Asset Management and
Professional Securities Services, offset by a decrease in Mutual Fund and
Institutional. The net asset additions in Private Asset Management were offset
by the net withdrawals in our Mutual Fund and Institutional segment, virtually
all of which were in the lower fee institutional fixed-income area, while the
market depreciation in Private Asset Management was outweighed by market
appreciation in our Mutual Fund and Institutional segment.
Private Asset Management. Our net revenues after interest expense
increased 11.8% to $290.7 million for 2000, from $260.1 million for 1999. Our
investment advisory fees increased 15.0% to $191.4 million for 2000, from
$166.5 million for 1999, due to increases in average quarterly billable assets
under management from $19.5 billion in 1999 to $22.0 billion in 2000. Our
commissions increased 4.3% to $94.0 million for 2000, from $90.1 million for
1999, due to the increased volume of equity securities transactions. Our net
interest income increased 44.1% to $5.0 million for 2000, from $3.5 million in
1999, due primarily to higher client margin balances.
Mutual Fund and Institutional. Our net revenues after interest expense
decreased 4.1% to $224.1 million for 2000, from $233.6 million for 1999. Our
investment advisory and administrative fees decreased 2.3% to $207.0 million
for 2000, from $211.8 million for 1999, due primarily to a lower average asset
base in the first six months of 2000 relative to the comparable period in 1999.
Commissions decreased 21.3% or $4.6 million as a result of a decrease in
transaction volume.
Professional Securities Services. Our net revenues after interest expense
increased 30.1% to $105.0 million for 2000, from $80.7 million for 1999. Our
commission income increased 17.3% or $5.3 million as a result of increased
transaction volume. Principal transactions in securities increased 34.7%
30
to $10.7 million for 2000, from $7.9 million for 1999, primarily due to market
making activity. Clearance fees increased 22.1% to $13.5 million for 2000, from
$11.1 million for 1999, due to increased transaction volume from new and
existing clients, while net interest income increased 46.4% or $12.1 million,
primarily due to higher margin balances.
Corporate. Our net loss after interest expense increased 126.6% to $3.4
million in 2000, from $1.5 million in 1999, primarily as a result of a decrease
in value of the corporate investment in our mutual funds.
Operating Expenses. Our total operating expenses were $369.4 million in
2000, an increase of $69.9 million or 23.4%, compared to $299.5 million (as
adjusted for the $150.1 million of Reorganization and IPO Charges) in 1999.
Employee compensation and benefits increased to $245.4 million for 2000, up
$60.0 million or 32.4% from $185.4 million (as adjusted for the $139.9 million
of compensation expenses included in the Reorganization and IPO Charges) for
the same period in 1999. As a result of the Exchange, principals who previously
received distributions of capital began receiving compensation as employees.
Compensation that was not previously reported as such for employees who were
principals was $45.6 million for the year ended December 31, 2000. In addition,
salary and benefits and incentive compensation increased in 2000. Our
information technology expenses increased to $22.9 million for 2000, up $3.8
million or 19.6% from $19.2 million 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. Our rent and
occupancy costs increased to $17.8 million for 2000, up $2.5 million or 16.2%
from $15.3 million in 1999, primarily due to the rental of additional space in
the head office as well as the opening of three new branch offices in 2000,
coupled with the full year of rent expense for the branch offices opened during
1999. Our professional fees increased to $11.2 million for 2000, up $1.9
million or 20.8% from $9.3 million in 1999, primarily due to the impact of
outsourcing mutual fund administration coupled with an increase in employment
agency fees. Other expenses increased to $22.7 million for 2000, up $1.7
million or 8.3% from $20.9 million (as adjusted for the $10.1 million of other
expenses included in the Reorganization and IPO Charges) in 1999, due primarily
to increases in travel and entertainment and office expenses.
Taxes. Our taxes increased to $96.6 million for the year ended December
31, 2000, up $56.9 million from $39.7 million (as adjusted for the $51.9
million tax benefit resulting from the Reorganization and IPO Charges) for the
same period in 1999. Prior to the Exchange, Neuberger Berman, LLC did not pay
United States federal and state taxes because, as a limited liability company,
it was treated as a partnership for tax purposes, and our principals were taxed
on their proportionate share of Neuberger Berman, LLC's taxable income or loss.
Neuberger Berman Management Inc., as an S-Corporation, also did not pay United
States federal taxes prior to the Exchange, but was subject to certain state
and local taxes, and its shareholders were responsible for their own federal
income taxes. Effective with the Exchange, we became subject to federal, state
and local income taxes and we file a consolidated federal income tax return.
The 2000 provision for income taxes includes federal, state and local taxes at
our 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 our
common stock from December 31, 1999 to June 30, 2000, in connection with our
Stock Incentive Plan. In March 2000, the FASB issued FIN 44, an interpretation
of APB Opinion No. 25. We adjusted, based upon the price of our common stock at
the close of business on June 30, 2000, the carrying value of the deferred tax
asset that related to unvested shares in the Stock Incentive Plan. FIN 44
became effective on July 1, 2000, and requires that the deferred tax asset be
determined by the compensation expense recognized for financial reporting
purposes. Accordingly, at June 30, 2000, we fixed the carrying value of our
deferred tax asset for unvested shares in our Stock Incentive Plan, based upon
the price of our common stock at the close of business that day.
31
Liquidity and Capital Resources
Our investment advisory business does not require us to maintain
significant capital balances. However, as a result of our broker-dealer
activities, our consolidated statements of financial condition include higher
levels of assets and liabilities than is typical for an investment adviser of
our size. Our broker-dealer activities provide financing, trade execution,
clearing, custody and global securities lending services for clients of the
Private Asset Management, Mutual Fund and Institutional and Professional
Securities Services segments.
Our financial condition is highly liquid with the significant majority of
our assets readily convertible to cash. Our receivable from and payable to
brokers, dealers and clearing organizations represent either current open
transactions that settle within a few days or the activity of global securities
lending that is collateralized and normally can be closed out within a few
days. Our receivable from and payable to clients arise in the normal course of
business in connection with cash and margin securities transactions. These
client receivables are secured by securities held as collateral.
Our cash flows are generally created as a result of the operating
activities of our three major business segments, with investment advisory and
administrative fees a significant contributor.
Cash and cash equivalents decreased to $222.0 million in the first quarter
of 2002, with $30.1 million used in operating activities, including the payment
of year-end bonuses. Cash of $7.0 million was used for investing activities,
primarily for leasehold improvements and purchases of technology related
equipment. Cash of $22.9 million was used in financing activities, reflecting
payments made for dividends and common stock repurchases.
Cash and cash equivalents increased by $36.0 million in the first quarter
of 2001, with $65.3 million provided by operating activities, including an
increase in our global securities lending activities, partially offset by the
payment of year-end bonuses. Cash of $18.9 million was used for investing
activities, reflecting payments for the acquisitions of Executive Monetary
Management, Inc. and the assets of Fasciano Company, Inc., as well as payments
for leasehold improvements and purchases of technology related equipment. Cash
of $10.4 million was used in financing activities, reflecting payments made for
dividends and common stock repurchases, partially offset by proceeds from the
issuance of common stock.
Cash and cash equivalents increased to $282.0 million in 2001, with $282.6
million provided by operating activities, including an increase in our global
securities lending activities. Cash of $64.0 million was used for investing
activities, primarily for the acquisitions of Executive Monetary Management,
Inc., the assets of Fasciano Company, Inc. and certain of the assets of Oscar
Capital Management, LLC. Cash of $24.7 million was used in financing
activities, reflecting payments made for dividends and common stock
repurchases, partially offset by net proceeds from the issuance of our
long-term debt.
Cash and cash equivalents decreased by $2.9 million in 2000, with $81.3
million provided by operating activities. Cash of $29.4 million was used for
investing activities, primarily for leasehold improvements and purchases of
technology related equipment. Cash of $54.9 million was used in financing
activities, reflecting payments made for dividends and common stock repurchases.
Cash and cash equivalents increased by $40.6 million in 1999, with $252.2
million provided by operations. Cash of $17.5 million was used for investing
activities, primarily for leasehold improvements and purchases of technology
related equipment. Cash of $194.0 million was used in financing activities
primarily due to payments for capital distributions to former principals prior
to our IPO, as well as dividends and common stock repurchases, partially offset
by proceeds from the issuance of common stock.
32
On May 4, 2001, in accordance with Rule 144A of the Securities Act of 1933,
as amended, we sold $175 million principal amount at maturity of zero-coupon
senior convertible notes due 2021, resulting in proceeds of approximately $151
million. The issue price represents a yield to maturity of 0.75% per year,
which is accounted for using the effective interest rate method. Each $1,000
principal amount at maturity of these convertible securities is convertible
into 13.8879 of our common stock upon the occurrence of any of the following
events:
. during any calendar quarter commencing after June 30, 2001, the closing
sale price of our common stock on the New York Stock Exchange for at
least 20 trading days in a period of 30 consecutive trading days ending
on the last trading day of the preceding calendar quarter is more than a
specified percentage, initially 120% and declining 0.12658% each quarter
thereafter, of the accreted conversion price per share of our common
stock on the last trading day of the preceding calendar quarter;
. we elect to redeem the convertible securities;
. we take certain corporate actions, such as the declaration of an
extraordinary dividend; or
. the credit rating by Standard & Poor's is below investment grade.
We may redeem the convertible securities for cash on or after May 4, 2006
at their accreted value. We may be required to repurchase the convertible
securities at the accreted value thereof, at the option of the holders on
November 4, 2002 and May 4 of 2004, 2006, 2011 and 2016 (the first put date was
May 4, 2002). We may choose to pay for such repurchases in cash or shares of
our common stock. We used the proceeds from this transaction for general
corporate purposes, including share repurchases. Prior to this transaction, we
received a BBB+ rating from Standard & Poor's. If we choose to access the
capital markets, we believe that this credit rating should facilitate our
ability to do so.
On May 2, 2002, we amended the terms of our convertible notes to permit the
holders, at their option, to cause us to repurchase the convertible securities
on November 4, 2002, at their then accreted value of $870.67 per $1,000
principal amount at maturity. We also announced that each holder electing not
to require us to repurchase our convertible securities as of May 4, 2002, would
receive a one-time payment of $4.34 for every $1,000 aggregate principal amount
at maturity of the convertible securities held. As of the close of business May
3, 2002, holders of approximately 5% or $8.7 million principal amount at
maturity of the convertible securities exercised their option to cause us to
repurchase their convertible securities. We paid $7.6 million for these
repurchases in cash on May 6, 2002. On May 8, 2002, we made a one-time payment
of $4.34 for every $1,000 aggregate principal amount at maturity to each holder
of our convertible securities as of the close of business on May 7, 2002.
It is our policy to continuously monitor and evaluate the adequacy of our
capital. We have consistently maintained net capital in excess of the
regulatory requirements for broker-dealers prescribed by the SEC and other
regulatory authorities. At March 31, 2002, our regulatory net capital exceeded
the minimum requirement by approximately $200 million. The SEC's Uniform Net
Capital Rule 15c3-1 imposes certain requirements that may have the effect of
prohibiting a broker-dealer from distributing or withdrawing capital and
requiring prior notice to the SEC for certain withdrawals of capital. In
addition, the debt covenants related to Neuberger Berman, LLC's $35 million
outstanding subordinated note and $100 million committed line of credit include
certain covenants that limit the percentage by which the aggregate unpaid
principal amount of subordinated liabilities exceeds total regulatory capital
and impose a dollar amount below which total ownership equity cannot fall. We
believe that our cash flows from operations and existing committed and
uncommitted lines of credit will be more than adequate to meet our anticipated
capital requirements and debt and other obligations as they come due.
33
Our Board of Directors has authorized the repurchase of our common stock in
the open market and/or private purchases. The acquired shares may be used for
corporate purposes, including shares issued to employees under our employee
stock purchase plans. Since the inception of our common stock repurchase
program, we have repurchased 5,946,595 shares of common stock for
$220.1 million, including 2,400,900 shares which were repurchased from a
limited number of former principals in a transaction that followed the
secondary offering in July 2001. We used cash flows from operations and the
proceeds from our convertible notes offering to fund the purchases of these
shares. As of March 31, 2002, authorizations for the repurchase of up to $29.9
million of our common stock remained in effect. On April 22, 2002, our Board of
Directors approved a $75 million increase to the existing authorization.
Looking Ahead
During the year ending December 31, 2002, we intend to continue to
implement our strategic plan to grow our asset management business. We plan to
continue to take advantage of the growth opportunities in the high net worth
market by utilizing our expanded national sales force and by aggressively
pursuing additional investment management teams. In addition to adding
investment management teams, we will continue to evaluate, where appropriate,
strategic acquisitions of, or joint ventures with, companies that would add new
product and services offerings, investment capabilities or distribution
channels.
Quantitative and Qualitative Disclosures About Market Risk
Our risk management policies and procedures have been established to
identify, monitor and manage risk continuously. The major types of risk that we
face 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, our
policy is to continuously monitor our exposure to market and counterparty risk
through the use of a variety of credit exposure, position and financial
reporting and control procedures. In addition, we have a policy of reviewing
the credit standing, where applicable, of each broker-dealer, client and other
counterparty with which we conduct business. We monitor the market value of
collateral, including margin loans to our clients, and request and receive
additional collateral when required.
A significant portion of our revenues is 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 our
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. Our primary exposure to interest
rate risk arises from our 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 we have no control.
Our securities owned at March 31, 2002 are primarily comprised of $336.4
million of U.S. Treasury and Agency securities, of which $328.9 million is
comprised of U.S. Treasury bills; $51.8 million of municipal revenue bonds; a
$20.6 million investment in one of our mutual funds, the Limited
34
Maturity Bond Fund; $2.8 million of an investment in an exchange traded
preferred security; and $1.3 million related to our market making activity. The
municipal revenue bonds, which are tax advantageous, trade at par and contain
variable rates of interest that generally reset monthly, at which time they can
be put back to the dealer. The bonds are rated in one of the two highest
categories by at least one but generally two of three rating agencies, Standard
& Poor's, Moody's Investors Services and Fitch Ratings. The Limited Maturity
Bond Fund, an open-ended fund with daily redemption characteristics, is
organized under the Investment Company Act of 1940 and invests in limited
maturity bonds, seeking the highest available current income consistent with
liquidity and low risk to principal. Our market making activities expose our
capital to potential equity price risk. To mitigate this risk, we impose strict
investment limits on both the trading desk and individual traders.
As part of our prime brokerage business, we write covered over-the-counter
put options on listed equity securities with certain of our prime brokerage
clients. Market risk is mitigated as the options are generally deep in the
money and covered by an equivalent number of securities sold but not yet
purchased. At March 31, 2002, the notional value of such options and market
value of securities sold were approximately $5.5 million and $4.3 million,
respectively and are included in securities sold but not yet purchased.
35
BUSINESS
Overview
Neuberger Berman Inc., through its subsidiaries, is an investment advisory
firm with approximately $61.9 billion in assets under management as of March
31, 2002. For over 60 years, the firm and its predecessor companies have
provided clients with a wide array of investment products, services and
strategies. Our business is conducted primarily through our subsidiaries,
Neuberger Berman, LLC and Neuberger Berman Management Inc., both of which are
registered investment advisers and broker-dealers, and Neuberger Berman Trust
Company, N.A. Neuberger Berman, LLC is also a member of the New York Stock
Exchange, Inc. As of March 31, 2002, we conduct our business from 18 offices in
16 cities.
We were founded in 1939 to be a premier provider of investment products and
services to high net worth individuals. We have built upon the qualities that
have made us successful in the high net worth market to establish a strong
presence in the mutual fund and institutional marketplaces, and to provide
estate planning and trust services through our National and Delaware trust
companies. Our clients include individuals, institutions, corporations, pension
funds, foundations and endowments.
We believe that one of our chief competitive advantages is our dedication
to asset management, and in particular, our focus on asset management for high
net worth individuals. To continue to build on this competitive advantage, we
are actively pursuing new hires and acquisitions, including the addition of
money management teams with existing client relationships, as well as expanding
our national sales force.
2001 in Review
Despite a highly challenging market environment and the tragic events of
September 11th, we successfully pursued our strategies of capitalizing on
opportunities in the growing high net worth business; expanding our mutual fund
distribution capabilities; and growing our Professional Securities Services
business while maintaining a watchful eye on investment performance and client
service.
In the first quarter of 2001, we completed a number of initiatives that
were begun or announced in 2000, including the addition of three experienced
money management teams. At December 31, 2001, assets under management related
to these money manager liftouts totaled approximately $1.5 billion.
We received a national bank charter in January 2001, and created Neuberger
Berman Trust Company, N.A., which is headquartered in Seattle, Washington.
During 2001, we hired highly experienced senior trust executives and
reorganized the management of the Trust Companies to capitalize on these
executives' skills and relationships.
In February 2001, we completed the acquisition of Executive Monetary
Management, Inc. ("EMM"), a wealth management firm for upper echelon high net
worth clients. Effective with the closing of the transaction, EMM became a
wholly owned subsidiary of Neuberger Berman Inc. At December 31, 2001, clients
for whom EMM performs various services had in the aggregate approximately $1.8
billion of investable assets. EMM has a strong following among senior
executives and leaders within the entertainment, finance and legal communities.
EMM has strengthened our presence in the highly specialized market of upper
echelon wealth, offering new opportunities for cross-selling products and
services.
During March 2001, we completed the acquisition of the assets of Fasciano
Company, Inc., an investment manager, which, through Michael Fasciano, managed
the Fasciano Fund, a predecessor of Neuberger Berman Fasciano Fund, a small-cap
blend mutual fund. The Neuberger Berman Fasciano Fund had approximately $200
million in assets under management at December 31, 2001.
36
In November 2001, we acquired certain of the assets of Oscar Capital
Management, LLC ("Oscar"), which resulted in approximately $800 million in
assets under management transferring to Neuberger Berman at closing. These
assets under management, which at December 31, 2001, were valued at
approximately $900 million, are primarily comprised of high net worth separate
accounts and investment partnerships. All four senior partners of Oscar joined
Neuberger Berman as Managing Directors in our Private Asset Management Group.
During 2001, we continued to expand our national presence with the opening
of a new sales office in Washington, D.C. We increased our national sales force
of Client Consultants, from 38 professionals at the end of 2000 to 40 as of
December 31, 2001. In 2001, this national sales force generated approximately
$1.7 billion in new assets under management.
Asset Management and Investor-Related Trends
Managing wealth is one of the fastest growing segments of the financial
services industry. According to the Merrill Lynch/Gemini Consulting World
Wealth Report 2002, the high net worth market in North America, defined as
individuals with more than $1 million in liquid financial assets, totaled $7.6
trillion in 2001 and is expected to increase to $11.2 trillion by year end
2006, which implies an annual compound growth rate of 8.1%.
We believe the following factors impacting investor behavior will be key
drivers of this growth:
. Current market volatility has led self-directed individuals to an
increased appreciation of the value of professional investment advice.
. High net worth clients are expanding their requirements of financial
service firms to provide comprehensive wealth management services
including objective investment policy design, manager selection and
oversight, and family office administration in addition to investment
advice.
. As affluent baby boomers age, they have an increasing awareness of the
need to manage and preserve wealth, as well as to provide for the future
through appropriate estate planning for the transfer of wealth across
generations.
. The public has become increasingly sophisticated due to the vast amount
of investment-related information that is now available through the media
and the Internet. As investors become more adept at employing new
information technologies, they are requiring financial service providers
to create value added services such as user friendly tools that
facilitate an efficient and organized window to this wealth of
information as well as real-time access to their personal account
information.
In addition to these investor-related trends, we have observed the
following changes affecting the general profile of the financial services
industry in the United States:
. The industry is refocusing its distribution strategies from a
transactional orientation to one of cultivating client relationships
built around fee-based products and services.
. Recently enacted tax legislation, which allows for increased
contributions to retirement accounts, will accelerate the growth of
retirement savings. In addition, investing these assets will emphasize
the need for a wide range of money management products to be distributed
through broad and varied distribution channels.
. As a result of increased access to information once generally limited to
the financial professional, clients now demand portfolio diversification
and asset allocation, which until
37
recently were considered an option, not an imperative. This has led many
firms to embrace open architecture structures such as wrap products that
allow diversification through customized asset allocation models that are
then realized through "best of breed" products. Moreover, both individual
and institutional investors are no longer satisfied with research with an
underlying bias. We believe that they want objective research that is not
compromised by other institutional relationships.
. Technology and the increasingly global outlook of world economies have
created opportunities to both transact business and form strategic
alliances across borders with growing ease. As this globalization
evolves, more clients are embracing the advice of investment
professionals to include global and international investments as part of
a sound diversified portfolio.
We believe we are well positioned to meet investor expectations and deliver
the products and services that will differentiate us in the marketplace and
enable us to capitalize on the potential growth in assets under management
these trends may yield.
Our Strategy
Capitalize on Opportunities in the Growing High Net Worth Market. Managing
wealth is one of the fastest growing segments of the financial services
industry. According to the Merrill Lynch/Gemini Consulting World Wealth Report
2002, the high net worth market in North America, defined as individuals with
more than $1 million in liquid financial assets, totaled $7.6 trillion in 2001
and is expected to increase to $11.2 trillion by year end 2006, which implies
an annual compound rate of 8.1%. With our brand name, the broad spectrum of our
investment styles and our commitment to personalized service, we believe that
we are well positioned to take advantage of growth in this market. Our
principal initiatives to generate growth are:
. Grow Assets Under Management Through Expanded National Sales
Force. Having expanded our national sales force to 40 professionals and
increased the number of our regional offices to 13, we seek to continue
to grow assets under management through this experienced and larger sales
force. In 2000 and 2001, our national sales force generated $807 million
and approximately $1.7 billion, respectively, of new assets under
management. For the first quarter of 2002, our sales force added $473
million in new assets under management.
. Selectively Continue to Add Experienced Money Management Teams Through
Direct Hiring and Acquisitions. To expand our investment capabilities
and continue to increase our assets under management, we continually seek
opportunities to add experienced money managers with long-standing client
relationships, time-tested investment performance and business styles
well suited to the Neuberger Berman culture. Over the past two years, we
have capitalized on such opportunities by hiring six money management
teams and experienced individual managers, with the most recent two hires
occurring in the first half of 2002. In addition, during the past two
years, two acquisitions resulted in the hiring of private asset
management teams and the successful conversion of a total of $1.3 billion
of client assets at closing. We have also recently announced the hiring
of a real estate investment management team through which we expect to
develop new investment products attractive to high net worth investors.
. Build Our Wealth Management Business. We seek to promote asset retention
from generation to generation through our national trust capabilities and
to provide related products and services in the highly specialized market
of upper echelon wealth. In addition, wealth management is a relationship
focused business that increasingly relies on providing clients with
access to non-affiliated money managers and financial products. We are
endeavoring to extend our money manager database and sophisticated
multi-manager reporting, which we believe are differentiating factors in
delivering valued services to this market. Executive Monetary
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Management, Inc., acquired in February 2001, specializes in wealth
management by serving as an independent counselor to upper echelon high
net worth clients to assist them in preserving and enhancing their
financial position. As of March 31, 2002, clients for whom Executive
Monetary Management performs various services had approximately $1.8
billion of investable assets.
Expand Mutual Fund and Institutional Distribution Capabilities. We believe
that sustained growth in the mutual fund and institutional arenas is dependent
on providing strong relative investment performance, expanding distribution
capabilities and delivering a variety of investment products. To this end our
initiatives include:
. Establish New Relationships with Defined Contribution Plan
Administrators. We seek to establish new relationships with defined
contribution plan administrators. With Congress' passage of the 2001 tax
bill, which allows for increased contributions to retirement accounts, we
expect growth from our existing relationships. As of March 31, 2002, we
had strategic alliances with 96 third-party administrators of defined
contribution plans.
. Expand Relationships with Providers of Variable Insurance Products. We
also seek to expand our relationships with insurance companies that offer
variable annuity and variable life insurance products that invest in our
mutual funds. As of March 31, 2002, we had relationships with 45
insurance companies offering these variable products.
. Build Wrap Fee Program Participation. We seek to continue to broaden our
participation in wrap programs sponsored by third party banks and
brokerages, as well as to increase the variety of our investment styles
available through this distribution channel. We manage assets for 13
sponsors of wrap fee programs, including three of the four largest
programs. We believe that wrap fee programs represent significant asset
growth opportunities.
. Further Diversify Product and Service Offerings. We continue to enhance
our existing product offerings through the internal development or
acquisition of new investment capabilities. In the past, we have relied
primarily on our domestic equity products. Currently, we offer equity,
international equity, balanced, domestic and international fixed income
and money market products. Historically, we have primarily followed the
value style of investing, but we now have portfolio managers who follow
growth or blended styles of investing. In May 2002, we launched the
Neuberger Berman Real Estate Fund, which is managed by a team of REIT
specialists who joined the firm in January 2002. Additionally, we have
entered into an agreement that is expected to result in a team of high
yield fixed income professionals joining Neuberger Berman during the
third quarter of 2002, which we anticipate will enhance our current high
yield fixed income offerings. We believe a broader array of products will
increase our ability to grow assets under management by attracting new
clients and through providing existing clients with a greater variety of
investment options.
Continue to Grow Professional Securities Services. Using our
infrastructure, net revenues after interest expense of our Professional
Securities Services segment have grown by 23% from 1999 through 2001. We seek
to continue to leverage our asset management infrastructure to provide
additional fee-earning services to the professional investment community
without a commensurate increase in expenses.
. Increase the Number of Correspondent Clearing and Prime Brokerage
Clients. We view the Correspondent Clearing and Prime Brokerage Client
business as an incremental revenue opportunity, and will continue using
our systems to provide correspondent clearing and prime brokerage
services to the professional investment community. Our dedicated
marketing group continues to target high quality, established, registered
investment advisers and hedge funds, as well as broker-dealers with
clientele similar to ours.
39
. Increase Research Sales. Our dedicated research group provides its
independent research reports to our Private Asset Management and Mutual
Fund and Institutional businesses and makes these reports available to
third-party investment managers, who generally place trades through us if
they decide to buy or sell securities based upon our research. We believe
that our long-standing dedication to unbiased fundamental research
distinguishes us from many of our competitors.
Pursue Strategic Acquisition and Joint Venture Opportunities. In addition
to seeking to add investment teams, we will continue to evaluate strategic
acquisitions of, or joint ventures with, companies that would add new products
and services, investment capabilities or broaden our current distribution
channels. It is our intent that any transaction that we consummate be both
strategic and accretive to earnings.
Business Segments
Our principal businesses include:
. Private Asset Management
. Mutual Fund and Institutional
. Professional Securities Services
A fourth segment, "Corporate," reflects certain corporate results that are
not directly related to the day-to-day operations of our principal business.
We derive our revenues primarily from investment advisory and
administrative fees, which are based on assets under management. Our fee
revenue is supplemented by commissions and by income from our Professional
Securities Services segment. We believe our business has attractive margins for
several reasons:
. the majority of our assets under management are held in equity accounts,
which carry higher fees than fixed-income accounts;
. 62% of our pre-tax earnings in 2001 and 66% of our pre-tax earnings in
the first quarter of 2002 were derived from our higher-margin Private
Asset Management segment; and
. we have effectively leveraged our franchise and infrastructure to enhance
profitability by developing complementary businesses such as
correspondent clearing and prime brokerage services.
Private Asset Management
Our Private Asset Management segment provides customized discretionary
investment management services for high net worth individuals, families and
smaller institutions. It represented 48% of net revenues after interest expense
in 2001 and 51% of net revenues after interest expense in the first quarter of
2002.
Assets under management in this segment were approximately $25.7 billion as
of March 31, 2002, including assets managed for clients of the Trust Companies.
Net revenues after interest expense for 2001 were $295.7 million. This included
$88.2 million in commission revenue, derived principally from listed equity
trades executed as broker, on behalf of clients. Net revenues after interest
expense for the first quarter of 2002 were $81.5 million, including $26.0
million in commission revenue. In this segment, we managed approximately 16,600
accounts, through 6,500 relationships, with an average relationship size of
$3.9 million, as of March 31, 2002.
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Private Asset Management has three components:
. Money Management
. Advisory Services
. Trust Services
Money Management. Since our founding, we have specialized in personalized
money management for high net worth investors. Our mission is to provide our
clients with the highest caliber investment expertise, supported by outstanding
personal service. Unlike many investment firms, we do not assign clients to a
model portfolio. We tailor each client's portfolio individually, based on
investment objectives, planning needs, and risk tolerance. We believe this
strategy is best for clients, and it also increases our ability to attract
experienced, talented money managers. Our Private Asset Management money
managers have, on average, more than 25 years of industry experience, and each
is free to pursue his or her investment style, subject to compliance oversight.
The Private Asset Management segment has enjoyed long-term client loyalty,
sometimes spanning several generations.
Our money managers use a broad spectrum of investment styles, including
growth and value for equities, fixed-income and international. They accommodate
clients with broadly different objectives or special needs, such as investment
restrictions or large holdings of stock options. As of March 31, 2002, we had
68 money managers in our Private Asset Management segment working in 30 teams.
We vigorously seek to expand our assets under management through internal
growth and new clients, as well as through the hiring of experienced money
management teams (liftouts) and acquisitions of money management firms. We
maintain a disciplined strategy for liftouts and acquisitions based on certain
criteria that require that liftouts and acquisitions:
. be accretive to earnings;
. be consistent with our overall strategy; and
. involve individuals who fit the Neuberger Berman culture in terms of
client focus, integrity and dedication to investment excellence.
We believe that by adhering to these criteria the result is stronger, more
stable growth. Our liftout and acquisition strategy continued in 2001 with
liftouts of several senior money management teams and the acquisition of
certain of the assets of Oscar.
In 2001, we continued to enhance the products and services we offer to our
Private Asset Management clients. We introduced a cash management service and
certain alternative investment products along with electronic account access
and electronic trade confirmations. Additionally, we also enhanced our website.
We believe these products and services improve our clients' experience with us,
helping us to retain client relationships and to remain competitive with other
financial services firms. We continue to explore and invest in products and
services that support our mission of providing the highest caliber investment
expertise with outstanding personal service.
Advisory Services. We have a national sales force, which is composed of
Client Consultants. It is dedicated to growing and supporting our Private Asset
Management segment, including our money managers and Trust Companies. Our
Client Consultants attract new clients and work with existing clients as
liaisons to our money managers. In 2001, we continued to increase the number of
our Client Consultants, as well as their geographic penetration, focusing on
cities in which U.S. wealth is concentrated. As of March 31, 2002, our Private
Asset Management Advisory Services group included 40 professionals supported by
28 client service administrators, working in New York and regional offices in
Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Miami, Philadelphia,
San Francisco, Tampa, Washington, D.C. and West Palm Beach.
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Our Client Consultants are highly trained professionals with average
industry experience of approximately 14 years. They work closely with our
clients to develop customized asset allocation, trust services and estate and
tax planning strategies. Our Client Consultants also frequently work with our
clients' accountants and attorneys as part of a financial advisory team, and
they cultivate relationships with these professional advisors. New assets
generated by our national sales force grew from $807 million in 2000 to
approximately $1.7 billion in 2001. For the first quarter of 2002, our sales
force added $473 million in new assets under management.
Trust Services. The Private Asset Management segment offers its clients a
wide array of trust services provided by our Trust Companies, integrating our
investment management expertise with comprehensive, customized fiduciary
services designed to assist clients build and protect wealth across generations.
In January 2001, we received a national bank charter and established
Neuberger Berman Trust Company, N. A., which we believe, along with Neuberger
Berman Trust Company of Delaware, enhances our ability to design creative
client solutions, and helps us retain client assets across generations. We
provide comprehensive family wealth planning through an integrated approach to
tax planning, fiduciary services, investment policy design and oversight.
Working closely with family advisors and coordinating with EMM, our trust
company executives strive to optimize wealth retention plans through flexible
and customized solutions, integrating the money management expertise of
Neuberger Berman, as appropriate. We believe these strengths afford us with a
unique competitive advantage that is already resulting in large new client
relationships. In 2001, the average relationship size of Trust Company clients
served by our Client Consultants was over 50% greater than the average Private
Asset Management relationship size.
We believe that the combination of our money management expertise, national
trust powers and wealth management services, and continuing investments in our
technological infrastructure has strengthened our ability to attract new
clients of larger size, to retain existing clients' assets across generations,
and to cross-sell products and services.
Mutual Fund and Institutional
Our Mutual Fund and Institutional segment includes our family of mutual
funds, institutional separate account products and wrap products sponsored by
third party brokerage firms and banks, which we offer to a wide array of
clients, from the smallest individual investors to the largest institutions. As
of March 31, 2002, assets under management in this segment were approximately
$36.1 billion. This segment generated net revenues after interest expense of
$223.7 million, which represented 36% of our net revenues after interest
expense in 2001, and net revenues after interest expense of $56.7 million,
which represented 35% of our net revenues after interest expense in the first
quarter of 2002.
Despite the challenging market conditions of 2001, we achieved a positive
net cash inflow of $1.8 billion, which includes approximately $700 million
related to the addition of a money management team and the acquisition of the
assets of Fasciano Company, Inc., in our Mutual Fund and Institutional segment.
Assets under management in this segment increased by $1.1 billion to
approximately $34.0 billion as of December 31, 2001. Our Mutual Fund and
Sub-Advised Account business and our Consultant Services Group business each
contributed $1.1 billion in positive net cash flow, both delivering markedly
stronger net cash flow activity compared to the previous year. These positive
net cash inflows were partially offset by net cash outflows of $0.4 billion in
our Institutional Separate Accounts business.
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The mutual funds and separate accounts in this segment cover a broad
spectrum of asset types, investment styles and market capitalization ranges.
Our equity products include large-cap, mid-cap and small-cap equity offerings,
generally incorporating value, growth and blend investment styles as well as
international and socially responsive products. Our fixed income products
include domestic taxable and tax-exempt offerings of various duration, as well
as global portfolios. We also offer balanced portfolios and money market
products. We make our funds available directly to investors, without a sales
load, and through third parties and sub-advisory relationships. We are actively
seeking opportunities to expand into new distribution channels. For example, we
recently added a team of experienced professionals to initiate an institutional
real estate securities effort.
Mutual Fund and Institutional has three components:
. Mutual Fund and Sub-Advised Accounts
. Institutional Separate Accounts (Equity and Fixed-Income)
. Consultant Services Group (Wrap accounts)
Mutual Fund and Sub-Advised Accounts. As of March 31, 2002, we managed a
total of $20.8 billion in assets in Mutual Funds and Sub-Advised Accounts. As a
result of the completion in February 2001 of the reorganization of the
operational structure of our Funds, as of year-end 2001, we managed 29 mutual
funds (the "Fund(s)") as both adviser and sub-adviser. We also acted as
sub-adviser for 16 additional mutual funds for non-affiliated financial
services companies. Net revenues after interest expense were $157.7 million in
2001 and $40.2 million in the first quarter of 2002, consisting primarily of
investment advisory and administrative fees and commissions. In addition to
advisory and sub-advisory fees, we also derive revenues from administrative and
service fees for accounting services, general mutual fund administration (such
as coordinating board meetings, compliance programs and prospectuses, annual
and semi-annual reports) and shareholder services. Approximately 52% of the
commissions paid by the Funds in 2001 were paid to Neuberger Berman, LLC for
executing listed equity trades as broker.
In the first quarter of 2001, we completed the acquisition of the assets of
Fasciano Company, Inc. In connection with that acquisition we established the
Neuberger Berman Fasciano Fund, a small-cap blend mutual fund, with
approximately $236 million in assets under management at March 31, 2002. The
small-cap blend strategy broadens our mutual fund product line by filling the
"style box" categories between Genesis Fund, a small-cap value fund, and
Millennium Fund, our small-cap growth fund. In December 2001, exceptional
growth of assets in the Genesis Fund caused us to close the fund to new
investors, and we anticipate that the Fasciano Fund may provide an alternative
to investors interested in small-cap investment opportunities.
As of March 31, 2002, we offered 19 of our Funds directly to the public
with no sales charge. These cover all capitalization ranges, and generally
include growth, value and blend investment styles, as well as international,
socially responsive and fixed-income portfolios. We managed assets in
direct-sold no load mutual funds that totaled $11.6 billion at March 31, 2002.
On May 1, 2002, we launched the Neuberger Berman Real Estate Fund, which is
managed by a team of REIT specialists who joined the firm earlier in 2002.
We also make our Funds available through mutual fund supermarkets,
broker-dealers, banks and through our internet site, where mutual fund
investors can access account information and buy, sell and exchange Fund
shares. The site also has Fund prospectuses and applications, daily share
prices and performance, as well as articles and educational materials.
Strategic alliances are an increasingly important distribution channel. As
of March 31, 2002, we had alliances with 96 administrators of defined
contribution plans (such as 401(k), 403(b) and
43
nonqualified deferred compensation plans). These alliances allow us, as
investment adviser, and these administrators, as recordkeepers and plan
participant service providers, to perform the task each of us is best suited to
carry out. Defined contribution plan assets under management in our Funds were
$4.0 billion at March 31, 2002.
We also had relationships with 45 insurance companies that offer variable
annuity and variable life insurance products that may be invested, at the
direction of policy holders, in certain of our Funds. As of March 31, 2002,
assets under management in our Mutual Fund and Sub-Advised Accounts business
included $2.4 billion in assets related to these insurance products.
In addition, assets under management in the 16 sub-advised funds for
non-affiliated financial services companies were $2.8 billion at March 31,
2002. Our continuing efforts to expand this business have been successful, and
we believe we have excellent relationships with some of the leading financial
services companies.
We also make available mutual fund investment advisory services through our
Advisory Services business. Advisory Services offers professional portfolio
management and consolidated recordkeeping services for mutual fund investors
seeking to build and monitor a customized portfolio of mutual funds from
well-known fund groups, including our own Funds and mutual funds managed by
third parties. As of March 31, 2002, we also had three "private-label"
arrangements in which financial advisory companies marketed our Advisory
Services product under another name with Neuberger Berman as the sub-adviser.
When third parties make our products available to their clients, we
generally pay the third parties for recordkeeping, sub-accounting or other
services that they perform with respect to assets that are invested, either
directly or indirectly, in the Funds.
Institutional Separate Accounts (Equity and Fixed-Income). As of March 31,
2002, we managed $11.8 billion of institutional separate account assets. While
our Institutional Separate Accounts business experienced net cash outflows of
approximately $400 million in 2001 (primarily from fixed-income accounts) this
marked a sharp improvement over more significant net cash outflows reported
during the prior year. Net revenues after interest expense were $57.1 million
in 2001 and $13.8 million in the first quarter of 2002, consisting primarily of
investment advisory fees and commissions.
We manage a range of domestic, international and global equity, balanced,
fixed-income and cash management portfolios for approximately 250 client
relationships. Some of our institutional separate account clients include:
defined benefit and defined contribution plans for corporations and
municipalities, Taft-Hartley plans, insurance companies, endowments and
foundations, mutual funds sponsored by third parties and hospital and health
care organizations.
We offer 13 different equity investment styles to institutional investors,
including small-, small/mid-, mid- and large-capitalization value and growth,
as well as socially responsive, technology, international, global and emerging
market portfolios. Our fixed-income separate account strategies include cash
management, limited maturity, high yield, municipal, broad investment grade,
opportunistic core and international. As bond managers, we are value oriented
and use sector rotation and security selection to earn incremental yield. We
use active duration management and volatility analysis to control risk, and,
depending on market conditions, to protect principal or add capital
appreciation.
Consultant Services Group (Wrap Accounts). As of March 31, 2002, we
managed $3.5 billion of wrap account assets. Our assets under management in
wrap accounts grew strongly in 2001, from $1.8 billion at December 31, 2000 to
$3.0 billion at December 31, 2001, in 13 wrap account
44
programs sponsored by third party banks and brokerage firms. We attribute this
growth to a combination of strong product performance, excellent customer
support, and the continued popularity of this product with investors and
financial intermediaries. Wrap account programs, which are designed to meet the
needs of individuals and smaller institutions, offer comprehensive investment
management services under a single fee structure covering all charges,
including investment management, brokerage, custody, recordkeeping and
reporting. Net revenues after interest expense were $8.9 million in 2001 and
$2.8 million in the first quarter of 2002, consisting primarily of investment
advisory fees.
We have relationships with three of the four largest sponsors of separate
account wrap programs. For separate account wrap programs we provide portfolio
management in a variety of investment styles, including value, growth, blend
and international, in small-, mid- and large-capitalization stocks. We believe
the wrap account product will continue to grow in importance as a distribution
channel for our money management expertise. We intend to keep seeking new
relationships, as well as to increase the variety of investment styles that we
offer through this channel. In addition to separate account wrap programs, some
of the sponsors also offer Mutual Fund wrap programs in which we participate.
Professional Securities Services
Our Professional Securities Services segment leverages our asset management
infrastructure to provide services to the professional investment community and
upper echelon high net worth clients.
Clients of our Professional Securities Service segment call upon us for
trade execution, clearing, custody, margin financing, portfolio reporting and
trust services. We provide our research to about 200 outside investment
managers. We also act as market maker for approximately 170 securities traded
primarily on the Nasdaq National Market System. Because these services are
based upon the capabilities and resources developed for our asset management
businesses, we generally can provide these services at a modest incremental
cost. Commissions, clearance fees and net interest income provide a significant
portion of this segment's revenues. Net revenues after interest expense were
$98.9 million in 2001 and $22.7 million in the first quarter of 2002.
Professional Securities Services has four components:
. Professional Investor Clearing Services
. Wealth Management Services
. Research Sales
. Other Activities
Professional Investor Clearing Services. We provide prime brokerage
services to 64 private investment partnerships, registered investment advisers
and family offices. We provide correspondent clearing services to 20
introducing brokers. These services include trade execution, custody, clearance
and settlement, margin financing and the borrowing of securities to meet short
sale obligations and portfolio reporting. In some instances, we provide our
clients with the use of a fully equipped office facility. A dedicated sales
team markets these services directly and through advertising in trade
publications. We also seek to cross-sell our other services to these clients,
including research sales and trust and custody services. Net revenues after
interest expense were $48.2 million in 2001 and $10.0 million in the first
quarter of 2002, consisting primarily of commissions, clearance fees and net
interest income.
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Wealth Management Services. The Wealth Management Services business
provides financial advice independent of our other business segments, through
the Trust Companies and EMM. The services offered to high net worth
individuals, wealthy families and family offices include:
. Wealth Management, Retirement, Estate and Gift Tax Planning
. Trust Administration, Agency and Custody Services
. Investment Policy Design, Manager Selection and Oversight
. Executor Services
. Charitable Gift Planning and Administration
. Retirement Plan and IRA Administration
Our Trust Companies provide comprehensive wealth planning services to high
net worth individuals and families in addition to personal fiduciary,
administrative, trustee and executor services. Our team of trust professionals
works closely with clients and their advisors to customize and implement plans
designed with an integrated approach to investment management and estate and
tax planning and administration, with the goal of providing continuity and
consistency of performance over time.
Additional services offered to business owners include employee benefit
plan and ESOP design, management and administrative services. We also furnish
investment and administration services for charities' planned giving programs.
All clients can also benefit from the Trust Companies' ability to deliver
multi-manager custody and consolidated performance and risk management
oversight and reporting.
To further enhance our comprehensive wealth management capabilities, we
acquired EMM in the first quarter of 2001. EMM acts as an independent counselor
to ultra affluent clients to assist them in preserving and enhancing their
financial position. Among its personal and professional management services,
EMM provides: comprehensive tax planning and administration; estate, trust and
gift planning strategy; family office management; contract structuring and
analysis; and insurance planning. As do the Trust Companies, EMM provides
independent investment advisory services, which include: asset allocation;
objective investment manager selection among a wide array of asset managers
which may include Neuberger Berman; and performance monitoring.
We believe that the sophisticated wealth management advisory expertise
provided by EMM and our Trust Companies enhances our ability to attract new
clients with substantial assets, retain existing clients' assets, and
cross-sell Neuberger Berman's products and services. Net revenues after
interest expense provided by our Wealth Management Services were $6.1 million
in 2001 and $2.2 million in the first quarter of 2002, consisting primarily of
investment advisory fees.
Research Sales. Our centralized research department regularly prepares and
updates research reports for our Private Asset Management and Mutual Fund and
Institutional businesses. As an independent asset manager, the primary goal of
our research capability is to advance the creative sharing of ideas among our
portfolio managers. Ten sales professionals in the research sales group also
make these research reports available to approximately 200 third-party
investment managers. If these third-party managers decide to buy or sell
securities based on this research, they generally place their trades through
us, although they have no obligation to do so. The research sales group also
includes eight traders who execute these brokerage transactions. Through our
corporate relationships, we participate as part of selling groups in public
offerings of securities (we do not participate in such offerings, however, for
our advisory clients). Net revenues after interest expense were $21.9 million
in 2001 and $6.6 million in the first quarter of 2002, consisting primarily of
commissions.
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Other Activities. Professional Securities Services also includes market
making activities, global securities lending, custody and recordkeeping
services and treasury management. We act as market maker for approximately 170
securities traded primarily on the Nasdaq National Market System, buying or
selling such securities as principal. We impose strict limits on the trading
desk and the individual traders to control our risk. We provide custody and
recordkeeping services to clients of our Trust Companies. We also generate net
interest income by managing cash available as a result of our broker-dealer
activities. Net revenues after interest expense were $22.7 million in 2001 and
$3.9 million in the first quarter of 2002, consisting primarily of principal
transactions in securities and net interest income.
Investment Process and Research
Our portfolio managers generally base their decisions on fundamental
research, attempting to make knowledgeable judgments about the investment
merits of industry groups and specific companies. Our centralized research
department supports all of our investment professionals. Organized primarily by
industry, our securities analysts are responsible for understanding
developments within the companies and industries they follow. To do this, they
meet with senior management of companies they follow and interview customers
and competitors of those companies. In some cases, they employ specialized
consultants and develop earnings and cash flow estimates. At present, there are
14 analysts in the research department, supported by 19 associate analysts.
They follow approximately 500 companies.
In addition to our centralized research department, many of our investment
groups employ dedicated analysts who focus on securities of particular interest
to their specific investment approach. Their research is augmented by an
established program of on-site visits between our portfolio managers and
analysts and the senior management teams of corporations. Hundreds of such
meetings occurred in 2001. They provide the portfolio managers and analysts
with valuable insight and perspective into a company's business, management
strategy and financial prospects. We believe that our long-standing dedication
to unbiased, fundamental research distinguishes us from many of our
competitors. Ultimately, each money manager is responsible for stock selection,
tax sensitivity and the timing of purchases and sales of securities. This
permits the manager to adhere to his or her investment style and to respond
quickly to market opportunities or risks. This flexibility allows our money
managers to do what they believe is best for our clients, without the
administrative delays of a system where an investment committee dictates
security selection.
Technology Initiatives
Technology is critical to our mission of superior investment performance
and excellent customer service. We continue to invest in technology, both to
enhance our clients' experience with us and to achieve operating cost savings.
In 2001, we launched a new website with an architecture that provides a
customized experience for different types of users. The site targets both
existing clients and prospects for all of our core businesses, as well as the
financial advisors and other intermediaries who work with our clients'
accounts. The unifying theme of the site is our commitment to personalized
investing and excellent customer service. The site encourages clients to access
their account records and perform transactions with us electronically.
Creative and appropriate uses of technology provide our clients with
greater convenience in accessing their records or communicating with us. It can
also reduce our operating costs by converting certain high-cost procedures,
such as the mailing of compliance materials, into electronic delivery. In 2001
we launched several programs with these benefits in mind, including electronic
trade confirmation and electronic delivery of certain compliance material.
47
MANAGEMENT
Set forth below is information concerning our directors and executive
officers as of June 30, 2002.
Name Age Position
---- --- --------
Lawrence Zicklin.. 66 Chairman of the Board of Directors
Richard A. Cantor. 69 Vice Chairman of the Board of Directors
Marvin C. Schwartz 60 Vice Chairman of the Board of Directors
Jeffrey B. Lane... 60 President, Chief Executive Officer and Director
Nathan Gantcher... 61 Director
David W. Glenn.... 57 Director
Michael M. Kassen. 49 Executive Vice President, Chief Investment Officer
and Director
Arthur Levitt, Jr. 71 Director
Jon C. Madonna.... 59 Director
Robert Matza...... 45 Executive Vice President, Chief Operating Officer
and Director
Jack H. Nusbaum... 61 Director
Heidi L. Schneider 48 Executive Vice President and Director
Matthew S. Stadler 47 Senior Vice President and Chief Financial Officer
Peter E. Sundman.. 43 Executive Vice President and Director
All directors are elected annually to serve until our next meeting of
stockholders and thereafter until their successors are elected and qualified.
Executive officers are appointed by and serve at the pleasure of our Board of
Directors. A brief biography of each director and executive officer follows.
Lawrence Zicklin has been the non-executive Chairman of the Board of
Directors of Neuberger Berman Inc. since October 1999. Mr. Zicklin served as
the Managing Principal and Chief Executive Officer of Neuberger Berman, LLC
from 1996 through October 1999, and Managing Partner of its predecessor from
1975 through 1996. He was a Director of Neuberger Berman Management Inc. from
1974 through February 2001. He joined our organization in 1969.
Richard A. Cantor has been a non-executive Vice Chairman of the Board of
Directors of Neuberger Berman Inc. since October 1999. Mr. Cantor oversaw our
mutual fund and institutional business from 1991 through October 1999 and
served as Executive Principal of Neuberger Berman, LLC from 1996 through
October 1999. He was a Director of Neuberger Berman Management Inc. from 1988
through February 2001, and its Chairman from 1991 through May 2000. He joined
our organization in 1973.
Marvin C. Schwartz has been a Vice Chairman of the Board of Directors of
Neuberger Berman Inc. and Managing Director of Neuberger Berman, LLC since
October 1999. Mr. Schwartz joined our organization in January 1961 and has been
a senior portfolio manager in the Private Asset Management business since 1967.
Mr. Schwartz was a Director of Neuberger Berman Management Inc. from December
1990 to April 1996.
Jeffrey B. Lane has been President and Chief Executive Officer of Neuberger
Berman Inc. and Neuberger Berman, LLC, and a Director of Neuberger Berman Inc.
since October 1999. He has been a Director of Neuberger Berman Management Inc.
since February 2001. Mr. Lane served as Chief Administrative Officer of
Neuberger Berman, LLC from July 1998 through October 1999. Mr. Lane was a
Director of Neuberger Berman Trust Company from June 1999 through November
2000. He was previously employed by Primerica Corp. (subsequently known as
Travelers Group Inc.) from February 1990 until July 1998, where he served in
several capacities, including President of Primerica Holdings
48
from February 1990 to February 1991, Vice Chairman of Smith Barney Inc. (then a
subsidiary of Primerica) from February 1991 through December 1995, and Vice
Chairman of Travelers Group from January 1996 to July 1998.
Nathan Gantcher has been a Director of Neuberger Berman Inc. since January
2001. Mr. Gantcher has been Co-Chairman, President and Chief Executive Officer
of Alpha Investment Management since January 2002. Mr. Gantcher was a private
investor from October 1999 to January 2002. From October 1997 to October 1999,
Mr. Gantcher served as Vice Chairman of CIBC World Markets. From 1983 to 1997,
Mr. Gantcher was employed by Oppenheimer & Co., Inc. where he served in several
capacities, including President, Chief Operating Officer and Co-Chief Executive
Officer. Mr. Gantcher is also a Director of ClickSoftware, Inc., E-Mind,
Liquidnet Holdings and Mack-Cali Realty, L.P.
David W. Glenn has been a Director of Neuberger Berman Inc. since December
1999. Mr. Glenn is currently Vice Chairman, President and Chief Operating
Officer of the Federal Home Loan Mortgage Corporation. He has been Vice
Chairman of the Federal Home Loan Mortgage Corporation since June 2000,
President since 1990 and Chief Operating Officer since November 1989. Mr. Glenn
has also been a Director of the Federal Home Loan Mortgage Corporation since
1990.
Michael M. Kassen is an Executive Vice President and the Chief Investment
Officer of Neuberger Berman Inc. and Neuberger Berman, LLC as well as a
Director of Neuberger Berman Inc., and has held those positions since October
1999. Mr. Kassen joined our organization in June 1990 as a portfolio manager.
He was a partner of Neuberger Berman, LLC from 1993 through 1996, when he
became a principal. In addition, he has been a Director of Neuberger Berman
Management Inc. since April 1996, and Chairman of that company in May 2000. Mr.
Kassen was Executive Vice President and Chief Investment Officer of Neuberger
Berman Management Inc. from November 1999 until May 2000, and held the office
of Vice President of that company from June 1990 until November 1999.
Mr. Kassen is the President and Trustee of three registered investment
companies in the Neuberger family of mutual funds.
Arthur Levitt, Jr. has been a Director of Neuberger Berman Inc. since May
2001. Mr. Levitt is currently Senior Advisor to the Carlyle Group. From July
1993 to February 2001, Mr. Levitt was Chairman of the Securities and Exchange
Commission. Before joining the Securities and Exchange Commission, Mr. Levitt
owned Roll Call, a Washington D.C. newspaper that covers Capitol Hill. From
1989 to 1993, he served as the Chairman of the New York City Economic
Development Corporation, and from 1978 to 1989 he was the Chairman of the
American Stock Exchange. Prior to joining the AMEX, Mr. Levitt worked for 16
years on Wall Street.
Jon C. Madonna has been a Director of Neuberger Berman Inc. since December
1999. Mr. Madonna is currently Chairman of the Board of Directors of
DigitalThink, Inc., a position he has held since April 2002, as well as a
Director. He was President of DigitalThink, Inc. from 2001 until April 2002,
and has been a Director since January 2000. Mr. Madonna is also a Director of
Tidewater Inc. From 1998 to December 2000, Mr. Madonna was President and Chief
Executive Officer of Carlson Wagonlit Travel. From 1997 to 1998, Mr. Madonna
was Vice Chairman of Travelers Group Inc. and Vice Chairman of Travelers
Property and Casualty. Mr. Madonna also served as Chairman and Chief Executive
Officer of KPMG Peat Marwick, USA from 1990 to 1996 and Chairman of KPMG
International from 1995 to 1997.
Robert Matza has been an Executive Vice President and a Director of
Neuberger Berman Inc. and Neuberger Berman, LLC since October 1999. He has held
the position of Chief Operating Officer of both companies since January 2001,
and was Chief Administrative Officer of both companies from October 1999 until
January 2001. Mr. Matza has been the head of our Professional Securities
Services
49
business since October 1999. Prior to joining our organization as an Operations
Principal in April 1999, Mr. Matza was Vice President and Deputy Treasurer of
Citigroup Inc. (formerly known as Travelers Group Inc.) from October 1998 to
April 1999, and Vice President and Treasurer of Travelers Group Inc. from July
1996 to October 1998. Mr. Matza was previously employed by Lehman Brothers Inc.
and Lehman Brothers Holdings Inc. where he served in several capacities,
including Chief Financial Officer and Member of the Corporate Management
Committee of Lehman Brothers Holdings Inc. from January 1994 to July 1996,
Chief Financial Officer and a Director of Lehman Brothers Inc. from January
1994 to July 1996, and Managing Director of Lehman Brothers Inc. from 1992 to
July 1996.
Jack H. Nusbaum has been a Director of Neuberger Berman Inc. since December
1999. Mr. Nusbaum is Chairman of the law firm Willkie Farr & Gallagher, where
he has been a Partner for more than 30 years. Mr. Nusbaum is also a Director of
Associated Community Bancorp, Inc., W.R. Berkley Corp., Prime Hospitality
Corp., Strategic Distribution, Inc., and The Topps Company, Inc.
Heidi L. Schneider has been an Executive Vice President of Neuberger Berman
Inc. and Neuberger Berman, LLC, as well as a Director of Neuberger Berman Inc.
since October 1999, at which time she also became the head of our Private Asset
Management business. Mrs. Schneider has been a Director of Neuberger Berman
Trust Company, N.A. since January 2001 of which she was Chair from January 2001
until April 2001, a Director of Neuberger Berman Trust Company of Delaware
since February 2000 of which she was Chair from February 2000 until April 2001.
She joined our organization in January 1986 and, since then, has directed our
Private Asset Management national sales and client service force.
Matthew S. Stadler has been a Senior Vice President and the Chief Financial
Officer of Neuberger Berman Inc., Neuberger Berman, LLC and Neuberger Berman
Management Inc., since August 2000. From November 1999 to August 2000, Mr.
Stadler served as Controller of Neuberger Berman, LLC. Mr. Stadler was
previously employed by National Discount Brokers Group from May 1999 until
October 1999, where he served as Senior Vice President and Chief Financial
Officer. From August 1994 to April 1999, Mr. Stadler was Senior Vice President
and Chief Financial Officer of Santander Investment Securities Inc.
Peter E. Sundman has been an Executive Vice President of Neuberger Berman
Inc. and Neuberger Berman, LLC, as well as a Director of Neuberger Berman Inc.
and Neuberger Berman Management Inc., and President of the latter entity since
October 1999. Mr. Sundman also has been head of the Mutual Fund and
Institutional business since October 1999. He was a Senior Vice President of
Neuberger Berman Management Inc. from January 1996 through October 1999.
Mr. Sundman joined our organization in February 1988, as Director of
Institutional Services, a position he held until January 1996. Mr. Sundman is
currently the Chairman of the Board and Trustee of three registered investment
companies in the Neuberger Berman family of mutual funds.
50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of June 30, 2002:
. the name of each director, executive officer and each other selling
stockholder;
. the number of shares and the percentage of common stock beneficially
owned by each such person as of such date, if more than one percent;
. the number of shares of common stock each such person may sell under this
prospectus; and
. the number of shares and the percentage of common stock beneficially
owned by each such person after the sale of the maximum number of shares
such person may sell under this prospectus, if more than one percent.
For purposes of this table, we have assumed that 70,164,694 shares of
common stock (the number outstanding as of June 30, 2002) are outstanding. Our
registration of the shares of common stock does not necessarily mean that the
selling stockholders will sell shares of common stock. We may amend or
supplement this prospectus from time to time in the future to update or modify
the list of selling stockholders or the shares that may be offered and sold.
For purposes of this table, "beneficial ownership" is determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, pursuant
to which a person or group is deemed to have "beneficial ownership" of any
shares of common stock that such person has the right to acquire within 60 days
after the date of this prospectus. For purposes of computing the percentage of
outstanding shares of common stock held by each person or group of persons
named below, any shares which such person or persons has the right to acquire
within 60 days after the date of this prospectus are deemed to be outstanding
but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
51
The 3,816,926 shares of common stock that may be offered and sold by our
former principals and their affiliates under this prospectus are subject to the
transfer restrictions contained in the Stockholders Agreement. Accordingly,
these shares cannot be offered or sold before January 1, 2003 unless our Board
of Directors or its designee waives these restrictions.
Shares Beneficially Shares Beneficially
Owned Before Number of Owned After
Offering(1)(2) Shares Offering(1)(2)
----------------- Being -----------------
Name Number Percent Offered Number Percent
---- ---------- ------- --------- ---------- -------
Directors and Executive Officers
Lawrence Zicklin(3)(4)........................................ 1,791,929 2.55% 0 1,791,929 2.55%
Richard A. Cantor(3)(5)....................................... 1,662,423 2.37% 0 1,662,423 2.37%
Marvin C. Schwartz(3)(6)...................................... 6,374,495 9.09% 450,000 5,924,495 8.44%
Jeffrey B. Lane(3)(7)......................................... 914,251 1.30% 50,000 864,251 1.23%
Nathan Gantcher(8)............................................ 4,036 * 0 4,036 *
David W. Glenn(9)............................................. 11,105 * 0 11,105 *
Michael M. Kassen(3)(10)...................................... 1,397,730 1.99% 140,000 1,257,730 1.79%
Arthur Levitt, Jr.(8)......................................... 4,075 * 0 4,075 *
Jon C. Madonna(9)............................................. 10,149 * 0 10,149 *
Robert Matza(3)(11)........................................... 553,145 * 0 553,145 *
Jack H. Nusbaum(9)............................................ 23,649 * 0 23,649 *
Heidi L. Schneider(3)(12)..................................... 773,826 1.10% 60,000 713,826 1.02%
Peter E. Sundman(3)(13)....................................... 529,942 * 35,000 494,942 *
All Executive Officers and Directors as a Group(14 people)(14) 14,069,960 20.05% 735,000 13,334,960 19.01%
Other Selling Stockholders(15)
Neuberger Berman Employee Defined Contribution Incentive Plan
Trust(16).................................................... 4,502,050 6.42% 1,183,074 3,318,976 4.73%
Robert J. Appel............................................... 2,109,291 3.01% 170,000 1,939,291 2.76%
Jeffrey Bolton(17)............................................ 679,040 * 87,739 591,301 *
Lawrence J. Cohn(18).......................................... 256,558 * 32,154 224,404 *
Robert W. D'Alelio(19)........................................ 496,542 * 30,000 466,542 *
Salvatore D'Elia(20).......................................... 229,029 * 14,246 214,783 *
Gregory P. Francfort(21)...................................... 941,257 1.34% 75,000 866,257 1.23%
Howard L. Ganek(22)........................................... 1,267,325 1.81% 167,884 1,099,441 1.57%
Robert I. Gendelman........................................... 658,077 * 87,144 570,933 *
Theodore P. Giuliano(23)...................................... 491,185 * 65,491 425,694 *
Michael W. Kamen(24).......................................... 487,800 * 63,840 423,960 *
Irwin Lainoff(25)............................................. 1,145,267 1.63% 149,303 995,964 1.42%
Richard S. Levine............................................. 568,017 * 49,336 518,681 *
Martin McKerrow(26)........................................... 351,618 * 36,000 315,618 *
Martin E. Messinger(27)....................................... 1,119,767 1.60% 149,302 970,465 1.38%
Roy R. Neuberger(28).......................................... 238,556 * 10,459 228,097 *
Daniel P. Paduano(29)......................................... 890,664 1.27% 100,000 790,664 1.13%
Leslie M. Pollack(30)......................................... 677,527 * 37,000 640,527 *
Janet W. Prindle.............................................. 1,040,511 1.48% 75,000 965,511 1.38%
Kevin L. Risen(31)............................................ 427,409 * 55,490 371,919 *
Daniel H. Rosenblatt(32)...................................... 379,285 * 25,000 354,285 *
R. Edward Spilka(33).......................................... 623,346 * 82,713 540,633 *
Gloria H. Spivak.............................................. 240,595 * 32,079 208,516 *
Bernard Z. Stein.............................................. 144,085 * 10,607 133,478 *
Fred Stein.................................................... 360,512 * 150,000 210,512 *
Eleanor Moore-Sterne.......................................... 411,654 * 25,000 386,654 *
Judith M. Vale(34)............................................ 1,034,084 1.47% 75,000 959,084 1.37%
David I. Weiner(35)........................................... 724,974 1.03% 30,000 694,974 *
Dietrich Weismann(36)......................................... 2,578,969 3.68% 343,863 2,235,106 3.19%
Allan R. White III(37)........................................ 428,871 * 55,656 373,215 *
TOTAL......................................................... 39,573,825 56.40% 4,203,380 35,370,445 50.41%
Other former principals and their affiliates(38).............. -- -- 796,620 -- --
--------
* Less than 1%.
(1)Except as otherwise indicated, the people shown in this table have sole
voting and investment power with respect to all shares of our common stock
shown as beneficially owned by them, subject to community property laws
where applicable.
(2)Certain of the Directors and Executive Officers hold shares of stock under
the Employee Trust. See Note 16 regarding the Employee Trust.
52
(3)These individuals are former principals of Neuberger Berman, LLC. They,
other former principals of Neuberger Berman, LLC, and their family
affiliates are parties to a Stockholders Agreement with us. As of June 30,
2002, there were 46,235,668 shares of our common stock subject to the
Stockholders Agreement, representing approximately 66% of outstanding common
stock as of that date. Under the Stockholders Agreement, each former
principal continuing in Neuberger Berman's employ and his or her family
affiliates have agreed to vote their shares in accordance with a majority of
the shares held by all former principals and their family affiliates subject
to that voting requirement, voting in a preliminary vote. As of June 30,
2002, there were 29,670,952 shares of common stock subject to the voting
requirement, representing approximately 42% of our common stock as of that
date. Mr. Cantor and Mr. Zicklin are not employed by us and are not subject
to the voting requirements of the Stockholders Agreement.
(4)Includes 586,407 shares held by Zicklin Associates, L.P., with respect to
which Mr. Zicklin has sole voting and investment control as the sole
stockholder of its sole general partner, as to which he disclaims beneficial
ownership.
(5)Includes 1,339,215 shares held by Cantor Associates, L.P., with respect to
which Mr. Cantor has sole voting and investment control as the sole
stockholder of its sole general partner, as to which he disclaims beneficial
ownership.
(6)Includes prior to the offering 2,446,855 shares held by Schwartz CS
Associates, L.P., and 2,446,854 shares held by Schwartz ES Associates, L.P.,
in each case, with respect to which Mr. Schwartz has sole voting and
investment control as the sole general partner. Shares being offered may be
held by Mr. Schwartz and/or through his family limited partnership.
(7)Includes options to acquire 102,910 shares, exercisable within 60 days.
(8)Includes options to acquire 3,000 shares, exercisable within 60 days.
(9)Includes options to acquire 1,385 shares, exercisable within 60 days.
(10)Includes (a) prior to the offering 428,706 shares held by Kassen
Associates, L.P., with respect to which Mr. Kassen has sole voting and
investment control as the sole stockholder of its sole general partner and
(b) options to acquire 19,949 shares, exercisable within 60 days. Shares
being offered may be held by Mr. Kassen and/or through his family limited
partnership.
(11)Includes options to acquire 59,837 shares, exercisable within 60 days.
(12)Includes (a) prior to the offering 95,626 shares held by Steiger
Associates, L.P., with respect to which Mrs. Schneider has sole voting and
investment control as the sole stockholder of its sole general partner and
(b) options to acquire 39,893 shares, exercisable within 60 days. Shares
being offered may be held by Mrs. Schneider and/or through her family
limited partnership.
(13)Includes (a) prior to the offering, 192,436 shares held by Sundman
Associates, L.P., with respect to which Mr. Sundman has sole voting and
investment control as the sole stockholder of its sole general partner and
(b) options to acquire 59,837 shares, exercisable within 60 days. Shares
being offered may be held by Mr. Sundman and/or through his family limited
partnership.
(14)Includes prior to the offering, 21,077 shares held through the Employee
Trust.
(15)Other than the Employee Trust, these selling stockholders are former
principals of Neuberger Berman and their affiliates. Each former principal
and his or her affiliates listed below is a party to the Stockholders
Agreement with Neuberger Berman.
The 3,816,926 shares of common stock that may be offered and sold by our
former principals and their affiliates under this prospectus are subject to
the transfer restrictions contained in the Stockholders Agreement.
Accordingly, these shares cannot be offered or sold before January 1, 2003
unless our Board of Directors or its designee waives these restrictions.
Under the Stockholders Agreement, each such former principal continuing in
Neuberger Berman's employ and his or her affiliates has agreed to vote his,
her or its shares in accordance with a majority of the shares held by all
former principals and affiliates who are subject to the Stockholders
Agreement voting in a preliminary vote.
The number of shares offered under this prospectus by any selling
stockholder other than the Employee Trust may be increased. However, the
aggregate number of shares offered by the former principals or their
affiliates specifically identified in this table and by any other former
principals and their affiliates named in any prospectus supplement will not
exceed 3,816,926 shares.
(16)The Employee Trust holds these shares for participants, which include
employees of Neuberger Berman, in our Employee Defined Contribution Stock
Incentive Plan. The Employee Trust is the holder of record of these shares,
and the trustee votes the shares of the Employee Trust in accordance with
the instructions of the participants to whom shares have been allocated.
The trustee does not have dispositive power with respect to shares held in
any participant's stock account. The right of a participant to receive
shares allocated to his or her account generally becomes vested, and the
shares become distributable to the participant, in three equal installments
on the second, third and fourth anniversaries of the allocation to the
participant, subject to the satisfaction of certain conditions.
The Employee Trust may offer and sell 1,183,074 shares of our common stock
on behalf of 791 employees in accordance with such employees' instructions
to the trustee. The net proceeds from any sale of such shares will be
distributed to the plan participants and/or applied to pay applicable
withholding taxes. A total of 1,856,230 shares held by the Employee Trust
were scheduled to vest and become distributable to plan participants in
October 2002. All of the 1,183,074 shares of common stock held by the
Employee Trust and covered by this prospectus are scheduled to vest in
October 2002 and may not be sold prior to the vesting date unless Neuberger
Berman accelerates the vesting of such shares. Neuberger Berman may
accelerate the vesting of such shares to permit their sale in an offering
prior to October 2002.
53
(17)Includes (a) prior to the offering, 153,258 shares held by Bolton
Associates, L.P., with respect to which Mr. Bolton has sole voting and
investment control as the sole stockholder of its sole general partner and
(b) options to acquire 6,000 shares, exercisable within 60 days. Shares
being offered may be held by Mr. Bolton and/or through his family limited
partnership.
(18)Includes options to acquire 3,876 shares, exercisable within 60 days.
(19)Includes options to acquire 7,500 shares, exercisable within 60 days.
(20)Includes options to acquire 4,500 shares, exercisable within 60 days.
(21)Includes prior to the offering, 110,336 shares held by Francfort 1998
Grantor Retained Annuity Trust, with respect to which Mr. Francfort, as
trustee, has sole voting control and shares investment control with
Patricia Francfort and Neuberger Berman Trust Company of Delaware. Shares
being offered may be held by Mr. Francfort and/or through his trust.
(22)Includes prior to the offering, 63,500 shares held by Ganek Associates,
L.P., with respect to which Mr. Ganek has sole voting and investment
control as the sole stockholder of its sole general partner. Shares being
offered may be held by Mr. Ganek and/or through his family limited
partnership.
(23)Includes prior to the offering, 106,483 shares held by Giuliano Associates,
L.P., with respect to which Mr. Giuliano has sole voting and investment
control as the sole stockholder of its sole general partner. Shares being
offered may be held by Mr. Giuliano and/or through his family limited
partnership.
(24)Includes (a) prior to the offering, 88,800 shares held by Kamen Associates,
L.P., with respect to which Mr. Kamen has sole voting and investment
control as the sole stockholder of its sole general partner and (b) options
to acquire 6,000 shares, exercisable within 60 days. Shares being offered
may be held by Mr. Kamen and/or through his family limited partnership.
(25)Includes prior to the offering, 47,509 shares held by Lainoff Associates,
L.P., with respect to which Mr. Lainoff has sole voting and investment
control as the sole stockholder of its sole general partner. Shares being
offered may be held by Mr. Lainoff and/or through his family limited
partnership.
(26)Includes prior to the offering, 64,315 shares held by McKerrow Associates,
L.P., with respect to which Mr. McKerrow has sole voting and investment
control as the sole stockholder of its sole general partner. Shares being
offered may be held by Mr. McKerrow and/or through his family limited
partnership.
(27)Includes prior to the offering, 519,463 shares held by Messinger
Associates, L.P., with respect to which Mr. Messinger has sole voting and
investment control as the sole stockholder of its sole general partner.
Shares being offered may be held by Mr. Messinger and/or through his family
limited partnership.
(28)Includes prior to the offering 198,556 shares held by Neuberger Associates,
L.P., with respect to which Mr. Neuberger has sole voting and investment
control as the sole stockholder of its sole general partner. Shares being
offered may be held by Mr. Neuberger and/or through his family limited
partnership.
(29)Includes prior to the offering, 782,157 shares held by Paduano Associates,
L.P., with respect to which Mr. Paduano has sole voting and investment
control as the sole stockholder of its sole general partner. Shares being
offered may be held by Mr. Paduano and/or through his family limited
partnership.
(30)Includes prior to the offering, 259,318 shares held by Pollack 1998 Grantor
Retained Annuity Trust, with respect to which Mr. Pollack, as trustee, has
sole voting control and shares investment control with Yvonne S. Pollack
and Neuberger Berman Trust Company of Delaware. Shares being offered may be
held by Mr. Pollack and/or through his trust.
(31)Includes options to acquire 6,015 shares, exercisable within 60 days.
(32)Includes options to acquire 7,017 shares, exercisable within 60 days.
(33)Includes (a) prior to the offering, 125,382 shares held by Robert Edward
Spilka 1998 Grantor Retained Annuity Trust, with respect to which Mr.
Spilka, as trustee, has sole voting control and shares investment control
with Linda Galarza Spilka and Neuberger Berman Trust Company of Delaware,
and (b) options to acquire 3,000 shares, exercisable within 60 days. Shares
being offered may be held by Mr. Spilka and/or through his trust.
(34)Includes options to acquire 7,500 shares, exercisable within 60 days.
(35)Includes prior to the offering, 44,784 shares held by Weiner 1998 Grantor
Retained Annuity Trust, with respect to which Mr. Weiner, as trustee, has
sole voting control and shares investment control with Laurie L. Weiner,
Bintoar Palar and Neuberger Berman Trust Company of Delaware. Shares being
offered may be held by Mr. Weiner and/or through his trust.
(36)Includes prior to the offering, 1,171,345 shares held by Weismann
Associates, L.P., with respect to which Mr. Weismann has sole voting and
investment control as the sole stockholder of its sole general partner.
Shares being offered may be held by Mr. Weismann and/or through his family
limited partnership.
(37)Includes options to acquire 5,813 shares, exercisable within 60 days.
(38)Information about other selling stockholders will be set forth in
prospectus supplements, if required. In no event will the aggregate number
of shares offered under this prospectus by other former principals or their
affiliates exceed 796,620 shares, and in no event will the aggregate number
of shares offered under this prospectus by the former principals or their
affiliates specifically identified in this table and any other former
principals or their affiliates named in any prospectus supplement exceed
3,816,926 shares.
54
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock does not purport to be
complete and is qualified in its entirety by reference to applicable Delaware
law and to the provisions of our certificate of incorporation and by-laws.
Copies of the forms of certificate of incorporation and by-laws have been
incorporated by reference as exhibits to our Annual Report on Form 10-K for the
calendar year ended December 31, 2001.
Our authorized capital stock consists of 255,000,000 shares, each with a
par value of $.01 per share, of which:
. 250,000,000 are designated as common stock; and
. 5,000,000 are designated as preferred stock.
Common Stock
As of June 30, 2002, there were 70,164,694 shares of common stock
outstanding.
Voting Rights
Each holder of common stock is entitled to one vote per share on all
matters to be voted on by stockholders. Holders of common stock are not
entitled to any cumulative voting rights.
Dividend Rights
Subject to the preferential rights of any holders of any outstanding series
of preferred stock and restrictions set forth in our credit facilities and
restrictions, if any, imposed by other indebtedness outstanding from time to
time, the holders of common stock will be entitled to such dividends and
distributions, whether payable in cash or otherwise, as may be declared from
time to time by our Board of Directors from legally available funds. See "Price
Range of our Common Stock and Dividends."
Other Rights
Upon our liquidation, dissolution or winding up, the holders of shares of
common stock would be entitled to share pro rata in the distribution of all of
our assets remaining available for distribution after satisfaction of all of
our liabilities and the payment of the liquidation preference of any
outstanding preferred stock. The holders of common stock have no preemptive or
other subscription rights to purchase shares of common stock, nor are they
entitled to the benefits of any sinking fund provisions. No share of common
stock issued in connection with or outstanding prior to the offerings is
subject to any further call or assessment.
Preferred Stock
Our certificate of incorporation authorizes 5,000,000 shares of preferred
stock, none of which are issued. Our Board of Directors has the authority to
issue shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any
unissued shares of preferred stock and to fix the number of shares constituting
any series and the designations of such series, without any further vote or
action by the stockholders. We have no present plans to issue any of the
preferred stock.
55
Certain Effects of Authorized But Unissued Stock
We believe that the ability of our Board of Directors to issue one or more
series of preferred stock will provide us with flexibility in structuring
possible future acquisitions and in meeting other corporate needs that might
arise. Our Board of Directors, without stockholder approval, can issue
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of common stock. Although our Board of
Directors has no current intention of doing so, it could issue one or more
series of preferred stock that could, depending on the terms of such series,
impede the completion of a merger, tender offer or other takeover attempt. Our
Board of Directors will make any determination to issue such shares based on
its judgment as to the best interests of Neuberger Berman and its stockholders.
Our Board of Directors, in so acting, could issue preferred stock having terms
that could discourage a potential acquiror from making, without first
negotiating with our Board of Directors, an acquisition attempt through which
such acquiror may be able to change the composition of our Board of Directors,
including a tender offer or other transaction that some, or a majority, of our
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price.
Anti-Takeover Provisions of the Certificate of Incorporation and By-Laws
Some provisions of our certificate of incorporation and by-laws, applicable
law and the Stockholders Agreement could make the acquisition of Neuberger
Berman by means of a tender offer, a proxy contest or otherwise more difficult.
As described above, our certificate of incorporation authorizes our Board of
Directors to designate and issue preferred stock. Other provisions in the
certificate of incorporation and in our by-laws impose procedural and other
requirements that may be deemed to have anti-takeover effects. These provisions
include the inability of our stockholders to take any action without a meeting
or to call special meetings of stockholders, certain advance notice procedures
for nominating candidates for election as directors and for submitting
proposals for consideration at stockholders' meetings, and limitations on the
ability to remove directors. Further, our stockholders can amend our by-laws
and certain provisions of our certificate of incorporation only with a
two-thirds majority vote. Additionally, the Stockholders Agreement requires all
former Neuberger Berman principals and their family affiliates to vote their
shares in accordance with a preliminary vote conducted solely among these
stockholders.
Section 203 of the Delaware General Corporation Law
We are subject to section 203 of the Delaware General Corporation Law,
which prohibits a public Delaware corporation from engaging in a "business
combination" with a stockholder that is an "interested stockholder" for a
period of three years after the date of the transaction in which the
stockholder became an interested stockholder unless:
. prior to such date, our Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder; or
. upon becoming an interested stockholder, the stockholder then owned at
least 85% of the voting stock, as defined in section 203; or
. subsequent to the date on which the stockholder became an interested
stockholder, the business combination is approved by both our Board of
Directors and by holders of at least 66 2/3% of our outstanding voting
stock, excluding shares owned by the interested stockholder.
For these purposes, the term "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder." An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of the
corporation's voting stock.
56
Stockholders Agreement
On October 7, 1999, the principals of Neuberger Berman, LLC and the
shareholders of Neuberger Berman Management Inc. exchanged their ownership
interests for 64.1 million shares of our common stock. On October 13, 1999, we
completed an IPO. In that offering, we sold 4.5 million shares of common stock
and received net proceeds after expenses of approximately $88 million. In
addition, certain of our stockholders who received our common stock in the
Exchange sold 6,329,545 shares of that stock in the IPO.
The individuals who were principals of Neuberger Berman, LLC, their family
affiliates and Neuberger Berman have entered into a Stockholders Agreement that
governs transfers and voting of the shares of common stock received by the
principals and family affiliates in the Exchange. We refer to these shares of
common stock as the "Founder Shares."
Transfer Restrictions
The Stockholders Agreement prohibited any transfers of Founder Shares by
the individuals who were principals or their family affiliates prior to January
1, 2002 except in limited circumstances. Thereafter, they may transfer their
Founder Shares only as follows:
(a) (1) In each calendar year beginning on January 1, 2002, they may
transfer in the aggregate up to 10% of the aggregate number of Founder
Shares initially received by them in the Exchange (plus, in 2002 only, a
number of Founder Shares equal to the amount, if any, by which 15% of the
aggregate number of Founder Shares initially received by them in the
Exchange exceeds the aggregate number of Founder Shares sold by them in our
IPO).
(2) Founder Shares eligible to be transferred in any calendar year but
not transferred may be transferred at any time thereafter without
restriction.
(3) Notwithstanding (1) and (2) above, during the three years following
the date on which a former principal's employment with Neuberger Berman
terminates (the "Employment Termination Date"), that former principal and
his or her family affiliates may not transfer any Founder Shares other than
their Founder Shares that were eligible to be transferred but were not
transferred before the Employment Termination Date.
(b) Notwithstanding paragraph (a) above, each former principal and his
or her family affiliates must at all times continue to hold at least 30% of
the aggregate number of Founder Shares initially received by them in the
Exchange until the third anniversary of the former principal's Employment
Termination Date.
Notwithstanding paragraphs (a) and (b) above, if a former principal's
Employment Termination Date occurs prior to January 1, 2003 for any reason
other than death, disability or termination by the firm without cause, that
principal and his or her family affiliates may not transfer any Founder Shares
prior to January 1, 2007. On and after January 1, 2007, that former principal
and his or her family affiliates may in any calendar year transfer in the
aggregate a maximum of 20% of the aggregate amount of Founder Shares held by
them on the principal's Employment Termination Date. The number of Founder
Shares eligible for transfer in any one calendar year but not transferred may
be added to the number otherwise eligible to be transferred in any future year.
Notwithstanding the foregoing, if a former principal's employment with the
firm terminates due to disability or death, the principal (or his or her
estate) and his or her family affiliates may transfer their Founder Shares
without restriction.
In addition, our Board of Directors (or a body designated by the Board of
Directors) has the authority to make exceptions to any or all of the transfer
restrictions contained in the Stockholders Agreement and may permit or cause
other persons to become party to the agreement.
57
The 3,816,926 shares of common stock that may be offered and sold by our
former principals and their affiliates under this prospectus are subject to the
transfer restrictions contained in the Stockholders Agreement. Accordingly,
these shares cannot be offered or sold before January 1, 2003 unless our Board
of Directors or its designee waives these restrictions.
Voting
Prior to any vote of our stockholders, the Stockholders Agreement provides
for a separate, preliminary vote of the former principals who are currently
employed by us and their family affiliates (and any additional stockholders who
have agreed to vote their shares of common stock in accordance with the
Stockholders Agreement) on each matter upon which a vote of the stockholders is
proposed to be taken. In this preliminary vote, the participating stockholders
may vote all of the shares currently owned by them in such manner as each may
determine in his, her or its sole discretion. Each must then vote all of their
Founder Shares in accordance with the vote of the majority of the shares of
common stock present (in person or by proxy) and voting in such preliminary
vote. Each of the former principals who are currently employed by us and their
family affiliates has granted the Secretary of Neuberger Berman (or other
officer designated by the Secretary) an irrevocable proxy to vote his, her or
its Founder Shares in order to give effect to the voting provisions. Former
principals and their family affiliates are no longer required to vote in
accordance with a preliminary vote under the Stockholders Agreement after the
former principals' Employment Termination Date.
Call Right
The Stockholders Agreement provides that we may repurchase the Founder
Shares of a former principal and his or her family affiliates if the principal
engages in "Harmful Activity" at any time during his or her employment or
during the first three years after leaving. "Harmful Activity" includes:
. soliciting or accepting business from any person who was (1) a client of
the firm during the year prior to his or her departure (or, in the case
of an action taken during employment, during the prior year) or (2) any
prospective client of the firm who, during the year prior to his or her
departure (or, in the case of an action taken during employment, during
the prior year), had been directly or indirectly solicited by such
principal;
. soliciting or accepting business from any financial intermediary (or any
employee of a financial intermediary) with which the principal had
business contact during the year prior to his or her departure (or, in
the case of an action taken during employment, during the prior year);
. employing or soliciting for employment certain employees or consultants
of the firm;
. using (other than in seeking new employment) the investment performance
record of any mutual fund or client account with which the principal was
associated during his or her employment;
. using or disclosing confidential information of the firm; and
. publicly disparaging the firm or its current or former principals,
employees or consultants.
If our Board of Directors (or a body designated by the Board of Directors)
determines in good faith that a former principal has engaged in Harmful
Activity, we may purchase from that principal the excess of the number of
Founder Shares received by the former principal and his or her family
affiliates in the Exchange over the number of Founder Shares that the principal
and his or her family affiliates could have transferred prior to the date on
which the principal initially engaged in Harmful Activity. If a former
principal does not hold sufficient Founder Shares, we may purchase Founder
Shares from his or her family affiliates pro rata in accordance with their then
current holdings. The purchase price of any Founder Shares the Company
purchases in this manner will be $2.00 per share.
58
Transfer Administration and Distributions
The certificates representing the Founder Shares beneficially owned by each
former principal and family affiliate are registered in the name of the firm or
its nominee and held in the firm's custody at its principal office. During any
period in which we are in dispute with any former principal regarding his or
her obligations under the Stockholders Agreement or certain other agreements,
we will not release for transfer any Founder Shares of that principal or his or
her family affiliates or distribute to them any dividends or distributions
received in respect of their Founder Shares.
Amendments and Term
The Stockholders Agreement may be amended by our Board of Directors (or a
body designated by the Board of Directors), provided that any amendment that
materially adversely affects the former principals or family affiliates (or any
group of former principals or family affiliates) (other than any amendment to
cure any ambiguity in the agreement) must be approved by the former principals
and family affiliates holding a majority of the Founder Shares then subject to
the agreement. The agreement will terminate on the earlier to occur of (i) the
first date on which there are no former principals or family affiliates who
remain bound by its terms and (ii) the date on which we agree with former
principals and family affiliates who are then bound by its terms to terminate
the agreement.
Listing
The common stock is listed on the New York Stock Exchange under the symbol
NEU.
Transfer Agent and Registrar
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the shares of common stock.
59
PLAN OF DISTRIBUTION
The securities offered by this prospectus may be sold from time to time by
the selling stockholders or by certain of their transferees or successors in
interest in one or more transactions on the New York Stock Exchange or
otherwise, at market prices prevailing at the time of sale, at a fixed offering
price, which may be changed, at varying prices determined at the time of sale
or at negotiated prices. The 3,816,926 shares of common stock that may be
offered and sold by our former principals and their affiliates under this
prospectus are subject to the transfer restrictions contained in the
Stockholders Agreement. Accordingly, these shares cannot be offered or sold
before January 1, 2003 unless our Board of Directors or its designee waives
these restrictions. All of the 1,183,074 shares of common stock held by the
Employee Trust and covered by this prospectus are scheduled to vest in October
2002 and may not be sold prior to the vesting date unless Neuberger Berman
accelerates the vesting of such shares. The shares of common stock may be sold
by one or more means, including but not limited to the following:
. a block trade in which the broker or dealer so engaged will attempt to
sell the shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
. purchases by a broker or dealer as principal and resale by that broker or
dealer for its account;
. an over-the-counter distribution;
. ordinary brokerage transactions in which the broker solicits purchasers;
. in connection with short sales or the writing of call options or other
derivative contracts, in hedging transactions and in settlement of other
transactions in standardized or over-the-counter options;
. sales in privately negotiated transactions;
. a combination of any such methods of sale; and
. any other method permitted under applicable law and not otherwise
prohibited by this prospectus.
A selling stockholder may decide not to sell any of that stockholder's
shares covered by this prospectus. We cannot assure you that any selling
stockholder will use this prospectus to sell any or all of the shares. Any
shares covered by this prospectus that qualify for sale under Rule 144 of the
Securities Act may be sold under Rule 144 rather than under this prospectus. In
addition, a selling stockholder may transfer, devise or gift the shares by
other means not described in this prospectus.
Alternatively, the selling stockholders may from time to time offer the
shares of common stock covered by this prospectus through underwriters, dealers
or agents, who may receive compensation in the form of underwriting discounts,
concessions or commissions from the selling stockholders or the purchasers of
securities for whom they may act as agents. Such offerings may be effected in
connection with underwritten offerings of securities that are convertible into
or exchangeable for shares of common stock.
The selling stockholders and any underwriters, dealers or agents that
participate in the distribution of securities offered by this prospectus may be
deemed to be underwriters. Any profit on the sale of those securities by them
and any discounts, commissions or concessions they receive might be deemed to
be underwriting discounts and commissions under the Securities Act. At the time
a particular underwritten offer of securities is made, to the extent required,
a supplement to this prospectus will be distributed which will set forth the
names of the selling stockholders, the aggregate amount of securities being
offered and the terms of the offering. These terms will include the name or
60
names of any underwriters, dealers or agents, and discounts, commissions and
other items constituting compensation from the selling stockholders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
In order to comply with the securities laws of particular states, if
applicable, the shares of common stock offered under this prospectus will be
sold in the jurisdictions only through registered or licensed brokers or
dealers. In addition, in particular states, the shares of common stock may not
be sold unless they have been registered or qualified for sale in the
applicable state or an exemption from the registration or qualification
requirements is available and complied with.
Each selling stockholder will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder, which
provisions may limit the timing of purchases and sales of shares of common
stock by the selling stockholders.
The selling stockholders will pay the commissions and discounts of
underwriters, dealers or agents, if any, incurred in connection with the sale
of common stock. In compliance with NASD guidelines, the maximum commission or
discount to be received by any NASD member or independent broker dealer may not
exceed 8% of the aggregate amount of the securities offered pursuant to this
prospectus and any applicable prospectus supplement.
We and the selling stockholders may have agreements with the underwriters,
dealers and agents to indemnify them against certain civil liabilities,
including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with or perform
services for us or our subsidiaries in the ordinary course of their business.
Any underwriter may engage in over-allotment, stabilizing transactions,
short-covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act. Over-allotment involves sales in excess of
the offering size, which create a short position. Stabilizing transactions
permit bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum. Short-covering transactions involve
purchases of the securities in the open market after the distribution is
completed to cover short positions. Penalty bids permit the underwriters to
reclaim a selling concession from a dealer when the securities originally sold
by the dealer are purchased in a covering transaction to cover short positions.
Those activities may cause the price of the securities to be higher than it
would otherwise be. If commenced, the underwriters may discontinue any of the
activities at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the offered
securities will be passed upon for us by Willkie Farr & Gallagher, New York,
New York. Any underwriters will be advised about matters relating to any
offering by their own legal counsel. Mr. Jack H. Nusbaum is chairman of Willkie
Farr & Gallagher, and a Director of Neuberger Berman. As of June 30, 2002, Mr.
Nusbaum beneficially owned 23,649 shares of Neuberger Berman common stock.
EXPERTS
The audited consolidated statements of financial condition of Neuberger
Berman as of December 31, 2001 and 2000, and the related audited consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2001, included and
incorporated by reference in this prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report
included and incorporated by reference in this prospectus, and are included and
incorporated by reference herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
61
INDEPENDENT PUBLIC ACCOUNTANTS
On April 23, 2002, we announced that our Board of Directors has appointed
KPMG LLP as our independent auditors replacing Arthur Andersen LLP. The
decision to change auditors was not the result of any disagreement between
Arthur Andersen LLP and us on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Neuberger Berman files annual, quarterly and current reports, proxy
statements and other information with the Securities Exchange Commission. You
may read and copy any documents filed by us at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our
filings with the SEC are also available to the public through the SEC's
Internet site at http://www.sec.gov and through the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005, on which our common stock is
listed.
We have filed a registration statement on Form S-3 with the SEC relating to
the shares of common stock covered by this prospectus. This prospectus is a
part of the registration statement and does not contain all of the information
in the registration statement. Whenever a reference is made in this prospectus
to a contract or other document of Neuberger Berman, please be aware that the
reference is only a summary and that you should refer to the exhibits that are
a part of the registration statement for a copy of the contract or other
document. You may review a copy of the registration statement at the SEC's
public reference room in Washington, D.C., as well as through the SEC's
Internet site.
We are "incorporating by reference" information into this prospectus. This
means that we can disclose important information to you by referring you to
another document. Any information referred to in this way is considered part of
this prospectus from the date we file that document. Any reports filed by us
with the SEC after the date of this prospectus and before the date that the
offering of the shares of common stock offered through this prospectus is
terminated will automatically update and, where applicable, supersede any
information contained in this prospectus or incorporated by reference in this
prospectus.
Neuberger Berman incorporates by reference into this prospectus the
following documents or information filed by Neuberger Berman with the SEC (File
No. 001-15361):
. Annual Report on Form 10-K for the fiscal year ended December 31, 2001;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2002;
. Current Report on Form 8-K, dated January 29, 2002 (other than with
respect to the information reported under Item 9 of that report);
. Current Report on Form 8-K, dated April 22, 2002 (other than with respect
to the information reported under Item 9 of that report);
. Current Report on Form 8-K, dated May 1, 2002;
. Current Report on Form 8-K, dated May 6, 2002;
. The description of common stock contained in the Registration Statement
on Form 8-A, dated October 4, 1999, of Neuberger Berman, filed with the
SEC under Section 12(b) of the Securities Exchange Act of 1934; and
62
. All documents filed by Neuberger Berman under Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 after the time of filing
of the initial registration statement and before effectiveness of the
registration statement, and after the date of this prospectus and before
the termination of this offering.
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon his or her written or oral
request, a copy of any or all documents referred to above which have been or
may be incorporated by reference into this prospectus, excluding exhibits to
those documents unless they are specifically incorporated by reference into
those documents. You can request those documents from our Director of Investor
Relations, 605 Third Avenue, New York, New York 10158-3698, telephone (212)
476-9000.
63
NEUBERGER BERMAN INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................................. F-2
Consolidated Statements of Financial Condition as of December 31, 2001 and 2000........... F-3
Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999.... F-4
Consolidated Statements of Changes in Principals' Capital and Stockholders' Equity for the
Years Ended December 31, 1999, 2000 and 2001............................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and
1999.................................................................................... F-6
Notes to Consolidated Financial Statements................................................ F-8
Schedule I--Condensed Financial Statements of the Registrant Parent and Notes
Condensed Statements of Financial Condition as of December 31, 2001 and 2000........... F-23
Condensed Statements of Operations for the Years Ended December 31, 2001 and 2000
and for the Period October 8, 1999 through December 31, 1999......................... F-24
Condensed Statements of Cash Flows for the Years Ended December 31, 2001 and 2000
and for the Period October 8, 1999 through December 31, 1999......................... F-25
Notes to Condensed Financial Statements................................................ F-27
Condensed Consolidated Statements of Financial Condition as of March 31, 2002 (Unaudited)
and December 31, 2001................................................................... F-28
Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended
March 31, 2002 and 2001................................................................. F-29
Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited) for the
Three Months Ended March 31, 2002....................................................... F-30
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended
March 31, 2002 and 2001................................................................. F-31
Notes to Condensed Financial Statements (Unaudited)....................................... F-33
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Neuberger Berman Inc.:
We have audited the accompanying consolidated statements of financial
condition of Neuberger Berman Inc. (a Delaware corporation) and subsidiaries as
of December 31, 2001 and 2000, and the related consolidated statements of
income, changes in principals' capital and stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2001. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Neuberger
Berman Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The condensed financial statements of
the registrant parent and notes contained in Schedule I are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not a required part of the basic financial statements. This information has
been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
February 19, 2002
F-2
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
December 31,
----------------------
2001 2000
---------- ----------
ASSETS
Cash and cash equivalents............................................. $ 282,040 $ 88,117
Cash and securities segregated for the exclusive benefit of clients... 593,973 911,182
Cash and securities deposited with clearing organizations (including
securities with market values of $11,957 and $4,443 at December 31,
2001 and 2000, respectively)........................................ 13,189 5,973
Securities purchased under agreements to resell....................... 304,576 282,720
Receivable from brokers, dealers and clearing organizations........... 2,109,110 2,466,102
Receivable from clients............................................... 773,854 456,691
Securities owned, at market value..................................... 88,058 67,688
Fees receivable....................................................... 29,719 23,012
Furniture, equipment and leasehold improvements, at cost, net of
accumulated depreciation and amortization of $38,651 and $26,797 at
December 31, 2001 and 2000, respectively............................ 43,793 43,089
Other assets.......................................................... 144,175 77,189
---------- ----------
Total assets................................................ $4,382,487 $4,421,763
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans......................................................... $ -- $ 3,000
Securities sold under agreements to repurchase..................... 608,538 234,972
Payable to brokers, dealers and clearing organizations............. 1,703,745 1,461,267
Payable to clients................................................. 1,415,904 2,199,169
Securities sold but not yet purchased, at market value............. 6,174 9,522
Other liabilities and accrued expenses............................. 135,316 128,694
---------- ----------
3,869,677 4,036,624
---------- ----------
Long-term debt..................................................... 151,420 --
---------- ----------
Subordinated liability............................................. 35,000 35,000
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued at December 31, 2001 and 2000............................. -- --
Common stock, $.01 par value; 250,000,000 shares authorized;
75,310,547 and 75,032,880 shares issued at December 31, 2001
and 2000, respectively; 70,416,985 and 73,204,509 shares
outstanding at December 31, 2001 and 2000, respectively.......... $ 753 $ 750
Paid-in capital.................................................... 341,344 332,620
Retained earnings.................................................. 173,265 60,971
---------- ----------
515,362 394,341
Less: Treasury stock, at cost, 4,893,562 and 1,828,371 shares at
December 31, 2001 and 2000, respectively............................ (181,488) (41,904)
Unearned compensation.............................................. (7,484) (2,298)
---------- ----------
Total stockholders' equity..................................... 326,390 350,139
---------- ----------
Total liabilities and stockholders' equity..................... $4,382,487 $4,421,763
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For The Years Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
REVENUES:
Investment advisory and administrative fees......... $413,601 $399,907 $379,434
Commissions......................................... 144,667 146,589 142,082
Interest............................................ 157,768 223,709 160,022
Principal transactions in securities, net........... 2,788 9,623 10,003
Clearance fees...................................... 13,450 13,532 11,081
Other income........................................ 4,146 6,428 4,059
-------- -------- --------
Gross revenues.................................. 736,420 799,788 706,681
Interest expense....................................... 123,138 183,441 133,769
-------- -------- --------
Net revenues after interest expense............. $613,282 $616,347 $572,912
-------- -------- --------
OPERATING EXPENSES:
Employee compensation and benefits.................. $253,365 $245,445 $325,310
Information technology.............................. 22,492 22,925 19,172
Rent and occupancy.................................. 20,828 17,796 15,313
Brokerage, clearing and exchange fees............... 12,022 10,514 10,164
Advertising and sales promotion..................... 9,372 9,251 9,259
Distribution and fund administration................ 19,424 18,977 19,437
Professional fees................................... 10,934 11,205 9,276
Depreciation and amortization....................... 13,063 10,638 10,532
Other expenses...................................... 22,723 22,675 31,077
-------- -------- --------
Total operating expenses........................ 384,223 369,426 449,540
-------- -------- --------
Net income before taxes......................... 229,059 246,921 123,372
Tax (benefit) expense.................................. 96,391 96,565 (12,195)
-------- -------- --------
Net income...................................... $132,668 $150,356 $135,567
======== ======== ========
Net income per common share
Net income per share--Basic......................... $ 1.85 $ 2.04 $ 2.04
======== ======== ========
Net income per share--Diluted....................... $ 1.82 $ 2.02 $ 2.04
======== ======== ========
Weighted average common shares outstanding--Basic... 71,795 73,648 66,615
======== ======== ========
Weighted average common shares outstanding--Diluted. 73,052 74,392 66,615
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PRINCIPALS' CAPITAL AND
STOCKHOLDERS' EQUITY
(in thousands)
For The Years Ended December 31, 1999, 2000 and 2001
------------------------------------------------------------------------
Retained
Principals' Common Paid-in (Deficit) Treasury Unearned
Capital Stock Capital Earnings Stock Compensation Total
----------- ------ -------- --------- --------- ------------ ---------
BEGINNING BALANCE,
December 31, 1998....................... $ 100,000 $ -- $ 2,876 $ 6,323 $ -- $ -- $ 109,199
Capital contributions................. 525 -- -- -- -- -- 525
Capital withdrawals................... (525) -- -- -- -- -- (525)
Capital distributions................. (182,375) -- -- -- -- -- (182,375)
Dividends--Neuberger Berman
Management Inc....................... -- -- -- (22,679) -- -- (22,679)
Acquisition of treasury stock--
Neuberger Berman Management
Inc.................................. -- -- -- -- (134) -- (134)
Net income (1/1/99-10/7/99)........... 182,375 -- -- 22,931 -- -- 205,306
--------- ---- -------- -------- --------- ------- ---------
Total before reorganization........... 100,000 -- 2,876 6,575 (134) -- 109,317
Exchange of principal interests for
common stock of Neuberger
Berman Inc........................... (100,000) 641 99,359 -- -- -- --
Exchange of corporate interests for
common stock of Neuberger
Berman Inc........................... -- -- 6,441 (6,575) 134 -- --
--------- ---- -------- -------- --------- ------- ---------
Total after reorganization (10/8/99).. -- 641 108,676 -- -- -- 109,317
Issuance of common stock to public.... -- 45 87,888 -- -- -- 87,933
Issuance of common stock to
defined contribution stock
incentive plan trust................. -- 64 134,263 -- -- -- 134,327
Dividends............................. -- -- -- (4,962) -- -- (4,962)
Acquisition of treasury stock......... -- -- -- -- (8,074) -- (8,074)
Net loss (10/8/99-12/31/99)........... -- -- -- (69,739) -- -- (69,739)
--------- ---- -------- -------- --------- ------- ---------
ENDING BALANCE,
December 31, 1999....................... -- 750 330,827 (74,701) (8,074) -- 248,802
Dividends............................. -- -- -- (14,684) -- -- (14,684)
Acquisition of treasury stock......... -- -- -- -- (35,210) -- (35,210)
Issuance of common stock.............. -- -- 1,793 -- 1,380 (2,298) 875
Net income............................ -- -- -- 150,356 -- -- 150,356
--------- ---- -------- -------- --------- ------- ---------
ENDING BALANCE,
December 31, 2000....................... -- 750 332,620 60,971 (41,904) (2,298) 350,139
Dividends............................. -- -- -- (20,374) -- -- (20,374)
Acquisition of treasury stock......... -- -- -- -- (158,602) -- (158,602)
Issuance of common stock.............. -- 3 8,823 -- 19,095 (8,040) 19,881
Amortization of unearned
compensation......................... -- -- -- -- -- 2,704 2,704
Forfeitures of restricted stock
awards............................... -- -- (99) -- (77) 150 (26)
Net income............................ -- -- -- 132,668 -- -- 132,668
--------- ---- -------- -------- --------- ------- ---------
ENDING BALANCE,
December 31, 2001....................... $ -- $753 $341,344 $173,265 $(181,488) $(7,484) $ 326,390
========= ==== ======== ======== ========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
For The Years Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 132,668 $ 150,356 $ 135,567
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization................................................... 13,063 10,638 10,532
Contribution to defined contribution stock incentive plan trust................. -- -- 134,327
Deferred tax (benefit) provision................................................ 14,705 (9,750) (48,427)
Amortization of unearned compensation, net...................................... 2,678 -- --
Interest on long-term debt...................................................... 1,643 -- --
Net tax benefit on options exercised............................................... 748 -- --
(Increase) decrease in operating assets--
Cash and securities segregated for the exclusive benefit of clients............. 317,209 (133,841) (120,063)
Cash and securities deposited with clearing organizations....................... (7,216) (2,063) (319)
Securities purchased under agreements to resell................................. (21,856) 247,580 (33,531)
Receivable from brokers, dealers and clearing organizations..................... 356,992 (592,843) 350,611
Receivable from clients......................................................... (317,163) (23,877) (106,579)
Securities owned, at market value............................................... (20,370) (47,422) (8,077)
Fees receivable................................................................. (6,707) 137 3,661
Other assets.................................................................... (16,805) 4,649 (7,825)
Increase (decrease) in operating liabilities
Bank loans...................................................................... (3,000) 3,000 (25,000)
Securities sold under agreements to repurchase.................................. 373,566 (296,790) 43,603
Payable to brokers, dealers and clearing organizations.......................... 242,478 443,784 (351,488)
Payable to clients.............................................................. (783,265) 327,846 246,429
Securities sold but not yet purchased, at market value.......................... (3,348) (24,650) (16,238)
Other liabilities and accrued expenses.......................................... 6,622 24,590 44,967
--------- --------- ---------
Net cash provided by operating activities.................................... 282,642 81,344 252,150
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of furniture, equipment and leasehold improvements....... (12,556) (21,499) (17,530)
Cash paid for acquisitions...................................................... (51,486) (7,882) --
--------- --------- ---------
Cash used in investing activities............................................ (64,042) (29,381) (17,530)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subordinated liability............................................. -- -- (50,000)
Proceeds from subordinated liability............................................ -- -- 35,000
Proceeds from capital contributions............................................. -- -- 525
Payments for capital withdrawals................................................ -- -- (525)
Payments for capital distributions.............................................. -- -- (236,039)
Issuance of common stock--Neuberger Berman Inc.................................. 3,633 -- 87,933
Payments for dividends--Neuberger Berman Management Inc......................... -- -- (22,679)
Purchase of treasury stock--Neuberger Berman Management Inc..................... -- -- (134)
Payments for dividends--Neuberger Berman Inc.................................... (20,374) (19,646) --
Purchase of treasury stock--Neuberger Berman Inc................................ (158,602) (35,210) (8,074)
Proceeds from issuance of long-term debt........................................ 150,666 -- --
--------- --------- ---------
Net cash used in financing activities........................................ (24,677) (54,856) (193,993)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents......................... 193,923 (2,893) 40,627
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................... 88,117 91,010 50,383
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................. $ 282,040 $ 88,117 $ 91,010
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands, except share data)
Supplemental disclosures of cash flow information:
Interest payments totaled $126,428, $181,075 and $132,842 during the years
ended December 31, 2001, 2000 and 1999, respectively.
Tax payments totaled $46,198, $117,670 and $7,621 during the years ended
December 31, 2001, 2000 and 1999, respectively.
Supplemental disclosures of non-cash operating, investing and financing
activities:
On October 7, 1999, the principals of Neuberger Berman, LLC and the
shareholders of Neuberger Berman Management Inc. exchanged their ownership
interests for common stock of Neuberger Berman Inc. with a carrying value of
$109,317.
In connection with Neuberger Berman Inc.'s initial public offering, an
initial, irrevocable non-cash contribution of 6,396,516 shares of its common
stock was made to an employee defined contribution stock incentive plan trust.
The non-cash expense associated with the contribution totaled $134,327 and was
recognized on the date it was funded, in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions." Neuberger
Berman Inc. recorded a deferred tax benefit of $46,262 related to the
contribution.
On November 23, 1999, Neuberger Berman Inc. declared an initial quarterly
cash dividend on its common stock in the amount of $0.067 per share. The
dividend was paid on January 25, 2000, to stockholders of record at the close
of business on January 11, 2000.
On December 27, 1999, Neuberger Berman Inc. made a cash contribution of
$10,000 to the Neuberger Berman Foundation. In connection with the cash
contribution, Neuberger Berman Inc. recorded a deferred tax benefit of $2,165.
During the first six months of 2000, Neuberger Berman Inc. increased, based
upon the price of its common stock at the close of business on June 30, 2000,
the carrying value of the deferred tax asset resulting from its initial,
irrevocable non-cash contribution of 6,396,516 shares referred to above, by
$9,750.
During 2000, as part of the purchase price of an acquisition, Neuberger
Berman Inc. issued 16,459 shares of common stock from treasury with a market
value of $875. During 2001, as part of the purchase price of two acquisitions,
Neuberger Berman Inc. issued 402,857 shares of common stock from treasury with
a market value of $15,500.
In connection with an employee stock ownership plan, Neuberger Berman Inc.
issued for the years ended December 31, 2001 and 2000, 163,502 and 43,756 of
restricted shares, respectively, with a market value of $8,040 and $2,298, of
which $3,503 and $1,003 were issued from treasury, respectively. These
issuances of shares were recorded as a credit to capital stock with a
corresponding debit to unearned compensation. In addition, 3,379 shares of
restricted common stock were forfeited in 2001 with a recorded value of $176.
These forfeitures of shares were recorded as a debit to capital stock with
corresponding credits to unearned compensation and employee compensation and
benefits.
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 common stock to the public. On October 7, 1999, the principals
of NB, LLC and the shareholders of NBMI exchanged their ownership interests in
the respective entities for shares of NBI (the "Exchange"), and on October 13,
1999, NBI completed its initial public offering (the "IPO"). Accordingly, these
entities have been consolidated pursuant to reorganization accounting. In
connection with the Exchange and the IPO, NBI incurred pre-tax charges totaling
approximately $150,054,000 (the "Reorganization and IPO Charges"). The
Reorganization and IPO Charges are primarily comprised of an initial,
irrevocable non-cash contribution of common stock to an employee defined
contribution stock incentive plan trust, a cash contribution to the Neuberger
Berman Foundation and severance and other payments.
The 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, NBMI, a New York corporation,
Neuberger Berman Trust Company, N.A., which holds a national bank charter under
the laws of the United States, Neuberger Berman Asset Management, LLC, a
Delaware limited liability company, Executive Monetary Management, Inc., a New
York corporation and Sage Partners, LLC, a New York limited liability company
(collectively, the "Company"). NB, LLC's wholly owned subsidiaries are
Neuberger Berman Trust Company of Delaware, a non-depository limited purpose
trust company chartered under the Delaware Banking Code and Neuberger & Berman
Agency Inc., a New York corporation. 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. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of the financial statements requires management to make estimates and
assumptions that affect the reported amounts in the financial statements.
Management does not believe that actual results will differ materially from
these estimates.
Securities owned and securities sold but not yet purchased are valued at
market. Principal transactions in securities and the related revenues and
expenses are recorded on a trade date basis. During the year ended December 31,
2000, the Company began recording its commission income and related expenses on
a trade date basis. There was no material impact resulting from this change.
For purposes of the consolidated statements of financial condition, the
Company considers all investments in money market funds to be cash equivalents.
F-8
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The majority of investment advisory fees earned from high net worth and
institutional clients are charged or billed to accounts quarterly based upon
the account's net asset value at the beginning of a quarter. Investment
advisory and administrative fees earned from the Company's mutual fund business
(the "Funds") are charged monthly to the Funds based upon average daily net
assets under management.
Furniture and equipment are depreciated using the straight-line method over
their estimated useful lives. Leasehold improvements are amortized using the
straight-line method over the lesser of the economic life of the improvement or
the life of the lease.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142, which became effective on July 1,
2001 for acquisitions after June 30, 2001 and on January 1, 2002 for
acquisitions prior to July 1, 2001, states that goodwill is no longer subject
to amortization over its estimated useful life, but will be assessed for
impairment. In addition, acquired intangible assets are separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. For the
years ended December 31, 2001 and 2000, net income excluding goodwill
amortization would have been $133,317,000 and $150,377,000, respectively. As of
December 31, 2001, the Company does not anticipate any goodwill impairment
charge as a result of the implementation of SFAS 142.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 144").
SFAS 144 addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company does not believe the implementation of
SFAS 144 will have a material impact on its consolidated financial condition or
results of operations.
Basic earnings per common share is calculated by dividing net income by the
weighted average common shares outstanding. Diluted earnings per common share
is calculated by dividing net income by the total weighted average number of
shares of common stock outstanding and common stock equivalents. Common stock
equivalents are comprised of dilutive potential shares from stock options and
certain restricted stock awards. Common stock equivalents are excluded from the
computation if their effect is anti-dilutive. Diluted earnings per share is
computed using the treasury stock method. For purposes of determining weighted
average common shares outstanding for the periods prior to the Exchange, the
outstanding shares were determined based upon the conversion ratio to effect
the exchange of principals' capital and stockholders' equity for NBI common
stock. Pro rata distributions of earnings and capital to the principals were
not considered to effect outstanding shares.
3. SECURITIES PURCHASED AND SOLD UNDER AGREEMENTS TO RESELL AND REPURCHASE
Securities purchased and sold under agreements to resell and repurchase are
accounted for as collateralized financing transactions and are carried at
contract value plus accrued interest. It is the policy of the Company to obtain
possession of collateral, comprised of market value and cash, equal to or in
excess of principal amounts received and pledged under resale and repurchase
agreements, respectively. Collateral is valued daily, and the Company may
require counterparties to deposit additional collateral when appropriate. As of
December 31, 2001, the Company had received securities
F-9
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SECURITIES PURCHASED AND SOLD UNDER AGREEMENTS TO RESELL AND REPURCHASE
(Continued)
with market values of $801,935,000, of which $497,504,000 is included in cash
and securities segregated for the exclusive benefit of clients (see Note 11).
In addition, the Company pledged securities with market values of $610,857,000.
As of December 31, 2001, the Company repledged $304,431,000 of the
securities it had received under its resale agreements.
4. RECEIVABLE FROM AND PAYABLE TO CLIENTS
Receivable from and payable to clients represent amounts due from or to
clients of the Company in connection with cash and margin securities
transactions. Amounts receivable are collateralized by clients' securities held
by NB, LLC and by others for delivery to NB, LLC, the value of which is not
reflected in the accompanying consolidated financial statements.
In the normal course of business, the Company is permitted to use client
margin securities to finance customer securities transactions subject to
certain regulatory guidelines.
5. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
As of December 31, 2001 and 2000, amounts receivable from and payable to
brokers, dealers and clearing organizations included approximately $1,946
million and $2,454 million of securities borrowed and approximately $1,576
million and $1,427 million of securities loaned, respectively.
Securities borrowed and securities loaned transactions are reported as
collateralized financing transactions. Securities borrowed transactions require
the Company to deposit cash with the lender. With respect to securities loaned,
the Company receives collateral in the form of cash in an amount generally in
excess of the market value of securities loaned. The Company monitors the
market value of securities borrowed and loaned on a daily basis, with
additional collateral obtained or refunded as necessary. As of December 31,
2001, the Company had received securities with a market value of approximately
$1,851 million related to its securities borrowed transactions. As of December
31, 2001, the Company had pledged securities with a market value of
approximately $1,494 million related to its securities loaned transactions.
As of December 31, 2001, the Company repledged $1,851 million of the
securities it had received under its securities borrowed transactions.
6. BANK LOANS
Bank loans represent unsecured short-term borrowings payable to commercial
banks. For the years ended December 31, 2001, 2000 and 1999, interest expense
incurred on these borrowings was approximately $2,700,000, $5,076,000 and
$2,287,000 based upon weighted average interest rates of 5.49%, 6.53%, and
5.13%, respectively.
7. LONG-TERM DEBT
On May 4, 2001, in accordance with Rule 144A of the Securities Act of 1933,
as amended, NBI sold $175 million principal amount at maturity of zero-coupon
convertible senior notes due 2021,
F-10
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. LONG-TERM DEBT (Continued)
resulting in proceeds of approximately $151 million. The issue price represents
a yield to maturity of 0.75% per year, which is accounted for under the
effective interest rate method. Each $1,000 principal amount at maturity of the
convertible securities is convertible into 13.8879 shares of the Company's
common stock upon the occurrence of any of the following events: i) during any
calendar quarter commencing after June 30, 2001, the closing sale price of
NBI's common stock on the New York Stock Exchange for at least 20 trading days
in a period of 30 consecutive trading days ending on the last trading day of
the preceding calendar quarter is more than a specified percentage, initially
120% and declining 0.12658% each quarter thereafter, of the accreted conversion
price per share of the Company's common stock on the last trading day of the
preceding calendar quarter; ii) the Company elects to redeem the convertible
securities; iii) the Company takes certain corporate actions, such as the
declaration of an extraordinary dividend; and iv) the credit rating by Standard
& Poor's is below investment grade. The Company may redeem the convertible
securities for cash on or after May 4, 2006, at their accreted value. The
Company may be required to repurchase the convertible securities at the
accreted value thereof, at the option of the holders on May 4 of 2002, 2004,
2006, 2011 and 2016. The Company may choose to pay for such repurchases in cash
or shares of its common stock. For the year ended December 31, 2001, NBI
recorded accreted interest of $754,000.
8. SUBORDINATED LIABILITIES
During 1998, the principals of NB, LLC withdrew $50,000,000 of capital and
invested it in a newly formed entity, NB Associates, LLC ("Associates").
Concurrently, Associates loaned the $50,000,000 to NB, LLC in the form of a
subordinated liability. The subordinated liability bore interest at 6.75% per
annum and was approved by the New York Stock Exchange, Inc. ("NYSE") as capital
for the purpose of computing net capital under Rule 15c3-1 (the "Rule") of the
Securities and Exchange Commission ("SEC"). For the year ended December 31,
1999, interest expense incurred on the subordinated liability was $2,411,000.
On October 29, 1999, the subordinated liability was fully repaid.
On September 1, 1999, The Travelers Insurance Company loaned NB, LLC
$35,000,000 pursuant to a subordinated promissory note (the "Note"). This
amount is payable on September 1, 2004. Interest accrues on the unpaid
principal amount of the Note at a floating rate adjusted quarterly, based on
the three month LIBOR rate plus 75 basis points and is payable quarterly. The
Note was approved by the NYSE and the unpaid principal amount is available to
NB, LLC in computing net capital under the Rule. The Note contains certain
covenants that limit the percentage by which the aggregate unpaid principal
amount of subordinated liabilities exceed total regulatory capital and impose a
dollar amount below which total ownership equity cannot fall. In the opinion of
management, the Company is in compliance with its debt covenants. For the years
ended December 31, 2001, 2000 and 1999, interest expense incurred on the Note
was $1,838,000, $2,588,000 and $747,000, respectively.
9. STOCK OPTIONS
The Company has two stock based plans that provide for the granting of
stock options to employees and directors, the 1999 Neuberger Berman Inc.
Long-Term Incentive Plan and the 1999 Neuberger Berman Inc. Directors Stock
Incentive Plan (collectively, the "Plans"). At December 31, 2001, approximately
10,482,000 shares were available for grant under the Plans.
Options were granted at the fair market value of NBI common stock at the
time of grant for a period of ten years and vest over a five-year period. The
Plans also permit an employee exercising an
F-11
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. STOCK OPTIONS (Continued)
option to be granted new options (reload options) in an amount equal to the
number of common shares used to satisfy the exercise price and withholding
taxes due upon exercise. In order to receive reload options, the fair value of
a share of NBI common stock must exceed the exercise price by at least 20% on
the date of exercise. The reload options are granted for the remaining term of
the related original option and vest after six months.
Information with respect to stock option activity under the Plans for the
years ended December 31, 2001 and 2000 is as follows:
2001 2000
--------------------------- ---------------------------
Weighted Weighted
Average Exercise Average Exercise
Options Price Per Share Options Price Per Share
--------- ---------------- --------- ----------------
Outstanding, beginning of year 4,207,500 $19.75 -- --
Granted--original.......... 926,000 $48.39 4,230,000 $19.75
Granted--reload............ 353,309 $42.77 -- --
Forfeited.................. (117,677) $28.24 (22,500) $18.75
Exercised.................. (593,280) $19.66 -- --
--------- ---------
Outstanding, end of year...... 4,775,852 $26.81 4,207,500 $19.75
========= =========
Exercisable at year end....... 592,645 $33.20 -- --
========= =========
The following table summarizes information about stock options outstanding
at December 31, 2001:
Exercise Prices Options Outstanding Options Exercisable
--------------- ---------------------------------------------- ----------------------------
Weighted Average
Number Contractual Life Weighted Average Number Weighted Average
Outstanding Remaining (Years) Exercise Price Exercisable Exercise Price
----------- ----------------- ---------------- ----------- ----------------
$18.75-$19.99. 2,645,220 8.2 $18.75 239,220 $18.75
$20.00-$29.99. 840,000 8.2 $21.33 -- --
$30.00-$39.99. 1,962 8.2 $33.94 -- --
$40.00-$49.99. 650,439 9.0 $41.91 343,694 $42.71
$50.00-$55.29. 638,231 9.1 $52.03 9,731 $52.61
----- ---
4,775,852 8.5 $26.81 592,645 $33.20
========= =======
The Company has elected to account for its Plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with APB 25, compensation expense is generally not recognized for
stock options that have no intrinsic value on the date of grant. The dilutive
effect of outstanding options is reflected as additional share dilution in the
computation of earnings per share (see Note 10).
Had the Company applied SFAS 123 in accounting for its Plans based on the
fair value of the awards at the date of grant, the Company's net income and net
income per share would have decreased as indicated in the table below. For
purposes of pro forma disclosures, the estimated fair value of the Plans is
amortized to expense over the vesting period.
F-12
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. STOCK OPTIONS (Continued)
For The Years Ended
December 31,
--------------------
2001 2000
-------- --------
(in thousands, except
per share data)
Net income:
As reported.................................. $132,668 $150,356
SFAS 123 fair value adjustment--net of taxes. (7,225) (2,241)
======== ========
Pro Forma.................................... $125,443 $148,115
======== ========
Net income per common share (Basic):
As reported.................................. $ 1.85 $ 2.04
Pro Forma.................................... 1.75 2.01
Net income per common share (Diluted):
As reported.................................. $ 1.82 $ 2.02
Pro Forma.................................... 1.72 1.99
The effects of applying SFAS 123 for providing pro forma disclosures may
not be representative of the effects on reported net income for future years.
The Black-Scholes option pricing model is used to estimate the fair value
of each option grant on the date of grant. This valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because NBI's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
The weighted average fair value of options granted during 2001 and 2000 was
$17.05 and $6.27, respectively. The following weighted average assumptions were
used for grants under the Plans for the years ended December 31, 2001 and 2000:
For The Years
Ended
Assumptions December 31,
----------- ------------
2001 2000
----- -----
Dividend Yield......... 0.62% 1.30%
Expected volatility.... 38.61% 30.20%
Risk-free interest rate 3.69% 6.40%
Expected lives......... 4.7 5.0
F-13
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. EARNINGS PER SHARE
Earnings per share has been computed in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Shares have been adjusted to give effect to the three-for-two stock split in
NBI's common stock in August 2001. The following is a reconciliation of the
income and share data used in the basic and diluted earnings per share
computations for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
-------- -------- --------
(in thousands, except per share data)
Net Income.............................................. $132,668 $150,356 $135,567
======== ======== ========
Basic weighted average shares outstanding............... 71,795 73,648 66,615
Dilutive potential shares from stock options and certain
restricted stock awards............................... 1,257 744 --
-------- -------- --------
Dilutive weighted average shares outstanding............ 73,052 74,392 66,615
======== ======== ========
Basic earnings per share................................ $ 1.85 $ 2.04 $ 2.04
======== ======== ========
Diluted earnings per share.............................. $ 1.82 $ 2.02 $ 2.04
======== ======== ========
At December 31, 2001 and 2000, options on approximately 676,000 shares and
30,000 shares, respectively, have been excluded from the earnings per share
computation above due to their anti-dilutive effect. Due to its contingent
conversion feature, long-term debt has not been considered.
11. REGULATORY REQUIREMENTS
NB, LLC and NBMI, as registered broker-dealers and member firms of the NYSE
and the National Association of Securities Dealers, Inc., respectively, are
subject to the Rule, which requires that broker-dealers maintain a minimum
level of net capital, as defined. As of December 31, 2001, NB, LLC and NBMI had
net capital of approximately $236,913,000 and $12,886,000, respectively, which
exceeded their requirements by approximately $210,489,000 and $12,636,000,
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 December 31, 2001, the
payments of dividends and advances to NBI by NB, LLC and NBMI are limited to
$170,853,000 and $12,586,000, respectively, under the most restrictive of these
requirements.
As of December 31, 2001, cash of $3,550,000, U.S. Treasury bills with a
market value of $101,133,000 and $475,265,000 of contract value plus accrued
interest on various U.S. Government obligations purchased under agreements to
resell have been segregated in a special reserve bank account for the exclusive
benefit of customers under Rule 15c3-3 of the SEC. In addition, cash of
approximately $24,000 and U.S. Treasury bills with a market value of
approximately $996,000 have been segregated under the Commodity Exchange Act.
As a clearing broker-dealer, NB, LLC has elected to compute a reserve
requirement for Proprietary Accounts of Introducing Broker-Dealers ("PAIB
Calculation"), as defined. The PAIB Calculation is computed in order for
correspondent firms to classify their assets held by NB, LLC as allowable
assets in the correspondents' net capital calculation. At December 31, 2001,
NB, LLC had a
F-14
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. REGULATORY REQUIREMENTS (Continued)
reserve requirement of $11,846,000 which was met by the deposit of $13,005,000
of contract value on a U.S. Treasury note purchased under an agreement to
resell, which has been segregated in a special reserve bank account for the
exclusive benefit of customers--PAIB under Rule 15c3-3 of the SEC.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under lease agreements
expiring on various dates through 2013. Office space leases are subject to
escalation based on increases in costs incurred by the lessor. Minimum rentals,
excluding office space escalation, under these lease agreements are as follows:
Years Ending December 31, Amount
------------------------- -----------
2002.............. $16,889,000
2003.............. 16,283,000
2004.............. 15,542,000
2005.............. 14,709,000
2006.............. 14,178,000
Thereafter........ 85,310,000
Rent expense for premises and equipment for the years ended December 31,
2001, 2000 and 1999, was $18,671,000, $16,390,000 and $13,483,000, respectively.
The Company has satisfied margin requirements with clearing organizations
by obtaining letters of credit in favor of the clearing organizations. Open
unsecured letters of credit as of December 31, 2001 and 2000, were $40,501,000
and $44,312,000, respectively. Unused committed lines of credit were
$100,000,000 as of December 31, 2001 and 2000.
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.
13. EMPLOYEE BENEFIT PLANS
The Company has defined contribution plans consisting of an employee
profit-sharing plan and a money purchase pension plan covering all full-time
employees and qualifying part-time employees who have completed one year of
continuous service, as defined. Contributions to the plans, which are at the
discretion of management, are determined annually but do not exceed the amount
permitted under the Internal Revenue Code as a deductible expense.
Contributions to the plans for the years ended December 31, 2001, 2000 and
1999, were $4,200,000, $5,437,000 and $6,854,000, respectively.
The Company made an initial, irrevocable contribution of 6,396,516 shares
of its common stock to an employee defined contribution stock incentive plan
trust (the "Stock Incentive Plan") on behalf of its employees. Common stock
that was awarded to employees in conjunction with the IPO is restricted and
vests in three installments on October 8/th/ of 2001, 2002 and 2003. Certain
benefits of ownership, including the payment of any dividends declared during
the restricted period, belong to the employees. Unvested common stock that
becomes forfeited upon an employee's termination of employment is
F-15
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. EMPLOYEE BENEFIT PLANS (Continued)
reallocated in the sole and absolute discretion of the compensation committee,
including determination of vesting periods. The common stock contributed may
not revert to the Company. Included in employee compensation and benefits for
the year ended December 31, 1999, is a non-cash charge of approximately
$134,327,000, related to the contribution of common stock. Due to forfeitures,
no contributions of common stock were made for the years ended December 31,
2001 and 2000.
On July 18, 2000, the Board of Directors 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 NBI common stock
through payroll deductions, on an after tax basis, at a 15% discount from
market value of such 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. During
the year ended December 31, 2001, the Company issued from treasury 49,922
shares of common stock, at a 15% discount, with an approximate value of
$1,923,000.
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.
Amounts deferred by employees are used to acquire, on a pretax basis, NBI
common stock at a 25% discount from the market value of such 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. Certain 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 associated with the restricted stock represents the market value
of NBI common stock at the date of issuance and is recognized as compensation
expense ratably over the vesting period. The Plan, which has an unlimited term,
became effective during September 2000. For the year ended December 31, 2001,
the Company recorded compensation expense of $2,678,000.
14. INCOME TAXES
Prior to the Exchange in 1999, the Company primarily operated as two
different types of tax entities. These entities included a Limited Liability
Company (taxed as a Partnership) and an S-Corporation and as such, the combined
entities' income prior to October 7, 1999 was not subject to U.S. federal
income taxes. The principals of the Company's predecessor partnership were
taxed on their proportionate share of the partnership's taxable income or loss.
Effective with the Exchange, the Company became subject to U.S. federal,
state and local corporate income taxes and has elected to file a federal
consolidated income tax return.
F-16
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. INCOME TAXES (Continued)
The components of pre-tax earnings and income tax expense and benefits
reflected in the consolidated statements of income are set forth below (000's
omitted):
For The Years Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
Net income before taxes $229,059 $246,921 $123,372
======== ======== ========
Current taxes:
U.S. federal........ $ 57,990 $ 75,356 $ 14,982
State and local..... 23,696 30,959 21,250
-------- -------- --------
81,686 106,315 36,232
-------- -------- --------
Deferred taxes:
U.S. federal........ 10,441 (6,922) (35,290)
State and local..... 4,264 (2,828) (13,137)
-------- -------- --------
14,705 (9,750) (48,427)
-------- -------- --------
Tax (benefit) expense.. $ 96,391 $ 96,565 $(12,195)
======== ======== ========
The Company accounts for taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income
taxes reflect the net tax 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. Significant components of the Company's
net deferred tax assets as of December 31, 2001 and 2000, include compensation
and benefits, depreciation and amortization and unrealized gains and losses 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.
A reconciliation of the statutory U.S. federal income tax rate of 35% to
the Company's effective income tax rate is set forth below:
For The Years Ended
December 31,
----------------------
2001 2000 1999
----- ----- ------
U.S. statutory rate....................................... 35.00% 35.00% 35.00%
Increase (decrease) related to:
State and local taxes, net of U.S. income tax effects.. 7.19% 8.15% 8.17%
Other.................................................. (.11)% (.09)% 0.13%
----- ----- ------
Rate before Reorganization and IPO Charges and effect from
changes in the value of the stock price................. 42.08% 43.06% 43.30%
Rate benefit for partnership period....................... -- -- (63.02)%
Adjustment in benefit related to movement in stock price.. -- (3.95)% 9.84%
----- ----- ------
Effective tax rate........................................ 42.08% 39.11% (9.88)%
===== ===== ======
The Company's effective tax rate in 1999 included a rate benefit
attributable to the Company generally not being subject to corporate taxes on
its earnings prior to its conversion to corporate form.
F-17
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. INCOME TAXES (Continued)
The value of the Company's deferred tax asset relating to the unvested
shares in the Stock Incentive Plan fluctuated with the price of the Company's
stock from December 31, 1999 to June 30, 2000. In March 2000, the FASB issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25 ("FIN 44"). The
Company adjusted, based upon the price of its common stock at the close of
business on June 30, 2000, the carrying value of the deferred tax asset that
relates to unvested shares in the Stock Incentive Plan. FIN 44 became effective
on July 1, 2000, and 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 for unvested shares in its Stock Incentive Plan, based upon
the price of NBI's common stock at the close of business that day.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires the Company to report the fair value
of financial instruments, as defined. Substantially all of the Company's assets
and liabilities are carried at contract value, which approximates market value
due to their relatively short-term nature or variable market rates of interest.
Long-term debt of $151,420,000, which is carried at accreted cost, had an
estimated fair value of approximately $150,063,000 at December 31, 2001.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In the normal course of business, the Company enters into various debt and
equity transactions as principal or agent. The execution, settlement and
financing of these transactions can result in off-balance sheet risk or
concentrations of credit risk.
The Company has a high net worth and institutional client base. The Company
records client securities transactions on a settlement date basis, which is
generally three business days after trade date. The Company is exposed to
off-balance sheet risk of loss on unsettled transactions in the event clients
and other counterparties are unable to fulfill contractual obligations.
The Company's policy is to continuously monitor its exposure to market and
counterparty risk through the use of a variety of credit exposure, position and
financial reporting and control procedures. In addition, the Company has a
policy of reviewing the credit standing, where applicable, of each
broker-dealer, client and other counterparty with which it conducts business.
The Company monitors the market value of collateral and requests and receives
additional collateral when required.
For transactions in which the Company extends credit to clients, the
Company seeks to control the risks associated with these activities by
requiring clients to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company monitors required margin levels
daily and, pursuant to such guidelines, requests the deposit of additional
collateral, or reduces securities positions when necessary. The Company's
policy is to take possession of securities purchased under agreements to resell.
As part of its prime brokerage business, the Company writes covered
over-the-counter put options on listed equity securities with certain of its
prime brokerage clients. Market risk is mitigated as the options are generally
deep in the money and covered by an equivalent number of securities sold but
not yet purchased. The fair value of such options was approximately $826,000
and $1,633,000 at December 31, 2001 and 2000, respectively.
F-18
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. SEGMENT INFORMATION
Under the provisions of Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information," the
Company has four reportable segments: Private Asset Management, Mutual Fund and
Institutional, Professional Securities Services and Corporate. The Private
Asset Management segment provides customized investment management services for
high net worth individuals, families and smaller institutions through money
management, advisory services and trust services. Its revenues are principally
investment advisory fees and commissions. The investment advisory and
administrative services that are provided through the Mutual Fund and
Institutional segment include: the management of the Neuberger Berman family of
mutual funds, investment management of institutional separate account products
and wrap products sponsored by third party brokerage firms and banks. Its
revenues are principally investment advisory and administrative fees and
commissions. The Professional Securities Services segment provides trade
execution, clearing, custody, margin financing, portfolio reporting and trust
services through professional investor clearing services, wealth management
services, research sales and other activities, including market making, global
securities lending, custody and recordkeeping services and treasury management.
The revenues derived by this segment are principally commissions, net interest,
trading revenues and clearance fees. The Corporate segment reflects certain
corporate results that are not directly related to the day-to-day operations of
the Company's principal business. Prior periods have been revised to conform
with current year presentation.
The Company does not record revenues from transactions between segments
(referred to as intersegment revenues).
The Company evaluates performance of its segments based on profit or loss
from operations before Reorganization and IPO Charges and 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 information for the Company's reportable segments is presented
in the following table (000's omitted):
For The Year Ended December 31, 2001
--------------------------------------------------------
Private Mutual Professional
Asset Fund and Securities
Management Institutional Services Corporate Total
---------- ------------- ------------ --------- --------
Investment advisory and administrative fees $201,956 $205,921 $ 5,712 $ 12 $413,601
Commissions................................ 88,230 17,671 38,766 -- 144,667
Net interest income (expense).............. 4,812 74 33,805 (4,061) 34,630
Principal transactions in securities, net.. -- (56) 3,910 (1,066) 2,788
Clearance fees............................. -- -- 13,450 -- 13,450
Other income............................... 740 90 3,282 34 4,146
-------- -------- ------- -------- --------
Net revenues (loss) after interest expense. 295,738 223,700 98,925 (5,081) 613,282
Operating expenses......................... 154,069 140,641 71,833 17,680 384,223
-------- -------- ------- -------- --------
Net income (loss) before taxes............. $141,669 $ 83,059 $27,092 $(22,761) $229,059
======== ======== ======= ======== ========
F-19
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. SEGMENT INFORMATION (Continued)
For The Year Ended December 31, 2000
--------------------------------------------------------
Private Mutual Professional
Asset Fund and Securities
Management Institutional Services Corporate Total
---------- ------------- ------------ --------- --------
Investment advisory and administrative fees....... $191,438 $206,965 $ 1,504 $ -- $399,907
Commissions....................................... 93,967 16,958 35,664 -- 146,589
Net interest income (expense)..................... 5,040 29 38,331 (3,132) 40,268
Principal transactions in securities, net......... -- 72 10,670 (1,119) 9,623
Clearance fees.................................... -- -- 13,532 -- 13,532
Other income...................................... 301 40 5,280 807 6,428
-------- -------- -------- -------- --------
Net revenues (loss) after interest expense........ 290,746 224,064 104,981 (3,444) 616,347
Operating expenses................................ 144,034 147,455 63,523 14,414 369,426
-------- -------- -------- -------- --------
Net income (loss) before taxes.................... $146,712 $ 76,609 $ 41,458 $(17,858) $246,921
======== ======== ======== ======== ========
For The Year Ended December 31, 1999
--------------------------------------------------------
Private Mutual Professional
Asset Fund and Securities
Management Institutional Services Corporate Total
---------- ------------- ------------ --------- --------
Investment advisory and administrative fees....... $166,454 $211,839 $ 1,141 $ -- $379,434
Commissions....................................... 90,132 21,544 30,406 -- 142,082
Net interest income (expense)..................... 3,498 30 26,182 (3,457) 26,253
Principal transactions in securities, net......... -- 142 7,924 1,937 10,003
Clearance fees.................................... -- -- 11,081 -- 11,081
Other income...................................... 30 54 3,975 -- 4,059
-------- -------- ------- -------- --------
Net revenues (loss) after interest expense........ 260,114 233,609 80,709 (1,520) 572,912
Operating expenses excluding Reorganization and
IPO Charges...................................... 86,847 150,362 51,494 10,783 299,486
-------- -------- ------- -------- --------
Net income (loss) before Reorganization and IPO
Charges and taxes................................ $173,267 $ 83,247 $29,215 $(12,303) $273,426
======== ======== ======= ======== ========
The following table is a reconciliation of reportable segment net income,
before Reorganization and IPO Charges and taxes, to the Company's consolidated
totals.
Total
--------
For the Year Ended December 31, 2001
Net income before taxes.................................... $229,059
Tax expense................................................ (96,391)
--------
Net income................................................. $132,668
========
For the Year Ended December 31, 2000
Net income before taxes.................................... $ 246,921
Tax expense................................................ (96,565)
---------
Net income................................................. $ 150,356
=========
For the Year Ended December 31, 1999
Net income before Reorganization and IPO Charges and taxes. $ 273,426
Reorganization and IPO Charges............................. (150,054)
Tax benefit................................................ 12,195
---------
Net income................................................. $ 135,567
=========
F-20
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2001, 2000 and 1999, the Company earned
approximately $14,174,000, $13,028,000 and $17,779,000, respectively, in
brokerage commissions from the Funds.
Included in fees receivable is $12,049,000 and $11,954,000 related to
amounts due from the Funds at December 31, 2001 and 2000, respectively.
Certain employees of the Company are officers and/or trustees of the Funds.
The Company also reimbursed certain Funds for expenses during the years ended
December 31, 2001, 2000 and 1999, of approximately $1,092,000, $1,770,000 and
$2,225,000, respectively, to the extent that such Funds exceeded their
specified expense limitations.
Included in cash and cash equivalents is $184,161,000 and $76,494,000
related to investments in affiliated funds at December 31, 2001 and 2000,
respectively. In addition, securities owned at market includes $23,092,000 and
$6,239,000 of investments made by the Company in various Funds as of December
31, 2001 and 2000, respectively.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001
-----------------------------------
First Second Third Fourth
-------- -------- -------- --------
(in thousands, except per share data)
Net revenues after interest expense $154,832 $157,034 $149,860 $151,556
Operating expenses................. 95,776 98,860 92,056 97,531
-------- -------- -------- --------
Net income before taxes............ 59,056 58,174 57,804 54,025
Tax expense........................ 24,822 24,490 24,335 22,744
-------- -------- -------- --------
Net income......................... $ 34,234 $ 33,684 $ 33,469 $ 31,281
======== ======== ======== ========
Net income per common share:
Basic........................... $ 0.47 $ 0.46 $ 0.47 $ 0.45
======== ======== ======== ========
Diluted......................... $ 0.46 $ 0.45 $ 0.47 $ 0.44
======== ======== ======== ========
2000
-----------------------------------
First Second Third Fourth
-------- -------- -------- --------
(in thousands, except per share data)
Net revenues after interest expense $155,412 $151,810 $151,650 $157,475
Operating expenses................. 95,194 90,206 89,672 94,354
-------- -------- -------- --------
Net income before taxes............ 60,218 61,604 61,978 63,121
Tax expense........................ 19,977 22,899 26,713 26,976
-------- -------- -------- --------
Net income......................... $ 40,241 $ 38,705 $ 35,265 $ 36,145
======== ======== ======== ========
Net income per common share:
Basic........................... $ 0.54 $ 0.53 $ 0.48 $ 0.49
======== ======== ======== ========
Diluted......................... $ 0.54 $ 0.52 $ 0.47 $ 0.48
======== ======== ======== ========
F-21
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued)
1999
-----------------------------------
First Second Third Fourth
-------- -------- -------- --------
(in thousands, except per share data)
Net revenues after interest expense $144,586 $143,602 $141,328 $143,396
Operating expenses................. 70,384 72,172 70,429 236,555
-------- -------- -------- --------
Net income (loss) before taxes..... 74,202 71,430 70,899 (93,159)
Tax (benefit) expense.............. 2,421 2,131 10,492 (27,239)
-------- -------- -------- --------
Net income (loss).................. $ 71,781 $ 69,299 $ 60,407 $(65,920)
======== ======== ======== ========
Net income (loss) per common share:
Basic and diluted............... $ 1.12 $ 1.08 $ 0.94 $ (0.89)
======== ======== ======== ========
20. SUBSEQUENT EVENT
On January 28, 2002, NBI declared a quarterly cash dividend on its common
stock in the amount of $0.075 per share. The dividend was paid on February 19,
2002 to stockholders of record at the close of business on February 7, 2002.
F-22
NEUBERGER BERMAN INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT PARENT
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
December 31,
-----------------
2001 2000
-------- --------
ASSETS
Cash and cash equivalents................................................... $ 4,131 $ --
Securities owned, at market value........................................... 10,210 --
Receivable from subsidiaries................................................ 58,961 47,971
Investment in subsidiaries.................................................. 363,193 248,331
Furniture, equipment and leasehold improvements, at cost, net of accumulated
depreciation and amortization of $4,955 and $608 at December 31, 2001 and
2000, respectively........................................................ 19,672 7,428
Other assets................................................................ 63,239 56,824
-------- --------
Total assets......................................................... $519,406 $360,554
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities and accrued expenses................................... $ 41,596 $ 10,415
-------- --------
Long-term debt........................................................... 151,420 --
-------- --------
Stockholders' equity:
Common stock............................................................. 753 750
Other equity............................................................. 325,637 349,389
-------- --------
Total liabilities and stockholders' equity........................... $519,406 $360,554
======== ========
The accompanying notes are an integral part of the condensed financial
statements.
F-23
NEUBERGER BERMAN INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT PARENT--(Continued)
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
For The Period
For The Years Ended October 8, 1999
December 31, Through
------------------ December 31,
2001 2000 1999
-------- -------- ---------------
REVENUES:
Interest................................................. $ 424 $ -- $ --
Management fees.......................................... 4,819 608 --
-------- -------- ---------
Gross revenues....................................... 5,243 608 --
Interest expense............................................ 1,643 -- --
-------- -------- ---------
Net revenues after interest expense.................. 3,600 608 --
======== ======== =========
OPERATING EXPENSES:
Employee compensation and benefits....................... 339 126 137,273
Depreciation and amortization............................ 4,819 608 --
Other expenses........................................... 2,458 1,342 10,000
-------- -------- ---------
Total operating expenses............................. 7,616 2,076 147,273
======== ======== =========
Loss from operations before equity in income of subsidiaries
and taxes................................................. (4,016) (1,468) (147,273)
Equity in income of subsidiaries............................ 134,168 141,384 26,845
-------- -------- ---------
Net income (loss) before taxes....................... 130,152 139,916 (120,428)
Tax benefit................................................. (2,516) (10,440) (50,689)
-------- -------- ---------
Net income (loss).................................... $132,668 $150,356 $ (69,739)
======== ======== =========
The accompanying notes are an integral part of the condensed financial
statements.
F-24
NEUBERGER BERMAN INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT PARENT--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
For The Period
For The Years Ended October 8, 1999
December 31, Through
-------------------- December 31,
2001 2000 1999
--------- --------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ 132,668 $ 150,356 $(69,739)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Equity in income of subsidiaries............................ (134,168) (141,384) (26,845)
Contribution to defined contribution stock incentive plan
trust..................................................... -- -- 134,327
Deferred tax (benefit) provision............................ 16,344 (9,750) (48,427)
Depreciation and amortization............................... 4,819 608 --
Interest on long-term debt.................................. 1,643 -- --
Amortization of unearned compensation, net..................... 2,678 -- --
Net tax benefit on options exercised........................... 748 -- --
(Increase) decrease in operating assets--
Securities owned, at market value........................... (10,210) -- --
Receivable from subsidiaries................................ (10,990) 1,604 (49,575)
Other assets................................................ (12,627) (23) --
Increase (decrease) in operating liability--...................
Other liabilities and accrued expenses...................... 31,181 (9,271) 21,271
--------- --------- --------
Net cash provided by (used in) operating activities..... 22,086 (7,860) (38,988)
========= ========= ========
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of furniture, equipment and
leasehold improvements.................................... (16,592) (8,245) --
Cash paid for acquisitions.................................. (51,486) (7,882) --
Dividends received from subsidiaries........................ 78,300 80,000 --
Investment in subsidiaries.................................. (3,500) (1,157) (40,871)
--------- --------- --------
Net cash provided by (used in) investing activities..... 6,722 62,716 (40,871)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... 3,633 -- 87,933
Payments for dividends...................................... (20,374) (19,646) --
Purchase of treasury stock.................................. (158,602) (35,210) (8,074)
Proceeds from issuance of long-tem debt..................... 150,666 -- --
--------- --------- --------
Net cash provided by (used in) financing activities..... (24,677) (54,856) 79,859
--------- --------- --------
Net increase in cash and cash equivalents............... 4,131 -- --
CASH AND CASH EQUIVALENTS, beginning of period................. -- -- --
--------- --------- --------
CASH AND CASH EQUIVALENTS, end of period....................... $ 4,131 $ -- $ --
========= ========= ========
The accompanying notes are an integral part of the condensed financial
statements.
F-25
NEUBERGER BERMAN INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT PARENT--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands, except share data)
Supplemental disclosures of cash flow information:
NBI made no interest payments for the years ended December 31, 2001 and
2000, and for the period October 8, 1999 through December 31, 1999.
Tax payments totaled $46,012 and $109,683 during the year ended December
31, 2000. NBI made no tax payments for the period October 8, 1999 through
December 31, 1999.
Supplemental disclosures of non-cash operating, investing and financing
activities:
On October 7, 1999, the principals of NB, LLC and the shareholders of NBMI
exchanged their ownership interests for common stock of NBI with a carrying
value of $109,317.
In connection with NBI's initial public offering, an initial, irrevocable
non-cash contribution of 6,396,516 shares of its common stock was made to an
employee defined contribution stock incentive plan trust. The non-cash expense
associated with the contribution totaled $134,327 and was recognized on the
date it was funded, in accordance with Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions." NBI recorded a deferred
tax benefit of $46,262 related to the contribution.
On November 23, 1999, NBI declared an initial quarterly cash dividend on
its common stock in the amount of $0.067 per share. The dividend was paid on
January 25, 2000, to stockholders of record at the close of business on January
11, 2000.
On December 27, 1999, NBI made a cash contribution of $10,000 to the
Neuberger Berman Foundation. In connection with the cash contribution, NBI
recorded a deferred tax benefit of $2,165.
During the first six months of 2000, NBI increased, based upon the price of
its common stock at the close of business on June 30, 2000, the carrying value
of the deferred tax asset resulting from its initial, irrevocable non-cash
contribution of 6,396,516 shares referred to above, by $9,750.
During 2000, as part of the purchase price of an acquisition, NBI issued
16,459 shares of common stock from treasury with a market value of $875. During
2001, as part of the purchase price of two acquisitions, NBI issued 402,857
shares of common stock from treasury with a market value of $15,500.
In connection with an employee stock ownership plan, NBI issued for the
years ended December 31, 2001 and 2000, 163,502 and 43,756 of restricted
shares, respectively, with a market value of $8,040 and $2,298, of which $3,503
and $1,003 were issued from treasury, respectively. These issuances of shares
were recorded as a credit to capital stock with a corresponding debit to
unearned compensation. In addition, 3,379 shares of common stock were forfeited
in 2001 with a market value of $176. These forfeitures of shares were recorded
as a debit to capital stock with corresponding credits to unearned compensation
and employee compensation and benefits.
The accompanying notes are an integral part of the condensed financial
statements.
F-26
NEUBERGER BERMAN INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT PARENT--(Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. GENERAL
The condensed financial statements of NBI should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements which are included elsewhere in this report.
For purposes of the condensed statements of financial condition, NBI
considers all investments in money market funds to be cash equivalents.
Securities owned are valued at market.
Investment in subsidiaries represents NBI's investment in its subsidiary
companies. Income and losses of the subsidiaries are recognized using equity
method accounting.
Receivable from subsidiaries include cash advances and amounts due under
intra-corporate tax sharing arrangements.
Dividends paid to NBI by its wholly owned subsidiaries were $78,300,000 and
$80,000,000 for the years ended December 31, 2001 and 2000, respectively. No
dividends were paid to NBI for the period October 8, 1999 through December 31,
1999.
For information on the following, refer to the indicated Notes to the
Consolidated Financial Statements, which are included elsewhere in this report.
. Long-Term Debt (Note 7)
. Commitments and Contingencies (Note 12)
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. SUBSEQUENT EVENT
On January 28, 2002, NBI declared a quarterly cash dividend on its common
stock in the amount of $0.075 per share. The dividend was paid on February 19,
2002 to stockholders of record at the close of business on February 7, 2002.
F-27
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents............................................. $ 222,000 $ 282,040
Cash and securities segregated for the exclusive benefit of clients... 992,241 593,973
Cash and securities deposited with clearing organizations, (including
securities with market values of $11,985 and $11,957 at March 31,
2002 and December 31, 2001, respectively)........................... 13,217 13,189
Securities purchased under agreements to resell....................... 190,862 304,576
Receivable from brokers, dealers and clearing organizations........... 2,212,776 2,109,110
Receivable from clients............................................... 572,046 773,854
Securities owned, at market value..................................... 91,603 88,058
Fees receivable....................................................... 33,517 29,719
Furniture, equipment and leasehold improvements, at cost, net of
accumulated depreciation and amortization of $42,224 and $38,651 at
March 31, 2002 and December 31, 2001, respectively.................. 47,181 43,793
Other assets.......................................................... 143,825 144,175
---------- ----------
Total assets....................................................... $4,519,268 $4,382,487
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold under agreements to repurchase..................... 465,122 608,538
Payable to brokers, dealers and clearing organizations............. 2,131,565 1,703,745
Payable to clients................................................. 1,305,886 1,415,904
Securities sold but not yet purchased, at market value............. 5,558 6,174
Other liabilities and accrued expenses............................. 84,644 135,316
---------- ----------
3,992,775 3,869,677
---------- ----------
Long-term debt..................................................... 151,704 151,420
---------- ----------
Subordinated liability............................................. 35,000 35,000
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued at March 31, 2002 and December 31, 2001................... -- --
Common stock, $.01 par value; 250,000,000 shares authorized;
75,680,379 and 75,310,547 shares issued at March 31, 2002 and
December 31, 2001, respectively; 70,442,722 and 70,416,985
shares outstanding at March 31, 2002 and December 31, 2001,
respectively..................................................... 757 753
Paid-in capital.................................................... 349,660 341,344
Retained earnings.................................................. 201,210 173,265
---------- ----------
551,627 515,362
Less: Treasury stock, at cost, of 5,237,657 and 4,893,562 shares at
March 31, 2002 and December 31, 2001, respectively.................. (196,906) (181,488)
Unearned compensation................................................ (14,932) (7,484)
---------- ----------
Total stockholders' equity......................................... 339,789 326,390
---------- ----------
Total liabilities and stockholders' equity......................... $4,519,268 $4,382,487
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-28
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
For The Three Months
Ended March 31,
--------------------
2002 2001
-------- --------
REVENUES:
Investment advisory and administrative fees............ $108,912 $103,292
Commissions............................................ 39,598 36,693
Interest............................................... 19,378 57,708
Principal transactions in securities, net.............. 502 559
Clearance fees......................................... 2,931 3,814
Other income........................................... 2,835 577
-------- --------
Gross revenues...................................... 174,156 202,643
Interest expense....................................... 13,961 47,811
-------- --------
Net revenues after interest expense................. 160,195 154,832
======== ========
OPERATING EXPENSES:
Employee compensation and benefits..................... 68,439 65,572
Information technology................................. 5,797 5,450
Rent and occupancy..................................... 5,503 4,625
Brokerage, clearing and exchange fees.................. 3,039 2,702
Advertising and sales promotion........................ 2,193 2,546
Distribution and fund administration................... 5,820 4,371
Professional fees...................................... 2,542 1,964
Depreciation and amortization.......................... 3,697 2,771
Other expenses......................................... 5,344 5,775
-------- --------
Total operating expenses............................ 102,374 95,776
-------- --------
Net income before taxes............................. 57,821 59,056
Provision for income taxes............................. 24,574 24,822
-------- --------
Net income.......................................... $ 33,247 $ 34,234
======== ========
Net income per common share
Net income per share--Basic......................... $ 0.48 $ 0.47
======== ========
Net income per share--Diluted....................... $ 0.47 $ 0.46
======== ========
Weighted average common shares outstanding--Basic... 70,044 73,167
======== ========
Weighted average common shares outstanding--Diluted. 71,279 74,668
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-29
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
For The Three Months Ended March 31, 2002
-----------------------------------------------------------
Common Paid-in Retained Treasury Unearned
Stock Capital Earnings Stock Compensation Total
------ -------- -------- --------- ------------ --------
Beginning balance,
December 31, 2001.................. $753 $341,344 $173,265 $(181,488) $ (7,484) $326,390
Dividends........................ -- -- (5,302) -- -- (5,302)
Acquisition of treasury stock.... -- -- -- (18,168) -- (18,168)
Issuance of common stock......... 4 8,344 -- 2,823 (8,889) 2,282
Amortization of unearned
compensation.................... -- -- -- -- 1,361 1,361
Forfeitures of restricted stock
awards.......................... -- (28) -- (73) 80 (21)
Net income....................... -- -- 33,247 -- -- 33,247
---- -------- -------- --------- -------- --------
Ending balance,
March 31, 2002..................... $757 $349,660 $201,210 $(196,906) $(14,932) $339,789
==== ======== ======== ========= ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-30
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For The Three Months
Ended March 31,
--------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................................ $ 33,247 $ 34,234
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Depreciation and amortization....................................... 3,697 2,771
Deferred tax provision (benefit).................................... 1,618 (1,077)
Amortization of unearned compensation, net.......................... 1,340 505
Interest on long-term debt.......................................... 616 --
Net tax benefit on options exercised................................... 1,745 570
(Increase) decrease in operating assets--
Cash and securities segregated for the exclusive benefit of clients. (398,268) 235,668
Cash and securities deposited with clearing organizations........... (28) 18
Securities purchased under agreements to resell..................... 113,714 119,465
Receivable from brokers, dealers and clearing organizations......... (103,666) (160,093)
Receivable from clients............................................. 201,808 (154,607)
Securities owned, at market value................................... (3,545) 12,613
Fees receivable..................................................... (3,798) (4,662)
Other assets........................................................ (1,724) (2,128)
Increase (decrease) in operating liabilities--
Bank loans.......................................................... -- 157,000
Securities sold under agreements to repurchase...................... (143,416) 14,430
Payable to brokers, dealers and clearing organizations.............. 427,820 519,631
Payable to clients.................................................. (110,018) (689,226)
Securities sold but not yet purchased, at market value.............. (616) 9,779
Other liabilities and accrued expenses.............................. (50,672) (29,558)
--------- ---------
Net cash provided by (used in) operating activities............. (30,146) 65,333
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of furniture, equipment and leasehold
improvements...................................................... (6,961) (4,503)
Cash paid for acquisitions.......................................... -- (14,442)
--------- ---------
Cash used in investing activities............................... (6,961) (18,945)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for dividends.............................................. (5,302) (4,889)
Issuance of common stock............................................ 537 2,079
Purchase of treasury stock.......................................... (18,168) (7,613)
--------- ---------
Net cash used in financing activities........................... (22,933) (10,423)
--------- ---------
Net increase (decrease) in cash and cash equivalents............ (60,040) 35,965
CASH AND CASH EQUIVALENTS, beginning of period......................... 282,040 88,117
--------- ---------
CASH AND CASH EQUIVALENTS, end of period............................... $ 222,000 $ 124,082
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-31
NEUBERGER BERMAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)--(Continued)
(in thousands, except share data)
Supplemental disclosures of cash flow information:
Interest payments totaled $12,836 and $46,885 for the three months ended
March 31, 2002 and 2001, respectively.
Tax payments totaled $31,124 and $7,393 for the three months ended March
31, 2002 and 2001, respectively.
Supplemental disclosures of non-cash operating, investing and financing
activities:
As part of the purchase price for the assets of Fasciano Company, Inc., on
March 23, 2001, Neuberger Berman Inc. issued 57,295 shares of common stock from
treasury with a market value of $2,500.
In connection with employee stock ownership plans, Neuberger Berman Inc.
issued for the three months ended March 31, 2002 and 2001, 206,929 and 106,896
of restricted shares, respectively, with market values of $8,889 and $5,635, of
which $2,320 and $1,586 were issued from treasury, respectively. These
issuances of shares were recorded as a credit to capital stock with a
corresponding debit to unearned compensation. In addition, 2,288 shares of
restricted stock were forfeited in the first quarter of 2002 with a recorded
value of $101. These forfeitures of shares were recorded as a debit to capital
stock with corresponding credits to unearned compensation and employee
compensation and benefits.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-32
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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"), a Delaware limited liability company and Neuberger Berman
Management Inc. ("NBMI"), a New York corporation, and to allow for the issuance
of common stock to the public.
The condensed consolidated financial statements include the accounts of NBI
and its subsidiaries. NBI's significant wholly owned subsidiaries are NB, LLC,
NBMI, and Neuberger Berman Trust Company, N.A., which holds a national bank
charter under the laws of the United States (collectively, the "Company").
Material intercompany transactions and balances have been eliminated in
consolidation.
The Company is a registered investment adviser and a registered
broker-dealer, 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 Annual
Report on Form 10-K for the year ended December 31, 2001. Certain prior period
amounts have been reclassified to conform to the three months ended March 31,
2002 presentation.
On July 23, 2001, the Board of Directors of NBI declared a three-for-two
stock split of the Company's common stock in the form of a 50% stock dividend.
Accordingly, certain share data as well as net income per common share amounts
have been retroactively adjusted to reflect the three-for-two stock split.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142, which became effective on July 1,
2001 for acquisitions after June 30, 2001, and on January 1, 2002 for
acquisitions prior to July 1, 2001, states that goodwill is no longer subject
to amortization over its estimated useful life, but will be assessed for
impairment. In addition, acquired intangible assets are separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. For the
three months ended March 31, 2001, net income excluding
F-33
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
3. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
goodwill amortization would have been $34,325,000. As of March 31, 2002, the
Company does not anticipate any goodwill impairment charge as a result of the
implementation of SFAS 142.
4. LONG-TERM DEBT
On May 4, 2001, in accordance with Rule 144A of the Securities Act of 1933,
as amended, the Company sold $175,000,000 principal amount at maturity of
zero-coupon senior convertible notes due 2021, resulting in proceeds of
approximately $151,000,000. The issue price represents a yield to maturity of
0.75% per year, which is accounted for using the effective interest rate
method. Each $1,000 principal amount at maturity of the convertible securities
is convertible into 13.8879 shares of the Company's common stock upon the
occurrence of any of the following events: i) during any calendar quarter
commencing after June 30, 2001, the closing sale price of NBI's common stock on
the New York Stock Exchange ("NYSE") for at least 20 trading days in a period
of 30 consecutive trading days ending on the last trading day of the preceding
calendar quarter is more than a specified percentage, initially 120% and
declining 0.12658% each quarter thereafter, of the accreted conversion price
per share of the Company's common stock on the last trading day of the
preceding calendar quarter; ii) the Company elects to redeem the convertible
securities; iii) the Company takes certain corporate actions, such as the
declaration of an extraordinary dividend; and iv) the credit rating by Standard
& Poor's is below investment grade. The Company may redeem the convertible
securities for cash on or after May 4, 2006, at their accreted value. The
Company may be required to repurchase the convertible securities at the
accreted value thereof, at the option of the holders on May 4 of 2002, 2004,
2006, 2011 and 2016. The Company may choose to pay for such repurchases in cash
or shares of its common stock. For the three months ended March 31, 2002, the
Company recorded accreted interest of $284,000.
Effective May 2, 2002, the Company amended the terms of its convertible
securities to permit the holders, at their option, to cause the Company to
repurchase the convertible securities on November 4, 2002, at their accreted
value of $870.67 per $1,000 principal amount at maturity. The Company also
announced that each holder electing not to require the Company to repurchase
its convertible securities as of May 4, 2002, will receive a one-time payment
of $4.34 for every $1,000 aggregate principal amount at maturity of the
convertible securities held. As of the close of business May 3, 2002, holders
of approximately 5% or $8.7 million principal amount of the convertible
securities exercised their option to cause the Company to repurchase their
convertible securities. The Company paid $7.6 million for these repurchases in
cash on May 6, 2002. On May 8, 2002, the Company made a one-time payment of
$4.34 for every $1,000 aggregate principal amount at maturity of the
convertible securities to each holder of the convertible securities as of the
close of business on May 7, 2002.
5. REGULATORY REQUIREMENTS
NB, LLC and NBMI, as registered broker-dealers and member firms of the NYSE
and the National Association of Securities Dealers, Inc., are subject to the
Securities and Exchange Commission's (the "SEC") Uniform Net Capital Rule
15c3-1 ("the Rule"), which requires that broker-dealers maintain a minimum
level of net capital, as defined. As of March 31, 2002, NB, LLC and NBMI had
net capital of approximately $216,132,000 and $5,429,000, respectively, which
exceeded their requirements by approximately $195,132,000 and $5,179,000,
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.
F-34
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. REGULATORY REQUIREMENTS (Continued)
Accordingly, at March 31, 2002, the payments of dividends and advances to NBI
by NB, LLC and NBMI are limited to approximately $163,633,000 and $5,129,000,
respectively, under the most restrictive of these requirements.
As of March 31, 2002, cash of $1,500,000, U.S Treasury bills with a market
value of $315,440,000 and $658,283,000 of contract value plus accrued interest
on various U.S. Government obligations purchased under agreements to resell
have been segregated in a special reserve bank account for the exclusive
benefit of customers under Rule 15c3-3 of the SEC. In addition, cash of
approximately $18,000 and U.S. Treasury bills with a market value of
approximately $996,000 have been segregated under the Commodity Exchange Act.
As a clearing broker-dealer, NB, LLC has elected to compute a reserve
requirement for Proprietary Accounts of Introducing Broker-Dealers ("PAIB
Calculation"), as defined. The PAIB Calculation is computed in order for
correspondent firms to classify their assets held by NB, LLC as allowable
assets in the correspondents' net capital calculation. At March 31, 2002, NB,
LLC had a reserve requirement of $11,811,000 which was met by the deposit of
$16,004,000 of contract value plus accrued interest on a U.S. Treasury note
purchased under an agreement to resell, which has been segregated in a special
reserve bank account for the exclusive benefit of customers-PAIB under Rule
15c3-3 of the SEC.
6. EARNINGS PER SHARE
Basic earnings per common share are calculated by dividing net income by
the weighted average common shares outstanding. Diluted earnings per common
share are calculated by dividing net income by the total weighted average
common shares outstanding and common stock equivalents. Common stock
equivalents are comprised of dilutive potential shares from stock options and
certain restricted stock awards. Common stock equivalents are excluded from the
computation if their effect is anti-dilutive. Diluted earnings per common share
are computed using the treasury stock method. Shares have been adjusted to give
effect to the three-for-two stock split in NBI's common stock in August 2001.
The following is a reconciliation of the income and share data used in the
basic and diluted earnings per share computations for the three months ended
March 31, 2002 and 2001:
For The Three Months
Ended March 31,
--------------------
2002 2001
------- -------
(In Thousands, Except
Per Share Data)
Net Income......................................................... $33,247 $34,234
======= =======
Basic weighted average shares outstanding.......................... 70,044 73,167
Dilutive potential shares from stock options and certain restricted
stock awards..................................................... 1,235 1,501
------- -------
Dilutive weighted average shares outstanding....................... 71,279 74,668
======= =======
Basic earnings per share........................................... $ 0.48 $ 0.47
======= =======
Diluted earnings per share......................................... $ 0.47 $ 0.46
======= =======
F-35
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. EARNINGS PER SHARE (Continued)
At March 31, 2002 and 2001, options on approximately 1,042,000 shares and
997,000 shares, respectively, have been excluded from the earnings per share
computation above due to their anti-dilutive effect. Due to its contingent
conversion feature, long-term debt has not been considered.
7. 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 condensed consolidated financial condition, results of operations
or liquidity of the Company.
8. STOCK OPTIONS
The Company has two stock based plans that provide for the granting of
stock options to employees and directors, the 1999 Neuberger Berman Inc.
Long-Term Incentive Plan and the 1999 Neuberger Berman Inc. Directors Stock
Incentive Plan (collectively, the "Plans"). The following table summarizes
awards of and transactions in options under the Plans for the three months
ended March 31, 2002:
Range of Exercise Prices
-------------------------------------------------------------------------------
$18.75-$19.99 $20.00-$29.99 $30.00-$39.99 $40.00-$49.99 $50.00-$55.29 Total
------------- ------------- ------------- ------------- ------------- ---------
Balance at December 31, 2001 2,645,220 840,000 1,962 650,439 638,231 4,775,852
Granted--original........... -- -- -- 1,472,000 -- 1,472,000
Granted--reload............. -- -- -- 366,507 -- 366,507
Forfeited................... -- -- -- -- (15,000) (15,000)
Exercised................... (399,376) (210,000) (703) -- -- (610,079)
--------- -------- ----- --------- ------- ---------
Balance at March 31, 2002... 2,245,844 630,000 1,259 2,488,946 623,231 5,989,280
========= ======== ===== ========= ======= =========
9. SEGMENT INFORMATION
Under the provisions of Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information," the
Company has four reportable segments: Private Asset Management, Mutual Fund and
Institutional, Professional Securities Services and Corporate. The Private
Asset Management segment provides customized investment management services for
high net worth individuals, families and smaller institutions through money
management, advisory services and trust services. Its revenues are principally
investment advisory fees and commissions. The investment advisory and
administrative services that are provided through the Mutual Fund and
Institutional segment include: the management of the Neuberger Berman family of
mutual funds, investment management of institutional separate account products
and wrap products sponsored by third party brokerage firms and banks. Its
revenues are principally investment advisory and administrative fees and
commissions. The Professional Securities Services segment provides trade
execution, clearing, custody, margin financing, portfolio reporting and trust
services through professional investor clearing services. This segment also
provides wealth management services, research sales and other activities,
including market making, global securities lending, custody and recordkeeping
services and treasury management. The revenues derived by this segment are
principally commissions, net interest, trading revenues and clearance fees. The
Corporate segment
F-36
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
9. SEGMENT INFORMATION (Continued)
reflects certain corporate results that are not directly related to the
day-to-day operations of the Company's principal business. Prior periods have
been revised to conform with current year presentation.
The Company does not record revenues from transactions between segments
(referred to as intersegment revenues).
The Company evaluates 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 table (in thousands):
For The Three Months
Ended March 31,
------------------
2002 2001
-------- --------
Private Asset Management
Net revenues after interest expense......................... $ 81,493 $ 75,850
Net income before taxes..................................... $ 38,373 $ 36,905
Mutual Fund & Institutional
Net revenues after interest expense......................... $ 56,737 $ 55,165
Net income before taxes..................................... $ 21,649 $ 19,761
Professional Securities Services
Net revenues after interest expense......................... $ 22,674 $ 25,681
Net income before taxes..................................... $ 3,619 $ 8,511
Corporate
Net loss after interest expense............................. $ (709) $ (1,864)
Net loss before taxes....................................... $ (5,820) $ (6,121)
Total
Net revenues after interest expense......................... $160,195 $154,832
Net income before taxes..................................... $ 57,821 $ 59,056
10. SUBSEQUENT EVENT
On April 22, 2002, the Board of Directors of NBI declared a quarterly cash
dividend on its common stock in the amount of $0.075 per share. The dividend is
payable on May 14, 2002 to stockholders of record at the close of business on
May 2, 2002.
F-37
================================================================================
5,000,000 Shares
[NEUBERGER BERMAN LOGO]
Common Stock
--------
Prospectus
--------
, 2002
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, all of which will be
borne by the selling stockholders, in connection with the issuance and
distribution of the securities registered hereby, other than underwriting
discounts and commissions:
Securities and Exchange Commission registration fee...... $ 16,546
Printing and engraving expenses.......................... 150,000*
NASD fees................................................ 18,485
Accounting fees and expenses............................. 80,000*
Legal fees and expenses.................................. 400,000*
Blue Sky fees and expenses............................... -- *
Miscellaneous............................................ 234,969*
--------
Total................................................ $900,000*
========
--------
* Estimated and subject to future contingencies.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person was an officer or director of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided that such officer or director acted in good faith
and in a manner he or she reasonably believed to be in, or not opposed to, the
corporation's best interests, and, for criminal proceedings, had no reasonable
cause to believe his or her conduct was illegal. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation in the performance of his or her duty. Where a
present or former officer or director is successful on the merits or otherwise
in the defense of any action referred to above, the corporation must indemnify
him against the expenses which such person actually and reasonably incurred.
Article VI of our by-laws provides for indemnification by us of our
directors and officers to the full extent permitted by the Delaware law.
Pursuant to specific authority granted by Section 102 of the DGCL, Article
VII of the Company's certificate of incorporation contains the following
provision regarding limitation of liability of directors and officers:
"(VII) No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of his or
her fiduciary duty as a director, provided that nothing contained in this
Certificate of Incorporation shall eliminate or limit the liability of a
director (a) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (b) for acts or
II-1
omissions not in good faith or which involve intentional misconducts or a
knowing violation of the law, (c) under Section 174 of the General
Corporation Law of the State of Delaware or (d) for any transaction from
which the director derived an improper personal benefit".
ITEM 16. EXHIBITS.
1.1 -- Form of Underwriting Agreement+
2.1 -- Plan of Merger and Exchange Agreement, dated as of August 2, 1999, by and among
Neuberger Berman Inc., Neuberger Berman, LLC, the members of Neuberger Berman,
LLC, Neuberger Berman Management Inc., the shareholders of Neuberger Berman
Management Inc. and Neuberger Berman Sub Inc., a New York corporation(1)
2.2 -- Amendment No. 1, dated as of September 30, 1999, to the Plan of Merger and
Exchange Agreement, dated as of August 2, 1999(2)
3.1 -- Certificate of Incorporation(1)
3.2 -- By-Laws, as amended May 10, 2001(3)
4.1 -- Specimen of Common Stock Certificate(1)
4.2 -- Stockholders Agreement, dated as of August 2, 1999, by and among Neuberger Berman
Inc. and the stockholders named therein(1)
4.3 -- Trust Indenture, dated as of May 4, 2001, by and between Neuberger Berman Inc. and
The Bank of New York(4)
4.4 -- Registration Rights Agreement, dated as of May 4, 2001, by and between Neuberger
Berman Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated(4)
4.5 -- First Supplemental Indenture, dated as of May 2, 2002, to the Indenture with respect to
senior convertible securities, by and between Neuberger Berman Inc. and The Bank of
New York, as Trustee(5)
5.1 -- Opinion of Willkie Farr & Gallagher as to the validity of the common stock
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Willkie Farr & Gallagher (included in Exhibit 5.1)
24.1 -- Power of Attorney*
--------
+ To be filed by amendment or incorporated by reference to the extent
applicable in connection with an offering.
*Previously filed.
(1)Incorporated by reference to exhibits filed with our Registration Statement
on Form S-1 (No. 333-84525).
(2)Incorporated by reference to exhibits filed with our Amendment No. 4 to
Registration Statement on Form S-1 (No. 333-84525).
(3)Incorporated by reference to exhibits filed with our Amendment No. 2 to
Registration Statement on Form S-3 (No. 333-62350).
(4)Incorporated by reference to exhibits filed with our Annual Report on Form
10-K for the year ended December 31, 2001.
(5)Incorporated by reference to exhibits filed with our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
II-2
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) ((S) 230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 ((S) 239.13 of this
chapter) or Form S-8 ((S) 239.16b of this chapter), and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the Securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(5) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
(6) (i) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement at the time it was declared effective.
(ii) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be initial bona fide offering thereof.
II-4
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that is has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in New York, New York, on the 22nd day of July, 2002.
NEUBERGER BERMAN INC.
/S/ JEFFREY B. LANE
By: _______________________________
Jeffrey B. Lane
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of
Neuberger Berman Inc. in the capacities indicated and on the dates indicated.
Signature Title Date
--------- ----- ----
* July 22, 2002
____________________ Chairman of the Board of
Lawrence Zicklin Directors
* July 22, 2002
____________________ Vice Chairman of the
Richard A. Cantor Board of Directors
* July 22, 2002
____________________ Vice Chairman of the
Marvin C. Schwartz Board of Directors
/S/ JEFFREY B. LANE President, Chief July 22, 2002
____________________ Executive Officer and
Jeffrey B. Lane Director
* Director July 22, 2002
____________________
Nathan Gantcher
* Director July 22, 2002
____________________
David W. Glenn
* Executive Vice July 22, 2002
____________________ President, Chief
Michael M. Kassan Investment Officer and
Director
* Director July 22, 2002
____________________
Arthur Levitt, Jr.
II-5
Signature Title Date
--------- ----- ----
* Director July 22, 2002
__________________
Jon C. Madonna
* Executive Vice President, July 22, 2002
__________________ Chief Operating Officer and
Robert Matza Director
* Director July 22, 2002
__________________
Jack H. Nusbaum
* Executive Vice President and July 22, 2002
__________________ Director
Heidi L. Schneider
* Chief Financial Officer, July 22, 2002
__________________ Principal Accounting Officer
Matthew S. Stadler and Senior Vice President
* Executive Vice President and July 22, 2002
__________________ Director
Peter E. Sundman
Jeffrey B. Lane, by signing his name below, signs this document on behalf
of each of the above-named persons specified by an asterisk (*), pursuant to a
power of attorney duly executed by such persons, filed with the Securities and
Exchange Commission in the registrant's Registration Statement on July 2, 2002.
/S/ JEFFREY B. LANE
----------------------------------
Attorney-in-fact
II-6
EXHIBIT INDEX
Exhibit
No. Description
------- ---------------------------------------------------------------------------------------
1.1 -- Form of Underwriting Agreement+
2.1 -- Plan of Merger and Exchange Agreement, dated as of August 2, 1999, by and among
Neuberger Berman Inc., Neuberger Berman, LLC, the members of Neuberger Berman,
LLC, Neuberger Berman Management Inc., the shareholders of Neuberger Berman
Management Inc. and Neuberger Berman Sub Inc., a New York corporation(1)
2.2 -- Amendment No. 1, dated as of September 30, 1999, to the Plan of Merger and
Exchange Agreement, dated as of August 2, 1999(2)
3.1 -- Certificate of Incorporation(1)
3.2 -- By-Laws, as amended May 10, 2001(3)
4.1 -- Specimen of Common Stock Certificate(1)
4.2 -- Stockholders Agreement, dated as of August 2, 1999, by and among Neuberger
Berman Inc. and the stockholders named therein(1)
4.3 -- Trust Indenture, dated as of May 4, 2001, by and between Neuberger Berman Inc. and
The Bank of New York(4)
4.4 -- Registration Rights Agreement, dated as of May 4, 2001, by and between Neuberger
Berman Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated(4)
4.5 -- First Supplemental Indenture, dated as of May 2, 2002, to the Indenture with respect to
senior convertible securities, by and between Neuberger Berman Inc. and The Bank of
New York, as Trustee(5)
5.1 -- Opinion of Willkie Farr & Gallagher as to the validity of the common stock
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Willkie Farr & Gallagher (included in Exhibit 5.1)
24.1 -- Power of Attorney*
--------
+ To be filed by amendment or incorporated by reference to the extent
applicable in connection with an offering.
* Previously filed.
(1)Incorporated by reference to exhibits filed with our Registration Statement
on Form S-1 (No. 333-84525).
(2)Incorporated by reference to exhibits filed with our Amendment No. 4 to
Registration Statement on Form S-1 (No. 333-84525).
(3)Incorporated by reference to exhibits filed with our Amendment No. 2 to
Registration Statement on Form S-3 (No. 333-62350).
(4)Incorporated by reference to exhibits filed with our Annual Report on Form
10-K for the year ended December 31, 2001.
(5)Incorporated by reference to exhibits filed with our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.