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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For Quarter Ended September 30, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                 
 
Commission file number 001-15361
 

 
Neuberger Berman Inc.
(Exact Name of Registrant As Specified in Its Charter)
 
Delaware
 
06-1523639
(State or Other Jurisdiction
of Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
     
605 Third Avenue, New York, NY
 
10158
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code (212) 476-9000
(Former name, former address and former fiscal year, if changed since last report)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes    x        No    ¨
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
 
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
Yes    ¨        No    ¨
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
69,767,601 shares of Common Stock, par value $.01 per share, were outstanding on October 31, 2002.
 


Table of Contents
NEUBERGER BERMAN INC.
 
Form 10-Q
 
Index
 
         
Page

Part I—Financial Information
    
  
2
       
2
       
3
       
4
       
5
       
7
  
13
  
24
  
25
Part II—Other Information
    
  
26
  
26
  
27
  
28
  
30
 
Forward Looking Statements
 
Our disclosure and analysis in this report or 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.

1


Table of Contents
 
Part I—Financial Information
 
Item 1.— Financial Statements
 
Neuberger Berman Inc. and Subsidiaries
 
Condensed Consolidated Statements of Financial Condition
(in thousands, except share data)
 
    
September 30, 2002

    
December 31, 2001

 
    
(Unaudited)
        
ASSETS
                 
Cash and cash equivalents
  
$
237,021
 
  
$
282,040
 
Cash and securities segregated for the exclusive benefit of clients
  
 
325,386
 
  
 
593,973
 
Cash and securities deposited with clearing organizations (including securities with market values of $12,962 and $11,957 at September 30, 2002 and December 31, 2001, respectively)
  
 
14,542
 
  
 
13,189
 
Securities purchased under agreements to resell
  
 
2,548
 
  
 
304,576
 
Receivable from brokers, dealers and clearing organizations
  
 
2,143,562
 
  
 
2,109,110
 
Receivable from clients
  
 
363,441
 
  
 
773,854
 
Securities owned, at market value
  
 
100,886
 
  
 
88,058
 
Fees receivable
  
 
33,058
 
  
 
29,719
 
Furniture, equipment and leasehold improvements, at cost, net of accumulated depreciation and amortization of $49,646 and $38,651 at September 30, 2002 and December 31, 2001, respectively
  
 
44,032
 
  
 
43,793
 
Other assets
  
 
130,963
 
  
 
144,175
 
    


  


Total assets
  
$
3,395,439
 
  
$
4,382,487
 
    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Liabilities:
                 
Securities sold under agreements to repurchase
  
$
—  
 
  
$
608,538
 
Payable to brokers, dealers and clearing organizations
  
 
1,781,228
 
  
 
1,703,745
 
Payable to clients
  
 
992,501
 
  
 
1,415,904
 
Securities sold but not yet purchased, at market value
  
 
889
 
  
 
6,174
 
Other liabilities and accrued expenses
  
 
82,325
 
  
 
135,316
 
    


  


    
 
2,856,943
 
  
 
3,869,677
 
    


  


Long-term debt
  
 
144,668
 
  
 
151,420
 
    


  


Subordinated liability
  
 
35,000
 
  
 
35,000
 
    


  


Stockholders’ equity:
                 
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued at September 30, 2002 and December 31, 2001
  
 
—  
 
  
 
—  
 
Common stock, $.01 par value; 250,000,000 shares authorized; 76,041,107 and 75,310,547 shares issued at September 30, 2002 and December 31, 2001, respectively; 69,796,466 and 70,416,985 shares outstanding at September 30, 2002 and December 31, 2001, respectively
  
 
760
 
  
 
753
 
Paid-in capital
  
 
360,590
 
  
 
341,344
 
Retained earnings
  
 
252,304
 
  
 
173,265
 
    


  


    
 
613,654
 
  
 
515,362
 
Less: Treasury stock, at cost, of 6,244,641 and 4,893,562 shares at
September 30, 2002 and December 31, 2001, respectively
  
 
(231,702
)
  
 
(181,488
)
Unearned compensation
  
 
(23,124
)
  
 
(7,484
)
    


  


Total stockholders’ equity
  
 
358,828
 
  
 
326,390
 
    


  


Total liabilities and stockholders’ equity
  
$
3,395,439
 
  
$
4,382,487
 
    


  


 
The accompanying notes are an integral part of the condensed consolidated financial statements.

2


Table of Contents
 
Neuberger Berman Inc. and Subsidiaries
 
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
 
    
For The Three Months
Ended September 30,

    
For The Nine Months Ended September 30,

    
2002

  
2001

    
2002

  
2001

REVENUES:
                             
Investment advisory and administrative fees
  
$
101,314
  
$
106,974
 
  
$
323,581
  
$
312,869
Commissions
  
 
32,671
  
 
32,136
 
  
 
109,588
  
 
107,017
Interest
  
 
15,138
  
 
32,850
 
  
 
53,039
  
 
135,152
Principal transactions in securities, net
  
 
68
  
 
(226
)
  
 
1,332
  
 
1,330
Clearance fees
  
 
3,063
  
 
3,196
 
  
 
9,127
  
 
10,004
Other income
  
 
1,272
  
 
800
 
  
 
4,785
  
 
2,667
    

  


  

  

Gross revenues
  
 
153,526
  
 
175,730
 
  
 
501,452
  
 
569,039
Interest expense
  
 
10,629
  
 
25,870
 
  
 
38,030
  
 
107,313
    

  


  

  

Net revenues after interest expense
  
 
142,897
  
 
149,860
 
  
 
463,422
  
 
461,726
    

  


  

  

OPERATING EXPENSES:
                             
Employee compensation and benefits
  
 
55,038
  
 
58,981
 
  
 
190,190
  
 
189,752
Information technology
  
 
6,379
  
 
5,701
 
  
 
18,251
  
 
16,621
Rent and occupancy
  
 
5,915
  
 
5,556
 
  
 
17,157
  
 
15,064
Brokerage, clearing and exchange fees
  
 
3,240
  
 
3,071
 
  
 
9,549
  
 
8,827
Advertising and sales promotion
  
 
1,806
  
 
1,337
 
  
 
6,247
  
 
7,060
Distribution and fund administration
  
 
5,767
  
 
4,870
 
  
 
17,915
  
 
14,194
Professional fees
  
 
3,430
  
 
3,534
 
  
 
9,164
  
 
8,234
Depreciation and amortization
  
 
3,794
  
 
3,398
 
  
 
11,294
  
 
9,361
Other expenses
  
 
6,559
  
 
5,608
 
  
 
18,154
  
 
17,579
    

  


  

  

Total operating expenses
  
 
91,928
  
 
92,056
 
  
 
297,921
  
 
286,692
    

  


  

  

Net income before taxes
  
 
50,969
  
 
57,804
 
  
 
165,501
  
 
175,034
Provision for income taxes
  
 
21,789
  
 
24,335
 
  
 
70,606
  
 
73,647
    

  


  

  

Net income
  
$
29,180
  
$
33,469
 
  
$
94,895
  
$
101,387
    

  


  

  

Net income per common share
                             
Net income per share—Basic
  
$
0.42
  
$
0.47
 
  
$
1.36
  
$
1.40
    

  


  

  

Net income per share—Diluted
  
$
0.42
  
$
0.47
 
  
$
1.34
  
$
1.38
    

  


  

  

Weighted average common shares outstanding—Basic
  
 
69,397
  
 
70,568
 
  
 
69,771
  
 
72,330
    

  


  

  

Weighted average common shares outstanding—Diluted
  
 
70,055
  
 
71,722
 
  
 
70,744
  
 
73,646
    

  


  

  

 
The accompanying notes are an integral part of the condensed consolidated financial statements.

3


Table of Contents
Neuberger Berman Inc. and Subsidiaries
 
Condensed Consolidated Statements of Changes
In Stockholders’ Equity (Unaudited)
(in thousands)
 
   
For The Three Months Ended March 31, 2002, June 30, 2002 and September 30, 2002

 
   
Common
Stock

 
Paid-in
Capital

   
Retained
Earnings

   
Treasury
Stock

    
Unearned
Compensation

   
Total

 
Beginning balance, December 31, 2001
 
$
753
 
$
341,344
 
 
$
173,265
 
 
$
(181,488
)
  
$
(7,484
)
 
$
326,390
 
Dividends
 
 
—  
 
 
—  
 
 
 
(5,302
)
 
 
—  
 
  
 
—  
 
 
 
(5,302
)
Acquisition of treasury stock
 
 
—  
 
 
—  
 
 
 
—  
 
 
 
(18,168
)
  
 
—  
 
 
 
(18,168
)
Issuance of common stock
 
 
4
 
 
8,344
 
 
 
—  
 
 
 
2,823
 
  
 
(8,889
)
 
 
2,282
 
Amortization of unearned compensation
 
 
—  
 
 
—  
 
 
 
—  
 
 
 
—  
 
  
 
1,361
 
 
 
1,361
 
Forfeitures of restricted stock awards
 
 
—  
 
 
(28
)
 
 
—  
 
 
 
(73
)
  
 
80
 
 
 
(21
)
Net income
 
 
—  
 
 
—  
 
 
 
33,247
 
 
 
—  
 
  
 
—  
 
 
 
33,247
 
   

 


 


 


  


 


Ending balance, March 31, 2002
 
 
757
 
 
349,660
 
 
 
201,210
 
 
 
(196,906
)
  
 
(14,932
)
 
 
339,789
 
Dividends
 
 
—  
 
 
—  
 
 
 
(5,285
)
 
 
—  
 
  
 
—  
 
 
 
(5,285
)
Acquisition of treasury stock
 
 
—  
 
 
—  
 
 
 
—  
 
 
 
(14,228
)
  
 
—  
 
 
 
(14,228
)
Issuance of common stock
 
 
—  
 
 
1,278
 
 
 
—  
 
 
 
673
 
  
 
(1,248
)
 
 
703
 
Amortization of unearned compensation
 
 
  —  
 
 
—  
 
 
 
—  
 
 
 
—  
 
  
 
1,488
 
 
 
1,488
 
Forfeitures of restricted stock awards
 
 
—  
 
 
(4
)
 
 
—  
 
 
 
(3
)
  
 
4
 
 
 
(3
)
Net income
 
 
—  
 
 
—  
 
 
 
32,468
 
 
 
—  
 
  
 
—  
 
 
 
32,468
 
   

 


 


 


  


 


Ending balance, June 30, 2002
 
 
757
 
 
350,934
 
 
 
228,393
 
 
 
(210,464
)
  
 
(14,688
)
 
 
354,932
 
Dividends
 
 
—  
 
 
—  
 
 
 
(5,269
)
 
 
—  
 
  
 
—  
 
 
 
(5,269
)
Acquisition of treasury stock
 
 
—  
 
 
—  
 
 
 
—  
 
 
 
(22,068
)
  
 
—  
 
 
 
(22,068
)
Issuance of common stock
 
 
3
 
 
9,978
 
 
 
—  
 
 
 
1,027
 
  
 
(10,509
)
 
 
499
 
Amortization of unearned compensation
 
 
—  
 
 
—  
 
 
 
—  
 
 
 
—  
 
  
 
1,874
 
 
 
1,874
 
Forfeitures of restricted stock awards
 
 
—  
 
 
(322
)
 
 
—  
 
 
 
(197
)
  
 
199
 
 
 
(320
)
Net income
 
 
—  
 
 
—  
 
 
 
29,180
 
 
 
—  
 
  
 
—  
 
 
 
29,180
 
   

 


 


 


  


 


Ending balance, September 30, 2002
 
$
760
 
$
360,590
 
 
$
252,304
 
 
$
(231,702
)
  
$
(23,124
)
 
$
358,828
 
   

 


 


 


  


 


 
The accompanying notes are an integral part of the condensed consolidated financial statements.

4


Table of Contents
 
Neuberger Berman Inc. and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
    
For The Nine Months
Ended September 30,

 
    
2002

    
2001

 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net Income
  
$
94,895
 
  
$
101,387
 
Adjustments to reconcile net income to net cash provided by operating activities—
                 
Depreciation and amortization
  
 
11,294
 
  
 
9,361
 
Deferred tax provision
  
 
17,098
 
  
 
16,276
 
Amortization of unearned compensation, net
  
 
4,379
 
  
 
1,903
 
Interest on long-term debt
  
 
1,906
 
  
 
1,027
 
Net tax benefit on options exercised
  
 
2,183
 
  
 
740
 
(Increase) decrease in operating assets—
                 
Cash and securities segregated for the exclusive benefit of clients
  
 
268,587
 
  
 
197,737
 
Cash and securities deposited with clearing organizations
  
 
(1,353
)
  
 
(8,496
)
Securities purchased under agreements to resell
  
 
302,028
 
  
 
88,107
 
Receivable from brokers, dealers and clearing organizations
  
 
(34,452
)
  
 
398,108
 
Receivable from clients
  
 
410,413
 
  
 
103,341
 
Securities owned, at market value
  
 
(12,828
)
  
 
(9,262
)
Fees receivable
  
 
(3,339
)
  
 
(3,350
)
Other assets
  
 
(3,977
)
  
 
(13,235
)
Increase (decrease) in operating liabilities—
                 
Bank loans
  
 
—  
 
  
 
(3,000
)
Securities sold under agreements to repurchase
  
 
(608,538
)
  
 
(40,153
)
Payable to brokers, dealers and clearing organizations
  
 
77,483
 
  
 
88,904
 
Payable to clients
  
 
(423,403
)
  
 
(810,847
)
Securities sold but not yet purchased, at market value
  
 
(5,285
)
  
 
7,653
 
Other liabilities and accrued expenses
  
 
(52,991
)
  
 
(31,978
)
    


  


Net cash provided by operating activities
  
 
44,100
 
  
 
94,223
 
    


  


CASH FLOWS FROM INVESTING ACTIVITIES:
                 
Payments for purchases of furniture, equipment and leasehold improvements
  
 
(11,234
)
  
 
(11,792
)
Cash paid for acquisitions
  
 
(1,285
)
  
 
(14,446
)
    


  


Cash used in investing activities
  
 
(12,519
)
  
 
(26,238
)
    


  


CASH FLOWS FROM FINANCING ACTIVITIES:
                 
Payments for dividends
  
 
(15,856
)
  
 
(15,093
)
Issuance of common stock
  
 
1,301
 
  
 
3,254
 
Purchase of treasury stock
  
 
(54,464
)
  
 
(143,648
)
Proceeds from issuance of long-term debt
  
 
—  
 
  
 
150,666
 
Repurchase of long-term debt
  
 
(7,581
)
  
 
—  
 
    


  


Net cash used in financing activities
  
 
(76,600
)
  
 
(4,821
)
    


  


Net increase (decrease) in cash and cash equivalents
  
 
(45,019
)
  
 
63,164
 
CASH AND CASH EQUIVALENTS, beginning of period
  
 
282,040
 
  
 
88,117
 
    


  


CASH AND CASH EQUIVALENTS, end of period
  
$
237,021
 
  
$
151,281
 
    


  


 
The accompanying notes are an integral part of the condensed consolidated financial statements.

5


Table of Contents
 
Neuberger Berman Inc. and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
(in thousands, except share data)
 
Supplemental disclosures of cash flow information:
 
Interest payments totaled $36,162 and $109,848 for the nine months ended September 30, 2002 and 2001, respectively.
 
Tax payments totaled $87,286 and $43,947 for the nine months ended September 30, 2002 and 2001, respectively.
 
Supplemental disclosures of non-cash investing and financing activities:
 
As part of the purchase price for the assets of Fasciano Company, Inc., on March 23, 2001, Neuberger Berman Inc. issued 57,295 shares of common stock from treasury with a market value of $2,500.
 
In connection with employee stock ownership plans, Neuberger Berman Inc. issued for the nine months ended September 30, 2002 and 2001, 554,250 and 132,534 of restricted shares, respectively, with market values of $20,646 and $6,795, of which $3,297 and $2,359 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, 13,304 and 3,316 shares of restricted stock were forfeited in the first nine months of 2002 and 2001, respectively, with recorded values of $627 and $174, respectively. These forfeitures of shares were recorded as a debit to capital stock with corresponding credits to unearned compensation and employee compensation and benefits.
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

6


Table of Contents
Neuberger Berman Inc. and Subsidiaries
 
Notes To Condensed Consolidated Financial Statements
(Unaudited)
 
1.    Organization and Description of Business
 
Neuberger Berman Inc. (“NBI”) was organized as a Delaware corporation on August 13, 1998. NBI was formed to be the holding company for Neuberger Berman, LLC (“NB, LLC”), a Delaware limited liability company, and Neuberger Berman Management Inc. (“NBMI”), a New York corporation, and to allow for the issuance of common stock to the public.
 
The condensed consolidated financial statements include the accounts of NBI and its subsidiaries. NBI’s significant wholly owned subsidiaries are NB, LLC, NBMI and Neuberger Berman Trust Company, N.A., which holds a national bank charter under the laws of the United States (collectively, the “Company”). Material intercompany transactions and balances have been eliminated in consolidation.
 
The Company is a registered investment adviser and a registered broker-dealer, providing investment management services to high net worth clients, mutual funds and institutional clients. As a registered investment adviser, the Company manages equity, fixed income, balanced, socially responsive, and international portfolios for clients, including individuals, families, endowments, foundations, trusts and employee benefit plans. In addition, the Company advises the Neuberger Berman family of funds. As a registered broker-dealer, the Company executes securities transactions for its clients and others and provides prime brokerage and correspondent clearing services to other firms.
 
2.    Basis of Presentation and Significant Accounting Policies
 
The accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of condensed consolidated financial condition and results of operations for the periods presented have been included. All adjustments are of a normal and recurring nature. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and the condensed consolidated financial statements and the related notes included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2002 and June 30, 2002. Certain prior period amounts have been reclassified to conform to the nine months ended September 30, 2002 presentation.
 
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. Customers’ securities transactions are reported on a settlement date basis with related commission income and expenses reported on a trade date basis.
 
For purposes of the condensed consolidated statements of financial condition, the Company considers all investments in money market funds to be cash equivalents.
 
Investment advisory fees are recorded as earned. Generally, high net worth and institutional clients are charged or billed 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.

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Table of Contents

Neuberger Berman Inc. and Subsidiaries
 
Notes To Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

2.    Basis of Presentation and 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 August 2001, the Financial Accounting Standards Board (“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 implementation of SFAS 144 did not have a material impact on the condensed consolidated financial condition or results of operations.
 
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not anticipate SFAS 146 having a material impact on the condensed consolidated financial condition or results of operations.
 
3.    Goodwill and Other Intangible Assets
 
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. For the three and nine months ended September 30, 2001, net income excluding goodwill amortization would have been $33,655,000 and $101,850,000, respectively. As of January 1, 2002, goodwill was attributable to the Company’s three business segments.
 
SFAS 142 prescribes an annual two-step process for impairment testing and measurement. The first step screens for impairment potential. If impairment potential is indicated, the second step measures the impairment.
 
In accordance with the guidelines set forth under SFAS 142, during the second quarter of 2002, a detailed valuation analysis was performed, incorporating discounted cash flow techniques, to measure both the fair value and the carrying value of each business segment. As a result of the valuation analysis, it was determined that no goodwill impairment existed because the fair value of each business segment substantially exceeded its carrying value. During the quarter ended September 30, 2002, there were no events or circumstances that would more likely than not reduce the fair value of the business segment below its carrying value and, accordingly, no additional testing for impairment is required until year end.
 
4.    Long-Term Debt
 
On May 4, 2001, in accordance with Rule 144A of the Securities Act of 1933, as amended, the Company sold $175,000,000 principal amount at maturity of zero-coupon senior convertible notes due 2021, resulting in proceeds of approximately $151,000,000. The issue price represents a yield to maturity of 0.75% per year, which is accounted for using the effective interest rate method. Each $1,000 principal amount at maturity of the convertible securities is convertible into 13.8879 shares of the Company’s common stock upon the occurrence of any of the following events: i) during any calendar quarter commencing after June 30, 2001, the closing sale price of NBI’s common stock on the New York Stock Exchange (“NYSE”) for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more

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Table of Contents

Neuberger Berman Inc. and Subsidiaries
 
Notes To Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

4.    Long-Term Debt—(Continued)

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 2004, 2006, 2011 and 2016. The Company may choose to pay for such repurchases in cash or shares of its common stock. For the three and nine months ended September 30, 2002, the Company recorded accreted interest of $270,000 and $828,000, respectively.
 
Effective May 2, 2002, the Company amended the terms of its convertible securities to permit the holders, at their option, to cause the Company to repurchase the convertible securities on November 4, 2002, at their accreted value of $870.67 per $1,000 principal amount at maturity. The Company also announced that each holder electing not to require the Company to repurchase its convertible securities as of May 4, 2002, would receive a one-time payment of $4.34 for every $1,000 aggregate principal amount at maturity of the convertible securities held. As of the close of business May 3, 2002, holders of approximately 5%, or $8,700,000 principal amount, of the convertible securities exercised their option to cause the Company to repurchase their convertible securities. On May 6, 2002, the Company made a cash payment of approximately $7,600,000 for these repurchases. On May 8, 2002, the Company made a one-time payment of $4.34 for every $1,000 aggregate principal amount at maturity of the convertible securities to each holder of the convertible securities as of the close of business on May 7, 2002.
 
Effective November 4, 2002, the Company amended the terms of its convertible securities to add cash interest payments of 3.047% per annum of the principal amount at maturity on its outstanding securities for the next 18 months. This additional interest, which is the equivalent of 3.500% of $870.67, the accreted value on November 4, 2002, will be paid on a semi-annual basis in arrears on May 4, 2003, November 4, 2003 and May 4, 2004 to holders of record at the close of business on April 15, 2003, October 15, 2003 and April 15, 2004, respectively. As of the close of business on November 1, 2002, holders of approximately 0.02%, or $25,000 principal amount at maturity, of the convertible securities made an irrevocable election to exercise their option to cause the Company to repurchase their convertible securities at their accreted value of $870.67 on November 4, 2002.
 
5.    Regulatory Requirements
 
NB, LLC and NBMI, as registered broker-dealers and member firms of the NYSE and the National Association of Securities Dealers, are subject to the Securities and Exchange Commission’s (the “SEC”) Uniform Net Capital Rule 15c3-1 (“the Rule”), which requires that broker-dealers maintain a minimum level of net capital, as defined. As of September 30, 2002, NB, LLC and NBMI had net capital of approximately $250,719,000 and $14,199,000, respectively, which exceeded their requirements by approximately $234,454,000 and $13,949,000, respectively.
 
The Rule also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital of a broker-dealer would be less than the amount required under the Rule. Accordingly, at September 30, 2002, the payments of dividends and advances to NBI by NB, LLC and NBMI are limited to approximately $210,056,000 and $13,899,000, respectively, under the most restrictive of these requirements.
 
As of September 30, 2002, cash of $38,250,000, contract value plus accrued interest of $45,611,000 on various U.S. Government obligations purchased under agreements to resell and $221,027,000 of U.S. Treasury bills have been segregated in a special reserve bank account for the exclusive benefit of customers under Rule

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Table of Contents

Neuberger Berman Inc. and Subsidiaries
 
Notes To Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

5.    Regulatory Requirements—(Continued)

15c3-3 of the SEC. In addition, cash of approximately $51,000 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 to give correspondent firms the ability to classify their assets held by NB, LLC as allowable assets in the correspondents’ net capital calculation. At September 30, 2002, a U.S. Treasury note purchased under an agreement to resell with a contract value, including accrued interest, of $10,252,000 and $9,199,000 of U.S. Treasury bills were segregated in a special reserve bank account for the exclusive benefit of customers-PAIB under Rule 15c3-3 of the SEC.
 
6.    Earnings Per Share
 
Basic earnings per common share are calculated by dividing net income by the weighted average common shares outstanding. Diluted earnings per common share are calculated by dividing net income by the total weighted average common shares outstanding and common stock equivalents. Common stock equivalents are comprised of dilutive potential shares from stock options and certain restricted stock awards. Common stock equivalents are excluded from the computation if their effect is anti-dilutive. Diluted earnings per common share are computed using the treasury stock method.
 
The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2002 and 2001:
 
    
For The Three Months
Ended September 30,

  
For The Nine Months
Ended September 30,

    
2002

  
2001

  
2002

  
2001

    
(In Thousands, Except Per Share Data)
Net income
  
$
29,180
  
$
33,469
  
$
94,895
  
$
101,387
    

  

  

  

Basic weighted average shares outstanding
  
 
69,397
  
 
70,568
  
 
69,771
  
 
72,330
Dilutive potential shares from stock options and certain restricted stock awards
  
 
658
  
 
1,154
  
 
973
  
 
1,316
    

  

  

  

Dilutive weighted average shares outstanding
  
 
70,055
  
 
71,722
  
 
70,744
  
 
73,646
    

  

  

  

Basic earnings per share
  
$
0.42
  
$
0.47
  
$
1.36
  
$
1.40
    

  

  

  

Diluted earnings per share
  
$
0.42
  
$
0.47
  
$
1.34
  
$
1.38
    

  

  

  

 
Options on approximately 3,387,000 and 1,003,000 shares for the three months ended September 30, 2002 and 2001, respectively, and options on approximately 3,129,000 and 657,000 shares for the nine months ended September 30, 2002 and 2001, respectively, have been excluded from the earnings per share computation above due to their anti-dilutive effect. Due to its contingent conversion feature, long-term debt has not been considered.
 
7.    Contingencies
 
In the normal course of business, the Company is subject to various legal proceedings. In the opinion of management, based on discussions with legal counsel, the resolution of pending proceedings will not have a material adverse effect on the condensed consolidated financial condition, results of operations or liquidity of the Company.

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Table of Contents

Neuberger Berman Inc. and Subsidiaries
 
Notes To Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

 
8.    Stock Options
 
The Company has two stock based plans that provide for the granting of stock options to employees and directors: the 1999 Neuberger Berman Inc. Long-Term Incentive Plan and the 1999 Neuberger Berman Inc. Directors Stock Incentive Plan (collectively, the “Plans”). The following table summarizes awards of and transactions in options under the Plans for the three months ended March 31, 2002, June 30, 2002 and September 30, 2002:
 
   
Range of Exercise Prices

 
   
$18.75-$19.99

    
$20.00-$29.99

    
$30.00-$39.99

   
$40.00-$49.99

    
$50.00-$55.29

   
Total

 
Balance at December 31, 2001
 
2,645,220
 
  
840,000
 
  
1,962
 
 
650,439
 
  
638,231
 
 
4,775,852
 
Granted—original
 
—  
 
  
—  
 
  
—  
 
 
1,472,000
 
  
—  
 
 
1,472,000
 
Granted—reload
 
—  
 
  
—  
 
  
—  
 
 
366,507
 
  
—  
 
 
366,507
 
Forfeited
 
—  
 
  
—  
 
  
—  
 
 
—  
 
  
(15,000
)
 
(15,000
)
Exercised
 
(399,376
)
  
(210,000
)
  
(703
)
 
—  
 
  
—  
 
 
(610,079
)
   

  

  

 

  

 

Balance at March 31, 2002
 
2,245,844
 
  
630,000
 
  
1,259
 
 
2,488,946
 
  
623,231
 
 
5,989,280
 
Granted—reload
 
—  
 
  
—  
 
  
902
 
 
21,409
 
  
—  
 
 
22,311
 
Exercised
 
(38,036
)
  
—  
 
  
(1,259
)
 
—  
 
  
—  
 
 
(39,295
)
   

  

  

 

  

 

Balance at June 30, 2002
 
2,207,808
 
  
630,000
 
  
902
 
 
2,510,355
 
  
623,231
 
 
5,972,296
 
Granted—original
 
—  
 
  
—  
 
  
250,000
 
 
—  
 
  
—  
 
 
250,000
 
Granted—reload
 
—  
 
  
1,230
 
  
6,101
 
 
—  
 
  
—  
 
 
7,331
 
Forfeited
 
(4,508
)
  
—  
 
  
—  
 
 
(4,881
)
  
—  
 
 
(9,389
)
Exercised
 
(11,227
)
  
—  
 
  
—  
 
 
—  
 
  
—  
 
 
(11,227
)
   

  

  

 

  

 

Balance at September 30, 2002
 
2,192,073
 
  
631,230
 
  
257,003
 
 
2,505,474
 
  
623,231
 
 
6,209,011
 
   

  

  

 

  

 

 
9.    Financial Instruments With Off-Balance Sheet Risk and Concentrations of Credit Risk
 
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.
 
The Company enters into various over-the-counter, foreign exchange forward contracts related to its professional investor clearing services business. The credit risk for forward contracts is limited to the unrealized market appreciation or depreciation, as applicable. Market risk is substantially dependent upon the value of the underlying financial instruments and is affected by market forces such as volatility and changes in foreign exchange rates. At September 30, 2002, the Company had outstanding obligations to purchase and sell foreign exchange forward contracts of approximately $111,000,000, scheduled to expire by December 31, 2002.
 
10.    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

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Table of Contents

Neuberger Berman Inc. and Subsidiaries
 
Notes To Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

10.    Segment Information—(Continued)
 
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 its professional investor clearing services business. This segment also provides wealth management services, research sales and other activities, including market making, global securities lending, custody and recordkeeping services and treasury management. The revenues derived by this segment are principally commissions, net interest, trading revenues and clearance fees. The Corporate segment reflects certain corporate results that are not directly related to the day-to-day operations of the Company’s principal business.
 
The Company does not record revenues from transactions between segments (referred to as intersegment revenues).
 
The Company evaluates performance of its segments based on profit or loss from operations before taxes. No single client accounted for more than 10% of the Company’s combined revenues. Information on statement of financial condition data by segment is not disclosed because it is not used for evaluating segment performance and deciding how to allocate resources to segments. Substantially all of the Company’s revenues and assets are attributable to or located in the United States.
 
Summarized financial information for the Company’s reportable segments is presented in the following table (in thousands):
 
    
For The Three Months
Ended September 30,

    
For The Nine Months
Ended September 30,

 
    
2002

    
2001

    
2002

    
2001

 
PRIVATE ASSET MANAGEMENT
                                   
Net revenues after interest expense
  
$
70,250
 
  
$
73,288
 
  
$
232,141
 
  
$
222,677
 
Net income before taxes
  
$
34,758
 
  
$
37,601
 
  
$
111,349
 
  
$
108,757
 
MUTUAL FUND & INSTITUTIONAL
                                   
Net revenues after interest expense
  
$
53,166
 
  
$
56,195
 
  
$
169,606
 
  
$
168,424
 
Net income before taxes
  
$
19,151
 
  
$
22,432
 
  
$
64,860
 
  
$
62,670
 
PROFESSIONAL SECURITIES SERVICES
                                   
Net revenues after interest expense
  
$
20,329
 
  
$
22,177
 
  
$
63,748
 
  
$
75,332
 
Net income before taxes
  
$
2,846
 
  
$
3,477
 
  
$
7,199
 
  
$
21,344
 
CORPORATE
                                   
Net loss after interest expense
  
$
(848
)
  
$
(1,800
)
  
$
(2,073
)
  
$
(4,707
)
Net loss before taxes
  
$
(5,786
)
  
$
(5,706
)
  
$
(17,907
)
  
$
(17,737
)
TOTAL
                                   
Net revenues after interest expense
  
$
142,897
 
  
$
149,860
 
  
$
463,422
 
  
$
461,726
 
Net income before taxes
  
$
50,969
 
  
$
57,804
 
  
$
165,501
 
  
$
175,034
 
 
11.    Subsequent Events
 
On October 21, 2002, the Board of Directors of NBI declared a quarterly cash dividend on its common stock in the amount of $0.075 per share. The dividend was paid on November 13, 2002 to stockholders of record at the close of business on November 1, 2002.
 
On October 31, 2002, Neuberger Berman Trust Company, N.A. closed its Seattle, Washington trust office and established its main office in New York, New York.
 

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Table of Contents
Item 2.—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 three and nine months ended September 30, 2002 and September 30, 2001. Such information should be read in conjunction with our Condensed Consolidated Financial Statements together with the Notes to the Condensed Consolidated Financial Statements.
 
Forward Looking Statements
 
Our disclosure and analysis in this report or 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.
 
When we use the terms “Neuberger Berman,” “we,” “us,” and “our,” 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
 
Most major U.S. equity indices posted double-digit declines for the third quarter of 2002, regardless of sector or investment style. On a total return basis, the Dow Jones Industrial Average lost 17.4%, the Standard & Poor’s 500 declined 17.3%, and the Nasdaq Composite dropped 19.9%. Although stock market performance was generally weak, a few bright spots emerged on the economic front. The pace of consumer spending slowed during the period, but continues to drive economic growth, due in large part to rising incomes and continued low interest rates. Personal income grew 0.4% in August, according to the Department of Commerce. Historically low interest rates continued to spur a boom in home purchases and mortgage refinancings.
 
Offsetting the quarter’s positive economic news, however, was a decline in consumer confidence and a number of high-profile earnings warnings. Ongoing concerns about corporate accounting standards added to the market’s negative sentiment. No economic sector managed to escape the market’s downdraft, but stable growth sectors such as healthcare and consumer staples did not fall as far as other areas of the market in the third quarter of 2002.

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Table of Contents
 
The stock market’s woes, declining interest rates, and mixed economic signals were good news for the bond market. In a period marked by international conflict and heightened uncertainty regarding economic recovery, the Lehman Brothers U.S. Aggregate Index, an unmanaged measure of the broad domestic bond market, rose 4.6%. Investors’ continued search for safety helped lift prices for U.S. Treasuries, municipal bonds, and high-quality corporate bonds. High-yield and emerging market bonds did not fare as well, given concerns about the pace of recovery and international tensions. During the third quarter, the Federal Reserve Board left the federal funds rate unchanged at 1.75%, but lowered it a half point to 1.25% on November 6th, stating that its low target for rates, along with strong productivity growth, should eventually boost economic activity. The Fed also cited recent signs that economic activity has slowed, in part due to the threat of war with Iraq. As bond prices rose, Treasury yields fell across all maturities.
 
Our business segments turned in respectable performance, despite a remarkably dismal market environment and the seasonally slow nature of the summer period. At quarter-end, assets under management were $53.6 billion, up 2.8% from $52.1 billion at September 30, 2001, but down 8.7% from $58.7 billion at the end of the previous quarter. Assets under management in our Private Asset Management segment were $20.8 billion, down 4.4% from $21.8 billion at September 30, 2001, and down 11.8% from $23.6 billion at the end of the previous quarter. Despite the severe market declines, investment performance in the Private Asset Management segment year-to-date has outpaced the rate of return of both the S&P 500 Index and the Dow Jones Industrial Average. Assets under management in our Mutual Fund and Institutional segment were $32.8 billion at quarter-end, up 8.0% from $30.4 billion at September 30, 2001, but down 6.6% from $35.1 billion at June 30, 2002. Mutual fund performance in the quarter was mixed, but approximately half the assets in our equity funds outperformed both their benchmarks and the S&P 500. The relative performance of the fixed-income funds is very good year-to-date, with the Neuberger Berman High Income Bond Fund significantly outpacing its peer group.
 
Recently Adopted Accounting Pronouncements
 
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142, which became effective on July 1, 2001 for acquisitions after June 30, 2001, and on January 1, 2002 for acquisitions prior to July 1, 2001, states that goodwill is no longer subject to amortization over its estimated useful life, but will be assessed for impairment. In addition, acquired intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. For the three and nine months ended September 30, 2001, net income excluding goodwill amortization would have been $33,655,000 and $101,850,000, respectively. As of January 1, 2002, goodwill was attributable to our three business segments.
 
SFAS 142 prescribes an annual two-step process for impairment testing and measurement. The first step screens for impairment potential. If impairment potential is indicated, the second step measures the impairment.
 
In accordance with the guidelines set forth under SFAS 142, during the second quarter of 2002, a detailed valuation analysis was performed, incorporating discounted cash flow techniques, to measure both the fair value and the carrying value of each of our business segments. As a result of the valuation analysis, it was determined that no goodwill impairment existed because the fair value of each business segment substantially exceeded its carrying value. During the quarter ended September 30, 2002, there were no events or circumstances that would more likely than not reduce the fair value of the business segment below its carrying value and, accordingly, no additional testing for impairment is required until year end.
 
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 implementation of SFAS 144 did not have a material impact on our condensed consolidated financial condition or results of operations.

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Table of Contents
 
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not anticipate SFAS 146 having a material impact on our condensed consolidated financial condition or results of operations.
 
Currently, we elect to account for stock options in accordance with Accounting Principles Board Opinion No. 25 (“APB No. 25), “Accounting for Stock Issued to Employees,” as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” In accordance with APB No. 25, compensation expense is generally not recognized for stock options that have no intrinsic value on the date of grant. Beginning in January 2003, we will adopt the expense recognition provisions of recording the fair value of stock options under the guidance of SFAS No. 123. Under this new method, compensation expense will be recognized over the vesting period based on the fair value of stock options on the date of grant. The amount of compensation to be recognized under SFAS No. 123 in future years is not currently determinable because the number and value of stock options to be granted in the future are not yet known.
 
Recent Developments
 
On October 31, 2002, Neuberger Berman Trust Company, N.A. closed its Seattle, Washington trust office and established its main office in New York, New York.
 
On November 4, 2002, we amended the terms of our zero-coupon senior convertible notes due 2021 (the “convertible securities”) to add cash interest payments of 3.047% per annum of the principal amount at maturity on our outstanding securities for the next 18 months. This additional interest, which is the equivalent of 3.500% of $870.67, the accreted value on November 4, 2002, will be paid on a semi-annual basis in arrears on May 4, 2003, November 4, 2003 and May 4, 2004 to holders of record at the close of business on April 15, 2003, October 15, 2003 and April 15, 2004, respectively. As of the close of business on November 1, 2002, holders of approximately 0.02%, or $25,000 principal amount at maturity, of the convertible securities made an irrevocable election to exercise their option to cause us to repurchase their convertible securities at their accreted value of $870.67 on November 4, 2002.

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Table of Contents
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. This segment also provides wealth management services, research sales and other activities, including market making, global securities lending, custody and recordkeeping services and treasury management. The 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 our investments in our mutual funds, corporate marketing expense, interest on long-term debt and goodwill amortization. The following tables of selected financial data present our business segments in a manner consistent with the way that we manage our businesses.
 
Results of Operations for the Three Months Ended September 30, 2002 and 2001
 
Results of Operations
(in thousands)
 
For The Three Months Ended
September 30, 2002

  
Private
Asset
Management

  
Mutual
Fund and
Institutional

  
Professional
Securities
Services

  
Corporate

    
Total

Net revenues (loss) after interest expense
  
$
70,250
  
$
53,166
  
$
20,329
  
$
(848
)
  
$
142,897
Operating expenses
  
 
35,492
  
 
34,015
  
 
17,483
  
 
4,938
 
  
 
91,928
    

  

  

  


  

Net income (loss) before taxes
  
$
34,758
  
$
19,151
  
$
2,846
  
$
(5,786
)
  
$
50,969
    

  

  

  


  

 
For The Three Months Ended
September 30, 2001

  
Private
Asset
Management

  
Mutual
Fund and
Institutional

  
Professional
Securities
Services

  
Corporate

    
Total

Net revenues (loss) after interest expense
  
$
73,288
  
$
56,195
  
$
22,177
  
$
(1,800
)
  
$
149,860
Operating expenses
  
 
35,687
  
 
33,763
  
 
18,700
  
 
3,906
 
  
 
92,056
    

  

  

  


  

Net income (loss) before taxes
  
$
37,601
  
$
22,432
  
$
3,477
  
$
(5,706
)
  
$
57,804
    

  

  

  


  

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Table of Contents
Assets Under Management
(in millions)
 
      
For The Three Months Ended

 
      
September 30,
2002

      
September 30,
2001

 
PRIVATE ASSET MANAGEMENT

                     
Assets under management, beginning of period
    
$
23,593
 
    
$
24,253
 
      


    


Net additions
    
 
216
 
    
 
266
 
Market depreciation
    
 
(3,001
)
    
 
(2,757
)
      


    


Total decrease
    
 
(2,785
)
    
 
(2,491
)
      


    


Assets under management, end of period(1)
    
$
20,808
 
    
$
21,762
 
      


    


MUTUAL FUND & INSTITUTIONAL

                     
Equity Separate Accounts

                     
Assets under management, beginning of period
    
$
6,091
 
    
$
6,810
 
      


    


Net withdrawals
    
 
(68
)
    
 
(122
)
Market depreciation
    
 
(958
)
    
 
(895
)
      


    


Total decrease
    
 
(1,026
)
    
 
(1,017
)
      


    


Assets under management, end of period
    
$
5,065
 
    
$
5,793
 
      


    


Fixed Income Separate Accounts

                     
Assets under management, beginning of period
    
$
5,437
 
    
$
5,280
 
      


    


Net additions
    
 
244
 
    
 
163
 
Market appreciation
    
 
236
 
    
 
162
 
      


    


Total increase
    
 
480
 
    
 
325
 
      


    


Assets under management, end of period
    
$
5,917
 
    
$
5,605
 
      


    


Consultant Services Group

                     
Assets under management, beginning of period
    
$
4,237
 
    
$
2,277
 
      


    


Net additions
    
 
753
 
    
 
304
 
Market appreciation (depreciation)
    
 
21
 
    
 
(39
)
      


    


Total increase
    
 
774
 
    
 
265
 
      


    


Assets under management, end of period
    
$
5,011
 
    
$
2,542
 
      


    


Mutual Fund and Sub-Advised Accounts

                     
Assets under management, beginning of period
    
$
19,342
 
    
$
19,616
 
      


    


Net withdrawals
    
 
(8
)
    
 
(176
)
Market depreciation
    
 
(2,537
)
    
 
(3,007
)
      


    


Total decrease
    
 
(2,545
)
    
 
(3,183
)
      


    


Assets under management, end of period(2)
    
$
16,797
 
    
$
16,433
 
      


    


Sub-Total Mutual Fund & Institutional

                     
Assets under management, beginning of period
    
$
35,107
 
    
$
33,983
 
      


    


Net additions
    
 
921
 
    
 
169
 
Market depreciation
    
 
(3,238
)
    
 
(3,779
)
      


    


Total decrease
    
 
(2,317
)
    
 
(3,610
)
      


    


Assets under management, end of period
    
$
32,790
 
    
$
30,373
 
      


    


TOTAL

                     
Assets under management, beginning of period
    
$
58,700
 
    
$
58,236
 
      


    


Net additions
    
 
1,137
 
    
 
435
 
Market depreciation
    
 
(6,239
)
    
 
(6,536
)
      


    


Total decrease
    
 
(5,102
)
    
 
(6,101
)
      


    


Assets under management, end of period
    
$
53,598
 
    
$
52,135
 
      


    


Equity component of assets under management
    
 
58
%
    
 
68
%
      


    



Note 1:
 
As of September 30, 2002 and 2001, Private Asset Management included $58 and $45 of assets invested in EMM’s Hedge Fund products, respectively.
Note 2:
 
As of September 30, 2002 and 2001, Mutual Fund and Sub-Advised Accounts included $143 and $88 of client assets invested in the Fund Advisory Service wrap mutual fund program with third party funds, respectively.

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Table of Contents
 
Three Months Ended September 30, 2002 Compared with Three Months Ended September 30, 2001
 
We reported net income before taxes of $51.0 million for the third quarter ended September 30, 2002, representing a decrease of $6.8 million or 11.8%, when compared to $57.8 million for the third quarter ended September 30, 2001. Our net revenues after interest expense were $142.9 million for the third quarter of 2002, a decrease of $7.0 million or 4.6% when compared to $149.9 million for the same period in 2001. Our third quarter results for 2002 reflect decreases in net revenues after interest expense in Private Asset Management, Mutual Fund and Institutional and Professional Securities Services and a smaller net loss after interest expense in our Corporate segment. Assets under management increased to $53.6 billion at September 30, 2002, up $1.5 billion or 2.8% when compared to $52.1 billion at September 30, 2001. The decrease in assets under management of $1.0 billion in Private Asset Management is due to market depreciation of $2.4 billion, partially offset by net asset additions of $1.4 billion. The increase in assets under management of $2.4 billion in Mutual Fund and Institutional is due to net asset additions of $4.3 billion, partially offset by market depreciation of $1.9 billion.
 
Private Asset Management.    Our net revenues after interest expense decreased 4.1% to $70.3 million for the third quarter of 2002, from $73.3 million for the third quarter of 2001. Our investment advisory fees decreased 5.5% to $50.2 million for the third quarter of 2002, from $53.1 million for the same period in 2001, due to a decrease in assets under management to $23.6 billion at June 30, 2002 (the billable base for the third quarter of 2002) from $24.3 billion at June 30, 2001 (the billable base for the third quarter of 2001). Because investment advisory fees from Private Asset Management are based on the previous quarter’s asset levels, we expect a decrease in advisory fees for the fourth quarter of 2002 commensurate with the decreased asset levels at September 30, 2002. Our net interest income decreased 27.6% to $0.7 million in the third quarter of 2002, from $1.0 million in the third quarter of 2001, due to a combination of lower average balances related to client financing and narrow interest spreads.
 
Mutual Fund and Institutional.    Our net revenues after interest expense decreased 5.4% to $53.2 million for the third quarter of 2002, from $56.2 million for the third quarter of 2001. Our investment advisory and administrative fees decreased 4.7% to $49.4 million for the third quarter of 2002, from $51.9 million for the same period in 2001, due primarily to decreases in our average daily assets under management for our mutual fund business and lower asset levels in our institutional equity separate account business, partially offset by higher asset levels in our wrap and institutional fixed income separate account businesses. Our commissions decreased 14.7% to $3.7 million in the third quarter of 2002, from $4.4 million in the third quarter of 2001, as a result of a greater proportion of transactions being executed at lower prices, partially offset by four additional trading days that were lost last year due to the tragic events of September 11th.
 
Professional Securities Services.    Our net revenues after interest expense decreased 8.3% to $20.3 million in the third quarter of 2002, from $22.2 million for the third quarter of 2001. Our investment advisory fees decreased 15.1% to $1.7 million in the third quarter of 2002, from $2.0 million for the same period in 2001, due primarily to decreases in fees from our wealth management services. Our commissions increased 13.4% to $9.9 million in the third quarter of 2002, from $8.8 million in the third quarter of 2001, as a result of an increase in commission generating share transactions in our prime brokerage and research sales businesses coupled with four additional trading days that were lost last year due to the tragic events of September 11th. Our net gain resulting from principal transactions decreased 75.9% to $0.1 million in the third quarter of 2002, from $0.5 million in the same period of 2001, primarily due to a decline in our market making activity related to a combination of the drop in the Nasdaq market and narrowing of transaction spreads that have resulted from the decimalization program. Our net interest income decreased 35.0% to $4.7 million in the third quarter of 2002, from $7.3 million in the third quarter of 2001, primarily due to lower average balances related to client financing and narrow interest spreads resulting from the decrease in absolute rates. Our global securities lending activities were also negatively impacted due to the narrowing interest spreads resulting from the decrease in absolute rates. Our clearance fees decreased 4.2% to $3.1 million in the third quarter of 2002, from $3.2 million for the same period in 2001, as a result of decreased transaction volume in our clearing business. Our other income increased 59.1% to $0.8 million in the third quarter of 2002, from $0.5 million in the third quarter of 2001, primarily as a result of an increase in our syndicate activity.

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Table of Contents
 
Corporate.    Our net loss after interest expense decreased to $0.8 million in the third quarter of 2002, from $1.8 million in the third quarter of 2001, due, in part, to an increase in value of our investment in our mutual funds and lower financing costs on our subordinated note resulting from a decrease in interest rates.
 
Operating Expenses.    Our total operating expenses were $91.9 million in the third quarter of 2002, a decrease of $0.1 million or 0.1% when compared to $92.1 million in the third quarter of 2001. Employee compensation and benefits decreased to $55.0 million in the third quarter of 2002, a decrease of $3.9 million or 6.7% when compared to $59.0 million in the third quarter of 2001. This was primarily due to a decrease in incentive compensation, partially offset by an increase in salaries, largely related to an acquisition and the addition of an investment management team. Our information technology costs increased to $6.4 million in the third quarter of 2002, an increase of $0.7 million or 11.9% when compared to $5.7 million in the third quarter of 2001, primarily due to increases associated with market data systems due to firm wide expansion. Our rent and occupancy costs increased to $5.9 million in the third quarter of 2002, an increase of $0.4 million or 6.5% when compared to $5.6 million in the third quarter of 2001, primarily due to additional costs associated with expansion in our principal place of business. Our advertising and sales promotion expenses increased to $1.8 million in the third quarter of 2002, an increase of $0.5 million or 35.1% when compared to $1.3 million in the third quarter of 2001, primarily due to increased expenditures on media advertising, print campaigns and promotional activities. Our distribution and fund administration expenses increased to $5.8 million in the third quarter of 2002, an increase of $0.9 million or 18.4% when compared to $4.9 million in the third quarter of 2001, primarily due to increases in several distribution relationships coupled with an increase in average mutual fund assets in certain of our mutual fund classes. Depreciation and amortization increased to $3.8 million in the third quarter of 2002, an increase of $0.4 million or 11.7% when compared to $3.4 million in the third quarter of 2001, primarily due to amortization of new leasehold improvements and depreciation resulting from technology related expenditures, partially offset by the elimination of goodwill amortization in accordance with SFAS 142. Our other expenses increased to $6.6 million in the third quarter of 2002, an increase of $1.0 million or 17.0% when compared to $5.6 million in the third quarter of 2001, primarily due to start-up costs related to our three closed-end intermediate municipal bond funds.
 
Taxes.    Our taxes decreased to $21.8 million in the third quarter of 2002, down $2.5 million or 10.5% from $24.3 million for the same period in 2001, due to lower net income before taxes, partially offset by a slightly higher effective tax rate. The increase in the effective tax rate is attributable to a lower level of investment income, primarily due to lower interest rates and narrow spreads.
 
Results of Operations for the Nine Months Ended September 30, 2002 and 2001
 
Results of Operations
(in thousands)
 
For The Nine Months Ended
September 30, 2002

  
Private
Asset
Management

  
Mutual
Fund and
Institutional

  
Professional
Securities
Services

  
Corporate

    
Total

Net revenues (loss) after interest expense
  
$
232,141
  
$
169,606
  
$
63,748
  
$
(2,073
)
  
$
463,422
Operating expenses
  
 
120,792
  
 
104,746
  
 
56,549
  
 
15,834
 
  
 
297,921
    

  

  

  


  

Net income (loss) before taxes
  
$
111,349
  
$
64,860
  
$
7,199
  
$
(17,907
)
  
$
165,501
    

  

  

  


  

 
For The Nine Months Ended
September 30, 2001

  
Private
Asset
Management

  
Mutual
Fund and
Institutional

  
Professional
Securities
Services

  
Corporate

    
Total

Net revenues (loss) after interest expense
  
$
222,677
  
$
168,424
  
$
75,332
  
$
(4,707
)
  
$
461,726
Operating expenses
  
 
113,920
  
 
105,754
  
 
53,988
  
 
13,030
 
  
 
286,692
    

  

  

  


  

Net income (loss) before taxes
  
$
108,757
  
$
62,670
  
$
21,344
  
$
(17,737
)
  
$
175,034
    

  

  

  


  

 

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Table of Contents
 
Assets Under Management
(in millions)
 
      
For The Nine Months Ended

 
      
September 30,
2002

      
September 30,
2001

 
PRIVATE ASSET MANAGEMENT

                     
Assets under management, beginning of period
    
$
25,004
 
    
$
22,510
 
      


    


Net additions
    
 
461
 
    
 
1,760
 
Market depreciation
    
 
(4,657
)
    
 
(2,508
)
      


    


Total decrease
    
 
(4,196
)
    
 
(748
)
      


    


Assets under management, end of period(1)
    
$
20,808
 
    
$
21,762
 
      


    


MUTUAL FUND & INSTITUTIONAL

                     
Equity Separate Accounts

                     
Assets under management, beginning of period
    
$
6,290
 
    
$
6,402
 
      


    


Net additions (withdrawals)
    
 
(22
)
    
 
222
 
Market depreciation
    
 
(1,203
)
    
 
(831
)
      


    


Total decrease
    
 
(1,225
)
    
 
(609
)
      


    


Assets under management, end of period
    
$
5,065
 
    
$
5,793
 
      


    


Fixed Income Separate Accounts

                     
Assets under management, beginning of period
    
$
5,229
 
    
$
5,298
 
      


    


Net additions
    
 
338
 
    
 
13
 
Market appreciation
    
 
350
 
    
 
294
 
      


    


Total increase
    
 
688
 
    
 
307
 
      


    


Assets under management, end of period
    
$
5,917
 
    
$
5,605
 
      


    


Consultant Services Group

                     
Assets under management, beginning of period
    
$
3,037
 
    
$
1,796
 
      


    


Net additions
    
 
1,876
 
    
 
750
 
Market appreciation (depreciation)
    
 
98
 
    
 
(4
)
      


    


Total increase
    
 
1,974
 
    
 
746
 
      


    


Assets under management, end of period
    
$
5,011
 
    
$
2,542
 
      


    


Mutual Fund and Sub-Advised Accounts

                     
Assets under management, beginning of period
    
$
19,488
 
    
$
19,480
 
      


    


Net additions
    
 
1,407
 
    
 
98
 
Market depreciation
    
 
(4,098
)
    
 
(3,145
)
      


    


Total decrease
    
 
(2,691
)
    
 
(3,047
)
      


    


Assets under management, end of period(2)
    
$
16,797
 
    
$
16,433
 
      


    


Sub-Total Mutual Fund & Institutional

                     
Assets under management, beginning of period
    
$
34,044
 
    
$
32,976
 
      


    


Net additions
    
 
3,599
 
    
 
1,083
 
Market depreciation
    
 
(4,853
)
    
 
(3,686
)
      


    


Total decrease
    
 
(1,254
)
    
 
(2,603
)
      


    


Assets under management, end of period
    
$
32,790
 
    
$
30,373
 
      


    


TOTAL

                     
Assets under management, beginning of period
    
$
59,048
 
    
$
55,486
 
      


    


Net additions
    
 
4,060
 
    
 
2,843
 
Market depreciation
    
 
(9,510
)
    
 
(6,194
)
      


    


Total decrease
    
 
(5,450
)
    
 
(3,351
)
      


    


Assets under management, end of period
    
$
53,598
 
    
$
52,135
 
      


    


Equity component of assets under management
    
 
58
%
    
 
68
%
      


    



Note 1:
 
As of September 30, 2002 and 2001, Private Asset Management included $58 and $45 of assets invested in EMM’s Hedge Fund products, respectively.
Note 2:
 
As of September 30, 2002 and 2001, Mutual Fund and Sub-Advised Accounts included $143 and $88 of client assets invested in the Fund Advisory Service wrap mutual fund program with third party funds, respectively.

20


Table of Contents
 
Nine Months Ended September 30, 2002 Compared with Nine Months Ended September 30, 2001
 
We reported net income before taxes of $165.5 million for the nine months ended September 30, 2002, representing a decrease of $9.5 million or 5.4%, when compared to $175.0 million for the nine months ended September 30, 2001. Our net revenues after interest expense were $463.4 million for the nine months ended September 30, 2002, an increase of $1.7 million or 0.4% when compared to $461.7 million for the same period in 2001. Our nine month results for 2002 reflect increases in net revenues after interest expense in Private Asset Management and Mutual Fund and Institutional, partially offset by a decrease in Professional Securities Services, and a smaller net loss in our Corporate segment. Net asset additions of $0.5 billion in Private Asset Management were outweighed by market depreciation of $4.7 billion during the first nine months of 2002. Mutual Fund and Institutional recorded net asset additions of $3.6 billion during the first nine months of 2002, which were more than offset by market depreciation of $4.9 billion in the same period.
 
Private Asset Management.    Our net revenues after interest expense increased 4.3% to $232.1 million for the first nine months of 2002, from $222.7 million for the first nine months of 2001. Our investment advisory and administrative fees increased 4.8% to $160.3 million for the first nine months of 2002, from $153.0 million for the same period in 2001, due to increases in quarterly billable assets under management, as well as fees charged to new clients obtained through new money management teams and the successful efforts of the national sales force. Our commissions increased 4.8% to $68.5 million in the first nine months of 2002, from $65.3 million in the first nine months of 2001, resulting from an increase in commission generating share transactions coupled with four additional trading days that were lost last year due to the tragic events of September 11th. Our net interest income decreased 39.1% to $2.3 million in the first nine months of 2002, from $3.9 million in the first nine months of 2001, due to a combination of lower average balances related to client financing and narrow interest spreads.
 
Mutual Fund and Institutional.    Our net revenues after interest expense increased 0.7% to $169.6 million for the first nine months of 2002, from $168.4 million for the first nine months of 2001. Our investment advisory and administrative fees increased 1.1% to $157.4 million for the first nine months of 2002, from $155.6 million for the same period in 2001, due primarily to increases in fees resulting from higher asset levels in both our mutual fund and wrap businesses, partially offset by a decrease in fees due to lower asset levels in our institutional separate account business. Our commissions decreased 5.2% to $12.1 million in the first nine months of 2002, from $12.8 million in the first nine months of 2001, as a result of a greater proportion of transactions being executed at lower prices, partially offset by four additional trading days that were lost last year due to the tragic events of September 11th.
 
Professional Securities Services.    Our net revenues after interest expense decreased 15.4% to $63.7 million in the first nine months of 2002, from $75.3 million for the first nine months of 2001. Our investment advisory fees increased 36.6% to $5.8 million in the first nine months of 2002, from $4.2 million for the same period in 2001, due primarily to an increase in fees from our wealth management services. Our net gain resulting from principal transactions decreased 56.0% to $1.3 million in the first nine months of 2002, from $2.9 million in the same period of 2001, primarily due to a decline in our market making activity related to a combination of the drop in the Nasdaq market and narrowing of transaction spreads that have resulted from the decimalization program. Our net interest income decreased 44.2% to $15.2 million in the first nine months of 2002, from $27.3 million in the first nine months of 2001, primarily due to lower average balances related to client financing and narrow interest spreads resulting from the decrease in absolute rates, which also negatively impacted our global securities lending activities. This was partially offset by an increase in net interest attributable to excess cash positions as well as a reduction in interest expense due to lower bank loan requirements. Our clearance fees decreased 8.8% to $9.1 million in the first nine months of 2002, from $10.0 million for the same period in 2001, as a result of decreased transaction volume. Our other income increased 66.2% to $3.4 million in the first nine months of 2002, from $2.0 million in the first nine months of 2001, primarily as a result of an increase in our syndicate activity.
 
Corporate.    Our net loss after interest expense decreased 56.0% to $2.1 million in the first nine months of 2002, from $4.7 million in the first nine months of 2001, due, in part, to an increase in value of our investment in our mutual funds and lower financing costs on our subordinated note resulting from a decrease in interest rates.

21


Table of Contents
 
Operating Expenses.    Our total operating expenses were $297.9 million for the first nine months of 2002, an increase of $11.2 million or 3.9% when compared to $286.7 million for the first nine months of 2001. Employee compensation and benefits increased to $190.2 million for the first nine months of 2002, a slight increase of $0.4 million or 0.2% when compared to $189.8 million for the first nine months of 2001. This was primarily due to an increase in salaries, largely related to an acquisition and the addition of investment management teams, and an increase in production compensation, almost equally offset by a decrease to incentive compensation. Our information technology costs increased to $18.3 million for the first nine months of 2002, an increase of $1.6 million or 9.8% when compared to $16.6 million for the first nine months of 2001, primarily due to increases associated with communication and market data systems due to firm wide expansion. Our rent and occupancy costs increased to $17.2 million for the first nine months of 2002, an increase of $2.1 million or 13.9% when compared to $15.1 million for the first nine months of 2001, primarily due to additional costs associated with expansion in our New York locations as well as an increase in operating escalations primarily related to our principal place of business. Our brokerage, clearing, and exchange fees increased to $9.5 million for the first nine months of 2002, an increase of $0.7 million or 8.2% when compared to $8.8 million for the first nine months of 2001, primarily due to an increase in exchange fees resulting from a higher proportion of orders with smaller share amounts. Our advertising and sales promotion expenses decreased to $6.2 million for the first nine months of 2002, a decrease of $0.8 million or 11.5% when compared to $7.1 million for the first nine months of 2001, primarily due to reduced expenditures on media advertising and print campaigns, partially offset by an increase in promotional activities. Our distribution and fund administration expenses increased to $17.9 million for the first nine months of 2002, an increase of $3.7 million or 26.2% when compared to $14.2 million for the first nine months of 2001, primarily due to increases in several distribution relationships coupled with an increase in average mutual fund assets in certain of our mutual fund classes. Our professional fees increased to $9.2 million for the first nine months of 2002, an increase of $0.9 million or 11.3% when compared to $8.2 million for the first nine months of 2001, primarily due to an increase in legal fees as well as an increase in professional services, largely related to start-up costs incurred in connection with our three closed-end intermediate municipal bond funds, partially offset by decreases to consulting and employment agency fees. Depreciation and amortization increased to $11.3 million for the first nine months of 2002, an increase of $1.9 million or 20.6% when compared to $9.4 million for the first nine months of 2001, primarily due to amortization of new leasehold improvements and depreciation resulting from technology related expenditures, partially offset by the elimination of goodwill amortization in accordance with SFAS 142.
 
Taxes.    Our taxes decreased to $70.6 million in the first nine months of 2002, down $3.0 million or 4.1% from $73.6 million for the same period in 2001, due to lower net income before taxes, partially offset by a slightly higher effective tax rate. The increase in the effective tax rate is attributable to a lower level of investment income, primarily due to lower interest rates and narrow spreads.
 
Capital Resources and Liquidity
 
Our investment advisory business does not require us to maintain significant capital balances. However, as a result of our broker-dealer activities, our condensed consolidated statements of financial condition include higher levels of assets and liabilities than is typical for an investment adviser of our size. Our broker-dealer activities provide financing, trade execution, clearing, custody and global securities lending services for clients of the Private Asset Management, Mutual Fund and Institutional and Professional Securities Services segments.
 
Our financial condition is highly liquid with the significant majority of our assets readily convertible to cash. Our receivable from and payable to brokers, dealers and clearing organizations represent either current open transactions that settle within a few days or the activity of global securities lending that is collateralized and normally can be closed out within a few days. Our receivable from and payable to clients arise in the normal course of business in connection with cash and margin securities transactions. These client receivables are secured by securities held as collateral.
 
Our cash flows are generally created as a result of the operating activities of our three major business segments, with investment advisory and administrative fees a significant contributor.

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Table of Contents
 
Cash and cash equivalents decreased by $45.0 million to $237.0 million in the first nine months of 2002, with $44.1 million provided by operating activities. Cash of $12.5 million was used in investing activities, primarily for leasehold improvements and purchases of technology related equipment. Cash of $76.6 million was used in financing activities, reflecting payments made for dividends, common stock repurchases and the repurchase of long-term debt.
 
Cash and cash equivalents increased by $63.2 million to $151.3 million in the first nine months of 2001, with $94.2 million provided by operating activities. Cash of $26.2 million was used in investing activities, reflecting payments for the acquisitions of Executive Monetary Management, Inc. and the assets of Fasciano Company, Inc., as well as payments for leasehold improvements and purchases of technology related equipment. Cash of $4.8 million was used in financing activities, reflecting payments made for dividends and common stock repurchases, partially offset by the proceeds from the issuance of long-term debt.
 
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 2004, 2006, 2011 and 2016. We may choose to pay for such repurchases in cash or shares of our common stock. We used the proceeds from this transaction for general corporate purposes, including share repurchases. Prior to this transaction, we received and still maintain 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.
 
On May 2, 2002, we amended the terms of our convertible securities to permit the holders, at their option, to cause us to repurchase the convertible securities on November 4, 2002, at their accreted value of $870.67 per $1,000 principal amount at maturity. Each holder electing not to require us to repurchase their convertible securities as of May 4, 2002, received a one-time payment of $4.34 for every $1,000 aggregate principal amount at maturity of the convertible securities held. As of the close of business May 3, 2002, holders of approximately 5%, or $8.7 million principal amount, of the convertible securities exercised their option. On May 6, 2002, we made a cash payment of $7.6 million for these repurchases. On May 8, 2002, we made a one-time payment of $4.34 for every $1,000 aggregate principal amount at maturity of the convertible securities to each holder of the convertible securities as of the close of business on May 7, 2002.
 
On November 4, 2002, we amended the terms of our convertible securities to add cash interest payments of 3.047% per annum of the principal amount at maturity on our outstanding securities for the next 18 months. This additional interest, which is the equivalent of 3.500% of $870.67, the accreted value on November 4, 2002, will be paid on a semi-annual basis in arrears on May 4, 2003, November 4, 2003 and May 4, 2004 to holders of record at the close of business on April 15, 2003, October 15, 2003 and April 15, 2004, respectively. As of the close of business on November 1, 2002, holders of approximately 0.02%, or $25,000 principal amount at maturity, of the convertible securities made an irrevocable election to exercise their option to cause us to repurchase their convertible securities at their accreted value of $870.67 on November 4, 2002.

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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 September 30, 2002, our regulatory net capital exceeded the minimum requirement by approximately $248 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 the issuance of shares to employees under certain of our employee stock purchase plans. Since the inception of our common stock repurchase program, we have repurchased 6,991,842 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 2001, for $256.4 million. We used cash flows from operations and the proceeds from our debt offering to fund the repurchases of these shares. As of September 30, 2002, an authorization to repurchase shares with a value of $68.6 million remains outstanding.
 
Item 3.— Quantitative and Qualitative Disclosures About Risk
 
Our risk management policies and procedures have been established to identify, monitor and manage risk continuously. The major types of risk that we face include credit risk and market risk.
 
Credit risk is the potential for loss due to a client or counterparty failing to perform its contractual obligations. In order to mitigate risk, our policy is to continuously monitor our exposure to market and counterparty risk through the use of a variety of credit exposure, position and financial reporting and control procedures. In addition, we have a policy of reviewing the credit standing, where applicable, of each broker-dealer, client and other counterparty with which we conduct business. We monitor the market value of collateral, including margin loans to our clients, and request and receive additional collateral when required.
 
A significant portion of our revenues is based upon the market value of assets under management. Accordingly, a decline in the prices of securities generally, or client withdrawals of assets under management, may cause our revenues and income to decline.
 
Interest rate risk is the possibility of a loss in the value of financial instruments from changes in interest rates. Our primary exposure to interest rate risk arises from our interest earning assets (mainly securities purchased under agreements to resell and receivables from brokers, dealers and clearing organizations) and funding sources (bank loans, subordinated liabilities and payables to brokers, dealers and clearing organizations).
 
Equity price risk generally means the risk of loss that may result from the potential change in the value of a financial instrument as a result of absolute and relative price movements, price volatility or changes in liquidity, over which we have no control.
 
Our securities owned at September 30, 2002, including securities segregated for the exclusive benefit of clients and deposited with clearing organizations, are primarily comprised of $244.2 million of U.S. Treasury bills; $61.8 million of municipal revenue bonds; a $21.2 million investment in one of our mutual funds, the Limited Maturity Bond Fund; $3.5 million invested in an exchange traded preferred security; and $0.4 million related to our market making activity. The municipal revenue bonds, which are tax advantageous, trade at par and

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contain variable rates of interest that generally reset monthly, at which time they can be put back to the dealer. The bonds are rated in one of the two highest categories by at least one but generally two of three rating agencies, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. The Limited Maturity Bond Fund, an open-ended fund with daily redemption characteristics, is organized under the Investment Company Act of 1940 and invests in limited maturity bonds, seeking the highest available current income consistent with liquidity and low risk to principal. Our market making activities expose our capital to potential equity price risk. To mitigate this risk, we impose strict investment limits on both the trading desk and individual traders.
 
As part of our prime brokerage business, we write covered over-the-counter put options on listed equity securities with certain of our prime brokerage clients. Market risk is mitigated as the options are generally deep in the money and covered by an equivalent number of securities sold but not yet purchased. At September 30, 2002, the notional value of such options and market value of securities sold was approximately $0.4 million and $0.3 million, respectively, and are included in securities sold but not yet purchased.
 
We enter into various over-the-counter, foreign exchange forward contracts related to our professional investor clearing services business. The credit risk for forward contracts is limited to the unrealized market appreciation or depreciation, as applicable. Market risk is substantially dependent upon the value of the underlying financial instruments and is affected by market forces such as volatility and changes in foreign exchange rates. At September 30, 2002, we had outstanding obligations to purchase and sell foreign exchange forward contracts of approximately $111 million, scheduled to expire by December 31, 2002.
 
Item 4.—Controls and Procedures
 
Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part II    Other Information
 
Item 1. —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 financial position, results of operations or liquidity.
 
Item 6.— Exhibits and Reports on Form 8-K
 
   
(a)    Exhibits
   
The following exhibits are filed as part of this Quarterly Report, or where indicated, were previously filed and are hereby incorporated by reference:
          
Exhibit 99.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
          
Exhibit 99.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
   
(b)    Reports on Form 8-K:
   
1.      Form 8-K filed July 24, 2002, Items 5 and 7.
          
Exhibit 99.1
  
Press release issued by Neuberger Berman Inc. on July 24, 2002, reporting the Corporation’s results of operations for the second quarter ended June 30, 2002.
          
Exhibit 99.2
  
Press release issued by Neuberger Berman Inc. on July 24, 2002, with respect to the declaration of the Corporation’s second quarter cash dividend.
          
Exhibit 99.3
  
Press release issued by Neuberger Berman Inc. on July 24, 2002, reporting that it will adopt the expense recognition provisions of recording the fair market value of stock options it grants, commencing January 2003.
   
2.      Form 8-K filed July 31, 2002, Items 5 and 7.
          
Exhibit 1.1  
  
Underwriting Agreement, dated July 29, 2002, among Neuberger Berman Inc., certain of its stockholders and the representatives named in Schedule I thereto, as the representative of the several underwriters named in Schedule I thereto.
          
Exhibit 99.1
  
Press release issued by Neuberger Berman Inc. on July 30, 2002, with respect to the sale of 3,845,737 shares of its common stock by certain of its stockholders.

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
NEUBERGER BERMAN INC.
By:
 
/S/    MATTHEW S. STADLER        

   
Matthew S. Stadler
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
November 14, 2002

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CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, Jeffrey B. Lane, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Neuberger Berman Inc.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
/s/    JEFFREY B. LANE        

Jeffrey B. Lane
Chief Executive Officer
Date: November 14, 2002

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CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, Matthew S. Stadler, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Neuberger Berman Inc.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
/s/    MATTHEW S. STADLER        

Matthew S. Stadler
Chief Financial Officer  
Date: November 14, 2002
 
 
 

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EXHIBIT INDEX
 
Exhibit No.

  
Exhibit

99.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

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