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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2001
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File No. 001-15361
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Neuberger Berman Inc.
(Exact Name of Registrant As Specified in Its Charter)
DELAWARE 06-1523639
(State or Other (I.R.S. Employer
Jurisdiction of Incorporation Identification No.)
or Organization)
605 Third Avenue, New York, NY 10158
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (212) 476-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the common stock held by non-affiliates of the
Registrant, based upon the closing price of $42.40 on February 15, 2002, on the
New York Stock Exchange was $716,196,964. Calculation of holdings of common
stock by non-affiliates is based upon the assumption, for these purposes only,
that executive officers, directors, former principals and the Registrant's
Defined Contribution Stock Incentive Plan are affiliates. As of February 15,
2002, the number of shares of the Registrant's common stock outstanding was
70,380,991.
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Documents Incorporated By Reference
Part of Report Into Which
Document Incorporated By Reference Incorporated
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The definitive proxy statement for the Part III
2002 Annual Meeting of Stockholders
to be held May 9, 2002.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business.......................................................... 3
Overview....................................................... 3
2001 in Review................................................. 3
Business Segments.............................................. 4
Private Asset Management....................................... 5
Mutual Fund and Institutional.................................. 6
Professional Securities Services............................... 8
Investment Process and Research................................ 10
Technology Initiatives......................................... 10
Competition.................................................... 11
Regulation..................................................... 11
Client Protection and Insurance................................ 13
Net Capital Requirements....................................... 13
Intellectual Property.......................................... 13
Employees...................................................... 13
Item 2. Properties........................................................ 14
Item 3. Legal Proceedings................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 14
Item 6. Selected Consolidated Financial Data.............................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 16
Forward Looking Statements..................................... 16
Business Environment........................................... 17
General........................................................ 18
Results of Operations.......................................... 19
Liquidity and Capital Resources................................ 24
Accounting Developments........................................ 26
Looking Ahead.................................................. 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 26
Item 8. Financial Statements and Supplementary Data....................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 55
PART III
Item 10. Directors and Executive Officers of the Registrant................ 55
Item 11. Executive Compensation............................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 55
Item 13. Certain Relationships and Related Transactions.................... 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 55
1
Forward Looking Statements
Our disclosure and analysis in this report and in documents that are
incorporated 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.
2
PART I
Item 1.--BUSINESS
Overview
Neuberger Berman Inc., through its subsidiaries, is an investment advisory
firm with approximately $59.0 billion in assets under management as of December
31, 2001. 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. ("NYSE"). As of December 31, 2001, 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.
In August 1998, Neuberger Berman Inc. was formed to be the holding company
for Neuberger Berman, LLC and Neuberger Berman Management Inc., which, together
with their predecessors, have conducted business since 1939 and 1970,
respectively. In October 1999, we completed an initial public offering (the
"IPO") of our common stock. As of December 31, 2001, our employees and retired
principals held approximately 76% of our common stock.
When we use the terms "Neuberger Berman," "we," "us," and "our," we mean,
prior to the IPO, Neuberger Berman, LLC, a Delaware limited liability company,
and its consolidated subsidiaries, and Neuberger Berman Management Inc., a New
York corporation, and their predecessors, and, after the IPO, 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.
2001 in Review
Despite a highly challenging market environment and the tragic events of
September 11/th/, 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.
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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 ultra affluent
individuals. 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.
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.
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 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.
4
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.
Assets under management in this segment were $25.0 billion as of December
31, 2001, 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. In this segment, we managed
approximately 16,000 accounts, through 6,000 relationships, with an average
relationship size of $3.9 million.
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 investment 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 December 31, 2001, we
had 69 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: 1) be accretive to
earnings; 2) be consistent with our overall strategy; and 3) 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
5
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. At December 31, 2001, our Private Asset
Management Advisory Services group included 40 professionals supported by 26
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.
Our Client Consultants are highly trained professionals with average
industry experience of approximately 13 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.
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.
This segment generated net revenues after interest expense of $223.7 million,
which represented 36% of our net revenues after interest expense in 2001.
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.
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 making
some progress in expanding our distribution channels and recently broadened our
product mix with the addition of experienced professionals to direct an
institutional real estate securities effort.
6
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 December 31, 2001, we managed a
total of $19.5 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, 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 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 $200 million in assets under management at December 31, 2001. 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.
We offer 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 $10.9 billion at December 31, 2001.
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 December 31, 2001, we had alliances with 96 administrators of defined
contribution plans (such as 401(k), 403(b) and 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 $3.7 billion at December 31,
2001.
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 December 31, 2001,
assets under management in our Mutual Fund and Sub-Advised Accounts business
included $2.3 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 $2.6 billion at December 31,
2001. 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 December 31, 2001, we also had four "private-label"
arrangements in which financial advisory companies marketed our Advisory
Services product under another name with Neuberger Berman as the sub-adviser.
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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 December
31, 2001, we managed $11.5 billion of institutional separate account assets.
While our Institutional Separate Accounts business experienced net cash
outflows of approximately $400 million for the year (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, 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). 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 14 wrap account 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, 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
ultra affluent individuals and families.
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 160 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,
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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.
Professional Securities Services has four components:
. Professional Investor Clearing Services
. Wealth Management Services
. Research Sales
. Other Activities
Professional Investor Clearing Services. As of December 31, 2001, we
provided prime brokerage services to 64 private investment partnerships,
registered investment advisers and family offices, up from 61 as of December
31, 2000. We provided correspondent clearing services to 20 introducing
brokers, up from 11 at the prior year end. 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,
consisting primarily of commissions, clearance fees and net interest income.
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
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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, 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. As of December 31, 2001, nine sales professionals in the
research sales group also made 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 usually
place their trades through us, although they have no obligation to do so. As of
December 31, 2001, the research sales group also included 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, consisting
primarily of commissions.
Other Activities. Professional Securities Services also includes market
making activities, global securities lending, custody and recordkeeping
services and treasury management. As of December 31, 2001 we acted as market
maker for approximately 160 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, 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.
10
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.
Competition
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, 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.
U.S. banks and insurance companies can now affiliate with securities firms.
This 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. In addition, 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 arenas
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.
We also face intense competition in attracting and retaining qualified
employees. The ability to continue to compete effectively in our businesses
depends in part on our ability to compete effectively in the labor market. As
part of our strategy to retain the best staff, in connection with the IPO, each
employee who did not own shares of our common stock received a restricted stock
grant. Additionally, we offer competitive compensation, a wide range of
benefits, and have implemented two stock-based incentive programs that allow
employees to buy restricted stock at discounted prices.
Regulation
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 ("SEC") is responsible for enforcing the federal securities laws and
serves as a supervisory body for all federally registered investment advisers,
as well as for national securities exchanges and associations. Our
subsidiaries, Neuberger
11
Berman, LLC and Neuberger Berman Management Inc., are registered investment
advisers and broker-dealers. The regulation of broker-dealers has, to a large
extent, been delegated by the federal securities laws to self-regulatory
organizations. These self-regulatory organizations include all the national
securities and commodities exchanges and the National Association of Securities
Dealers, Inc. ("NASD"). Subject to approval by the SEC and the Commodity
Futures Trading Commission ("CFTC"), the self-regulatory organizations adopt
rules that govern the industry and conduct periodic examinations of the
operations of Neuberger Berman, LLC and Neuberger Berman Management Inc. The
NYSE and the NASD are the respective designated self-regulatory organizations
for Neuberger Berman, LLC and Neuberger Berman Management Inc. 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.
Neuberger Berman, LLC, Neuberger Berman Management Inc. and certain of our
subsidiaries, are registered as investment advisers with the SEC. As registered
investment advisers, each is subject to the requirements and regulations of the
Investment Advisers Act. Such requirements relate to, among other things,
recordkeeping and reporting requirements, disclosure requirements, limitations
on agency cross and principal transactions between an adviser and advisory
clients, as well as general anti-fraud prohibitions. Moreover, Neuberger
Berman, LLC and Neuberger Berman Management Inc. and the Funds are subject to
the Investment Company Act rules and regulations. The Investment Company Act
regulates the relationship between a mutual fund and its investment adviser and
prohibits or severely restricts principal transactions and joint transactions.
Neuberger Berman, LLC is registered with the CFTC as a futures commission
merchant and, along with one of our subsidiaries, is registered as a commodity
pool operator and commodity trading adviser. Our commodity futures and options
activities are also regulated by the National Futures Association. Neuberger
Berman, LLC limits its futures and options activities to those permitted by the
CFTC to be provided with reduced disclosure and other requirements to certain
eligible clients.
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.
Our registered broker-dealer subsidiaries are each subject to certain net
capital requirements under the Securities Exchange Act of 1934. The net capital
requirements, which specify minimum net capital levels for registered
broker-dealers, are designed to measure the financial soundness and liquidity
of broker-dealers. 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 material impact on the financial and
operational condition of broker-dealers.
Our Trust Companies are supervised by federal or state banking authorities,
which regulate such matters as policies and procedures relating to conflicts of
interest, account administration and overall governance and supervisory
procedures. Neuberger Berman Trust Company, N.A. is regulated by the Office of
the Comptroller of the Currency of the United States. Neuberger Berman Trust
Company of Delaware is subject to oversight by the State Bank Commissioner of
the State of Delaware.
In addition to being regulated in the United States, our business is subject
to regulation by various foreign governments and regulatory bodies. Neuberger
Berman, LLC is registered with and subject to regulation by the Ontario
Securities Commission, the Alberta Securities Commission and the British
Columbia Securities Commission. Foreign regulations govern all aspects of the
investment business, including regulatory capital, sales and trading practices,
use and safekeeping of client funds and securities, recordkeeping, margin
practices and procedures, registration standards, reporting and disclosure. To
the extent that we decide to engage in securities activities in other
jurisdictions, additional regulations may apply.
12
On October 26, 2001, President Bush signed the USA PATRIOT Act, aimed at
giving the government new powers in the war on terrorism. Title III of the new
legislation, the International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001, imposes significant new anti-money laundering
requirements on all financial institutions, including domestic banks and
domestic operations of foreign banks, broker-dealers, futures commission
merchants and investment companies.
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.
Client Protection and Insurance
Neuberger Berman, LLC is a member of the Securities Investor Protection
Corporation ("SIPC"). Clients of Neuberger Berman, LLC are protected by SIPC
against some losses. SIPC provides protection against lost, stolen or missing
securities (except loss in value due to a rise or fall in market prices) for
clients in the event of the failure of a broker-dealer. Accounts are protected
up to $500,000 per client with a limit of $100,000 for cash balances. In
addition to being a member of SIPC, Neuberger Berman, LLC carries excess SIPC
insurance coverage, which increases the coverage up to $100 million per client
for securities held in their accounts.
Net Capital Requirements
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 (the "Rule"). The Rule 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, the Rule 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.
As of December 31, 2001, Neuberger Berman, LLC was required to maintain
minimum net capital of approximately $26 million and had total excess net
capital of approximately $210 million. As of December 31, 2001, Neuberger
Berman Management Inc. was required to maintain minimum net capital of $250,000
and had total excess net capital of approximately $13 million.
Intellectual Property
We regard our name as material to our business, and the name "Neuberger
Berman" is a trademark registered with the U.S. Patent and Trademark Office. We
also currently hold trademark registrations relating to the Funds.
Employees
As of December 31, 2001, we employed 1,268 people. None of our personnel are
covered by a collective bargaining agreement. We consider our relations with
our personnel to be satisfactory.
13
Item 2.--PROPERTIES
Our executive office is located in leased office space at 605 Third Avenue,
New York, New York. We also lease premises at 55 Water Street, New York, New
York for our securities clearing operation, at 220 East 42/nd/ Street, New
York, New York for the operations of EMM, and at 600 Third Avenue, New York,
New York for use by certain of our Professional Investor Clearing Services
clients. A growth equity management group and the Fasciano group operate
alongside sales personnel in office spaces leased in Boston, Massachusetts, and
Chicago, Illinois, respectively. In addition, as of December 31, 2001, we have
leased premises primarily for use as regional sales offices in Atlanta,
Georgia; Los Angeles and San Francisco, California; Dallas and Houston, Texas;
Columbia, Maryland; Philadelphia, Pennsylvania; Miami, Tampa and West Palm
Beach, Florida; and Washington, D.C. Neuberger Berman Trust Company of Delaware
leases office space in Wilmington, Delaware and Neuberger Berman Trust Company,
N.A. leases office space in Seattle, Washington. We do not own any real
property.
Item 3.--LEGAL PROCEEDINGS
In the normal course of business, we are subject to various legal
proceedings. However, in our management's opinion, based on currently available
information, there are no legal proceedings pending against us that would have
a material adverse effect on our consolidated financial position, results of
operations or liquidity.
Item 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
PART II
Item 5.--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the fiscal quarters indicated, the high
and low closing prices per share of our common stock ("NEU"), as reported by
the NYSE:
Year High Low
---- ------- -------
2000
First Quarter.................................... $19.250 $15.917
Second Quarter................................... $31.667 $18.333
Third Quarter.................................... $42.250 $29.959
Fourth Quarter................................... $56.000 $38.583
2001
First Quarter.................................... $55.207 $40.247
Second Quarter................................... $55.347 $38.027
Third Quarter.................................... $46.667 $31.850
Fourth Quarter................................... $44.720 $33.350
As of February 15, 2002, the closing sales price per share for our common
stock was $42.40. There were approximately 99 stockholders of record of our
common stock at February 15, 2002. We estimate that as of February 15, 2002,
there were approximately 2,500 beneficial stockholders whose shares were held
in street name.
Dividends of $0.067 per share of our common stock were declared on April 13,
2000, July 18, 2000, October 17, 2000, January 18, 2001 and April 18, 2001. On
July 23, 2001, the Board of Directors of Neuberger Berman Inc. (the "Board")
declared a three-for-two split in our common stock in the form of a 50%
14
stock dividend. The Board also approved an increase in the quarterly cash
dividend to $0.075 per share on a post-split basis, reflecting a 12 1/2%
increase in the cash dividend. Dividends of $0.075 per share of our common
stock were declared on July 23, 2001 and October 22, 2001. The holders of our
common stock share proportionately on a per share basis in all dividends
declared by our Board.
The declaration of dividends by Neuberger Berman Inc. is subject to the
discretion of our Board. Our Board 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 may deem relevant. See "Business--Net Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a discussion of certain
limitations on our receipt of funds from our regulated subsidiaries.
To the extent that assets are used to meet minimum net capital requirements
of Neuberger Berman, LLC and Neuberger Berman Management Inc. under the Rule,
they are not available for distribution to stockholders as dividends. See
"Business--Net Capital Requirements." 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 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 capital cannot fall. These covenants may further restrict
our ability to pay dividends to stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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 5,529,001 shares of common stock, 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, for
approximately $202 million. We used cash flows from operations and the proceeds
from our debt offering to fund the purchases of these shares. As of December
31, 2001, authorizations for the repurchase of up to $48 million of our common
stock remain in effect.
On July 5, 2001, former principals and certain of our employees completed
the sale of 5,906,949 shares of common stock in an underwriting offering.
Although we did not receive any proceeds from the sale of our common stock, the
ownership percentage of our employees and retired principals decreased to 76%
from 85%, increasing our public float.
15
Item 6.--SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of our five
years ended December 31, should be read in conjunction with the respective
consolidated financial statements and related notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as applicable. Per share data has been retroactively adjusted to
reflect a three-for-two stock split in our common stock effective August 16,
2001.
As Of and For The Years Ended December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Operating Data (in thousands):
Net revenues after interest expense... $ 613,282 $ 616,347 $ 572,912 $ 582,134 $ 502,525
========== ========== ========== ========== ==========
Net income before taxes............... $ 229,059 $ 246,921 $ 123,372 $ 294,457 $ 273,839
Tax (benefit) expense................. 96,391 96,565 (12,195) 9,506 8,857
---------- ---------- ---------- ---------- ----------
Net income............................ $ 132,668 $ 150,356 $ 135,567 $ 284,951 $ 264,982
========== ========== ========== ========== ==========
Per Share Data:
Net income per share--Basic........... $ 1.85 $ 2.04 $ 2.04 $ 4.45 $ 4.05
Net income per share--Diluted......... 1.82 2.02 2.04 4.45 4.05
Cash dividends declared............... 0.28 0.20 0.07 -- --
Cash dividends paid................... 0.28 0.27 -- -- --
Book value per share--Basic........... 4.64 4.78 3.34 1.71 1.71
Book value per share--Diluted (1)..... 6.11 6.34 3.34 1.71 1.71
Balance Sheet Data (in thousands):
Total assets.......................... $4,382,487 $4,421,763 $3,847,608 $3,829,435 $2,410,213
Debt.................................. 186,420 35,000 35,000 50,000 --
Principals' capital and stockholders'
equity.............................. 326,390 350,139 248,802 109,199 159,031
Assets Under Management (in millions) $ 59,048 $ 55,486 $ 54,399 $ 55,587 $ 53,511
- --------
Note 1: Assumes exercise of stock options that have intrinsic value as well as
vesting of restricted stock awards, including associated tax benefits.
Item 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Set forth on the following pages is management's discussion and analysis of
the results of operations for the years ended December 31, 2001, 2000 and 1999.
Such information should be read in conjunction with our Consolidated Financial
Statements together with the Notes to the Consolidated Financial Statements.
Share and per share data have been retroactively adjusted to reflect a
three-for-two stock split in our common stock effective August 16, 2001.
Forward Looking Statements
Our disclosure and analysis in this report and in documents that are
incorporated 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
16
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.
When we use the terms "Neuberger Berman," "we," "us," and "our," we mean,
prior to the IPO, Neuberger Berman, LLC, a Delaware limited liability company,
and its consolidated subsidiaries, and Neuberger Berman Management Inc., a New
York corporation, and their predecessors, and, after the IPO, 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.
Business Environment
The financial markets suffered a turbulent year in 2001, overshadowed by the
tragic events of September 11/th/. The economic aftershocks of the attacks--a
sharp drop in consumer and business spending--exacerbated an already difficult
year in the financial markets. The U.S. economy had entered a recession
starting in March 2001, according to the National Bureau of Economic Research,
and the equity markets remained deeply below their peak levels reached in March
2000. Weakening investor confidence drove the Standard & Poor's 500 Index down
13.0% in 2001, its second negative annual return in a row. Almost every major
equity index yielded negative returns for the year: the Dow Jones Industrial
Average dropped 7.1%; the Nasdaq Composite Index declined 21.0%; and
international stocks, as represented by the MSCI EAFE Index, fell 22.6%.
Signs of economic recovery began to emerge late in the year, due in part to
fiscal and monetary stimuli. Throughout 2001, the Federal Reserve Board engaged
in a massive interest-rate cutting campaign, lowering short-term interest rates
to 1.75%, the lowest level in 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 Index plunged after the September
11/th/ attacks, hitting a low point of 965.80 on September 21/st/, it rallied
in December and ended the year at 1,148.08. However, the S&P 500 remained well
below its record peak 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 and a "flight to
safety" by investors. The Lehman Brothers Aggregate Bond Index rose 8.4% during
the year. In an unexpected move, the U.S. Treasury Department halted issuance
of 30-year bonds, spurring demand for long-term fixed-income securities in
other areas of the bond market. The U.S. Agency market performed strongly as
buyers flocked to the high-quality issues. Corporate bonds also performed well
as a class, despite record supply and rising credit quality concerns. According
to Moody's Investor Services, credit downgrades in 2001 outnumbered upgrades by
a ratio of 2.9 to 1, marking the steepest decline in corporate credit since
1991. The December 2, 2001 bankruptcy filing of Enron Corp. heightened
volatility in the energy sector, with ripple effects spreading to other sectors
as well, particularly among conglomerates and companies with complex financing
structures.
The developments in the market were mostly unfavorable for the securities
industry. Declining asset values and narrowing interest rate spreads tended to
reduce 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.
17
In this environment, we remain confident that our diversified family of
investment products and services will help us weather turbulent markets.
Despite the volatile market conditions of 2001, we increased our assets under
management by more than 6% to $59.0 billion, from $55.5 billion in 2000.
Notably, the value style of investing continued to gain favor: the S&P Barra
Value Index outperformed the S&P Barra Growth Index for the second year in a
row. While we offer all styles of investing, we believe our longstanding
expertise in value investing will continue to serve us well in a difficult
market environment.
The increase in our assets under management during this time period
supported our belief that difficult market conditions tend to convince more
investors--both individual and institutional--of the inherent value, over the
long term, of seeking professional advice and active management of their money.
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 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
18
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 operating
results.
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 current year
presentation. 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.
19
RESULTS OF OPERATIONS
(in thousands)
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
======== ======== ======== ======== ========
- --------
Note 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.
20
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 (2) $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 (3)...... $59,048 $55,486 $54,399
======= ======= =======
- --------
Note 1: As of December 31, 2001, Private Asset Management includes $49 of
assets invested in EMM's Fund of Funds product.
Note 2: Mutual Fund and Institutional includes $121 and $88 of client assets
invested in the Advisory Services wrap mutual fund program with third
party funds, as of December 31, 2001 and 2000, respectively.
Note 3: As of December 31, 2001 and 2000, the equity component of assets under
management approximates 71% and 73%, respectively.
21
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 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 11/th/ 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.
22
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 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.
23
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% 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.
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
24
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 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.
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
convertible senior 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 under the effective interest rate method. Each $1,000
principal amount at maturity of the convertible securities is convertible into
13.8879 of our 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 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; ii) we elect to redeem the convertible
securities; iii) we take certain corporate actions, such as the declaration of
an extraordinary dividend; and iv) 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 May 4 of 2002, 2004, 2006, 2011 and 2016. We may choose to pay for
such repurchases in cash or shares of our common stock. In the event we are
required to repurchase the convertible securities prior to maturity, and we
elect to pay for such repurchases in cash, we believe, based upon our current
and projected future cash flows from operations, that we will have sufficient
liquidity to do so. 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. This credit rating should enable
us opportunistically to access the capital markets for additional liquidity if
we believe it is necessary.
25
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 Securities and
Exchange Commission ("SEC") and other regulatory authorities. At December 31,
2001, our regulatory net capital exceeded the minimum requirement by
approximately $223 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.
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 5,529,001 shares of common stock, 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, for
approximately $202 million. We used cash flows from operations and the proceeds
from our debt offering to fund the purchases of these shares. As of December
31, 2001, authorizations for the repurchase of up to $48 million of our common
stock remain in effect.
On July 5, 2001, former principals and certain of our employees completed
the sale of 5,906,949 shares of common stock in an underwriting offering.
Although we did not receive any proceeds from the sale of our common stock, the
ownership percentage of our employees and retired principals decreased to 76%
from 85%, increasing our public float.
Accounting Developments
In June 2001, the 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. As of December 31, 2001, we do 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. We do not believe the implementation of SFAS 144 will
have a material impact on our consolidated financial condition or results of
operations.
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.
Item 7A.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our risk management policies and procedures have been established to
continuously identify, monitor and manage risk. The major types of risk that we
face include credit risk and market risk.
26
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 receivable from brokers, dealers and clearing
organizations) and funding sources (bank loans, subordinated liabilities and
payable 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 December 31, 2001 are primarily comprised of $121.3
million of U.S. Treasury and Agency securities, of which $114.1 million is
comprised of U.S. Treasury bills; $51.8 million of municipal revenue bonds; a
$20.4 million investment in one of our mutual funds, the Limited Maturity Bond
Fund; $2.9 million of an investment in an exchange traded preferred security;
and $1.5 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
("S&P"), Moody's Investors Services ("Moody's") 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. The notional value of such options and market value of securities
sold was approximately $5.1 million and $4.9 million, respectively and are
included in securities sold but not yet purchased.
27
Item 8.--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Neuberger Berman Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Report of Independent Public Accountants................................... 29
Consolidated Financial Statements and Notes
Consolidated Statements of Financial Condition--December 31, 2001 and
2000.................................................................. 30
Consolidated Statements of Income--For The Years Ended December 31,
2001, 2000 and 1999................................................... 31
Consolidated Statements of Changes in Principals' Capital and
Stockholders' Equity--For The Years Ended December 31, 1999, 2000
and 2001.............................................................. 32
Consolidated Statements of Cash Flows--For The Years Ended December
31, 2001, 2000 and 1999............................................... 33
Notes to Consolidated Financial Statements.............................. 35
Schedule I--Condensed Financial Statements of the Registrant Parent and
Notes
Condensed Statements of Financial Condition--December 31, 2001 and 2000. 50
Condensed Statements of Operations--For The Years Ended December 31,
2001 and 2000 and For The Period October 8, 1999 Through December
31, 1999.............................................................. 51
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.............................................................. 52
Notes to Condensed Financial Statements................................. 54
28
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
(the "Company") 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
29
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..... 502 500
Paid-in capital............................................... 341,595 332,870
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.
30
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.
31
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) 427 99,573 -- -- -- --
Exchange of corporate interests for
common stock of Neuberger Berman
Inc.................................... -- -- 6,441 (6,575) 134 -- --
--------- ---- -------- -------- --------- ------- ---------
Total after reorganization (10/8/99).... -- 427 108,890 -- -- -- 109,317
Issuance of common stock to public...... -- 30 87,903 -- -- -- 87,933
Issuance of common stock to defined
contribution stock incentive plan
trust.................................. -- 43 134,284 -- -- -- 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......................... -- 500 331,077 (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 -- 500 332,870 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................ -- 2 8,824 -- 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......................... $ -- $502 $341,595 $173,265 $(181,488) $(7,484) $ 326,390
========= ==== ======== ======== ========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
32
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.
33
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.
34
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.
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.
35
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
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 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'
36
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. RECEIVABLE FROM AND PAYABLE TO CLIENTS--(Continued)
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, 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.
37
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 Average
Exercise Exercise
Price Per Price Per
Options Share Options 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 -- --
========= =========
38
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. STOCK OPTIONS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------- --------------------
Weighted
Average Weighted Weighted
Contractual Average Average
Number Life Remaining Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable 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.
For The Years Ended
December 31,
--------------------
2001 2000
-------- --------
(in thousands, excep
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.
39
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. STOCK OPTIONS--(Continued)
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
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.
40
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
41
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES--(Continued)
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 8th 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 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
42
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. EMPLOYEE BENEFIT PLANS--(Continued)
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.
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.
43
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. INCOME TAXES--(Continued)
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.
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.
44
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK--(Continued)
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.
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.
45
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. SEGMENT INFORMATION--(Continued)
Summarized information for the Company's reportable segments is presented in
the following table (000's omitted):
For The Year Ended December 31, 2001
--------------------------------------------------------
Mutual
Private Fund Professional
Asset 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
======== ======== ======== ======== ========
For The Year Ended December 31, 2000
--------------------------------------------------------
Mutual
Private Fund Professional
Asset 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
======== ======== ======== ======== ========
46
NEUBERGER BERMAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. SEGMENT INFORMATION--(Continued)
For The Year Ended December 31, 1999
--------------------------------------------------------
Mutual
Private Fund Professional
Asset 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
=========
47
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
======== ======== ======== ========
48
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.
49
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.................................................................. 502 500
Other equity.................................................................. 325,888 349,639
-------- --------
Total liabilities and stockholders' equity................................ $519,406 $360,554
======== ========
The accompanying notes are an integral part of the condensed financial
statements.
50
NEUBERGER BERMAN INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL STATEMENTS OF THE REGISTRANT PARENT
(Continued)
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
For The
Period
October 8,
For The Years Ended 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.
51
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.
52
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.
53
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.
54
Item 9.--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
Item 10.--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
Item 11.--EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
Item 12.--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
Item 13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the
Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
PART IV
Item 14.--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Consolidated Financial Statements.
The consolidated financial statements required to be filed as part of this
Annual Report on Form 10-K arelisted in the index to Item 8 of this Report.
2. Financial Statement Schedules.
The financial statement schedules required to be filed as part of this
Annual Report on Form 10-K are listedin the index to Item 8 of this Report.
3. Exhibits.
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)/
55
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)/
10.1 1999 Neuberger Berman Inc. Directors Stock Incentive Plan./(1)/
10.2 1999 Neuberger Berman Inc. Long-Term Incentive Plan./(1)/
10.3 1999 Neuberger Berman Inc. Annual Incentive Plan./(1)/
10.4 1999 Neuberger Berman Inc. Deferred Compensation Plan./(1)/
10.5 Neuberger Berman Inc. Employee Defined Contribution Stock
Incentive Plan, as amended January 21, 2000./(5)/
10.6 Non-Competition Agreement, dated as of August 2, 1999, by and
among the Company and the stockholders named therein./(1)/
10.7 Form of Employment Agreement, dated August 2, 1999, between
Neuberger Berman, LLC and each continuing principal./(1)/
10.8 Subordinated Loan Agreement, dated as of August 31, 1998, between
Neuberger Berman, LLC and NB Associates, LLC./(1)/
10.9 First Amendment, dated March 30, 1999, to Subordinated Loan
Agreement, dated August 31, 1998, between Neuberger Berman, LLC
and NB Associates, LLC./(1)/
10.10 Second Amendment, dated September 1, 1999, to subordinated Loan
Agreement, dated August 31, 1998, between Neuberger Berman, LLC
and NB Associates, LLC./(1)/
10.11 $15,000,000 Promissory Note due September 1, 2000, issued by
Neuberger Berman, LLC to NB Associates, LLC on September 1,
1999./(1)/
10.12 Subordinated Note Purchase Agreement, dated September 1, 1999,
between Neuberger Berman, LLC and The Travelers Insurance
Company./(1)/
10.13 $10,000,000 Floating Rate Subordinated Note due September 1,
2004, issued by Neuberger Berman, LLC to Tral & Co. on September
1, 1999./(1)/
10.14 $25,000,000 Floating Rate Subordinated Note due September 1,
2004, issued by Neuberger Berman, LLC to Tral & Co. on September
1, 1999./(1)/
10.15 Neuberger Berman Inc. Wealth Accumulation Plan./(6)/
10.16 Neuberger Berman Inc. Employee Stock Purchase Plan./(6)/
10.17 Amendment No. 1 to the 1999 Neuberger Berman Inc. Directors Stock
Incentive Plan./(7)/
10.18 Amendment No. 1 to the 1999 Neuberger Berman Inc. Long-Term
Incentive Plan./(7)/
10.19 Amendment No. 1 to the 1999 Neuberger Berman Inc. Annual
Incentive Plan./(7)/
10.20 Amendment No. 2 to the Neuberger Berman Inc. Employee Defined
Contribution Stock Incentive Plan./(7)/
10.21 Neuberger Berman Inc. Wealth Accumulation Plan, Amended and
Restated as of September 1, 2000./(7)/
10.22 Neuberger Berman Inc. Employee Stock Purchase Plan, Amended and
Restated as of September 1, 2000./(7)/
12.1 Computation in support of ratio of earnings to fixed charges
(filed herewith).
21.1 Subsidiaries of the Company (filed herewith).
23.1 Consent of Arthur Andersen LLP (filed herewith).
99.1 Representation from Arthur Andersen pursuant to Temporary Note 3T
to Article 3 of Regulation S-X (filed herewith).
- --------
/(1)/ Incorporated by reference to the corresponding exhibit to the
Registrant's Registration Statement on Form S-1 (No. 333-84525).
/(2)/ Incorporated by reference to the corresponding exhibit to the
Registrant's Amendment No. 4 to Registration Statement on Form S-1 (No.
333-84525).
56
/(3)/ Incorporated by reference to the corresponding exhibit to the
Registrant's Amendment No. 2 to Registration Statement on Form S-3 (No.
333-62350).
/(4)/ Incorporated by reference to the corresponding exhibit to the
Registrant's Quarterly Report on Form 10-Q, for the quarter ended March
31, 2001 (No. 001-15361).
/(5)/ Incorporated by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K, for the period ended December
31, 1999 (No. 001-15361).
/(6)/ Incorporated by reference to the corresponding exhibit to the
Registrant's Quarterly Report on Form 10-Q, for the quarter ended June
30, 2000 (No. 001-15361).
/(7)/ Incorporated by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K, for the period ended December
31, 2000 (No. 001-15361).
(b) Reports on Form 8-K:
1. Form 8-K dated October 24, 2001, Items 5, 7 and 9
Exhibits:
Exhibit 99.1 Press release issued by the Corporation on October 22, 2001, reporting that it had entered into
an agreement to acquire the assets of Oscar Capital Management, LLC.
Exhibit 99.2 Press release issued by the Corporation on October 23, 2001 with respect to the declaration of a
third quarter cash dividend.
Financial Statements:
Exhibit 99.3 Press release issued by the Corporation on October 23, 2001 with respect to its results of
operations for the third quarter ended September 30, 2001.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
NEUBERGER BERMAN INC.
By: /S/ JEFFREY B. LANE
-----------------------------
Jeffrey B. Lane
President and Chief Executive
Officer
Dated: March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ LAWRENCE ZICKLIN Chairman of the Board of March 26, 2002
- ----------------------------- Directors
Lawrence Zicklin
/S/ RICHARD A. CANTOR Vice Chairman of the Board of March 26, 2002
- ----------------------------- Directors
Richard A. Cantor
/S/ MARVIN C. SCHWARTZ Vice Chairman of the Board of March 26, 2002
- ----------------------------- Directors
Marvin C. Schwartz
/S/ JEFFREY B. LANE President, Chief Executive March 26, 2002
- ----------------------------- Officer and Director
Jeffrey B. Lane
/S/ NATHAN GANTCHER Director March 26, 2002
- -----------------------------
Nathan Gantcher
/S/ DAVID W. GLENN Director March 26, 2002
- -----------------------------
David W. Glenn
/S/ MICHAEL M. KASSEN Executive Vice President, March 26, 2002
- ----------------------------- Chief Investment Officer and
Michael M. Kassen Director
/S/ ARTHUR LEVITT, JR. Director March 26, 2002
- -----------------------------
Arthur Levitt, Jr.
/S/ JON C. MADONNA Director March 26, 2002
- -----------------------------
Jon C. Madonna
/S/ ROBERT MATZA Executive Vice President, March 26, 2002
- ----------------------------- Chief Operating Officer
Robert Matza and Director
58
Signature Title Date
--------- ----- ----
/S/ JACK H. NUSBAUM Director March 26, 2002
- -----------------------------
Jack H. Nusbaum
/S/ HEIDI L. SCHNEIDER Executive Vice President March 26, 2002
- ----------------------------- and Director
Heidi L. Schneider
/S/ MATTHEW S. STADLER Senior Vice President, March 26, 2002
- ----------------------------- Chief Financial Officer
Matthew S. Stadler and Chief Accounting Officer
/S/ PETER E. SUNDMAN Executive Vice President March 26, 2002
- ----------------------------- and Director
Peter E. Sundman
59