PROSPECTUS [NEUBERGER BERMAN LOGO]
NEUBERGER BERMAN REALTY INCOME FUND INC.
AUCTION PREFERRED SHARES
330 SHARES, SERIES A
330 SHARES, SERIES B
330 SHARES, SERIES C
330 SHARES, SERIES D
LIQUIDATION PREFERENCE $25,000 PER SHARE
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THE OFFERING. Neuberger Berman Realty Income Fund Inc. ("Fund") is offering
330 newly issued Series A auction preferred shares, 330 newly issued Series B
auction preferred shares, 330 newly issued Series C auction preferred shares,
and 330 newly issued Series D auction preferred shares. The shares are referred
to in this Prospectus as "New Preferred Shares."
THE FUND. The Fund is a recently organized, non-diversified, closed-end
management investment company. Neuberger Berman Management Inc. ("NB
Management") acts as the Fund's investment manager and Neuberger Berman, LLC
acts as the Fund's sub-adviser (collectively, the investment manager and the
sub-adviser are referred to as "Neuberger Berman").
INVESTMENT OBJECTIVES. The Fund's primary investment objective is high
current income. Capital appreciation is a secondary investment objective.
INVESTMENT PORTFOLIO. Under normal market conditions, the Fund invests:
- at least 90% of its total assets in income-producing common equity
securities, preferred securities, securities convertible into equity
securities and non-convertible debt securities issued by real estate
companies (including real estate investment trusts ("REITs")); and
- at least 75% of its total assets in income-producing equity securities of
REITs.
The Fund will not invest more than 10% of its total assets in the securities
of any single issuer. The Fund may invest up to 25% of its total assets in
below-investment grade quality debt securities (such debt securities are
commonly known as "junk bonds") as well as below-investment grade quality
convertible and non-convertible preferred securities. There can be no assurance
that the Fund will achieve its investment objectives. For more information on
the Fund's investment strategies, see "The Fund's Investments" and "Risks."
(CONTINUED ON FOLLOWING PAGE)
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THE FUND'S INVESTMENT POLICY OF INVESTING IN SECURITIES OF REAL ESTATE
COMPANIES, INCLUDING REITS, AND ITS USE OF FINANCIAL LEVERAGE INVOLVE A HIGH
DEGREE OF RISK. YOU COULD LOSE SOME OR ALL OF YOUR INVESTMENT. SEE "RISKS"
BEGINNING ON PAGE 25. THE MINIMUM PURCHASE AMOUNT OF NEW PREFERRED SHARES IS
$25,000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PER SHARE TOTAL
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Price to Public............................. $25,000 $33,000,000
Sales Load.................................. $ 250 $ 330,000
Proceeds to the Fund........................ $24,750 $32,670,000
Total offering expenses paid by the Fund (which do not include the sales
load) are estimated to be $96,000. "Proceeds to the Fund" does not reflect this
amount. The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date New Preferred Shares are
first issued.
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A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO.
LEHMAN BROTHERS
Prospectus dated October 24, 2003
The underwriters are offering New Preferred Shares subject to various
conditions. The underwriters expect to deliver New Preferred Shares in
book-entry form, through the facilities of The Depository Trust Company, on or
about October 28, 2003.
NEUBERGER BERMAN. As of June 30, 2003, Neuberger Berman and its affiliates
had approximately $63.7 billion in assets under management, including more than
$1.4 billion in real estate-related securities, and continue an asset management
history that began in 1939.
Investors in New Preferred Shares will be entitled to receive cash dividends
at an annual rate that may vary for the successive rate periods for New
Preferred Shares. New Preferred Shares have a liquidation preference of $25,000
per share, plus any accumulated, unpaid dividends. New Preferred Shares also
have priority over the Fund's outstanding common stock ("Common Shares") as to
distribution of assets, as described in this Prospectus. Except for the initial
rate period and initial dividend rate, described below, the terms of each series
of New Preferred Shares are the same as the terms of the corresponding currently
outstanding Series A, Series B, Series C and Series D auction preferred shares.
See "Description of New Preferred Shares." The dividend rate for the initial
rate period will be 1.18% for Series A New Preferred Shares, 1.18% for Series B
New Preferred Shares, 1.18% for Series C New Preferred Shares and 1.18% for
Series D New Preferred Shares. The initial rate period is from the date of
issuance through November 4, 2003 for Series A New Preferred Shares,
November 5, 2003 for Series B New Preferred Shares, November 6, 2003 for Series
C New Preferred Shares and November 9, 2003 for Series D New Preferred Shares.
For subsequent rate periods, each series of New Preferred Shares will pay
dividends based on rates set at auction, which will usually be held every 7
days.
After the initial rate period described in this Prospectus, investors may
buy or sell New Preferred Shares through an order placed at an auction with or
through a broker-dealer in accordance with the procedures specified in this
Prospectus.
Each prospective purchaser should review carefully the detailed information
regarding the auction procedures which appears in this Prospectus and the Fund's
Statement of Additional Information and should note that (i) an order placed at
an auction constitutes an irrevocable commitment to hold, purchase or sell New
Preferred Shares based upon the results of the related auction, (ii) settlement
for purchases and sales will be on the business day following the auction and
(iii) ownership of New Preferred Shares will be maintained in book-entry form by
or through The Depository Trust Company (or any successor securities
depository). New Preferred Shares are redeemable in whole or in part, at the
option of the Fund, on the second business day prior to any date dividends are
paid on New Preferred Shares, and will be subject to mandatory redemption in
certain circumstances at a redemption price of $25,000 per share, plus
accumulated unpaid dividends to the date of redemption. See "Description of New
Preferred Shares--Redemption."
New Preferred Shares will be senior to the Common Shares. New Preferred
Shares are not listed on an exchange. The Common Shares are traded on the New
York Stock Exchange under the symbol "NRI." It is a condition of closing this
offering that New Preferred Shares at the time of closing carry ratings of AAA
from Fitch Ratings and of Aaa from Moody's Investors Service, Inc.
You should read this Prospectus, which contains important information about
the Fund, before deciding whether to invest, and retain it for future reference.
A Statement of Additional Information, dated October 24, 2003, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus, which means that it is part of the Prospectus for legal purposes.
You may request a free copy of the Statement of Additional Information, the
table of contents of which is on page 56 of this Prospectus, by calling
877-461-1899 or by writing the Fund, or you may obtain a copy (and other
information regarding the Fund) from the Securities and Exchange Commission's
web site (HTTP://WWW.SEC.GOV).
New Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
ii
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN NEW PREFERRED SHARES. YOU SHOULD CAREFULLY READ THE ENTIRE
PROSPECTUS, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE INTO IT,
PARTICULARLY THE SECTION ENTITLED "RISKS" BEGINNING ON PAGE 25, AS WELL AS THE
STATEMENT OF ADDITIONAL INFORMATION AND THE FUND'S ARTICLES SUPPLEMENTARY.
THE FUND.......................................... Neuberger Berman Realty Income Fund Inc. ("Fund")
is a recently organized, non-diversified,
closed-end management investment company.
Neuberger Berman Management Inc. ("NB Management")
acts as the Fund's investment manager and
Neuberger Berman, LLC acts as the Fund's
sub-adviser (collectively, the investment manager
and the sub-adviser are referred to as "Neuberger
Berman").
The Fund commenced operations on April 29, 2003
upon the closing of an initial public offering of
shares of its common stock, par value $0.0001 per
share ("Common Shares"). The Common Shares are
traded on the New York Stock Exchange ("NYSE")
under the symbol "NRI." As of September 15, 2003,
the Fund had outstanding 1,950 Series A auction
preferred shares, 1,950 Series B auction preferred
shares, 1,950 Series C auction preferred shares,
and 1,950 Series D auction preferred shares
(collectively, "Outstanding Preferred Shares") and
27,372,139 Common Shares outstanding. See "The
Fund."
THE OFFERING OF NEW PREFERRED SHARES.............. The Fund is offering newly issued shares of
preferred stock, par value $0.0001 per share,
which have been designated Series A auction
preferred shares, Series B auction preferred
shares, Series C auction preferred shares and
Series D auction preferred shares, with a purchase
price of $25,000 per share plus dividends, if any,
that have accumulated from the date the Fund first
issues the preferred stock. The shares of
preferred stock offered hereby are called "New
Preferred Shares" in the rest of this Prospectus.
The Outstanding Preferred Shares and New Preferred
Shares are referred to collectively as "Preferred
Shares" in the rest of this Prospectus. Except for
the initial rate period and initial dividend rate,
the terms of each series of New Preferred Shares
are the same as the terms of corresponding series
of Outstanding Preferred Shares. New Preferred
Shares are offered through a group of underwriters
(the "Underwriters") led by A.G. Edwards & Sons,
Inc. See "Underwriting." Issuance of New Preferred
Shares represents leverage financing of the Fund.
New Preferred Shares entitle their holders to
receive cash dividends at an annual rate that may
vary for the successive rate periods for New
Preferred Shares. In general, except as described
under "--Dividends and Rate Periods" below and
"Description of New Preferred Shares--Dividends
and Rate Periods," the rate period for each series
of New Preferred Shares will be 7 days. The Bank
of New York, acting as auction agent ("Auction
1
Agent"), will determine the dividend rate for a
particular rate period by an auction conducted on
the business day next preceding the start of that
rate period. See "The Auction."
New Preferred Shares are not listed on an
exchange. Instead, investors may buy or sell New
Preferred Shares in an auction by submitting
orders to broker-dealers that have entered into an
agreement with the Auction Agent
("Broker-Dealers") or to broker-dealers that have
entered into agreements with Broker-Dealers.
Generally, investors in New Preferred Shares will
not receive certificates representing ownership of
their shares. The Depository Trust Company or any
successor securities depository ("DTC") or its
nominee for the account of the investor's
broker-dealer will maintain record ownership of
New Preferred Shares in book-entry form. An
investor's broker-dealer, in turn, will maintain
records of that investor's beneficial ownership of
New Preferred Shares.
INVESTMENT OBJECTIVES OF
THE FUND.......................................... The Fund's primary investment objective is high
current income. Capital appreciation is a
secondary investment objective. There can be no
assurance that the Fund's investment objectives
will be achieved. See "The Fund's Investments."
INVESTMENT PARAMETERS OF THE FUND'S PORTFOLIO..... Under normal market conditions, the Fund invests
at least 90% of its total assets in
income-producing common equity securities,
preferred securities, securities convertible into
equity securities ("convertible securities") and
non-convertible debt securities issued by "Real
Estate Companies." A Real Estate Company is a
company that generally derives at least 50% of its
revenue from the ownership, construction,
financing, management and/or sale of commercial,
industrial and/or residential real estate (or has
at least 50% of its assets invested in such real
estate). Real estate investment trusts ("REITs")
are considered to be Real Estate Companies.
The Fund invests at least 75% of its total assets,
under normal market conditions, in
income-producing equity securities issued by
REITs. A REIT is a Real Estate Company that pools
investors' funds for investment primarily in
income-producing real estate or in real
estate-related loans (such as mortgages) or other
interests. In general, the shares of a REIT are
freely traded, usually on a major stock exchange.
REITs historically have paid relatively high
dividends (as compared to other types of
companies), and the Fund intends to use these REIT
dividends in an effort to meet its primary
investment objective of high current income. The
Fund anticipates that, in current market
conditions, it will invest primarily in
"equity-oriented" REITs, which invest the majority
of their assets directly in real property and
derive their income primarily from rents.
2
The Fund typically invests approximately 70% to
80% of its total assets in common equity
securities and 20% to 30% of its total assets in
preferred securities issued by REITs and other
Real Estate Companies, although the actual
investment percentages can be expected to vary
over time.
The Fund will not invest more than 10% of its
total assets in the securities of any one issuer.
The Fund has a fundamental policy of concentrating
its investments in the U.S. real estate industry
and not concentrating in any other industry. This
policy cannot be changed without stockholder
approval.
Under normal market conditions, the Fund may
invest up to 20% of its total assets in debt
securities (including convertible and non-
convertible debt securities), such as debt
securities issued by Real Estate Companies and
U.S. government obligations.
The convertible and non-convertible preferred and
debt securities in which the Fund may invest are
sometimes collectively referred to in this
Prospectus as "Senior Income Securities." The Fund
may invest up to 25% of its total assets in Senior
Income Securities that are below-investment grade
quality (i.e., not rated in one of the four
highest grades), including unrated securities
determined by the Fund's investment manager to be
of comparable quality. Below-investment grade
quality debt securities are commonly referred to
as "junk bonds."
The Fund may invest up to 10% of its total assets
in securities of non-U.S. issuers located in
industrialized countries.
The Fund may, for cash management purposes, during
a reasonable period following this offering, or
for defensive purposes, temporarily hold all or a
substantial portion of its assets in cash, in
high-quality, short-term money market instruments,
including shares of money market funds that are
managed by Neuberger Berman, or in high-quality
debt securities. A reasonable period following
this offering would not exceed three months. See
"The Fund's Investments" and "Risks."
The Fund's investments are subject to
diversification, liquidity and related guidelines
that may be established in connection with the
Fund's efforts to receive and maintain ratings of
Aaa and AAA from Moody's Investors Service, Inc.
("Moody's") and Fitch Ratings ("Fitch"),
respectively, for New Preferred Shares. Ratings
issued by Moody's, Fitch or any other rating
agency do not eliminate or mitigate the risk of
investing in New Preferred Shares.
3
NEUBERGER BERMAN'S APPROACH TO SECURITIES......... Neuberger Berman's investment philosophy in
managing the Fund is driven by:
- an experienced portfolio management staff that
believes in traditional on-site real estate
analysis and frequent meetings with company
management;
- a distinct investment approach that combines
fundamental securities analysis and direct real
estate analysis with property sector
diversification;
- a disciplined valuation methodology that seeks
attractively priced real estate securities
relative to their historical growth rates and
alternative property sectors; and
- an investment strategy that seeks to develop a
portfolio with a broad mix of real estate
securities through quality stock selection and
property sector allocation.
Neuberger Berman focuses on quality of management,
relative equity valuation levels within the real
estate securities universe and relative property
sector performance expectations.
RATINGS OF NEW PREFERRED SHARES................... The Fund will issue New Preferred Shares only if
the shares carry a credit quality rating of Aaa
from Moody's and AAA from Fitch at the time of
closing. Of course, there can be no assurance that
New Preferred Shares will carry a rating of Aaa
from Moody's and AAA from Fitch at all times in
the future. These ratings are an assessment of the
capacity and willingness of an issuer to pay
preferred stock obligations. The ratings are not a
recommendation to purchase, hold or sell those
shares inasmuch as the rating does not comment as
to market price or suitability for a particular
investor. The ratings described above also do not
address the likelihood that an owner of New
Preferred Shares will be able to sell such shares
in an auction or otherwise. The ratings are based
on current information furnished to Moody's and
Fitch by the Fund and NB Management and
information obtained from other sources. The
ratings may be changed, suspended or withdrawn in
the rating agencies' discretion as a result of
changes in, or the unavailability of, such
information. See "Description of New Preferred
Shares--Rating Agency Guidelines and Asset
Coverage."
USE OF PROCEEDS................................... The net proceeds of this offering of New Preferred
Shares will be invested in accordance with the
Fund's investment objectives and policies as
stated herein. It is currently anticipated that
the Fund will be able to invest substantially all
of the net proceeds in securities of Real Estate
Companies that meet its investment objectives and
policies within three months after the completion
of this offering. Pending such investment, it is
anticipated that the proceeds will be invested in
high quality, short-term money market instruments,
including shares of money market funds that are
managed by Neuberger Berman.
4
INTEREST RATE TRANSACTIONS........................ In connection with the Fund's use of financial
leverage through the issuance of Preferred Shares
or through the issuance of commercial paper and/or
borrowing by the Fund ("Borrowings") (col-
lectively, "Financial Leverage"), the Fund may
seek to hedge the interest rate risks associated
with the Financial Leverage through interest rate
swaps, caps or other derivative transactions.
These transactions involve investment techniques
and risks different from those associated with
portfolio transactions in securities of Real
Estate Companies. There is no assurance that any
interest rate hedging transactions, if undertaken,
will be successful, and such transactions may
adversely affect the Fund's achievement of its
investment objectives. See "Interest Rate
Transactions."
NEUBERGER BERMAN.................................. NB Management serves as the investment manager of
the Fund. Subject to the general supervision of
the Fund's board of directors (the "Board" or the
"Board of Directors"), NB Management is
responsible for managing, either directly or
through others selected by it, the investment
activities of the Fund and the Fund's business
affairs and other administrative matters.
NB Management has retained Neuberger Berman, LLC
to serve as the Fund's sub-adviser, responsible
for providing investment recommendations and
research. NB Management (and not the Fund) pays a
portion of the fees it receives to Neuberger
Berman, LLC in return for its services. As of
June 30, 2003, Neuberger Berman and its affiliates
managed approximately $63.7 billion in total
assets, including more than $1.4 billion in real
estate-related securities, and continue an asset
management history that began in 1939.
Neuberger Berman Inc., the parent company of NB
Management and Neuberger Berman, LLC, announced
that it has entered into an agreement with Lehman
Brothers Holdings Inc. whereby Lehman Brothers
Holdings Inc. would acquire Neuberger Berman Inc.
The agreement is subject to the approval of the
stockholders of Neuberger Berman Inc. If the
agreement is approved by those stockholders,
regulatory approvals and consents are obtained and
certain other conditions are met, it is
anticipated that the closing will take place in
the fourth quarter of 2003. The acquisition would
constitute an "assignment" as defined in the
Investment Company Act of 1940, as amended (the
"1940 Act"), which would automatically terminate
the investment management and sub-advisory
agreements of the Fund. Accordingly, the Fund's
Board of Directors considered and approved a new
investment management agreement and sub-advisory
agreement for the Fund. The new agreements were
approved by the Fund's stockholders at a special
meeting of stockholders on September 23, 2003.
CUSTODIAN, AUCTION AGENT AND TRANSFER AGENT....... State Street Bank and Trust Company serves as
custodian of the Fund's assets. The Bank of New
York serves as the Fund's Auction Agent, transfer
agent, registrar and dividend paying agent. See
"Custodian, Auction Agent and Transfer Agent."
5
SPECIAL RISK CONSIDERATIONS....................... RISK IS INHERENT IN ALL INVESTING. Therefore,
before investing in New Preferred Shares of the
Fund, you should consider certain risks carefully.
The primary risks of investing in New Preferred
Shares are:
LEVERAGE RISK. The Fund's leveraged capital
structure creates special risks not associated
with unleveraged funds having similar investment
objectives and policies. These include the
possibility of higher volatility of the net asset
value of the Fund and New Preferred Shares' asset
coverage.
The Fund is offering New Preferred Shares, which
typically pay dividends based on short-term
interest rates, and will use the proceeds to buy
portfolio securities. If short-term interest rates
rise, dividend rates on New Preferred Shares may
rise so that the amount of dividends to be paid to
holders of New Preferred Shares ("New Preferred
Stockholders") exceeds the income from the
portfolio securities. Because income from the
Fund's entire investment portfolio (not just the
portion of the portfolio purchased with the
proceeds of this offering) is available to pay
dividends on New Preferred Shares, however,
dividend rates on New Preferred Shares would need
to greatly exceed the Fund's net portfolio income
before the Fund's ability to pay dividends on New
Preferred Shares would be jeopardized. If
long-term interest rates rise, this could
negatively impact the value of the Fund's
investment portfolio, reducing the amount of
assets serving as asset coverage for New Preferred
Shares.
AUCTION RISK. If an auction fails, you may not be
able to sell some or all of your New Preferred
Shares. Neither the Broker-Dealers nor the Fund
are obligated to purchase New Preferred Shares in
an auction or otherwise, nor is the Fund required
to redeem New Preferred Shares in the event of a
failed auction.
SECONDARY MARKET RISK. If you try to sell your New
Preferred Shares between auctions, you may not be
able to sell any or all of your shares, or you may
not be able to sell them for $25,000 per share
plus accumulated and unpaid dividends, especially
when market interest rates are rising. If the Fund
has designated a special rate period, changes in
interest rates are more likely to affect the price
you would receive if you sold your shares in the
secondary market. You may transfer your shares
outside of auctions only to or through a
Broker-Dealer or a broker-dealer that has entered
into an agreement with a Broker-Dealer.
RATING AGENCY AND ASSET COVERAGE RISK. A rating
agency could downgrade New Preferred Shares, which
could affect their liquidity and their value in a
secondary market. The value of the Fund's
investment portfolio may decline, reducing the
asset coverage for New Preferred Shares. The Fund
may be forced to redeem your New Preferred Shares
to meet regulatory or rating agency requirements
or may voluntarily redeem your shares.
6
In addition to the risks described above, certain
general risks of investing in the Fund may under
certain circumstances limit the Fund's ability to
pay dividends and meet its asset coverage
requirements on New Preferred Shares. These risks
include:
LIMITED OPERATING HISTORY. The Fund is a recently
organized, non-diversified, closed-end management
investment company that has been operational only
since April 29, 2003.
INVESTMENT RISK. An investment in the Fund is
subject to investment risk, including the possible
loss of the entire amount that you invest.
STOCK MARKET RISK. Your investment in Fund shares
will represent an indirect investment in REIT
shares and other real estate securities owned by
the Fund, substantially all of which are traded on
a national securities exchange or in the
over-the-counter markets. The value of the Fund's
portfolio securities will fluctuate, sometimes
rapidly and unpredictably. The Fund's use of
Financial Leverage magnifies stock market risk.
RISKS OF SECURITIES LINKED TO THE REAL ESTATE
MARKET. The Fund invests, under normal market
conditions, at least 90% of its total assets in
income-producing securities of Real Estate
Companies, including REITs. Although the values of
the securities of Real Estate Companies and REITs
reflect the perceived operating values of these
companies and do not always move in tandem with
the prices of real estate assets, because the Fund
concentrates its assets in the real estate
industry, your investment in the Fund may be
closely linked to the performance of the real
estate markets. Property values may fall due to
increasing vacancies or declining rents resulting
from economic, legal, cultural or technological
developments.
Values of the securities of Real Estate Companies
may fall, among other reasons, because of the
failure of borrowers from such Real Estate
Companies to pay their loans or because of poor
management of the real estate properties owned by
such Real Estate Companies. Many Real Estate
Companies, including REITs, utilize leverage (and
some may be highly leveraged), which increases
investment risk and could adversely affect a Real
Estate Company's operations and market value in
periods of rising interest rates. Restrictions
contained in the agreements under which many Real
Estate Companies borrow money from banks and other
lenders may affect a Real Estate Company's ability
to operate effectively. Real estate risks may also
arise where Real Estate Companies fail to carry
adequate insurance, or where a Real Estate Company
becomes liable for removal or other costs related
to environmental contamination. Real Estate
Companies may operate within particular sectors of
the real estate industry, such as apartments,
office and industrial, regional malls and
community centers, hotels and lodging and the
health care sector, that are subject to specific
sector-related risks.
7
Real Estate Companies tend to be small to
medium-sized companies. Real Estate Company
shares, like other smaller company shares, can be
more volatile than, and perform differently from,
larger company shares. There may be less trading
in a smaller company's shares, which means that
buy and sell transactions in those shares could
have a larger impact on the share's price than is
the case with larger company shares.
REITs are subject to highly technical and complex
provisions of the Internal Revenue Code of 1986,
as amended (the "Code"). There is a possibility
that a REIT may fail to qualify for conduit income
tax treatment under the Code or may fail to
maintain exemption from registration under the
Investment Company Act of 1940, as amended (the
"1940 Act"), either of which could adversely
affect its operations. See "Risks--Risks of
Securities Linked to the Real Estate Market."
Terrorist incidents can adversely affect the value
of a property or an entire area substantially and
unexpectedly. These incidents can also disrupt or
depress the economy, business and tourism, which
may adversely affect the value of properties in
particular industries, e.g., hotels and retail
establishments. Higher insurance costs may
adversely affect Real Estate Companies, and
certain Real Estate Companies may be unable to
obtain certain kinds of insurance.
INTEREST RATE RISK. Interest rate risk is the risk
that fixed-income investments such as preferred
stocks and debt securities, and to a lesser extent
dividend-paying common stocks such as REIT com-
mon shares, will decline in value because of
changes in interest rates. When market interest
rates rise, the market value of such securities
generally will fall. Generally, the longer the
maturity of a fixed-income security, the more its
value falls in response to a given rise in
interest rates. The Fund's investment in such
securities means that the net assets of the Fund
and the asset coverage for Preferred Shares will
tend to decline if market interest rates rise. See
"Risks--Interest Rate Risk."
INTEREST RATE TRANSACTIONS RISK. If the Fund
enters into interest rate hedging transactions, a
decline in interest rates may result in a decline
in the net amount receivable (or increase the net
amount payable) by the Fund under the hedging
transaction, which could result in a decline in
the Fund's net assets. See "Interest Rate
Transactions" and "Risks--Interest Rate Transac-
tions Risk."
CREDIT RISK. Credit risk is the risk that an
issuer of a debt security, or the counterparty to
a derivative contract or other obligation, becomes
unwilling or unable to meet its obligation to make
interest and principal payments. In general,
lower-rated debt securities carry a greater degree
of credit risk. If nationally recognized sta-
tistical ratings organizations (each a "rating
agency") lower their ratings of debt securities in
the Fund's portfolio, the value of
8
those obligations could decline, which could
reduce the asset coverage on Preferred Shares and
negatively impact the rating agencies' ratings of
the Preferred Shares. Even if an issuer does not
actually default, adverse changes in the issuer's
financial condition may negatively affect its
credit rating or presumed creditworthiness. These
developments would adversely affect the market
value of the issuer's obligations and,
correspondingly, the net asset value of the Fund.
See "Risks--Credit Risk."
RISKS OF BELOW-INVESTMENT GRADE QUALITY
SECURITIES. The Fund may invest up to 25% of its
total assets in Senior Income Securities that are
below-investment grade quality. Securities that
are below-investment grade quality are regarded as
having predominantly speculative characteristics
with respect to capacity to pay interest and repay
principal. See "Risks--Risks of Investing in
Below-Investment Grade Quality Securities."
FOREIGN SECURITIES RISK. The Fund may invest up to
10% of its total assets in securities of issuers
located outside of the United States, which may be
denominated in currencies other than the U.S. dol-
lar. The prices of foreign securities may be
affected by factors not present with securities
traded in U.S. markets, including currency
exchange rates, foreign political and economic
conditions, less stringent regulation and higher
volatility. As a result, many foreign securities
may be less liquid and more volatile than U.S.
securities. To help control this risk, the Fund
will invest in foreign issuers located only in
industrialized countries. See "Risks--Foreign
Security Risk."
PORTFOLIO TURNOVER. The Fund may engage in
portfolio trading when considered appropriate by
NB Management. Although in normal market
conditions the Fund does not expect that its
annual portfolio turnover rate will exceed 50%,
the Fund has not established any limit on the rate
of portfolio turnover. A higher portfolio turnover
rate results in correspondingly greater brokerage
commissions and other transaction expenses that
are borne by the Fund, which would reduce the
amount of income available for distribution on
Preferred Shares. See "The Fund's Investments--
Investment Strategies and Parameters of the Fund's
Portfolio--Portfolio Turnover."
TERRORISM; EVENTS IN IRAQ. Some of the U.S.
securities markets were closed for a four-day
period as a result of the terrorist attacks on the
World Trade Center and Pentagon on September 11,
2001. These terrorist attacks, the war in Iraq and
its aftermath, the continuing occupation of Iraq
and other geopolitical events have led to, and may
in the future lead to, increased short-term market
volatility and may have long-term effects on U.S.
and world economies and markets. Those events
could also have an acute effect on individual
issuers or related groups of issuers. A similar
disruption of financial markets or other terrorist
attacks could adversely impact interest rates,
auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to Preferred
Shares and
9
adversely affect Fund service providers and the
Fund's operations. See "Risks--Terrorism; Events
in Iraq."
NON-DIVERSIFICATION RISK. The Fund is classified
as "non-diversified" under the 1940 Act. As a
result, it can invest a greater portion of its
assets in the securities of a single issuer than a
"diversified" fund. However, the Fund has adopted
a policy that it will not invest more than 10% of
its total assets in the securities of any one
issuer. Nonetheless, the Fund will be more
susceptible than a more widely diversified fund to
any single corporate, economic, political or
regulatory occurrence. See "The Fund's Invest-
ments" and "Risks--Non-Diversified Status."
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of
Incorporation (which, as hereafter amended,
restated or supplemented from time to time, are,
together with the Articles Supplementary, referred
to as the "Articles") and Bylaws include
provisions that could limit the ability of other
entities or persons to acquire control of the Fund
or convert the Fund to an open-end fund. If the
Fund were converted to open-end status, the Fund
would have to redeem Preferred Shares. See
"Anti-Takeover and Other Provisions in the
Articles of Incorporation" and
"Risks--Anti-Takeover Provisions."
For further discussion of the risks associated
with investing in New Preferred Shares and the
Fund, see "Risks."
DIVIDENDS AND RATE PERIODS........................ The table below shows the dividend rate, the
dividend payment date and the number of days for
the initial rate period for each series of New
Preferred Shares offered in this Prospectus. For
subsequent rate periods, each series of New
Preferred Shares will pay dividends based on a
rate set at auctions normally held every 7 days.
In most instances, dividends are payable on the
first business day following the end of the rate
period. The rate set at an auction will not exceed
a maximum rate (which is determined in accordance
with procedures described in the Articles
Supplementary).
Dividends on New Preferred Shares will be
cumulative from the date of shares are first
issued and will be paid only out of legally
available funds.
DIVIDEND
PAYMENT NUMBER
INITIAL DATE FOR OF DAYS
DIVIDEND INITIAL RATE OF INITIAL
RATE PERIOD RATE PERIOD
-------- ----------------- -----------
Series A 1.18% November 5, 2003 8
Series B 1.18% November 6, 2003 9
Series C 1.18% November 7, 2003 10
Series D 1.18% November 10, 2003 13
The Fund may, subject to certain conditions,
designate a special rate period of more than 7
days. These conditions include the Fund providing
certain notices to the Auction Agent, an auction
10
being held at which sufficient clearing bids exist
and the Fund mailing any notices of redemption and
depositing funds with the Auction Agent for any
such redemption. In addition, full cumulative
dividends, any amounts due with respect to
mandatory redemptions and any additional dividends
payable prior to such date must be paid in full.
The dividend payment dates for special
rate periods will be set out in the notice
designating a special rate period. The Fund may
designate a special rate period if market
conditions indicate that a longer rate period
would provide greater stability or attractive
dividend rates.
See "Description of New Preferred
Shares--Dividends and Rate Periods" and "The
Auction."
TRADING MARKETS................................... New Preferred Shares are not listed on an
exchange. Instead, you may place orders to buy or
sell New Preferred Shares at an auction that
normally is held periodically at the end of the
preceding rate period by submitting the orders to
a Broker-Dealer, or to a broker-dealer that has
entered into a separate agreement with a
Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in New
Preferred Shares outside of auctions, but may
discontinue this activity at any time. There is no
assurance that a secondary market will exist or,
if one does exist, that it will provide New
Preferred Stockholders with liquidity. You may
transfer New Preferred Shares outside of auctions
only to or through a Broker-Dealer, or a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer.
The table below shows the first auction date for
each series of New Preferred Shares and the day on
which each subsequent auction will normally be
held for that series. The first auction date for
each series of New Preferred Shares will be the
business day before the dividend payment date for
the initial rate period for that series. The start
date for subsequent rate periods normally will be
the business day following the auction date unless
the then-current rate period is a special rate
period, or the day that normally would be the
auction date or the first day of the subsequent
rate period is not a business day.
FIRST AUCTION DATE SUBSEQUENT AUCTION
------------------ ------------------
Series A................................ November 4, 2003 Tuesday
Series B................................ November 5, 2003 Wednesday
Series C................................ November 6, 2003 Thursday
Series D................................ November 7, 2003 Friday
ASSET MAINTENANCE................................. Under the Fund's Articles Supplementary, which
establish and fix the rights and preferences of
New Preferred Shares, the Fund must maintain:
- asset coverage of New Preferred Shares as
required by Moody's and Fitch or by any other
rating agency rating New Preferred Shares, and
11
- asset coverage of at least 200% with respect to
senior securities that are stock, including New
Preferred Shares.
In the event that the Fund does not maintain these
coverage tests or cure any deficiencies in the
time allowed, some or all of New Preferred Shares
will be subject to mandatory redemption. See
"Description of New Preferred
Shares--Redemption--Mandatory Redemption."
Based on the composition of the Fund's portfolio
as of September 15, 2003, the asset coverage of
Preferred Shares as measured pursuant to the 1940
Act would be approximately 291%, if the Fund were
to issue all of the New Preferred Shares offered
in this Prospectus, representing approximately 34%
of the Fund's average daily total assets minus
liabilities other than any aggregate indebt-
edness that is entered into for purposes of
leverage ("Managed Assets").
VOTING RIGHTS..................................... The 1940 Act requires that the holders of New
Preferred Shares and any other preferred stock of
the Fund, voting as a separate class, have the
right to elect at least two Directors of the Fund
at all times and to elect a majority of the
Directors at any time when two years' dividends on
New Preferred Shares or any other preferred stock
are unpaid.
As required under the Fund's Articles and the 1940
Act, certain other matters must be approved by a
vote of all stockholders of all classes voting
together and by a vote of the holders of New
Preferred Shares and any other preferred stock of
the Fund tallied separately. Each Common Share,
each New Preferred Share, each Outstanding
Preferred Share, and each share of any other
series of preferred stock of the Fund is entitled
to one vote per share. See "Description of New
Preferred Shares--Voting Rights" and
"Anti-Takeover and Other Provisions in the
Articles of Incorporation."
REDEMPTION........................................ Although the Fund will not ordinarily redeem New
Preferred Shares, it may be required to redeem New
Preferred Shares if, for example, the Fund does
not meet an asset coverage ratio required by law
or required by the Articles Supplementary or in
order to correct a failure to meet a rating agency
guideline in a timely manner. See "Description of
New Preferred Shares--Redemption--Mandatory
Redemption." The Fund also may redeem New
Preferred Shares voluntarily in certain
circumstances. See "Description of New Preferred
Shares--Redemption--Optional Redemption.
LIQUIDATION....................................... The liquidation preference of New Preferred Shares
is $25,000 per share, plus an amount equal to
accumulated but unpaid dividends (whether or not
earned or declared by the Fund, but excluding
interest thereon). See "Description of New
Preferred Shares--Liquidation.
FEDERAL INCOME TAXATION........................... The Fund believes that the New Preferred Shares
will constitute stock of the Fund and that
distributions by the Fund with respect
12
to New Preferred Shares (other than distributions
in redemption of New Preferred Shares that are
treated as exchanges of stock under
Section 302(b) of the Code) thus will constitute
dividends to the extent of the Fund's current or
accumulated earnings and profits, as calculated
for federal income tax purposes. Such dividends
generally will not qualify for the recently
enacted 15% maximum federal income tax rate on
certain dividends and thus will be taxable as
ordinary income (and subject to rates that
generally will be higher) to holders.
Distributions of net capital gain (the excess of
net long-term capital gain over net short-term
capital loss) that the Fund designates as capital
gain dividends will be treated as long-term
capital gains in the hands of holders receiving
such distributions. The Internal Revenue Service
("IRS") requires that a regulated investment
company that has two or more classes of stock
(e.g., common stock and preferred stock) allocate
to each such class proportionate amounts of each
type of its income (such as ordinary income and
capital gains) based on the percentage of total
dividends distributed to each class for the
taxable year. Accordingly, the Fund intends each
taxable year to allocate capital gain dividends
among its Common Shares and Preferred Shares in
proportion to the total dividends paid to each
class with respect to such year. See "Tax
Matters."
13
FINANCIAL HIGHLIGHTS
The following table includes selected data for a Common Share outstanding
throughout the period and other performance information derived from the Fund's
Unaudited Financial Information included in the Statement of Additional
Information dated October 24, 2003. It should be read in conjunction with the
Unaudited Financial Information and notes thereto.
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on April 29, 2003 through September 15, 2003. Because the Fund was
recently organized and commenced investment operations on April 29, 2003, the
table covers approximately four and a half months of operations, during which a
substantial portion of the Fund's portfolio was held in temporary investments
pending investment in real estate securities that meet the Fund's investment
objectives and policies. Accordingly, the information presented may not provide
a meaningful picture of the Fund's operating performance.
FOR THE PERIOD
APRIL 29, 2003*
THROUGH
SEPTEMBER 15, 2003
(UNAUDITED)
------------------
PER SHARE OPERATING PERFORMANCE:
Common Share Net Asset Value, Beginning of
Period........................................ $ 14.33**
-------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO
COMMON STOCKHOLDERS:
Net Investment Income........................... 0.22
Net Gains or Losses on Securities (both realized
and unrealized)............................... 1.93
Common Share Equivalent of Distributions to
Preferred Stockholders From Net Investment
Income........................................ (0.02)
-------
Total from Investment Operations Applicable to
Common Stockholders........................... 2.13
-------
Less: Distributions to Common Stockholders:
From Net Investment Income.................... (0.45)
-------
Less: Capital Charges:
Issuance of Common Shares..................... (0.03)
Issuance of Preferred Shares.................. (0.08)
-------
Total Capital Charges........................... (0.11)
-------
Common Share Net Asset Value, End of Period..... $ 15.90
-------
Common Share Market Value, End of Period........ $ 15.10
-------
Total Investment Return on Common Share Net
Asset Value................................... + 14.30%***
Total Investment Return on Common Share Market
Value......................................... + 3.66%***
RATIOS/SUPPLEMENTAL DATA:
Net Assets Applicable to Common Stockholders,
End of Period (in millions)................... $ 435.1
Preferred Shares, at Redemption Value ($25,000
per share liquidation preference) (in
millions)..................................... $ 195.0
Ratio of Expenses to Average Net Assets
Applicable to Common Stockholders............. 1.57%****
Ratio of Expenses to Average Net Assets
Applicable to Common Stockholders (before
expense offset arrangements and net of expense
waiver)....................................... 1.25%****
Ratio of Expenses to Average Net Assets
Applicable to Common Stockholders (net of
expense offset arrangements and expense
waiver)....................................... 1.25%****
Ratio of Net Investment Income Excluding
Preferred Share Dividends to Average Net
Assets Applicable to Common Stockholders (net
of expense reduction)......................... 3.86%****
Ratio of Preferred Share Dividends to Average
Net Assets Applicable to Common
Stockholders.................................. 0.32%*****
Ratio of Net Investment Income Including
Preferred Share Dividends to Average Net
Assets Applicable to Common Stockholders (net
of expense reduction)......................... 3.54%*****
Portfolio Turnover Rate......................... 0%
Asset Coverage per Preferred Share, End of
Period........................................ $80,786
------------------------
* Commencement of operations.
** Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the holders of Common Shares ("Common
Stockholders") from the $15.00 offering price.
*** Total investment return on net asset value is calculated assuming a
purchase at the offering price of $15.00 less the sales load of $0.675 per
share paid by the Common Stockholders on the first day and a sale at the
net asset value on the last day of the period reported. Total investment
return on market value is calculated assuming a purchase at the offering
price of $15.00 per share paid by the Common Stockholders on the first day
and a sale at the current market price on the last day of the period
reported. Total investment return on net asset value and total investment
return on market value are not computed on an annualized basis.
**** Annualized. These ratios do not reflect the effect of dividend payments to
holders of Preferred Shares ("Preferred Stockholders").
***** Annualized.
See accompanying notes to Unaudited Financial Information
14
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
corporation on March 4, 2003 pursuant to Articles of Incorporation governed by
the laws of the State of Maryland. The Fund issued an aggregate of 24,000,000
Common Shares, par value $0.0001 per share, pursuant to the initial public
offering thereof and commenced operations on April 29, 2003. On May 8, 2003 and
June 3, 2003, respectively, the Fund issued 2,800,000 and 540,000 additional
Common Shares in connection with partial exercises by the Underwriters of their
over-allotment option. The Fund's Common Shares are traded on the NYSE under the
symbol "NRI." On June 23, 2003, the Fund issued 1,950 Series A auction preferred
shares, 1,950 Series B auction preferred shares, 1,950 Series C auction
preferred shares, and 1,950 Series D auction preferred shares. The Fund's
principal office is located at 605 Third Avenue, Second Floor, New York, New
York 10158-0180, and its telephone number is 877-461-1899.
The following provides information about the Fund's outstanding shares as of
September 15, 2003:
AMOUNT HELD BY
AMOUNT THE FUND FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------- ------------ -------------- -------------
Common............................. 999,986,000* 0 27,372,139
Preferred
Series A......................... 3,500 0 1,950
Series B......................... 3,500 0 1,950
Series C......................... 3,500 0 1,950
Series D......................... 3,500 0 1,950
-------------------
* A total of 1,000,000,000 shares of capital stock of the Fund are authorized
under the Articles, all originally designated common stock pursuant to the
Articles. The Board of Directors may classify or reclassify any unissued
shares of capital stock from time to time without a stockholder vote into
one or more classes of preferred or other stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption of such shares of stock. The Board has reclassified 3,500 shares
of common stock as Series A auction preferred shares, reclassified 3,500
shares of common stock as Series B auction preferred shares, reclassified
3,500 shares of common stock as Series C auction preferred shares, and
reclassified 3,500 shares of common stock as Series D auction preferred
shares, and has authorized the issuance of those auction preferred shares.
USE OF PROCEEDS
The net proceeds of the offering of New Preferred Shares will be
approximately $32,574,000 after payment of the sales load and estimated offering
costs. The Fund will invest the net proceeds of this offering in accordance with
its investment objectives and policies as stated below. It is currently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in accordance with its investment objectives and policies within three
months after the completion of this offering. Pending such investment, it is
anticipated that the proceeds will be invested in U.S. government securities or
high-quality, short-term money market instruments, including shares of money
market funds that are managed by Neuberger Berman.
15
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of September 15, 2003, and as adjusted to give effect to the issuance of New
Preferred Shares offered in this Prospectus.
AS OF SEPTEMBER 15, 2003
(UNAUDITED)
--------------------------
ACTUAL AS ADJUSTED
------ -----------
Preferred Shares, par value $0.0001 per
share, $25,000 per share liquidation
preference (7,800 Preferred Shares
issued; 9,120 Preferred Shares, as
adjusted)............................. $195,000,000 $228,000,000
Stockholders' equity:
Common Shares, par value, $0.0001 per
share (27,372,139 shares issued and
outstanding)........................ 2,737 2,737
Capital in excess of par value
attributable to Common Shares....... 389,004,727 388,578,727
Undistributed investment
income (loss)--net.................. (6,719,422) (6,719,422)
Accumulated realized gain (loss)--net... 986,741 986,741
Unrealized appreciation on
investments--net...................... 51,830,139 51,830,139
Net Assets attributable to Common
Shares................................ $435,104,922 $434,678,922
Managed Assets.......................... $630,104,922 $662,678,922
As used in this Prospectus, unless otherwise noted, the Fund's "net assets"
include assets of the Fund attributable to any outstanding Common Shares and
Preferred Shares, with no deduction for the liquidation preference of Preferred
Shares. For financial reporting purposes, however, the Fund is required to
deduct the liquidation preference of its outstanding Preferred Shares from net
assets so long as Preferred Shares have redemption features that are not solely
within the control of the Fund. In connection with the rating of Preferred
Shares, the Fund has established in its Articles various portfolio covenants to
meet third-party rating agency guidelines. These covenants include, among other
things, investment diversification requirements and requirements that
investments included in the Fund's portfolio meet specific industry and credit
quality criteria. Market factors outside the Fund's control may affect its
ability to meet the criteria of third-party rating agencies set forth in the
Fund's portfolio covenants. If the Fund violates these covenants, it may be
required to cure the violation by redeeming all or a portion of the Preferred
Shares. For all regulatory purposes, Preferred Shares will be treated as stock
(rather than indebtedness).
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES
The Fund's primary investment objective is high current income. Capital
appreciation is a secondary investment objective. There can be no assurance that
the Fund will achieve its investment objectives.
INVESTMENT STRATEGIES AND PARAMETERS OF THE FUND'S PORTFOLIO
CONCENTRATION. The Fund has a fundamental policy of concentrating its
investments in the U.S. real estate industry and not concentrating in any other
industry. This policy cannot be changed without stockholder approval. See
"--Fundamental Investment Policies."
REAL ESTATE COMPANIES. Under normal market conditions, the Fund invests at
least 90% of its total assets in income-producing common equity securities,
preferred securities, convertible securities and non-convertible debt securities
issued by Real Estate Companies. A Real Estate Company is a company
16
that generally derives at least 50% of its revenue from the ownership,
construction, financing, management and/or sale of commercial, industrial and/or
residential real estate (or has at least 50% of its assets invested in such real
estate). The Fund may also invest in rights or warrants to purchase income-
producing common and preferred securities of Real Estate Companies. REITs are
considered to be Real Estate Companies. The Fund will not invest more than 10%
of its total assets in the securities of any one issuer.
In addition, the Fund normally invests at least 80% of its net assets plus
the amount of any borrowing for investment purposes in securities of Real Estate
Companies. If because of market action the Fund falls out of compliance with
this policy, it will make future investments in such a manner as to bring the
Fund back into compliance with the policy. Although this is a non-fundamental
policy, the Board will not change this policy without at least 60 days' notice
to the Fund's stockholders.
REITS. The Fund invests at least 75% of its total assets, under normal
market conditions, in income-producing equity securities issued by REITs. A REIT
is a Real Estate Company that pools investors' funds for investment primarily in
income-producing real estate or in real estate-related loans (such as mortgages)
or other interests. REITs historically have paid relatively high dividends (as
compared to other types of companies), and the Fund intends to use these REIT
dividends in an effort to meet its primary investment objective of high current
income.
REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs generally invest a majority of their assets in
income-producing real estate properties in order to generate cash flow from
rental income and a gradual asset appreciation. The income-producing real estate
properties in which Equity REITs invest typically include properties such as
office, retail, industrial, hotel and apartment buildings and healthcare
facilities. Equity REITs can realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive their income primarily from interest payments
on the mortgages. Hybrid REITs combine the characteristics of both Equity REITs
and Mortgage REITs.
The Fund anticipates that, in current market conditions, its investment in
REITs will consist primarily of Equity REITs. The Fund may invest up to 10% of
its total assets in any combination of Mortgage REITs and Hybrid REITs.
Substantially all of the equity securities of Real Estate Companies,
including REITs, in which the Fund intends to invest are traded on a national
securities exchange or in the over-the-counter markets. The Fund may invest in
both publicly and privately traded REITs.
COMMON EQUITY SECURITIES, PREFERRED SECURITIES AND CONVERTIBLE
SECURITIES. Under normal market conditions, the Fund invests at least 90% of its
total assets in income-producing common equity securities, preferred securities,
convertible securities and non-convertible debt securities issued by Real Estate
Companies, including REITs.
- COMMON EQUITY SECURITIES. Common equity securities are shares of a
corporation or other entity that entitle the holder to a pro rata share of the
profits of the corporation, if any, without preference over any other class of
securities, including such entity's debt securities, preferred stock and other
senior equity securities. Common equity securities usually carries with it the
right to vote and frequently an exclusive right to do so.
- PREFERRED SECURITIES. Preferred securities generally have a preference as
to dividends and liquidation over an issuer's common equity securities but ranks
junior to debt securities in an issuer's capital structure. Unlike interest
payments on debt securities, preferred security dividends are payable only if
declared by the issuer's board of directors. Preferred securities also may be
subject to optional or
17
mandatory redemption provisions. Preferred securities in which the Fund invests
generally have no voting rights or their voting rights are limited to certain
extraordinary transactions or events.
- CONVERTIBLE SECURITIES. A convertible security is a bond, debenture,
note, preferred stock, warrant or other security that may be converted into or
exchanged for a prescribed amount of common stock or other security of the same
or a different issuer or into cash within a particular period of time at a
specified price or formula. A convertible security generally entitles the holder
to receive interest paid or accrued on debt securities or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Before conversion, convertible securities generally have
characteristics similar to both debt and equity securities. The value of
convertible securities tends to decline as interest rates rise and, because of
the conversion feature, tends to vary with fluctuations in the market value of
the underlying securities. Convertible securities ordinarily provide a stream of
income with generally higher yields than those of common equity securities of
the same or similar issuers. Convertible securities generally rank senior to
common equity securities in a corporation's capital structure but are usually
subordinated to comparable non-convertible securities. Convertible securities
generally do not participate directly in any dividend increases or decreases of
the underlying securities, although the market prices of convertible securities
may be affected by any dividend changes or other changes in the underlying
securities.
The Fund typically invests approximately:
- 70% to 80% of its total assets in common equity securities issued by Real
Estate Companies; and
- 20% to 30% of its total assets in preferred securities issued by Real
Estate Companies.
The actual investment percentages with respect to common equity securities
and preferred securities are subject to market conditions at the time of such
investment, the current market prices of such securities and Neuberger Berman's
views on the marketplace for such securities. The Fund's portfolio composition
can be expected to vary over time based on NB Management's assessment of market
conditions.
DEBT SECURITIES. In normal market conditions, the Fund may invest up to 20%
of its total assets in debt securities (including convertible and
non-convertible debt securities), such as debt securities issued by Real Estate
Companies and U.S. government obligations. As noted above, the Fund may exceed
this limit during its initial three months of operation.
- DEBT SECURITIES OF REAL ESTATE COMPANIES. Debt securities in which the
Fund may invest include all types of debt obligations having varying terms with
respect to security or credit support, subordination, purchase price, interest
payments and maturity. The debt securities in which the Fund invests may bear
interest at fixed rates or variable rates of interest, and may involve equity
features such as contingent interest or participation based on revenues, rents
or profits. The prices of debt securities generally vary inversely with interest
rates.
- U.S. GOVERNMENT OBLIGATIONS. Obligations issued or guaranteed by the U.S.
government and its agencies and instrumentalities include bills, notes and bonds
issued by the U.S. Treasury, as well as certain "stripped" or "zero coupon" U.S.
Treasury obligations representing future interest or principal payments on U.S.
Treasury notes or bonds. Stripped securities are sold at a discount to their
"face value" and may exhibit greater price volatility than interest-bearing
securities since investors receive no payment until maturity. Obligations of
certain agencies and instrumentalities of the U.S. government are supported by
the full faith and credit of the U.S. Treasury; others are supported by the
right of the issuer to borrow from the U.S. Treasury; others are supported by
the discretionary authority of the U.S. government to purchase the agency's
obligations; still others, though issued by an instrumentality
18
chartered by the U.S. government, are supported only by the credit of the
instrumentality. The U.S. government may choose not to provide financial support
to U.S. government-sponsored agencies or instrumentalities if it is not legally
obligated to do so. Even where a security is backed by the full faith and credit
of the U.S. Treasury, it does not guarantee the market price of that security,
only the payment of principal and/or interest.
If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. Debt securities with longer
maturities generally offer higher yields than debt securities with shorter
maturities assuming all other factors, including credit quality, are equal. For
a given change in interest rates, the market prices of longer-maturity debt
securities generally fluctuate more than the market prices of shorter-maturity
debt securities. This potential for a decline in prices of debt securities due
to rising interest rates is referred to herein as "interest rate risk."
BELOW-INVESTMENT GRADE QUALITY SECURITIES. The preferred securities and the
convertible and non-convertible preferred and debt securities in which the Fund
may invest are sometimes collectively referred to in this Prospectus as "Senior
Income Securities." The Fund may invest in Senior Income Securities that are
below-investment grade quality, including unrated securities determined by the
Fund's investment manager to be of comparable quality. In the event that one
rating agency assigns an investment grade rating and another rating agency
assigns a below-investment grade rating to the same Senior Income Security, NB
Management will determine which rating it considers more appropriate and
categorize the Senior Income Security accordingly. Below-investment grade
quality Senior Income Securities are those that have received ratings lower than
Baa or BBB by Moody's, Standard & Poor's ("S&P") or Fitch and unrated securities
determined by NB Management to be of comparable quality. Below-investment grade
quality debt securities are commonly referred to as "junk bonds." The Fund will
not invest in below-investment grade quality Senior Income Securities if, as a
result of such investment, more than 25% of the Fund's total assets would be
invested in such securities. If a downgrade of one or more investment grade
quality Senior Income Securities causes the Fund to exceed this 25% limit, the
Fund's portfolio manager will determine, in his discretion, whether to sell any
below-investment grade quality Senior Income Securities to reduce the percentage
to below 25% of the Fund's total assets. It is possible, therefore, that the
value of below-investment grade quality Senior Income Securities could exceed
25% of the Fund's total assets for an indefinite period of time. NB Management
will monitor the credit quality of the Fund's Senior Income Securities.
Securities that are below-investment grade quality are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal. The Fund may only invest in below-investment grade
quality securities that are rated CCC or higher by S&P, Caa or higher by Moody's
or CCC or higher by Fitch, or are unrated but determined to be of comparable
quality by the Fund's investment manager. The issuers of these securities have a
currently identifiable vulnerability to default on their payments of principal
and interest. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. The Fund will not invest in
securities that are in default as to payment of principal and interest at the
time of purchase. For a description of security ratings, see Appendix B of the
Statement of Additional Information.
FOREIGN SECURITIES. At least 90% of the Fund's total assets will be invested
in U.S. dollar-denominated securities of issuers located in the United States.
The Fund may invest up to 10% of its total assets in securities of non-U.S.
issuers located in countries considered by Neuberger Berman to be
industrialized, which securities may be U.S. dollar-denominated or denominated
in a currency other than the U.S. dollar.
ILLIQUID SECURITIES. Substantially all of the equity securities of Real
Estate Companies in which the Fund intends to invest are traded on a national
securities exchange or in the over-the-counter markets. The Fund may, however,
invest in illiquid securities (I.E., securities that are not readily
marketable). For
19
purposes of this restriction, illiquid securities include, but are not limited
to, restricted securities (securities the disposition of which is restricted
under the federal securities laws), securities that may be resold only pursuant
to Rule 144A under the Securities Act of 1933, as amended (the "Securities
Act"), and that are not deemed to be liquid, privately-traded REITs and
repurchase agreements with maturities in excess of seven days. The Board of
Directors has the authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid. The Board has
delegated to NB Management the day-to-day determination of the illiquidity of
any security held by the Fund, although it has retained oversight of such
determinations. Although no definitive liquidity criteria are used, the Board
has directed NB Management to look for such factors as the nature of the market
for a security (including the institutional private resale market); the
frequency of trades and quotes for the security; the number of dealers willing
to purchase or sell the security; the amount of time normally needed to dispose
of the security; and other permissible relevant factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell.
Illiquid securities will be priced at fair value as determined in good faith
by the Board of Directors or its delegate. Valuing illiquid securities typically
requires greater judgment than valuing securities for which there is an active
trading market. See "Net Asset Value." If, through the appreciation of illiquid
securities or the depreciation of liquid securities, the Fund is in a position
where a substantial portion of the value of its total assets are invested in
illiquid securities, including restricted securities that are not readily
marketable, the Fund will take steps NB Management deems advisable, if any, to
protect liquidity.
As discussed below under "Interest Rate Transactions," the Fund intends to
segregate cash or liquid securities with its custodian having a value at least
equal to the Fund's net payment obligations under any interest rate swap
transaction, marked to market daily. The Fund will treat such amounts as
illiquid.
SHORT SALES AND DERIVATIVES. The Fund will not enter into short sales or
invest in derivatives, except for interest rate hedging purposes as described in
this Prospectus in connection with interest rate swap and interest rate cap
transactions, futures and options on futures. See "Interest Rate Transactions."
CASH POSITIONS. In anticipation of or in response to adverse market
conditions, for cash management purposes, during a reasonable start-up period
following the completion of this offering and any offering of preferred stock or
for defensive purposes, the Fund may temporarily hold all or a portion of its
assets in cash, money market instruments, shares of money market funds that are
managed by Neuberger Berman or bonds or other debt securities. Doing so may help
the Fund avoid losses but may mean lost opportunities for the Fund to achieve
its investment objectives. A reasonable start up period following any offering
would not exceed three months.
Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities, repurchase agreements collateralized by such
obligations, commercial paper and shares of money market funds, including money
market funds for which NB Management serves as investment manager ("Affiliated
Money Market Funds"). To the extent the Fund purchases shares of a money market
fund, the Fund
20
will indirectly bear its proportionate share of the advisory fees and other
operating expenses of such fund.
Cash reserves may be invested in Affiliated Money Market Funds if such
investments are expected to produce higher net returns, reduce transaction
costs, create more liquidity and/or increase diversification for the Fund as
compared to comparable overnight investment vehicles. When assets are invested
in an Affiliated Money Market Fund, NB Management waives a portion of its
investment advisory fee on the Fund equal to the advisory fee paid on those
assets by the Affiliated Money Market Fund.
SECURITIES LENDING. The Fund may lend its portfolio securities (principally
to broker-dealers) where such loans are callable at any time and are
continuously secured by segregated collateral equal to no less than the market
value, determined daily, of the loaned securities. The Fund would continue to
receive the income on the loaned securities and would at the same time earn
interest on the collateral or on the investment of any cash collateral. The Fund
may invest such cash collateral in Affiliated Money Market Funds, subject to the
policies discussed above under "Cash Positions." Because the collateral received
by the Fund is not considered a part of Managed Assets for purposes of
calculating the Fund's advisory fee, there is no waiver of the advisory fee for
collateral invested in an Affiliated Money Market Fund. The Fund will not lend
portfolio securities representing more than one-third of its total assets.
Lending securities involves a risk of loss to the Fund if and to the extent
that the market value of the securities loaned increases and the collateral is
not increased accordingly, or if the Fund is prevented from disposing promptly
of the collateral in the event the borrower defaults.
PORTFOLIO TURNOVER. The Fund may engage in portfolio trading when NB
Management considers it to be appropriate, but the Fund will not use short-term
trading as the primary means of achieving its investment objectives. Although
the Fund cannot accurately predict its annual portfolio turnover rate, it is not
expected to exceed 50% under normal circumstances. However, there are no limits
on the rate of portfolio turnover, and investments may be sold without regard to
the length of time held when, in the opinion of NB Management, investment
considerations warrant such action. A higher turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the Fund's
realization of net short-term capital gains that, when distributed to
stockholders, will be taxable as ordinary income. See "Tax Matters."
FUNDAMENTAL INVESTMENT POLICIES
The Fund has adopted certain fundamental investment policies designed to
limit investment risk. These fundamental policies, as well as the investment
objectives of the Fund, may not be changed without the approval of the holders
of a majority of the outstanding Common Shares and any outstanding preferred
stock, including, if issued, New Preferred Shares, voting as a single class, as
well as by the vote of holders of a majority of the outstanding preferred stock
tabulated separately. A "majority of the outstanding" shares means (i) 67% or
more of the shares present at a meeting, if the holders of more than 50% of the
shares are present or represented by proxy, or (ii) more than 50% of the shares,
whichever of (i) or (ii) is less. See "Investment Objectives" and "Investment
Strategies, Techniques and Risks" in the Statement of Additional Information for
a complete list of the fundamental and non-fundamental investment policies of
the Fund. See "Description of Shares--New Preferred Shares--Voting Rights" and
the Statement of Additional Information under "New Preferred Shares--Voting
Rights" for additional information with respect to the voting rights of New
Preferred Stockholders.
21
The Fund may become subject to guidelines that are more limiting than the
fundamental investment policies referenced above in order to obtain and maintain
ratings from a rating agency in connection with the Fund's utilization of
Financial Leverage. The Fund does not anticipate that such guidelines would have
a material adverse effect on the Fund's Preferred Stockholders or the Fund's
ability to achieve its investment objectives.
INVESTMENT PHILOSOPHY
Neuberger Berman's investment philosophy in managing the Fund is driven by:
- an experienced portfolio management staff that believes in traditional,
on-site real estate analysis and frequent meetings with company
management;
- a distinct investment approach that combines fundamental securities
analysis and direct real estate analysis with property sector
diversification;
- a disciplined valuation methodology that seeks attractively priced real
estate securities relative to their historical growth rates and
alternative property sectors; and
- an investment strategy that seeks to develop a portfolio with a broad mix
of real estate securities through quality stock selection and property
sector allocation.
Neuberger Berman focuses on quality of management, relative equity valuation
levels within the real estate securities universe and relative property sector
performance expectations.
INVESTMENT PROCESS
The Neuberger Berman investment process for the Fund emphasizes
internally-generated investment ideas derived from both top-down analysis of
property sectors and bottom-up research on real estate securities. The
investment process utilizes a relative valuation model that ranks securities on
a daily basis and allows for a discrete buy/sell process.
Neuberger Berman's investment process for the Fund consists of four primary
investment areas: (1) macro research; (2) property sector research; (3) company
research; and (4) portfolio management.
Macro research consists of an overall assessment of the economy and
expectations for economic growth on a national as well as regional basis. Macro
research is considered essential in the construction of a real estate securities
portfolio as a result of the breadth of lease duration levels among the
respective property sectors. Macro research is also required in determining the
level of demand across the primary property sectors. The resources available to
conduct macro research include in-house economic research, Wall Street analysts
and numerous economic reports.
Property sector research is emphasized as a result of Neuberger Berman's
belief that prudent property sector selection will produce consistent levels of
investment performance versus an appropriate benchmark. Historically, there has
been a material level of divergence in investment results among the core
property sectors (multi-family, office, industrial and retail). The investment
team seeks to identify property sector valuation disparities through the
construction of and analysis of relative valuation models among the property
sectors within the REIT industry. Property sector valuations are analyzed on
both a relative and absolute basis. Relative valuation analysis is important
because the investment team seeks to be fully invested in real estate securities
at all times.
Neuberger Berman's real estate securities research endeavors to focus its
investment efforts on those firms that demonstrate attractive prospects for
satisfactory levels of earnings growth and earnings
22
consistency, as well as dividend growth and coverage. The companies with the
most attractive fundamental attributes are then screened according to pricing
factors that may be important indicators of potential share price performance
versus peers. Some of the pricing factors that Neuberger Berman focuses on
include multiple-to-long-term earnings growth and net asset value-to-price.
Neuberger Berman also assigns a quantitative score to its assessment of
management and management strategy. A company's strategy and its ability to
execute that strategy as well as the public market's acceptance of that strategy
are considered a key company attribute in the investment review process. The
fundamental research and pricing components of the investment process are
combined to identify attractively priced securities of companies with relatively
favorable long-term prospects. Neuberger Berman will also consider the relative
liquidity of each security in the construction of the Fund's portfolio.
Portfolio construction consists of overweighting and underweighting specific
property types, individual securities and geographic regions based on the
previously described investment process. Portfolio weightings are measured
against the appropriate benchmarks. In order to control risk, Neuberger Berman
seeks to maintain a portfolio that is representative of the major property
sectors and geographic regions.
INTEREST RATE TRANSACTIONS
The Fund may, but is not required to, enter into interest rate transactions,
including those described below, to hedge against interest rate risks inherent
in its underlying investments and capital structure.
SWAPS AND CAPS
In connection with the Fund's use of Financial Leverage, the Fund may enter
into interest rate swap or cap transactions. Interest rate swaps involve the
Fund's agreement with the swap counterparty to pay a fixed-rate payment in
exchange for the counterparty's paying the Fund a variable rate payment that is
intended to approximate all or a portion of the Fund's variable-rate payment
obligation on the Fund's Financial Leverage. The payment obligation would be
based on the notional amount of the swap, which will not exceed the amount of
the Fund's Financial Leverage.
Interest rate caps require the Fund to pay a premium to the cap counterparty
that would entitle the Fund, to the extent that a specified variable-rate index
exceeds a predetermined fixed rate, to receive payment from the counterparty of
the difference based on the notional amount. The Fund would use interest rate
swaps or caps only with the intent to reduce or eliminate the risk that an
increase in short-term interest rates could have on the Fund's net earnings as a
result of leverage.
The Fund will usually enter into interest rate swaps or caps on a net basis;
that is, the two payment streams will be netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The Fund
intends to segregate cash or liquid securities having a value at least equal to
the Fund's net payment obligations under any interest rate swap or cap
transaction, marked to market daily. The Fund will treat such amounts as
illiquid.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, the Fund's use of interest rate instruments could
enhance or harm the overall performance of the Fund. To the extent that there is
a decline in interest rates, the net amount receivable by the Fund under the
interest rate swap or cap could decline and thus could result in a decline in
the net asset value of the Fund. In addition, if short-term interest rates are
lower than the Fund's fixed rate of payment on the interest rate swap, the swap
will reduce the
23
Fund's net earnings if the Fund must make net payments to the counterparty. If,
on the other hand, short-term interest rates are higher than the fixed rate of
payment on the interest rate swap, the swap will enhance the Fund's net earnings
if the Fund receives net payments from the counterparty. Buying interest rate
caps could enhance the performance of the Fund by limiting the Fund's maximum
leverage expense. Buying interest rate caps could also decrease the net earnings
of the Fund if the premium paid by the Fund to the counterparty exceeds the
additional cost of the Financial Leverage that the Fund would have been required
to pay had it not entered into the cap agreement. The Fund has no current
intention of entering into interest rate swaps or caps other than as described
in this Prospectus. The Fund would not enter into interest rate swap or cap
transactions in an aggregate notional amount that exceeds the outstanding amount
of the Fund's Financial Leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the costs of the Financial Leverage.
Although this will not guarantee that the counterparty does not default, the
Fund will not enter into an interest rate swap or cap transaction with any
counterparty that NB Management believes does not have the financial resources
to honor its obligation under the interest rate swap or cap transaction.
Further, NB Management regularly monitors the financial stability of a
counterparty to an interest rate swap or cap transaction in an effort to
proactively protect the Fund's investments.
In addition, at the time the interest rate swap or cap transaction reaches
its scheduled termination date, there is a risk that the Fund will not be able
to obtain a replacement transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction.
The Fund may choose or be required to redeem some or all Preferred Shares or
prepay any Borrowings. Such a redemption or prepayment would likely result in
the Fund seeking to terminate early all or a portion of any interest rate swap
or cap transaction. Such early termination of a swap could result in a
termination payment by or to the Fund. An early termination of a cap could
result in a termination payment to the Fund. There may also be penalties
associated with early termination.
FUTURES AND OPTIONS ON FUTURES
The Fund may also purchase and sell futures contracts and options on futures
contracts to hedge interest rate risk. A futures contract is a two-party
agreement to buy or sell a specified amount of a specified security, such as
U.S. Treasury securities, for a specified price at a designated date, time and
place. Brokerage fees are incurred when a futures contract is bought or sold,
and margin deposits must be maintained at all times when a futures contract is
outstanding. The Fund may sell futures contracts as an offset against the effect
of expected increases in interest rates and may purchase futures contracts as an
offset against the effect of expected declines in interest rates. The Fund will
enter into futures contracts only if they are traded on domestic futures
exchanges and are standardized as to maturity date and underlying financial
instrument.
The Fund will purchase or sell options on futures contracts only to hedge
interest rate risks. Options on futures contracts give the purchaser the right,
in return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures contract position by
the writer of the option to the holder of the option will be accompanied by
delivery of any accumulated balance in the writer's futures contract margin
account. If the Fund sells ("writes") options on futures contracts, it will
segregate cash or liquid securities in an amount necessary to cover its
obligations under the option and will mark such amounts to market daily.
24
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in New Preferred Shares.
LEVERAGE RISK
The Fund uses leverage for investment purposes by issuing preferred stock.
It is currently anticipated that, taking into account New Preferred Shares being
offered in this Prospectus, the amount of leverage will represent approximately
34% of the Fund's net assets.
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the Fund
and the Preferred Shares' asset coverage. There can be no assurance that the
Fund's leveraging strategies involving Preferred Shares or derivatives will be
successful. While the Fund may from time to time consider reducing leverage in
response to actual or anticipated changes in interest rates in an effort to
mitigate the increased volatility of current income and net asset value
associated with leverage, there can be no assurance that the Fund will actually
reduce leverage in the future. As long as Preferred Shares are outstanding, the
Fund does not intend to utilize other forms of leverage.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. The shares of other investment companies are subject to
the management fees and other expenses of those funds. Therefore, investments in
other investment companies will cause the Fund to bear proportionately the costs
incurred by the other investment companies' operations. If these other
investment companies engage in leverage, the Fund, as a stockholder, would bear
its proportionate share of the cost of such leveraging.
Because the fees paid to NB Management are calculated on the basis of the
Fund's Managed Assets (which includes the liquidation preference of Preferred
Shares), the fee will be higher when leverage is utilized, giving NB Management
an incentive to favor the use of leverage.
The Fund is offering New Preferred Shares, which typically pay dividends
based on short-term interest rates, and will use the proceeds to buy real estate
equity securities that pay dividends based upon the performance of the issuing
companies. The Fund also may buy real estate debt securities that pay interest
based on longer-term yields. These dividends and interest payments are
typically, although not always, higher than short-term interest rates. Real
Estate Company dividends, as well as long-term and short-term interest rates,
fluctuate. If short-term interest rates rise, dividend rates on New Preferred
Shares may rise so that the amount of dividends to be paid to New Preferred
Stockholders exceeds the income from the portfolio securities. Because income
from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of this offering) is available to pay
dividends on New Preferred Shares, however, dividend rates on New Preferred
Shares would need to greatly exceed the Fund's net portfolio income before the
Fund's ability to pay dividends on New Preferred Shares would be jeopardized. If
long-term interest rates rise, this could negatively impact the value of the
Fund's investment portfolio, reducing the amount of assets serving as asset
coverage for New Preferred Shares. The Fund anticipates entering into interest
rate swap or cap transactions with the intent to reduce or eliminate the risk
posed by an increase in short-term interest rates. There is no guarantee that
the Fund will engage in these transactions or that these transactions will be
successful in reducing or eliminating interest rate risk.
25
AUCTION RISK
New Preferred Stockholders may not be able to sell New Preferred Shares at
an auction if the auction fails (that is, if there are more Preferred Shares
offered for sale than there are buyers for those Preferred Shares). Also, if a
hold order is placed at an auction (an order to retain New Preferred Shares)
only at a specified rate, and that bid rate exceeds the rate set at the auction,
New Preferred Shares subject to that hold order will not be retained.
Additionally, if you elect to buy or retain New Preferred Shares without
specifying a rate below which you would not wish to continue to hold those New
Preferred Shares, and the auction sets a rate below the current market rate, you
may receive a lower rate of return on your New Preferred Shares than the market
rate. Finally, the rate period may be changed, subject to certain conditions and
with notice to the holders of New Preferred Shares, which could also affect the
liquidity of your investment. Neither the Broker-Dealers nor the Fund are
obligated to purchase New Preferred Shares in an auction or otherwise, nor is
the Fund required to redeem New Preferred Shares in the event of a failed
auction. See "Description of New Preferred Shares" and "The Auction--Auction
Procedures."
SECONDARY MARKET RISK
If you try to sell your New Preferred Shares between auctions, you may not
be able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. The value
of income securities typically falls when market interest rates rise, and
securities with longer maturities or interest rate reset periods are affected
more than shorter securities. Accordingly, if the Fund has designated a special
rate period (a rate period of more than 7 days in the case of each series of New
Preferred Shares), changes in interest rates are more likely to affect the price
you would receive if you sold your shares in the secondary market. You may
transfer shares outside of auctions only to or through a Broker-Dealer or a
broker-dealer that has entered into an agreement with a Broker-Dealer. The Fund
does not anticipate imposing significant restrictions on transfers to other
persons. However, unless any such other person has entered into a relationship
with a Broker-Dealer, that person will not be able to submit bids at auctions
with respect to New Preferred Shares. Broker-Dealers that maintain a secondary
trading market for New Preferred Shares are not required to maintain this
market, and the Fund is not required to redeem shares if either an auction or an
attempted secondary market sale fails because of a lack of buyers. New Preferred
Shares are not listed on a stock exchange or the Nasdaq Stock Market.
RATINGS AND ASSET COVERAGE RISK
In order to obtain a rating of Aaa and AAA from Moody's and Fitch,
respectively, the Fund must satisfy certain asset coverage and diversification
requirements. See "Description of New Preferred Shares--Rating Agency Guidelines
and Asset Coverage" for a more detailed description of the asset tests the Fund
must meet. While it is a condition to the closing of this offering that Moody's
and Fitch assign a rating of Aaa and AAA, respectively, to New Preferred Shares,
the ratings do not eliminate or necessarily mitigate the risks of investing in
New Preferred Shares. A rating agency could downgrade New Preferred Shares,
which may make New Preferred Shares less liquid at an auction or in the
secondary market, although the downgrade would probably result in higher
dividend rates. If a rating agency downgrades Preferred Shares, the Fund will
alter its portfolio or redeem Preferred Shares, if appropriate, to address
rating agency concerns.
In certain circumstances the Fund may not earn sufficient income from its
investments to pay dividends on New Preferred Shares. The value of the Fund's
investment portfolio may decline, reducing the asset coverage for New Preferred
Shares. The Fund may be forced to redeem New Preferred Shares to meet regulatory
requirements or may voluntarily redeem New Preferred Shares in certain
circumstances.
26
An investment in New Preferred Shares is also subject to, among other risks,
stock market risk, interest rate risk, credit risk, inflation risk, liquidity
risk and derivatives risk. An investment in New Preferred Shares will also be
subject to the risk associated with the fact that the Fund is recently
organized. These risks are summarized below.
RECENTLY ORGANIZED
The Fund is a recently organized, non-diversified closed-end management
investment company that has been operational only since April 29, 2003.
INVESTMENT RISK
An investment in the Fund is subject to investment risk, including possible
loss of the entire amount that you invest.
STOCK MARKET RISK
Your investment in New Preferred Shares will represent an indirect
investment in REIT shares and other real estate securities owned by the Fund,
substantially all of which are traded on a national securities exchange or in
the over-the-counter markets. The prices of the common shares of Real Estate
Companies, including REITs, and other securities in which the Fund will invest,
will fluctuate from day to day and may--either in the near term or over the long
run--decline in value. The net asset value of the Fund and asset coverage of
Preferred Shares may be affected by a decline in financial markets in general.
The Fund's use of Financial Leverage magnifies stock market risks.
RISKS OF SECURITIES LINKED TO THE REAL ESTATE MARKET
The Fund invests in real estate indirectly through securities issued by Real
Estate Companies, including REITs. Because of the Fund's policies of indirect
investments in real estate and concentration in the securities of companies in
the real estate industry, it is subject to risks associated with the direct
ownership of real estate. These risks include:
- declines in the value of real estate;
- general and local economic conditions;
- unavailability of mortgage funds;
- overbuilding;
- extended vacancies of properties;
- increased competition;
- increases in property taxes and operating expenses;
- changes in zoning laws;
- losses due to costs of cleaning up environmental problems and
contamination;
- limitations on, or unavailability of, insurance on economic terms;
- liability to third parties for damages resulting from environmental
problems;
- casualty or condemnation losses;
- limitations on rents;
- changes in neighborhood values and the appeal of properties to tenants;
- changes in valuation due to the impact of terrorist incidents on a
particular property or area, or on a segment of the economy; and
- changes in interest rates.
27
As a result of these factors, the net asset value of the Fund may change at
different rates compared to the net asset value of a registered investment
company with investments in a mix of different industries. The performance of
the Fund will also depend on the general condition of the economy. An economic
downturn could have a material adverse effect on the real estate markets and on
the Real Estate Companies in which the Fund invests, which in turn could result
in the Fund not achieving its investment objectives.
Real property investments are subject to varying types and degrees of risk.
The yields available from investments in real estate depend on the amount of
income and capital appreciation generated by the related properties. Income and
real estate values may also be adversely affected by such factors as applicable
laws (E.G., Americans with Disabilities Act and tax laws), interest rate levels
and the availability of financing.
If the properties do not generate sufficient income to meet operating
expenses, including, where applicable, debt service, ground lease payments,
tenant improvements, third-party leasing commissions and other capital
expenditures, the income and ability of a Real Estate Company to make payments
of any interest and principal on its debt securities, and its ability to pay
dividends, will be adversely affected. In addition, real property may be subject
to the quality of credit extended and defaults by borrowers and tenants.
The performance of the economy in each of the regions in which the real
estate owned by a Real Estate Company is located affects occupancy, market
rental rates and expenses and, consequently, has an impact on the income from
such properties and their underlying values. The financial results of major
local employers also may have an impact on the cash flow and value of certain
properties. In addition, certain real estate valuations, including residential
real estate values, are influenced by market sentiments, which can change
rapidly and could result in a sharp downward adjustment from current valuation
levels.
Real estate investments are relatively illiquid and, therefore, the ability
of Real Estate Companies to vary their portfolios promptly in response to
changes in economic or other conditions is limited. A Real Estate Company may
also have joint venture investments in certain of its properties, and,
consequently, its ability to control decisions relating to such properties may
be limited.
As discussed below, real property investments are also subject to risks that
are specific to the investment sector or type of property in which the Real
Estate Companies are investing.
RETAIL PROPERTIES. Retail properties are affected by the overall health of
the economy. A retail property may be adversely affected by the growth of
alternative forms of retailing (for example, catalog or on-line shopping),
bankruptcy, decline in drawing power, a shift in consumer demand due to
demographic changes and/or changes in consumer preference (for example, to
discount retailers), spending patterns and other trends in the retail industry.
A retail property may also be adversely affected if an anchor or significant
tenant ceases operation at such location, voluntarily or otherwise. Certain
tenants at retail properties may be entitled to terminate their leases if an
anchor tenant ceases operations at such property. Retail properties in general
may suffer from declines in consumer spending, which may result from economic
downturns or changes in consumer habits. Changes in market rental rates,
competitive market forces, the inability to collect rent due to bankruptcy or
insolvency of tenants or otherwise and changes in market rates of interest could
also have an adverse effect on retail properties.
COMMUNITY CENTERS. Community center properties are dependent upon the
successful operations and financial condition of their tenants, particularly
certain of their major tenants, and could be adversely affected by the
bankruptcy of those tenants. In some cases, a tenant may have a significant
number of leases in one community center and the filing of bankruptcy could
cause significant revenue
28
loss. Like others in the commercial real estate industry, community centers are
subject to environmental risks and interest rate risk. They also face the need
to enter into new leases or renew leases on favorable terms to generate rental
revenues. Community center properties could be adversely affected by changes in
the local markets where their properties are located, as well as by adverse
changes in national economic and market conditions.
OFFICE AND INDUSTRIAL PROPERTIES. Office and industrial properties generally
require their owners to expend significant amounts for general capital
improvements, tenant maintenance and improvements and costs of reletting space.
Increases in real estate construction costs, insurance premiums and interest
rates could adversely affect office and industrial properties. Industrial
properties are also subject to tenant defaults and bankruptcies that could
affect their collection of outstanding receivables. In addition, office and
industrial properties that are not equipped to accommodate the needs of modern
businesses may become functionally obsolete and thus non-competitive. Office and
industrial properties may also be adversely affected if there is an economic
decline in the businesses operated by their tenants or in the economy as a
whole. The risk of such an adverse effect is increased if the property revenue
is dependent on a single tenant or if there is a significant concentration of
tenants in a particular business or industry.
HOTEL PROPERTIES. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism (which may be affected by terrorist
activities), increases in fuel costs and other expenses of travel, changes to
regulations of operating, liquor and other licenses and adverse effects of
general and local economic conditions. Because hotel rooms are generally rented
for short periods of time, hotel properties tend to be more sensitive to adverse
economic conditions and competition than many other commercial properties. Also,
hotels may be operated pursuant to franchise, management and lease agreements
that may be terminable by the franchiser, the manager or the lessee. Hotel
properties may be adversely affected if there is an economic decline in the
business of the franchiser, the manager or the lessee. On the other hand, it may
be difficult to terminate an ineffective operator of a hotel property after a
foreclosure of the property. Hotel properties may also be adversely affected by
the bankruptcy or insolvency of their tenants.
HEALTHCARE PROPERTIES. Healthcare properties and healthcare providers are
affected by several significant factors, including: (1) federal, state and local
laws governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; (2) continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); (3) competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis; (4) deterioration, including bankruptcy, of tenants;
(5) occupancy rates; and (6) the general distress of the healthcare industry.
These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively, and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursements. In addition, in the event that a tenant is in default
on its lease, a new operator or purchaser at a foreclosure sale will have to
apply for all relevant licenses if such new operator does not already hold such
licenses. There can be no assurance that such new licenses could be obtained,
and, consequently, there can be no assurance that any healthcare property
subject to foreclosure will be disposed of in a timely manner.
29
MULTIFAMILY/RESIDENTIAL PROPERTIES. The value and successful operation of a
multifamily and residential property may be affected by a number of factors,
such as changes in the national, regional and local economic climate, the
location of the property, the ability of management to provide adequate
maintenance and insurance, types of services provided by the property, the level
of mortgage rates, the presence of competing properties, the relocation of
tenants to new projects with better amenities, adverse economic conditions in
the locale, the amount of rent charged, oversupply of units due to new
construction or a reduction in the demand for multifamily living and tenant
competition. In addition, multifamily and residential properties may be subject
to rent control laws or other laws affecting such properties, which could impact
the future cash flows of such properties.
SELF-STORAGE PROPERTIES. The value and successful operation of a
self-storage property may be affected by a number of factors, such as the
ability of the management team, the location of the property, the presence of
competing properties, changes in traffic patterns and adverse effects of general
and local economic conditions in general and with respect to rental rates and
occupancy levels.
Other factors may also contribute to the level of risk of real estate
investments.
INSURANCE ISSUES. Certain Real Estate Companies may have disclosed in
connection with the issuance of their securities that they carry comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. However, such insurance is not uniform among Real Estate Companies.
Moreover, there are certain types of extraordinary losses that may be
uninsurable or not economically insurable. Substantial increases in certain
insurance premiums since the terrorist attacks of September 11, 2001 may cause
some Real Estate Companies to reduce their coverage. Certain of the properties
may be located in areas that are subject to earthquake activity for which
insurance may not be maintained. If a property sustains damage as a result of an
earthquake, even if the Real Estate Company maintains earthquake insurance, it
may incur substantial losses due to insurance deductibles, co-payments on
insured losses or uninsured losses. A massive earthquake or other event could
threaten the financial viability of some insurance companies. It may be
difficult or impossible to find commercial insurance against certain types of
losses, such as those stemming from floods or mold damage. If any type of
uninsured loss occurs, the Real Estate Company could lose its investment in, and
anticipated profits and cash flows from, a number of properties, which would
adversely impact the Fund's investment performance.
FINANCIAL LEVERAGE. Real Estate Companies, including REITs, may be highly
leveraged, and financial covenants may affect the ability of those companies to
operate effectively. Real Estate Companies are subject to risks normally
associated with debt financing. If the principal payments of a Real Estate
Company's debt cannot be refinanced, extended or paid with proceeds from other
capital transactions, such as new equity capital, the Real Estate Company's cash
flow may not be sufficient to repay all maturing debt outstanding.
In addition, a Real Estate Company's obligation to comply with covenants
contained in agreements with its lenders, such as debt-to-asset ratios and
secured debt-to-total asset ratios, and other contractual obligations may
restrict the Real Estate Company's range of operating activity. A Real Estate
Company may therefore be prevented from incurring additional indebtedness,
selling its assets and engaging in mergers or making acquisitions that may be
beneficial to the operation of the Real Estate Company.
ENVIRONMENTAL RISKS. In connection with the ownership (direct or indirect),
operation, management and development of real properties that may contain
hazardous or toxic substances, a Real Estate Company may be considered an owner
or operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and, therefore, may be potentially
liable for removal or remediation costs, as well as governmental fines and
liabilities for injuries to persons and property and other costs. The existence
of any such material environmental liability could have a
30
material adverse effect on the results of operations and cash flow of any such
Real Estate Company, and, as a result, the amount available to make
distributions on its shares could be reduced.
SMALLER COMPANIES. Even the larger Real Estate Companies tend to be small to
medium-sized companies in relation to the equity markets as a whole. There may
be less trading in a smaller company's shares, which means that buy and sell
transactions in those shares could have a larger impact on the share's price
than is the case with larger company shares. Smaller companies also may have
fewer lines of business so that changes in any one line of business may have a
greater impact on a smaller company's share price than is the case for a larger
company. Further, smaller company shares may perform differently in different
cycles than larger company shares. Accordingly, Real Estate Company shares can
be more volatile than--and at times will perform differently from--larger
company shares such as those found in the Dow Jones Industrial Average.
TAX AND RELATED ISSUES. REITs are subject to highly technical and complex
provisions of the Code. It is possible that the Fund may invest in a Real Estate
Company that purports to be a REIT but fails to qualify as such under the Code.
In the event of any such unexpected failure to qualify as a REIT, the Real
Estate Company would be subject to corporate-level taxation, significantly
reducing the return to the Fund on its investment in such company. A REIT could
possibly fail to qualify for tax-free pass-through of income under the Code or
to maintain its exemption from registration under the 1940 Act, either of which
could adversely affect its operations. In the event of a default by a borrower
or lessee, a REIT may experience delays in enforcing its rights as a creditor or
lessor and may incur substantial costs associated with protecting its
investments. There is a risk that future changes in U.S. tax laws may affect the
tax treatment of REITs and their stockholders.
Like a regulated investment company, a REIT that satisfies a minimum
distribution requirement for a taxable year is not required to pay federal
income tax on its income and realized capital gains for that year that it
distributes to its stockholders. See "Tax Matters." Also like a regulated
investment company, a REIT must make annual distributions to avoid a
non-deductible 4% federal excise tax on certain undistributed real estate
investment trust taxable income and capital gain net income. REITs generally
make distributions to avoid the imposition of federal income and excise taxes in
December each year (or make distributions in January that are treated for
federal income tax purposes as made on the preceding December 31). Those
distributions will be included in the Fund's income and realized gains,
respectively (as of the ex-distribution date), even though some part thereof may
represent a return of its investment in the distributing REITs' shares.
TERRORISM. Terrorist attacks may adversely affect or even destroy completely
the value of individual properties or wide areas. Economic disruption or
recession stemming from such attacks can reduce the value of real property of
all kinds. Such attacks can also disrupt business and tourism, either in a
particular city or in the nation as a whole, which can adversely affect the
value of properties in particular industries, E.G., hotels and retail
establishments. Higher insurance costs may adversely affect Real Estate
Companies, and certain Real Estate Companies may be unable to obtain certain
kinds of insurance.
INTEREST RATE RISK
Interest rate risk is the risk that fixed-income investments such as
preferred shares, U.S. government obligations and debt securities, and to a
lesser extent dividend-paying common stocks and shares such as REIT common
shares, will decline in value because of changes in market interest rates. When
interest rates rise, the market value of such securities generally will fall.
Generally, the longer the maturity of a fixed-income security, the more its
value falls in response to a given rise in interest rates. Because investors
generally look to REITs for a stream of income, the prices of REIT shares may be
more sensitive to changes in interest rates than are other equity securities.
The Fund's investment in
31
such securities means that the Fund's net assets and the asset coverage for
Preferred Shares will tend to decline if market interest rates rise.
The Fund's use of leverage magnifies the interest rate risks. The Fund
intends to use interest rate swaps, interest rate caps, futures contracts and
options on futures contracts to help control interest rate risks. See "Interest
Rate Transactions."
CREDIT RISK
The Fund could lose money if the issuer of a debt security, or the
counterparty to a derivatives contract or other obligation, is unable or
unwilling to make timely principal and/or interest payments or to otherwise
honor its obligations. In general, lower-rated securities carry a greater degree
of risk that the issuer will lose its ability to make interest and principal
payments, which could have a negative impact on the Fund's net asset value or
distributions.
If rating agencies lower their ratings of debt securities in the Fund's
portfolio, the value of those obligations could decline, which could reduce the
asset coverage on Preferred Shares and negatively impact the rating agencies'
ratings of the Preferred Shares. Even if an issuer does not actually default,
adverse changes in the issuer's financial condition may negatively affect its
credit rating or presumed creditworthiness. These developments would adversely
affect the market value of the issuer's obligations and, correspondingly, the
net asset value of the Fund.
RISKS OF INVESTING IN BELOW-INVESTMENT GRADE QUALITY SECURITIES
Below-investment grade quality securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than higher-grade
securities. The prices of such securities have been found to be less sensitive
to interest rate changes than higher-quality investments but more sensitive to
adverse economic downturns or individual corporate developments. Yields on
investment grade securities will fluctuate. If an issuer of lower-rated
securities defaults, the Fund may incur additional expenses to seek recovery.
The secondary markets in which below-investment grade quality securities are
traded may be less liquid than the market for higher-grade quality securities.
Less liquidity in the secondary trading markets could adversely affect the price
at which the Fund could sell a particular below-investment grade security when
necessary to meet liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of the issuer, and could
adversely affect and cause large fluctuations in the net asset value of the
Fund. Valuation of securities that are illiquid or that trade infrequently often
requires the exercise of greater judgment. Adverse publicity and investor
perceptions may decrease the values and liquidity of below-investment grade
quality securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for below-investment grade quality securities, have an
adverse impact on the value of such securities and adversely affect the ability
of the issuers of such securities to repay principal and pay interest thereon.
New laws and proposed new laws may have an adverse impact on the market for
below-investment grade quality securities.
INTEREST RATE TRANSACTIONS RISK
The Fund may enter into an interest rate swap or cap transaction to attempt
to protect itself from increasing dividend or interest expenses resulting from
increasing short-term interest rates. A decline in interest rates may result in
a decline in net amounts receivable by the Fund from the counterparty under the
interest rate swap or cap (or an increase in the net amounts payable by the Fund
to the
32
counterparty under the swap), which may result in a decline in the net asset
value of the Fund. See "Interest Rate Transactions."
RISKS OF FUTURES AND OPTIONS ON FUTURES
The use by the Fund of futures contracts and options on futures contracts to
hedge interest rate risks involves special considerations and risks, as
described below.
- Successful use of hedging transactions depends upon Neuberger Berman's
ability to correctly predict the direction of changes in interest rates.
While Neuberger Berman is experienced in the use of these instruments,
there can be no assurance that any particular hedging strategy will
succeed.
- There might be imperfect correlation, or even no correlation, between the
price movements of a futures or option contract and the movements of the
interest rates being hedged. Such a lack of correlation might occur due
to factors unrelated to the interest rates being hedged, such as market
liquidity and speculative or other pressures on the markets in which the
hedging instrument is traded.
- Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable movements in the
interest rates being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable
movements in the hedged interest rates.
- There is no assurance that a liquid secondary market will exist for any
particular futures contract or option thereon at any particular time. If
the Fund were unable to liquidate a futures contract or an option on a
futures contract position due to the absence of a liquid secondary market
or the imposition of price limits, it could incur substantial losses. The
Fund would continue to be subject to market risk with respect to the
position.
- There is no assurance that the Fund will use hedging transactions. For
example, if the Fund determines that the cost of hedging will exceed the
potential benefit to it, it will not enter into such transaction.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the value of
money. As a result of inflation, the real value of the dividends on Preferred
Shares can decline.
TERRORISM; EVENTS IN IRAQ
Some of the U.S. securities markets were closed for a four-day period as a
result of the terrorist attacks on the World Trade Center and Pentagon on
September 11, 2001. These terrorist attacks, the war in Iraq and its aftermath,
the continuing occupation of Iraq and other geopolitical events have led to, and
may in the future lead to, increased short-term market volatility and may have
long-term effects on U.S. and world economies and markets. Those events could
also have an acute effect on individual issuers or related groups of issuers. A
similar disruption of the financial markets or other terrorist attacks could
adversely impact interest rates, auctions, secondary trading, ratings, credit
risk, inflation and other factors relating to Preferred Shares and adversely
affect Fund service providers and the Fund's operations, including its ability
to conduct auctions.
33
FOREIGN SECURITY RISK
The prices of foreign securities may be affected by factors not present in
U.S. markets, including:
- CURRENCY EXCHANGE RATES. The dollar value of the Fund's foreign
investments will be affected by changes in the exchange rates between the
dollar and the currencies in which those investments are traded.
- FOREIGN POLITICAL AND ECONOMIC CONDITIONS. The value of the Fund's
foreign investments may be adversely affected by political and social
instability in their home countries and by changes in economic or
taxation policies in those countries.
- REGULATIONS. Foreign companies generally are subject to less stringent
regulations, including financial and accounting controls, than are U.S.
companies. As a result, there generally is less publicly available
information about foreign companies than about U.S. companies.
- MARKETS. The securities markets of other countries are smaller than U.S.
securities markets. As a result, many foreign securities may be less
liquid and more volatile than U.S. securities.
NON-DIVERSIFIED STATUS
Because the Fund is classified as "non-diversified" under the 1940 Act, it
can invest a greater portion of its assets in obligations of a single issuer
than a "diversified" fund can. As a result, the Fund will be more susceptible
than a more widely-diversified fund to any single corporate, economic, political
or regulatory occurrence. However, the Fund has adopted a policy that it will
not invest more than 10% of its total assets in the securities of any one
issuer. See "The Fund's Investments." Moreover, the Fund intends to diversify
its investments to the extent necessary to maintain its status as a regulated
investment company under the Code. See "Tax Matters."
ANTI-TAKEOVER PROVISIONS
The Fund's Articles and Bylaws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund or convert
it to an open-end fund. If the Fund were converted to open-end status, the Fund
would have to redeem Preferred Shares. See "Anti-Takeover and Other Provisions
in the Articles of Incorporation."
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors is broadly responsible for the management of the
Fund, including general supervision of the duties performed by NB Management and
Neuberger Berman, LLC. The names and business addresses of the Directors and
officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under "Management of the Fund" in the
Statement of Additional Information.
INVESTMENT MANAGER
NB Management serves as the investment manager of the Fund. Subject to the
general supervision of the Board of Directors, NB Management is responsible for
managing the investment activities of the Fund and the Fund's business affairs
and other administrative matters. NB Management is located at 605 Third Avenue,
New York, New York 10158-0180.
34
Continuing an asset management history that began in 1939, NB Management
provides investment management and advisory services to several investment
company clients and other institutional investors, as well as to individuals. As
of June 30, 2003, Neuberger Berman and its affiliates had approximately $63.7
billion in assets under management, including more than $1.4 billion in
real-estate related securities.
NB Management has retained Neuberger Berman, LLC to serve as sub-adviser to
the Fund. See "Sub-Adviser" below. NB Management and Neuberger Berman, LLC are
wholly-owned subsidiaries of Neuberger Berman Inc., a publicly-owned holding
company, located at 605 Third Avenue, New York, New York 10158-3698.
Steven R. Brown serves as Portfolio Manager of the Fund. Mr. Brown is a Vice
President of NB Management and a Managing Director of Neuberger Berman, LLC.
Mr. Brown joined Neuberger Berman in January 2002 to head up the firm's
institutional and retail real estate securities effort. Until he joined
Neuberger Berman, Mr. Brown managed institutional separate accounts and served
as a Co-Portfolio Manager for the Cohen & Steers Equity Income Fund, Inc. and
the Cohen & Steers Advantage Income Realty Fund, Inc. He joined Cohen & Steers
in 1992. Prior to that, he was a debt rating analyst with Standard & Poor's
Corporation covering REITs, homebuilders and commercial mortgage securities.
SUB-ADVISER
NB Management has retained Neuberger Berman, LLC, 605 Third Avenue, New
York, New York 10158-3698, to serve as the Fund's sub-adviser, responsible for
providing investment recommendations and research.
NB Management (and not the Fund) pays for the services rendered by Neuberger
Berman, LLC based on the direct and indirect costs to Neuberger Berman, LLC in
connection with those services. Neuberger Berman, LLC also serves as sub-adviser
for all of the open-end management investment companies and the other closed-end
management investment companies managed by NB Management. Neuberger Berman, LLC
and NB Management employ experienced professionals that work in a competitive
environment.
Neuberger Berman Inc., the parent company of NB Management and Neuberger
Berman, LLC, announced that it has entered into an agreement with Lehman
Brothers Holdings Inc. whereby Lehman Brothers Holdings Inc. would acquire
Neuberger Berman Inc. The agreement is subject to the approval of the
stockholders of Neuberger Berman Inc. If the agreement is approved by those
stockholders, regulatory approvals and consents are obtained, and certain other
conditions are met, it is anticipated that the closing will take place in the
fourth quarter of 2003.
The acquisition would constitute an "assignment" as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), which would
automatically terminate the investment management and sub-advisory agreements of
the Fund. Accordingly, the Fund's Board of Directors considered and approved a
new investment management agreement and sub-advisory agreement for the Fund. The
new agreements were approved by the Fund's stockholders at a special meeting of
stockholders on September 23, 2003.
MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between NB Management and the
Fund (the "Management Agreement"), the Fund has agreed to pay NB Management a
management fee payable on a monthly basis at the annual rate of 0.60% of the
Fund's average daily total assets minus liabilities
35
other than the aggregate indebtedness entered into for purposes of leverage
("Managed Assets") for the services and facilities it provides. The liquidation
preference of Preferred Shares is not a liability or permanent equity. The Fund
also pays NB Management a fee payable on a monthly basis at the annual rate of
0.25% of the Fund's average daily Managed Assets for services provided under an
administration agreement.
In addition to the fees of NB Management, the Fund pays all other costs and
expenses of its operations, including compensation of its Directors (other than
those affiliated with NB Management), custodial expenses, transfer agency and
dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of issuing any preferred stock,
expenses of preparing, printing and distributing Prospectuses, stockholder
reports, notices, proxy statements and reports to governmental agencies, and
taxes, if any.
NB Management has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund in the amounts and for the time
periods set forth below (covering commencement of the Fund's operations through
October 31, 2011):
PERCENTAGE WAIVED (ANNUAL RATE AS A PERCENTAGE WAIVED (ANNUAL RATE AS A
PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO
FISCAL PERIOD COMMON SHARES--ASSUMING NO FINANCIAL COMMON SHARES--ASSUMING THE ISSUANCE OF
ENDING OCTOBER 31, LEVERAGE IS ISSUED OR OUTSTANDING) PREFERRED SHARES(2))
------------------ ---------------------------------------- ----------------------------------------
2003(1) 0.25% 0.38%
2004 0.25% 0.38%
2005 0.25% 0.38%
2006 0.25% 0.38%
2007 0.25% 0.38%
2008 0.20% 0.30%
2009 0.15% 0.23%
2010 0.10% 0.15%
2011 0.05% 0.08%
-------------------
(1) From the commencement of the Fund's operations.
(2) Assumes the issuance of Preferred Shares in an amount equal to 34% of the
Fund's total assets (after issuance).
NB Management has not agreed to waive any portion of its fees beyond October
31, 2011.
Because the fees received by NB Management are based on the Managed Assets
of the Fund (including assets represented by the proceeds of any Financial
Leverage), NB Management has a financial incentive for the Fund to utilize
Financial Leverage, which may create a conflict of interest between NB
Management and the holders of the Fund's Common Shares. Because holders of
Preferred Shares or Borrowings receive a specified rate of return, the Fund's
investment management fees and other expenses, including expenses incurred in
the issuance and maintenance of any Financial Leverage, are paid only by the
Common Stockholders, and not by holders of Preferred Shares or Borrowings.
DESCRIPTION OF NEW PREFERRED SHARES
The following is a brief description of the terms of New Preferred Shares.
This description does not purport to be complete and is subject to and qualified
in its entirety by reference to the more detailed description of Preferred
Shares in the Fund's Articles Supplementary, which are attached as Appendix A to
the Statement of Additional Information.
36
GENERAL
Under the Articles, the Fund is authorized to issue up to 1,000,000,000
shares of capital stock, all of it originally designated Common Shares. Pursuant
to the Articles, the Board may classify or reclassify any unissued shares of
capital stock without a stockholder vote into one or more classes of preferred
or other stock. New Preferred Shares will have a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared by the Fund, but excluding interest thereon).
New Preferred Shares will rank on a parity with Outstanding Preferred
Shares, and with shares of any other class or series of preferred stock of the
Fund, as to the payment of dividends and the distribution of assets upon
liquidation. All New Preferred Shares carry one vote per share on all matters on
which such shares are entitled to be voted. New Preferred Shares will, when
issued, be fully paid and non-assessable and have no preemptive, exchange,
conversion or cumulative voting rights. If the net assets of the Fund increase,
the Fund may offer additional shares of preferred stock to maintain the leverage
ratio of the Fund.
Generally, investors in New Preferred Shares will not receive certificates
representing ownership of their shares. The Depository Trust Company or any
successor securities depository ("DTC") or its nominee for the account of the
investor's broker-dealer will maintain record ownership of Preferred Shares in
book-entry form. An investor's broker-dealer, in turn, will maintain records of
that investor's beneficial ownership of Preferred Shares.
DIVIDENDS AND RATE PERIODS
GENERAL. The following is a general description of dividends and rate
periods for New Preferred Shares. The initial rate period will be 8 days in the
case of Series A New Preferred Shares, 9 days in the case of Series B New
Preferred Shares, 10 days in the case of Series C New Preferred Shares and 13
days in the case of Series D New Preferred Shares. The dividend rate for this
period will be 1.18% in the case of Series A New Preferred Shares, 1.18% in the
case of Series B New Preferred Shares, 1.18% in the case of Series C New
Preferred Shares, and 1.18% in the case of Series D New Preferred Shares.
Subsequent rate periods normally will be 7 days for each series of New Preferred
Shares, and the dividend rate for each such period will be determined by an
auction generally held on the business day before commencement of the rate
period. The Fund, subject to certain conditions, may change the length of
subsequent rate periods, depending on its needs and NB Management's outlook for
interest rates, by designating them as special rate periods. See "--Designations
of Special Rate Periods" below.
Any dividend payment made on Preferred Shares shall first be credited
against the earliest accumulated but unpaid dividends due with respect to such
shares. Dividends in arrears for any past dividend period may be declared and
paid at any time, without reference to any regular dividend payment date, to the
holders of the Preferred Shares as their names appear on the record books of the
Fund on such date, not exceeding 15 days preceding the payment date thereof, as
may be fixed by the Board of Directors.
DIVIDEND PAYMENT DATES. Dividends on New Preferred Shares will be payable,
when, as and if declared by the Board, out of legally available funds in
accordance with the Fund's Articles and applicable law. The new dividend rate
determined in an auction generally will apply to the period beginning on the
first business day after the auction and lasting through the date of the next
auction. If dividends are payable on a day that is not a business day, then
dividends will generally be payable on the next day if such day is a business
day, or as otherwise specified in the Articles Supplementary.
Dividends will be paid through DTC on each dividend payment date. The
dividend payment date will normally be the first business day after the rate
period ends. DTC, in accordance with its current
37
procedures, is expected to distribute dividends received from the Auction Agent
in same-day funds on each dividend payment date to agent members (members of DTC
that will act on behalf of existing or potential New Preferred Stockholders).
These agent members are in turn expected to distribute such dividends to the
persons for whom they are acting as agents. However, the current Broker-Dealers
have indicated to the Fund that dividend payments will be available in same-day
funds on each dividend payment date to customers that use a Broker-Dealer or a
Broker-Dealer's designee as agent member.
CALCULATION OF DIVIDEND PAYMENT. The Fund computes the amount of dividends
per share payable on New Preferred Shares by multiplying the rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the applicable rate period or part thereof, and the denominator of the fraction
will be 365 for any rate period other than a special rate period and 360 for a
special rate period. This rate is multiplied by $25,000 to arrive at the
dividends per share. Dividends on New Preferred Shares will accumulate from the
date of their original issue, which is expected to be October 28, 2003. For each
rate period after the initial rate period, the dividend rate will be the rate
determined at auction, except as described below. The dividend rate that results
from an auction cannot be greater than the maximum rate.
The maximum rate for a rate period is normally the product of the applicable
percentage (see Table I, below) and the reference rate (see Table II, below),
each as of the auction date. In each case, the applicable percentage will be
determined based on the lower of the credit rating or ratings assigned to
Preferred Shares by Moody's and Fitch.
TABLE I
APPLICABLE PERCENTAGE TABLE
RATINGS FOR NEW PREFERRED SHARES APPLICABLE PERCENTAGE
--------------------------------- ---------------------
MOODY'S FITCH
------- ---------------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 160%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
38
The reference rate used to determine the maximum rate generally varies
depending on the length of the applicable rate period, as set forth in the
Reference Rate Table below:
TABLE II
REFERENCE RATE TABLE
RATE PERIOD REFERENCE RATE
----------- --------------------------------------------------
91 days or less AA Financial Composite Commercial Paper Rate (see
Table III and its introductory paragraph)
92 days to 270 days The AA Financial Composite Commercial Paper Rate
made available by the Federal Reserve Bank of New
York or, if the Federal Reserve Bank of New York
does not make available such a rate, the
arithmetic average of the interest equivalent (as
defined below) of rates on commercial paper placed
on behalf of issuers whose corporate bonds are
rated AA by S&P or the equivalent of such rating
by another rating agency, as quoted on a discount
basis or otherwise by the certain commercial paper
dealers to the Auction Agent for the close of
business on the business day immediately preceding
the date of calculation (rounded to the next
highest .001 of 1%).
271 days or more Treasury Index Rate
For purposes of the Reference Rate Table, the "interest equivalent" of a
rate stated on a discount basis (a "discount rate") for commercial paper of a
given number of days' maturity shall be equal to the quotient (rounded upwards
to the next higher one-thousandth (.001) of 1%) of (A) the discount rate divided
by (B) the difference between (x) 1.00 and (y) a fraction, the numerator of
which shall be the product of the discount rate times the number of days in
which such commercial paper matures and the denominator of which shall be 360.
The AA Financial Composite Commercial Paper Rate is the rate for the
applicable period on commercial paper issued by corporations whose bonds are
rated AA by S&P or the equivalent of such rating by another rating agency, as
made available by the Federal Reserve Bank of New York. If the Federal Reserve
Bank of New York does not make available any such rate, the rate shall be the
average rate quoted on a discount basis to the Auction Agent for the close of
business on the business day immediately preceding such date by commercial paper
dealers designated by the Fund. If any commercial paper dealer does not quote a
rate, the rate shall be determined by quotes provided by the remaining
commercial paper dealers.
The AA Financial Composite Commercial Paper Rate for a regular 7-day rate
period is the 7-day rate. The AA Financial Composite Commercial Paper Rate for a
special rate period is as set forth in the table below:
TABLE III
AA FINANCIAL COMPOSITE COMMERCIAL PAPER RATE FOR SPECIAL RATE PERIODS
SPECIAL RATE PERIOD AA COMPOSITE COMMERCIAL PAPER RATE*
------------------- --------------------------------------------------
8 days to 31 days 30-day rate
32 days to 61 days 60-day rate
62 days to 91 days 90-day rate
-------------------
* Rates stated on a discount basis
39
On or prior to each dividend payment date, the Fund is required to deposit
with the Auction Agent sufficient funds for the payment of declared dividends.
The failure to make such deposit will not result in the cancellation of auction
results. The Fund does not intend to establish any reserves for the payment of
dividends.
In most, but not all, cases, if an auction for New Preferred Shares is not
held when scheduled or if sufficient clearing bids have not been made in an
auction (other than because all Preferred Shares are subject to submitted hold
orders), the dividend rate for the corresponding rate period will be the maximum
rate on the date the auction was scheduled to be held. The maximum rate would
not apply, for example, if an auction could not be held when scheduled because
the NYSE was closed for three or more consecutive business days due to
circumstances beyond its control or the Auction Agent was not able to conduct an
auction in accordance with the auction procedures due to circumstances beyond
its control.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. While any New Preferred
Shares are outstanding, the Fund generally may not declare, pay or set apart for
payment any dividend or other distribution in respect of its Common Shares
(other than in additional Common Shares or rights to purchase Common Shares) or
repurchase any of its Common Shares (except by conversion into or exchange for
shares of the Fund ranking junior to New Preferred Shares as to the payment of
dividends and the distribution of assets upon liquidation) unless each of the
following conditions has been satisfied:
- In the case of the Moody's coverage requirements, immediately after such
transaction, the aggregate Moody's discounted value (i.e., the aggregate
value of the Fund's portfolio discounted according to Moody's criteria)
would be equal to or greater than the Preferred Shares Basic Maintenance
Amount (i.e., the amount necessary to pay all outstanding obligations of
the Fund with respect to New Preferred Shares, any other preferred stock
outstanding, expenses for the next 90 days and any other liabilities of
the Fund) (see "--Rating Agency Guidelines and Asset Coverage" below);
- In the case of Fitch's coverage requirements, immediately after such
transaction, the aggregate Fitch discounted value (i.e., the aggregate
value of the Fund's portfolio discounted according to Fitch criteria)
would be equal to or greater than the Preferred Shares Basic Maintenance
Amount;
- Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this Prospectus under "Rating Agency Guidelines
and Asset Coverage" below) is met;
- Full cumulative dividends on Preferred Shares due on or prior to the date
of the transaction have been declared and paid or shall have been
declared and sufficient funds for the payment thereof deposited with the
Auction Agent; and
- The Fund has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the
Articles Supplementary.
The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking, as to the payment of dividends, on a
parity with Preferred Shares unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on Preferred
Shares through its most recent dividend payment date. However, when the Fund has
not paid dividends in full on Preferred Shares through the most recent dividend
payment date or upon any shares of the Fund ranking, as to the payment of
dividends, on a parity with Preferred Shares through their most recent
respective dividend payment dates, the amount of dividends declared per share on
Preferred Shares and such other class or series of shares will in all cases bear
to each other the same ratio that accumulated dividends per share on Preferred
Shares and such other class or series of shares bear to each other.
40
DESIGNATIONS OF SPECIAL RATE PERIODS. The Fund, in certain circumstances,
may designate any succeeding subsequent rate period as a special rate period
consisting of a specified number of rate period days evenly divisible by seven,
subject to certain adjustments. A designation of a special rate period shall be
effective only if, among other things, (a) the Fund shall have given certain
notices to the Auction Agent, which will include a report showing that, as of
the third business day next preceding the proposed special rate period, the
Moody's discounted value and Fitch discounted value, as applicable, were at
least equal to the Preferred Shares Basic Maintenance Amount; (b) an auction
shall have been held on the auction date immediately preceding the first day of
such proposed special rate period and sufficient clearing bids shall have
existed in such auction; and (c) if the Fund shall have mailed a notice of
redemption with respect to any Preferred Shares, the redemption price with
respect to such shares shall have been deposited with the Auction Agent. In
addition, full cumulative dividends, any amounts due with respect to mandatory
redemptions and any additional dividends payable prior to such date must be paid
in full or deposited with the Auction Agent. The Fund also must have portfolio
securities with a discounted value at least equal to the Preferred Shares Basic
Maintenance Amount. The Fund will give New Preferred Stockholders notice of a
special rate period as provided in the Articles Supplementary.
REDEMPTION
MANDATORY REDEMPTION. In the event the Fund does not timely cure a failure
to maintain (a) a discounted value of its portfolio equal to the Preferred
Shares Basic Maintenance Amount in accordance with the requirements of the
rating agency or agencies then rating New Preferred Shares or (b) the 1940 Act
Preferred Shares Asset Coverage, New Preferred Shares will be subject to
mandatory redemption on a date specified by the Board out of funds legally
available therefor in accordance with the Articles and applicable law at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared by the Fund, but
excluding interest thereon) to (but not including) the date fixed for
redemption. In the event that the Fund does not have funds legally available for
the redemption of all of the required number of Preferred Shares that are
subject to mandatory redemption or the Fund otherwise is unable to effect such
redemption on or prior to such mandatory redemption date, the Fund will redeem
those Preferred Shares on the earliest practicable date on which the Fund is
able to effect such redemption. Any such mandatory redemption will be limited to
the number of Preferred Shares necessary to restore the required discounted
value or the 1940 Act Preferred Shares Asset Coverage, as the case may be. See
the Articles Supplementary, attached as Appendix A to the Statement of
Additional Information, for more information concerning the circumstances in
which the Fund must redeem Preferred Shares.
In determining the number of New Preferred Shares required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro rata
among New Preferred Shares of the Fund and any other preferred stock of the Fund
subject to redemption or retirement. If fewer than all outstanding shares of any
series are, as a result, to be redeemed, the Fund may redeem such shares pro
rata from the holders in proportion to their holdings, or by any other method
that it deems fair and equitable.
OPTIONAL REDEMPTION. The Fund, at its option, may redeem shares of each
series of New Preferred Shares, in whole or in part, out of funds legally
available therefor. Any optional redemption will occur at the optional
redemption price per share of $25,000, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared by the Fund, but
excluding interest thereon) to (but not including) the date fixed for redemption
plus the premium, if any, specified in a special redemption provision. No New
Preferred Shares may be redeemed if the redemption would cause the Fund to
violate the 1940 Act or applicable law. New Preferred Shares of a series may not
be
41
redeemed in part if fewer than 250 Preferred Shares of that series would remain
outstanding after the redemption. The Fund has the authority to redeem New
Preferred Shares for any reason.
Except for the mandatory and optional redemption provisions, which are more
fully described in the Articles Supplementary, nothing contained in the Articles
Supplementary limits any right of the Fund to purchase or otherwise acquire any
New Preferred Shares outside of an auction at any price, whether higher or lower
than the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on, or the mandatory or optional redemption price
with respect to, any shares for which notice of redemption has been given and
the Fund meets the 1940 Act Preferred Shares Asset Coverage and the Preferred
Shares Basic Maintenance Amount tests after giving effect to such purchase or
acquisition on the date thereof. Any shares that are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the outstanding shares of any series of New Preferred Shares are redeemed or
otherwise acquired by the Fund, the Fund shall give notice of such transaction
to the Auction Agent, in accordance with the procedures agreed upon by the Board
of Directors.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with New Preferred Shares with respect to the distribution
of assets upon liquidation of the Fund, upon a liquidation, dissolution or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
holders of New Preferred Shares then outstanding will be entitled to receive and
to be paid out of the assets of the Fund available for distribution to its
stockholders, before any payment or distribution is made on the Common Shares,
an amount equal to the liquidation preference with respect to such shares
($25,000 per share), plus an amount equal to all dividends thereon (whether or
not earned or declared by the Fund, but excluding interest thereon) accumulated
but unpaid to (but not including) the date of final distribution in same-day
funds in connection with the liquidation of the Fund. After the payment to New
Preferred Stockholders of the full preferential amounts provided for as
described herein, New Preferred Stockholders as such shall have no right or
claim to any of the remaining assets of the Fund.
None of the sale of all or substantially all of the property or business of
the Fund, the merger or consolidation of the Fund into or with any other
corporation, or the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, dissolution or winding up of the affairs,
whether voluntary or involuntary, for the purposes of the foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under Moody's and Fitch guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount. The discounted value of an asset (other than
cash and cash equivalents) is a specified percentage of its full value; the
concept is intended to provide increased assurance of adequate asset coverage in
the face of expected or unexpected fluctuation in the value of the assets.
Moody's and Fitch have each established separate guidelines for determining
discounted value. To the extent any particular portfolio holding does not
satisfy the applicable rating agency's guidelines, all or a portion of such
holding's value will not be included in the calculation of discounted value (as
defined by such rating agency). The Moody's and Fitch guidelines impose certain
diversification requirements on the Fund's portfolio. Other than as needed to
meet the asset coverage tests, the Moody's and Fitch guidelines do not impose
any absolute limitations on the percentage of the Fund's assets that may be
invested in holdings not eligible for inclusion in the calculation of the
discounted value of the Fund's portfolio. The amount of ineligible assets
included in the portfolio at any time may vary depending upon the rating,
diversification and
42
other characteristics of the eligible assets included in the portfolio. The
Preferred Shares Basic Maintenance Amount includes the sum of (a) the aggregate
liquidation preference of Preferred Shares then outstanding and (b) certain
accrued and projected dividend and other payment obligations of the Fund.
The Fund is also required under the 1940 Act to maintain the 1940 Act
Preferred Shares Asset Coverage. The Fund's 1940 Act Preferred Shares Asset
Coverage is tested as of the last business day of each month in which any senior
equity securities are outstanding. The minimum required 1940 Act Preferred
Shares Asset Coverage amount of 200% may be increased or decreased if the 1940
Act is amended. Based on the composition of the portfolio of the Fund and market
conditions as of September 15, 2003, the 1940 Act Preferred Shares Asset
Coverage with respect to all of the Fund's preferred stock (including
Outstanding Preferred Shares), assuming the issuance on that date of all New
Preferred Shares offered hereby and giving effect to the deduction of related
sales load and related offering costs estimated at $426,000, would have been
computed as follows:
Value of Fund assets less
liabilities
not constituting senior
securities = $662,678,922 = 291%
------------------------------ -----------
Senior securities representing $228,000,000
indebtedness
plus
liquidation value of Preferred
Shares
In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of its portfolio at least equal to the Preferred Shares Basic
Maintenance Amount in accordance with the requirements of the rating agency or
agencies then rating New Preferred Shares or (b) the 1940 Act Preferred Shares
Asset Coverage, the Fund will be required to redeem New Preferred Shares as
described under "Redemption--Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for New Preferred Shares may, at any time, change or
withdraw any such rating. The Board may, without stockholder approval, amend,
alter or repeal any or all of the definitions and related provisions that have
been adopted by the Fund pursuant to the rating agency guidelines in the event
the Fund receives confirmation from Moody's or Fitch, or both, as appropriate,
that any such amendment, alteration or repeal would not impair the ratings then
assigned by Moody's and Fitch to New Preferred Shares.
The Board of Directors may amend the definition of maximum rate to increase
the percentage amount by which the reference rate is multiplied to determine the
maximum rate without the vote or consent of New Preferred Stockholders or any
other stockholder of the Fund, provided that immediately following any such
increase the Fund could meet the Preferred Shares Basic Maintenance Amount test.
The Fund will issue New Preferred Shares only if the shares carry a credit
quality rating of Aaa from Moody's and AAA from Fitch at the time of closing. Of
course, there can be no assurance that the New Preferred Shares will carry a
rating of Aaa from Moody's and AAA from Fitch at all times in the future. As
described by Moody's and Fitch, a preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock obligations. The
ratings on New Preferred Shares are not recommendations to purchase, hold or
sell those shares, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of New Preferred Shares
will be able to sell such shares in an auction or otherwise. The ratings are
based on current information furnished to Moody's and Fitch by the Fund and NB
Management and information obtained from other sources.
43
The ratings may be changed, suspended or withdrawn as a result of changes in, or
the unavailability of, such information. The Common Shares have not been rated
by a rating agency.
A rating agency's guidelines will apply to New Preferred Shares only so long
as such rating agency is rating such shares. The Fund will pay certain fees to
Moody's and Fitch for rating New Preferred Shares.
VOTING RIGHTS
Except as otherwise provided in this Prospectus, in the Statement of
Additional Information, in the Articles or as otherwise required by law, holders
of Preferred Shares will have equal voting rights with holders of Common Shares
and holders of any other shares of preferred stock of the Fund (one vote per
share) and will vote together with holders of Common Shares and holders of any
other shares of preferred stock of the Fund as a single class.
Holders of outstanding preferred stock, including New Preferred Shares,
voting as a separate class, are entitled at all times to elect two of the Fund's
Directors. The remaining Directors normally are elected by holders of Common
Shares and preferred stock, including New Preferred Shares, voting together as a
single class. If at any time dividends (whether or not earned or declared by the
Fund, but excluding interest thereon) on outstanding preferred stock, including
New Preferred Shares, shall be due and unpaid in an amount equal to two full
years' dividends thereon, and sufficient cash or specified securities shall not
have been deposited with the Auction Agent for the payment of such dividends,
then, as the sole remedy of holders of outstanding preferred stock, the number
of Directors constituting the Board shall be increased by the smallest number
that, when added to the two Directors elected exclusively by the holders of
outstanding preferred stock, as described above, would constitute a majority of
the Board as so increased by such smallest number, and at a special meeting of
stockholders that will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the holders of
outstanding preferred stock, voting as a separate class, will be entitled to
elect the smallest number of additional Directors that, together with the two
Directors which such holders will be in any event entitled to elect, constitutes
a majority of the total number of Directors of the Fund as so increased. The
terms of office of the persons who are Directors at the time of that election
will continue. If the Fund thereafter shall pay, or declare and set apart for
payment, in full, all dividends payable on all outstanding preferred stock, the
voting rights stated in the second preceding sentence shall cease, and the terms
of office of all of the additional Directors elected by the holders of
outstanding preferred stock (but not of the Directors with respect to whose
election the holders of Common Shares were entitled to vote or the two Directors
the holders of outstanding preferred stock have the right to elect in any
event), will terminate automatically.
So long as any Preferred Shares are outstanding, the Fund will not, without
the affirmative vote or consent of the holders of at least a majority of
Preferred Shares outstanding at the time (voting together as a separate class):
(a) authorize, create or issue, or increase the authorized or issued amount
of, any class or series of shares ranking prior to or on a parity with Preferred
Shares with respect to payment of dividends or the distribution of assets on
dissolution, liquidation or winding up the affairs of the Fund, or authorize,
create or issue additional shares of any series of Preferred Shares or any other
preferred stock, unless, in the case of preferred stock on a parity with
Preferred Shares, the Fund obtains confirmation from Moody's (if Moody's is then
rating Preferred Shares), Fitch (if Fitch is then rating Preferred Shares) or
any substitute rating agency (if any such substitute rating agency is then
rating Preferred Shares) that the issuance of such a class or series would not
impair the rating then assigned by such rating agency to Preferred Shares and
the Fund continues to comply with Section 13 of the 1940 Act, the 1940 Act
44
Preferred Shares Asset Coverage requirements and the Preferred Shares Basic
Maintenance Amount requirements, in which case the vote or consent of the
holders of Preferred Shares is not required;
(b) amend, alter or repeal the provisions of the Articles by merger,
consolidation or otherwise, so as to adversely affect any preference, right or
power of Preferred Shares or Preferred Stockholders; provided, however, that
(i) none of the actions permitted by the exception to (a) above will be deemed
to affect such preferences, rights or powers, (ii) a division of Preferred
Shares will be deemed to affect such preferences, rights or powers only if the
terms of such division adversely affect Preferred Stockholders and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to Preferred Shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund will be deemed to affect such preferences, rights or powers
only if Moody's or Fitch is then rating Preferred Shares and such issuance
would, at the time thereof, cause the Fund not to satisfy the 1940 Act Preferred
Shares Asset Coverage or the Preferred Shares Basic Maintenance Amount;
(c) authorize the Fund's conversion from a closed-end to an open-end
investment company; or
(d) approve any reorganization (as such term is used in the 1940 Act)
adversely affecting Preferred Shares.
So long as any Preferred Shares are outstanding, the Fund shall not, without
the affirmative vote or consent of the holders of at least a majority of
Preferred Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class, file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee becoming
insolvent.
The Fund will not approve any of the actions set forth in (a) or (b) above
which adversely affects the rights expressly set forth in the Articles of a
holder of shares of a series of preferred stock differently than those of a
holder of shares of any other series of preferred stock without the affirmative
vote or consent of the holders of at least a majority of the shares of each
series adversely affected. Even with such a vote, some of the actions set forth
in (a) or (b) above may not be permitted under the 1940 Act. Unless a higher
percentage is provided for under the Articles, the affirmative vote of the
holders of a majority of the outstanding Preferred Shares, voting together as a
single class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or any action requiring
a vote of security holders under Section 13(a) of the 1940 Act. Under the 1940
Act, the vote of a majority of the outstanding Preferred Shares means the
affirmative vote of the lesser of (a) 67% or more of the outstanding Preferred
Shares present at a meeting of Preferred Stockholders or represented by proxy if
the holders of more than 50% of the outstanding Preferred Shares are present or
represented by proxy or (b) more than 50% of the outstanding Preferred Shares.
However, to the extent permitted by Maryland law and the Articles, no vote of
holders of Common Shares, either separately or together with holders of
Preferred Shares as a single class, is necessary to take the actions
contemplated by (a) and (b) above.
The foregoing voting provisions will not apply with respect to Preferred
Shares if, at or prior to the time when a vote is required, such shares shall
have been (i) redeemed or (ii) called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
45
THE AUCTION
GENERAL
The Articles Supplementary provide that, except as otherwise described
herein, the applicable dividend rate for New Preferred Shares for each rate
period after the initial rate period shall be equal to the rate per annum that
the Auction Agent advises has resulted on the business day preceding the first
day of such subsequent rate period (an "auction date") from implementation of
the auction procedures (the "Auction Procedures") set forth in the Articles
Supplementary and summarized below, in which persons determine to hold or offer
to sell or, based on dividend rates bid by them, offer to purchase or sell New
Preferred Shares. Each periodic implementation of the Auction Procedures is
referred to herein as an "auction." See the Articles Supplementary for a more
complete description of the auction process.
AUCTION AGENCY AGREEMENT. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York) that provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the applicable
rate for New Preferred Shares so long as the applicable rate is to be based on
the results of an auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 60 days after such notice (30 days if such
termination is because amounts due to the Auction Agent are unpaid). If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALER AGREEMENTS. Each auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with one or more Broker-Dealers
selected by the Fund that provide for the participation of those Broker-Dealers
in auctions for New Preferred Shares.
The Auction Agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1%,
for any auction preceding a rate period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealer, for any auction preceding a rate
period of one year or more, of the liquidation preference ($25,000 per share) of
Preferred Shares held by a Broker-Dealer's customer upon settlement in the
auction.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination. The Auction Agent may not
terminate the Broker-Dealer Agreement with A.G. Edwards & Sons, Inc. without the
consent of the Fund.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for New Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction
46
Agent) as a holder of New Preferred Shares (a "Beneficial Owner") may submit
orders with respect to such New Preferred Shares to that Broker-Dealer as
follows:
- Hold order--indicating its desire to hold such shares without regard to
the applicable rate for the next rate period.
- Bid--indicating its desire to sell such shares at $25,000 per share if the
applicable rate for the next rate period thereof is less than the rate specified
in such bid.
- Sell order--indicating its desire to sell such shares at $25,000 per share
without regard to the applicable rate for the next rate period thereof.
A Beneficial Owner may submit different types of orders to its Broker-Dealer
with respect to different shares of a series of New Preferred Shares then held
by the Beneficial Owner. A Beneficial Owner for shares of such series that
submits its bid with respect to shares of such series to its Broker-Dealer
having a rate higher than the applicable maximum rate for shares of such series
on the auction date will be treated as having submitted a sell order to its
Broker-Dealer. A Beneficial Owner of shares of such series that fails to submit
an order to its Broker-Dealer with respect to such shares will ordinarily be
deemed to have submitted a hold order with respect to such shares of such series
to its Broker-Dealer. However, if a Beneficial Owner of shares of such series
fails to submit an order with respect to such shares of such series to its
Broker-Dealer for an auction relating to a rate period of more than 28 days,
such Beneficial Owner will be deemed to have submitted a sell order to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell New
Preferred Shares subject to the sell order. A Beneficial Owner that offers to
become the Beneficial Owner of additional New Preferred Shares is, for purposes
of such offer, a potential beneficial owner as discussed below.
A potential beneficial owner is either a customer of a Broker-Dealer that is
not a Beneficial Owner of a series of New Preferred Shares but that wishes to
purchase shares of such series or that is a Beneficial Owner of shares of such
series that wishes to purchase additional shares of such series. A potential
beneficial owner may submit bids to its Broker-Dealer in which it offers to
purchase shares of such series at $25,000 per share if the applicable rate for
shares of such series for the next rate period is not less than the specified
rate in such bid. A bid placed by a potential beneficial owner of shares of such
series specifying a rate higher than the maximum rate for shares of such series
on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are Beneficial Owners and potential beneficial owners to the
Auction Agent. The Broker-Dealers will designate themselves (unless otherwise
permitted by the Fund) as existing holders of shares subject to orders submitted
or deemed submitted to them by Beneficial Owners. They will designate themselves
as potential holders of shares subject to orders submitted to them by potential
beneficial owners. However, neither the Fund nor the Auction Agent will be
responsible for a Broker-Dealer's failure to comply with these procedures. Any
order placed with the Auction Agent by a Broker-Dealer as or on behalf of an
existing holder or a potential holder will be treated the same way as an order
placed with a Broker-Dealer by a Beneficial Owner or potential beneficial owner.
Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an
order for any New Preferred Shares held by it or by customers who are Beneficial
Owners will be treated as a Beneficial Owner's failure to submit to its
Broker-Dealer an order in respect of New Preferred Shares held by it. A
Broker-Dealer may also submit orders to the Auction Agent for its own account as
an existing holder or potential holder, provided it is not an affiliate of the
Fund.
There are sufficient clearing bids for shares of a series in an auction if
the number of shares of such series subject to bids submitted or deemed
submitted to the Auction Agent by Broker-Dealers for
47
potential beneficial owners with rates or spreads equal to or lower than the
applicable maximum rate for such series is at least equal to or exceeds the sum
of the number of shares of such series subject to sell orders and the number of
shares of such series subject to bids specifying rates or spreads higher than
the applicable maximum rate for such series submitted or deemed submitted to the
Auction Agent by Broker-Dealers for Beneficial Owners of such series. If there
are sufficient clearing bids for shares of a series, the applicable rate for
shares of such series for the next succeeding rate period thereof will be the
lowest rate specified in the submitted bids which, taking into account such rate
and all lower rates in the submitted bids, would result in existing holders and
potential holders owning all the shares of such series available for purchase in
the auction.
If there are not sufficient clearing bids for shares of such series, the
applicable rate for the next rate period will be the maximum rate on the auction
date. However, if the Fund has declared a special rate period and there are not
sufficient clearing bids, the election of a special rate period will not be
effective and a regular rate period will commence. If there are not sufficient
clearing bids, Beneficial Owners of New Preferred Shares that have submitted or
are deemed to have submitted sell orders may not be able to sell in the auction
all shares subject to such sell orders. If all outstanding shares of a series
are the subject of submitted hold orders, then the applicable rate for the next
rate period of that series will be 80% of the reference rate. The Auction Agent
will notify the Fund and the Broker-Dealers if the results of each auction.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale that may result in an existing holder continuing to hold or selling, or
a potential holder purchasing, a number of shares of a series of New Preferred
Shares that is different than the number of shares of such series specified in
its order. To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as existing holders or potential
holders in respect of customer orders will be required to make appropriate pro
rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same day funds to
DTC against delivery to their respective agent members. DTC will make payment to
the sellers' agent members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their agent members in same day funds.
The auctions for each series of New Preferred Shares will normally be held
every 7 days, and a rate period will normally begin on the following business
day.
If an auction date is not a business day because the NYSE is closed for
business for more than three consecutive business days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications
services, or the Auction Agent is not able to conduct an auction in accordance
with the Auction Procedures for any such reason, then the applicable rate for
the next rate period will be the rate determined on the previous auction date.
If a dividend payment date is not a business day because the NYSE is closed
for more than three consecutive business days due to an act of God, natural
disaster, act of war, civil or military disturbance, act of terrorism, sabotage,
riots or a loss or malfunction of utilities or communications services, or the
dividend payable on such date cannot be paid for any such reason, then:
- the dividend payment date for the affected rate period will be the next
business day on which the Fund and its paying agent, if any, can pay the
dividend;
- the affected rate period will end on the day it otherwise would have
ended; and
48
- the next rate period will begin and end on the dates on which it
otherwise would have begun and ended.
The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding New Preferred Shares of a series and three
current holders. The three current holders and three potential holders submit
orders through Broker-Dealers at the auction:
Current Holder A Owns 500 shares, wants to sell all 500 Bid order of 2.1% rate for all 500
shares if dividend rate is less than shares
2.1%
Current Holder B Owns 300 shares, wants to hold Hold order--will take the dividend rate
Current Holder C Owns 200 shares, wants to sell all 200 Bid order of 1.9% rate for all 200
shares if dividend rate is less than shares
1.9%
Potential Holder D Wants to buy 200 shares Places order to buy at or above 2.0%
Potential Holder E Wants to buy 300 shares Places order to buy at or above 1.9%
Potential Holder F Wants to buy 200 shares Places order to buy at or above 2.1%
The lowest dividend rate that will result in all 1,000 New Preferred Shares
being bought or continuing to be held is 2.0% (the offer by D). Therefore, the
dividend rate will be 2.0%. Current holders B and C will continue to own their
shares. Current holder A will sell its shares because A's dividend rate bid was
higher than the dividend rate. Potential holder D will buy 200 shares and
potential holder E will buy 300 shares because their bid rates were at or below
the dividend rate. Potential holder F will not buy any shares because its bid
rate was above the dividend rate.
SECONDARY MARKET TRADING AND TRANSFER OF NEW PREFERRED SHARES
The Broker-Dealers may maintain a secondary trading market in New Preferred
Shares outside of auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that such secondary trading
market in New Preferred Shares will provide owners with liquidity of investment.
New Preferred Shares are not registered on any stock exchange or on the Nasdaq
Stock Market.
Investors who purchase shares in an auction (particularly if the Fund has
declared a special rate period) should note that because the dividend rate on
such shares will be fixed for the length of such rate period, the value of the
shares may fluctuate in response to changes in interest rates, and may be more
or less than their original cost if sold on the open market in advance of the
next auction, depending upon market conditions.
A Beneficial Owner or an existing holder may sell, transfer or otherwise
dispose of New Preferred Shares only in whole shares and only (1) pursuant to a
bid or sell order placed with the Auction Agent in accordance with the Auction
Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of New Preferred Shares from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of the foregoing if such
Broker-Dealer remains the existing holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and (b) in the
case of all transfers other than pursuant to auctions, the Broker-Dealer (or
other person, if permitted by the Fund) to whom such transfer is made shall
advise the Auction Agent of such transfer.
49
DESCRIPTION OF COMMON SHARES
The Articles authorize the issuance of 1,000,000,000 shares of capital
stock. The Fund has issued 27,372,139 Common Shares with a par value of $0.0001
per share. All Common Shares have equal rights to the payment of dividends and
the distribution of assets upon liquidation. The Common Shares are fully paid
and non-assessable and have no preemptive or conversion rights or rights to
cumulative voting. Whenever Preferred Shares are outstanding, Common
Stockholders will not be entitled to receive any distributions from the Fund
unless all accrued dividends on Preferred Shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to Preferred Shares
would be at least 200% after giving effect to the distributions. See
"Description of New Preferred Shares" above.
The Common Shares are listed on the NYSE under the trading or "ticker"
symbol "NRI." The Fund intends to hold annual meetings of stockholders so long
as the Common Shares are listed on a national securities exchange and such
meetings are required as a condition to such listing. The Fund must continue to
meet the NYSE requirements in order for the Common Shares to remain listed.
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE
ARTICLES OF INCORPORATION
The Articles and the Fund's Bylaws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund, to cause it
to engage in certain transactions or to modify its structure.
The Articles require a vote by at least 75% of the Fund's Board and holders
of at least 75% of the shares of the Fund's capital stock outstanding and
entitled to vote, except as described below, to authorize (1) the Fund's
conversion from a closed-end to an open-end management investment company;
(2) any merger or consolidation or share exchange of the Fund with or into any
other company; (3) the dissolution or liquidation of the Fund; (4) any sale,
lease, or exchange of all or substantially all of the Fund's assets to any
Principal Stockholder (as defined below); (5) a change in the nature of the
business of the Fund so that it would cease to be an investment company
registered under the 1940 Act; (6) with certain exceptions, the issuance of any
securities of the Fund to any Principal Stockholder for cash; or (7) any
transfer by the Fund of any securities of the Fund to any Principal Stockholder
in exchange for cash, securities or other property having an aggregate fair
market value of $1,000,000 or more; provided, with respect to (1) through (5),
if such action has been authorized by the affirmative vote of a majority of the
entire Board, including a majority of the Directors who are not "interested
persons" of the Fund, as defined in the 1940 Act ("Independent Directors"), then
the affirmative vote of the holders of only a majority of the Fund's shares of
capital stock outstanding and entitled to vote at the time is required; and
provided, further, with respect to (6) and (7), if such transaction has been
authorized by the affirmative vote of a majority of the entire Board, including
a majority of the Independent Directors, no stockholder vote is required to
authorize such action. The term "Principal Stockholder" means any person, entity
or group that holds, directly or indirectly, more than 5% of the outstanding
shares of the Fund, and includes any associates or affiliates of such person or
entity or of any member of the group. None of the foregoing provisions may be
amended except by the vote of the holders of at least 75% of the outstanding
shares of capital stock of the Fund outstanding and entitled to vote thereon.
The percentage vote required under these provisions is higher than that required
under Maryland law or by the 1940 Act. The Board believes that the provisions of
the Articles relating to such a higher vote are in the best interest of the Fund
and its stockholders. Even if agreed to by the Fund, certain of the transactions
described above may be prohibited by the 1940 Act. As noted above, Preferred
Shares vote together with Common Shares on all matters. The 1940 Act also
requires approval of a majority of the outstanding Preferred Shares, for any
conversion from a closed-end to an open-end investment company. As the 1940 Act
also prohibits doing indirectly what cannot be done directly, a vote of
Preferred Shares may be required to effect some of the other transactions
described
50
above if the effective result would be conversion of the Fund from a closed-end
to an open-end structure.
The Board is classified into three classes, each with a term of three years
with only one class of Directors standing for election in any year. Such
classification may prevent replacement of a majority of the Directors for up to
a two-year period. Directors may be removed from office only for cause and only
by vote of the holders of at least 75% of the shares entitled to be voted for
such Director in an election of directors.
Reference should be made to the Articles on file with the Securities and
Exchange Commission for the full text of these provisions. See the Statement of
Additional Information under "Certain Provisions in the Articles of
Incorporation" for a discussion of the voting requirements applicable to certain
other transactions.
REPURCHASE OF COMMON SHARES; TENDER OFFERS; CONVERSION TO OPEN-END FUND
The Fund is a closed-end management investment company and as such its
Common Stockholders do not have the right to cause the Fund to redeem their
shares. Instead, the Common Shares trade in the open market at a price that is a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, dividend stability,
portfolio credit quality, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors. Shares of a
closed-end management investment company may frequently trade at prices lower
than net asset value. The Fund's Board of Directors regularly monitors the
relationship between the market price and net asset value of the Common Shares.
If the Common Shares were to trade at a substantial discount to net asset value
for an extended period of time, the Board may consider the repurchase of its
Common Shares on the open market or in private transactions, the making of a
tender offer for such shares or the conversion of the Fund to an open-end
management investment company. The Fund cannot assure you that its Board of
Directors will decide to take or propose any of these actions or that share
repurchases or tender offers will actually reduce market discount. Any
determination to repurchase Common Shares would reduce the asset coverage for
Preferred Shares and might make it necessary or desirable for the Fund to redeem
Preferred Shares. As described above in "Description of New Preferred
Shares--Dividends and Rate Periods--Restrictions on Dividends and Other
Distributions," the repurchase of Common Shares may be restricted or prohibited
at times when there exist unpaid distributions on Preferred Shares.
If the Fund converted to an open-end management investment company, it would
be required to redeem all Preferred Shares then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio), and the Common Shares
would no longer be listed on the NYSE. In contrast to a closed-end management
investment company, stockholders of an open-end management investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less any redemption charge that is in effect at the time of redemption.
Before deciding whether to take any action to convert the Fund to an
open-end management investment company, the Board would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its stockholders and market considerations. Based on these considerations, even
if the Fund's Common Shares should trade at a discount, the Board of Directors
may determine that, in the interest of the Fund and its stockholders, no action
should be taken. See the Statement of Additional Information under "Repurchase
of Common Shares; Tender Offers; Conversion to Open-End Fund" for a further
discussion of possible action to reduce or eliminate such discount to net asset
value.
51
TAX MATTERS
The following is a brief summary of certain federal tax considerations
affecting the Fund and its stockholders and does not purport to be complete or
to deal with all aspects of federal taxation that may be relevant to
stockholders in light of their particular circumstances. This discussion assumes
that you are a U.S. stockholder and will hold your New Preferred Shares as
capital assets. We have provided more detailed information regarding the tax
consequences of investing in the Fund in the Statement of Additional
Information.
The Fund intends to qualify for treatment as a regulated investment company
under the Code which requires (among other things) that it distribute each
taxable year to its stockholders at least 90% of its "investment company taxable
income" (which generally includes dividends the Fund receives on shares of Real
Estate Companies and other issuers, interest income, and the excess, if any, of
net short-term capital gains over long-term capital losses, all determined
without regard to the deduction for dividends paid). If the Fund so qualifies,
it will not be required to pay federal income tax on any income and gains it
distributes to its stockholders, but such distributions generally will be
taxable to you as a stockholder of the Fund when received.
The Fund believes that the New Preferred Shares will constitute stock of the
Fund and that distributions by the Fund with respect to New Preferred Shares
(other than distributions in redemption of New Preferred Shares that are treated
as exchanges of stock under Section 302(b) of the Code) thus will constitute
dividends to the extent of the Fund's current and accumulated earnings and
profits, as calculated for federal income tax purposes. It is possible, however,
that the IRS might take a contrary position, asserting, for example, that New
Preferred Shares constitute debt of the Fund. If this position were upheld, the
discussion of the treatment of distributions below would not apply. Instead,
Fund distributions to Preferred Stockholders would constitute interest, whether
or not they exceeded the Fund's earnings and profits, would be included in full
in the recipient's income, and would be taxed as ordinary income. Counsel to the
Fund believes that such a position, if asserted by the IRS, would be unlikely to
prevail if the issue were properly litigated.
The IRS requires that a regulated investment company that has two or more
classes of stock (E.G., common stock and preferred stock) allocate to each such
class proportionate amounts of each type of its income (such as ordinary income
and capital gains) based on the percentage of total dividends distributed to
each class for the taxable year. Accordingly, the Fund intends each taxable year
to allocate capital gain dividends among its Common Shares and Preferred Shares
in proportion to the total dividends paid to each class with respect to such
year.
Dividends paid to you out of the Fund's investment company taxable income
generally will be taxable as ordinary income (currently at a maximum federal
income tax rate of 35%, except as noted below) to the extent of its earnings and
profits. Distributions to you of net capital gain (the excess of net long-term
capital gain over net short-term capital loss), if any, will be taxable as
long-term capital gain, regardless of how long you have held your New Preferred
Shares. The Fund intends to distribute to its stockholders, at least annually,
substantially all of its investment company taxable income and net capital gain.
A distribution to you of an amount in excess of the Fund's current and
accumulated earnings and profits will be treated as a non-taxable return of
capital that will reduce your tax basis in your shares; the amount of any such
distribution in excess of your basis will be treated as gain from a sale of your
shares. Stockholders not subject to tax on their income generally will not be
required to pay income tax on amounts distributed to them.
A distribution will be treated as paid to you on December 31 of a particular
calendar year if it is declared by the Fund in October, November or December of
that year with a record date in such a
52
month and is paid during January of the following year. Each year, the Fund will
notify you of the tax status of distributions.
After calendar year-end, REITs can and often do change the category (E.G.,
ordinary income dividend, capital gain distribution, or return of capital) of
the distributions they have made during that year, which would result at that
time in the Fund's also having to re-categorize some of the distributions it has
made to stockholders. These would be reflected in your annual Form 1099,
together with other tax information. Those forms generally will be distributed
to you in January of each year, although the Fund may, in one or more years,
request from the IRS an extension of time to distribute those forms until mid-or
late-February to enable it to receive the latest information it can from the
REITs in which it invests and thereby accurately report that information to you
on a single form (rather than having to send you an amended form).
If you sell your shares, or have shares repurchased by the Fund, you may
realize a capital gain or loss in an amount equal to the difference between the
amount realized and your adjusted tax basis in the shares sold, which gain or
loss will be long-term or short-term depending on your holding period for the
shares.
The Fund may be required to withhold federal income tax (currently at the
rate of 28%) from all taxable distributions otherwise payable to you if you:
- fail to provide it with your correct taxpayer identification number;
- fail to make required certifications; or
- have been notified by the IRS that you are subject to backup withholding.
The recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003
contains provisions that reduce to 15% the maximum federal income tax rate on
(1) net capital gain individuals recognize and (2) "qualified dividend income"
individuals receive from certain domestic and foreign corporations ("QDI").
Distributions of net capital gain the Fund makes will be eligible for the
reduced rate, which will also apply to capital gains recognized by stockholders
who sell New Preferred Shares they have held for more than one year. The reduced
rate, which does not apply to short-term capital gains, generally applies to
long-term capital gains from sales or exchanges recognized after May 5, 2003
(and Fund distributions of such gain), and will cease to apply for taxable years
beginning after December 31, 2008.
The 15% rate for QDI applies to dividends that individuals receive during
the years 2003 through 2008. Dividends paid by REITs generally are not QDI.
Thus, it is currently expected that most dividends the Fund pays will not
constitute QDI and thus will not be eligible for the reduced rate. You should
consult your own adviser to evaluate the consequences of these changes in the
tax law.
Fund distributions also may be subject to state and local taxes. You should
consult with your own tax adviser regarding the particular consequences of
investing in the Fund.
53
UNDERWRITING
The Underwriters named below, acting through A.G. Edwards & Sons, Inc., as
lead manager, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lehman
Brothers Inc., as their representatives (the "Representatives"), have severally
agreed, subject to the terms and conditions of the underwriting agreement with
the Fund, NB Management and Neuberger Berman, LLC (the "Underwriting
Agreement"), to purchase from the Fund the number of New Preferred Shares set
forth below opposite their respective names.
NUMBER OF SHARES
--------------------------------------
UNDERWRITER SERIES A SERIES B SERIES C SERIES D
----------- -------- -------- -------- --------
A.G. Edwards & Sons, Inc...... 132 132 132 132
Merrill Lynch, Pierce, Fenner
& Smith
Incorporated........ 132 132 132 132
Lehman Brothers Inc........... 66 66 66 66
-------- -------- -------- --------
Total..................... 330 330 330 330
======== ======== ======== ========
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions, including the absence of any materially
adverse change in the Fund's business and the receipt of certain certificates,
opinions and letters from the Fund and the Fund's attorneys and independent
accountants. The nature of the Underwriters' obligation is such that they are
committed to purchase all New Preferred Shares offered hereby if they purchase
any New Preferred Shares.
The Representatives have advised the Fund that the Underwriters propose to
offer some New Preferred Shares directly to investors at the offering price of
$25,000 per New Preferred Share, and may offer some New Preferred Shares to
certain dealers at the offering price less a concession not in excess of $137.50
per New Preferred Share, and such dealers may reallow a concession not in excess
of $100.00 per New Preferred Share on sales to certain other dealers. New
Preferred Shares are offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters, and subject to their
right to reject orders in whole or in part.
The Fund, NB Management and Neuberger Berman, LLC have each agreed to
indemnify the Underwriters for or to contribute to the losses arising out of
certain liabilities, including liabilities under the Securities Act.
The Fund anticipates that the Representatives and certain other Underwriters
may from time to time act as brokers or dealers in connection with the execution
of its portfolio transactions after they have ceased to be Underwriters and,
subject to certain restrictions, may so act while they are Underwriters.
The Fund anticipates that the Underwriters or their respective affiliates
may, from time to time, act in auctions as a Broker-Dealers and receive fees as
set forth under "The Auction" and in the Statement of Additional Information.
The Underwriters are active underwriters of, and dealers in, securities and act
as market makers in a number of such securities, and therefore can be expected
to engage in portfolio transactions with, and perform services for, the Fund.
In connection with this offering, the Underwriters or selected dealers may
distribute prospectuses electronically.
54
The settlement date for the purchase of New Preferred Shares will be October
28, 2003 as agreed upon by the Underwriters, the Fund and NB Management pursuant
to Rule 15c6-1 under the Securities Exchange Act of 1934.
NB Management (and not the Fund) has agreed to pay from its own assets a fee
to A.G. Edwards & Sons, Inc. for the provision of certain corporate finance and
consulting services to NB Management and the Fund. This fee will be payable
quarterly at the annual rate of 0.15% of the Fund's Managed Assets and will be
payable only so long as the Management Agreement remains in effect between the
Fund and NB Management or any successor in interest or affiliate of NB
Management, as and to the extent that such Management Agreement is renewed or
continued periodically in accordance with the 1940 Act. A.G. Edwards &
Sons, Inc. may delegate a portion of its rights and obligations under its
agreement with NB Management to other persons, certain of whom may have been
Underwriters or other participants, or affiliates of such participants, in this
offering and the distribution of the Fund's Common Shares.
The addresses of the principal underwriters are: A.G. Edwards & Sons, Inc.,
One North Jefferson Avenue, St. Louis, Missouri 63108; Merrill Lynch, Pierce,
Fenner & Smith Incorporated, 4 World Financial Center, New York, New York 10080;
and Lehman Brothers Inc., 745 Seventh Avenue, New York, New York 10019.
CUSTODIAN, AUCTION AGENT AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts, 02110. The Custodian
performs custodial, fund accounting and portfolio accounting services. The
Fund's Auction Agent, transfer agent, registrar and dividend paying agent is The
Bank of New York, Attn: Corporate Trust Administration, 100 Church Street,
8th Floor, New York, New York 10286.
LEGAL OPINIONS
Certain legal matters in connection with New Preferred Shares will be passed
upon for the Fund by Kirkpatrick & Lockhart LLP, Washington, D.C., and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois and Cleary, Gottlieb, Steen & Hamilton, New York, New York.
55
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Investment Objectives, Policies and Limitations... 1
Investment Strategies, Techniques and Risks....... 4
Portfolio Trading and Turnover Rate............... 27
Management of the Fund............................ 28
Investment Management and Administration
Services........................................ 38
Portfolio Transactions............................ 43
Net Asset Value................................... 47
Description of New Preferred Shares............... 48
Additional Information Concerning the Auction for
New Preferred Shares............................ 50
Certain Provisions in the Articles of
Incorporation................................... 52
Distributions on Common Shares.................... 53
Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund..................... 55
Tax Matters....................................... 57
Reports to Stockholders........................... 63
Custodian, Auction Agent and Transfer Agent....... 63
Independent Auditors.............................. 63
Counsel........................................... 64
Registration Statement............................ 64
Report of Independent Auditors.................... 65
Financial Statement............................... 66
Unaudited Financial Information................... 69
APPENDIX A--Form of Articles Supplementary for
Preferred Shares................................ A-1
APPENDIX B--Ratings of Corporate Bonds and
Commercial Paper................................ B-1
56
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.................... 1
Financial Highlights.................. 14
The Fund.............................. 15
Use of Proceeds....................... 15
Capitalization........................ 16
The Fund's Investments................ 16
Interest Rate Transactions............ 23
Risks................................. 25
Management of the Fund................ 34
Description of New Preferred Shares... 36
The Auction........................... 46
Description of Common Shares.......... 50
Anti-takeover and Other Provisions in
the Articles of Incorporation....... 50
Repurchase of Common Shares; Tender
Offers; Conversion to Open-End
Fund................................ 51
Tax Matters........................... 52
Underwriting.......................... 54
Custodian, Auction Agent and Transfer
Agent............................... 55
Legal Opinions........................ 55
Table of Contents of the Statement of
Additional Information.............. 56
NEUBERGER BERMAN
REALTY INCOME
FUND INC.
AUCTION PREFERRED SHARES
330 SHARES, SERIES A
330 SHARES, SERIES B
330 SHARES, SERIES C
330 SHARES, SERIES D
--------------
PROSPECTUS
--------------
A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO.
LEHMAN BROTHERS
October 24, 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NEUBERGER BERMAN REALTY INCOME FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
AUCTION PREFERRED SHARES
Neuberger Berman Realty Income Fund Inc. ("Fund") is a recently
organized, non-diversified closed-end management investment company.
This Statement of Additional Information ("SAI") relating to newly
issued Series A, Series B, Series C and Series D auction preferred shares
(collectively, "New Preferred Shares" and, together with the outstanding Series
A, Series B, Series C and Series D auction preferred shares, "Preferred Shares")
is not a prospectus and should be read in conjunction with the Fund's Prospectus
relating to New Preferred Shares dated October 24, 2003 ("Prospectus"). This SAI
does not include all information that a prospective investor should consider
before purchasing New Preferred Shares, and investors should obtain and read the
Fund's Prospectus prior to purchasing such shares. You can get a free copy of
the Prospectus from Neuberger Berman Management Inc. ("NB Management"), 605
Third Avenue, 2nd Floor, New York, NY 10158-0180 or by calling 877-461-1899. You
may also obtain a copy of the Prospectus on the web site (http://www.sec.gov) of
the Securities and Exchange Commission. Capitalized terms used but not defined
in this SAI have the meanings ascribed to them in the Prospectus.
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or in this SAI in connection
with the offering made by the Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Fund. The Prospectus and this SAI do not constitute an offering by the
Fund in any jurisdiction in which such offering may not lawfully be made.
The "Neuberger Berman" name and logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the name of the Fund are
either service marks or registered trademarks of NB Management.
(C)2003 Neuberger Berman Management Inc. All rights reserved.
This Statement of Additional Information is dated October 24, 2003.
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVES, POLICIES AND LIMITATIONS................................1
INVESTMENT STRATEGIES, TECHNIQUES AND RISKS....................................4
PORTFOLIO TRADING AND TURNOVER RATE...........................................27
MANAGEMENT OF THE FUND........................................................28
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES.............................38
PORTFOLIO TRANSACTIONS........................................................42
NET ASSET VALUE...............................................................46
DESCRIPTION OF NEW PREFERRED SHARES...........................................47
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR NEW PREFERRED SHARES.......50
CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION...........................51
DISTRIBUTIONS ON COMMON SHARES................................................52
REPURCHASE OF COMMON SHARES; TENDER OFFERS; CONVERSION TO OPEN-END FUND.......54
TAX MATTERS...................................................................56
REPORTS TO STOCKHOLDERS.......................................................63
CUSTODIAN, AUCTION AGENT AND TRANSFER AGENT...................................63
INDEPENDENT AUDITORS..........................................................63
COUNSEL.......................................................................63
REGISTRATION STATEMENT........................................................63
REPORT OF INDEPENDENT AUDITORS................................................64
FINANCIAL STATEMENT...........................................................65
UNAUDITED FINANCIAL INFORMATION...............................................68
APPENDIX A - ARTICLES SUPPLEMENTARY FOR PREFERRED SHARES AND NEW
PREFERRED SHARES.............................................................A-1
APPENDIX B - RATINGS OF CORPORATE BONDS AND COMMERCIAL PAPER.................B-1
i
INVESTMENT OBJECTIVES, POLICIES AND LIMITATIONS
The investment objectives and general investment policies of the Fund
are described in the Prospectus. Additional information concerning the
characteristics of certain of the Fund's investments is set forth below.
The Fund's primary investment objective is high current income. Capital
appreciation is a secondary investment objective. These investment objectives
are fundamental. Unless otherwise specified, the investment policies and
limitations of the Fund are not fundamental. Any investment policy or limitation
that is not fundamental may be changed by the Board of Directors of the Fund
("Board") without stockholder approval. The investment objectives and
fundamental investment policies and limitations of the Fund may not be changed
without the approval of the holders of a majority of the outstanding shares of
common stock ("Common Shares") and Preferred Shares voting as a single class, as
well as by the vote of the holders of a majority of the outstanding Preferred
Shares tabulated separately. A "majority of the outstanding" shares means (i)
67% or more of the shares present at a meeting, if the holders of more than 50%
of the shares are present or represented by proxy, or (ii) more than 50% of the
shares, whichever of (i) or (ii) is less. These percentages are required by the
Investment Company Act of 1940, as amended ("1940 Act").
Under normal market conditions, the Fund invests at least 90% of its
total assets in income-producing common equity securities, preferred securities,
securities convertible into equity securities ("convertible securities") and
non-convertible debt securities issued by Real Estate Companies. A "Real Estate
Company" is a company, including a real estate investment trust ("REIT"), that
generally derives at least 50% of its revenue from the ownership, construction,
financing, management and/or sale of commercial, industrial and/or residential
real estate (or has at least 50% of its assets invested in such real estate).
The Fund invests at least 75% of its total assets under normal market conditions
in income-producing equity securities of REITs.
The Fund may invest up to 25% of its total assets in below-investment
grade debt securities (commonly referred to as "junk bonds"), as well as
below-investment grade convertible and non-convertible preferred securities. For
a description of the risks associated with below-investment grade securities,
see "Investment Strategies, Techniques and Risks - Below-Investment Grade
Securities" below.
Unless otherwise indicated, any investment policy or limitation that
involves a maximum percentage of securities or assets will not be considered
exceeded unless the percentage limitation is exceeded immediately after, and
because of, a transaction by the Fund. If, because of changes in the value of
the Fund's portfolio, the asset coverage for any borrowings were to fall below
300%, this would limit the Fund's ability to pay dividends and therefore, the
Fund intends to restore the 300% asset coverage as soon as practical in light of
the circumstances.
The Fund's fundamental investment policies and limitations are as
follows:
1. BORROWING. The Fund may not borrow money in excess of 33 1/3% of its
total assets (including the amount of money borrowed) minus liabilities (other
than the amount borrowed), except that the Fund may borrow up to an additional
1
5% of its total assets for temporary purposes.
2. COMMODITIES. The Fund may not purchase physical commodities or
contracts thereon, unless acquired as a result of the ownership of securities or
instruments, but this restriction shall not prohibit the Fund from purchasing
futures contracts or options (including options on futures contracts, but
excluding options or futures contracts on physical commodities) or from
investing in securities of any kind.
For purposes of the limitation on commodities, the Fund does not
consider foreign currencies or forward contracts to be physical commodities.
3. DIVERSIFICATION. The Fund is non-diversified under the 1940 Act.
4. INDUSTRY CONCENTRATION. The Fund may not purchase any security if,
as a result, 25% or more of its total assets (taken at current value) would be
invested in the securities of issuers having their principal business activities
in the same industry, except that the Fund will invest greater than 25% of its
total assets in the real estate industry. This limitation does not apply to U.S.
Government and Agency Securities.
5. LENDING. The Fund may not lend any security or make any other loan
if, as a result, more than 33 1/3% of its total assets (taken at current value)
would be lent to other parties, except, in accordance with its investment
objectives, policies, and limitations, (i) through the purchase of debt
securities or (ii) by engaging in repurchase agreements.
6. REAL ESTATE. The Fund may not purchase real estate unless acquired
as a result of the ownership of securities or instruments, except that the Fund
may (i) invest in securities of issuers that mortgage, invest or deal in real
estate or interests therein, (ii) invest in securities that are secured by real
estate or interests therein, (iii) purchase and sell mortgage-related
securities, (iv) hold and sell real estate acquired by the Fund as a result of
the ownership of securities, and (v) invest in REITs of any kind.
7. SENIOR SECURITIES. The Fund may not issue senior securities, except
as permitted under the 1940 Act.
8. UNDERWRITING. The Fund may not underwrite securities of other
issuers, except to the extent that the Fund, in disposing of portfolio
securities, may be deemed to be an underwriter within the meaning of the
Securities Act of 1933, as amended ("1933 Act").
The following investment policies and limitations are non-fundamental:
1. LENDING. Except for the purchase of debt securities and engaging in
repurchase agreements, the Fund may not make any loans other than securities
loans.
2. MARGIN TRANSACTIONS. The Fund may not purchase securities on margin
from brokers or other lenders, except that the Fund may obtain such short-term
credits as are necessary for the clearance of securities transactions. Margin
payments in connection with transactions in futures contracts and options on
2
futures contracts shall not constitute the purchase of securities on margin and
shall not be deemed to violate the foregoing limitation.
3. FOREIGN SECURITIES. The Fund may not invest more than 10% of the
value of its total assets in securities of non-U.S. issuers located in countries
considered by NB Management to be industrialized, which securities may be U.S.
dollar-denominated or denominated in a currency other than the U.S. dollar. This
policy does not limit investment in American Depositary Receipts ("ADRs") and
similar instruments denominated in U.S. dollars, where the underlying security
may be denominated in a foreign currency.
4. INVESTMENTS IN ANY ONE ISSUER. At the close of each quarter of the
Fund's taxable year, (i) no more than 25% of the value of its total assets may
be invested in the securities of a single issuer and (ii) with regard to 50% of
the value of its total assets, no more than 5% of the value of its total assets
may be invested in the securities of a single issuer and the Fund may not hold
more than 10% of an issuer's outstanding voting securities. These limitations do
not apply to U.S. Government securities, as defined for tax purposes, or
securities of another regulated investment company ("RIC"), as defined in
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
5. SECURITIES OF REAL ESTATE COMPANIES. The Fund normally invests at
least 80% of its Assets in securities of Real Estate Companies. If because of
market action, the Fund falls out of compliance with this policy, it will make
future investments in such a manner as to bring the Fund back into compliance
with the policy. Although this is a non-fundamental policy, the Board will not
change this policy without at least 60 days' notice to the Fund's stockholders.
As used in this policy, Assets means net assets plus the amount of any borrowing
for investment purposes.
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes if
it is repaid within sixty days and is not extended or renewed. Preferred Shares
would be considered senior securities under the 1940 Act. The Fund may only
issue New Preferred Shares if the asset coverage (as defined in the 1940 Act)
with respect to Preferred Shares would be at least 200% after such issuance.
To the extent the Fund covers its commitment under a derivative
instrument by the segregation of assets determined by NB Management to be liquid
and/or by holding instruments representing offsetting commitments, such
instrument will not be considered a "senior security" for purposes of the asset
coverage requirements otherwise applicable to borrowings by the Fund or the
Fund's issuance of Preferred Shares.
The Fund interprets its policies with respect to borrowing and lending
to permit such activities as may be lawful for the Fund, to the full extent
permitted by the 1940 Act or by exemption from the provisions therefrom pursuant
to an exemptive order of the SEC.
3
If rating agencies assign different ratings to the same security, NB
Management will determine which rating it believes best reflects the security's
quality and risk at that time, which may be the highest of several assigned
ratings.
The Fund will apply for ratings for its New Preferred Shares from
Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings ("Fitch"). In
order to obtain and maintain the required ratings, the Fund may be required to
comply with investment quality, diversification and other guidelines established
by Moody's and Fitch. Such guidelines will likely be more restrictive than the
restrictions set forth above. The Fund does not anticipate that such guidelines
would have a material adverse effect on holders of Common Shares ("Common
Stockholders") or its ability to achieve its investment objectives. The Fund
currently anticipates that any New Preferred Shares that it intends to issue
initially would be given the highest ratings by Moody's ("Aaa") and Fitch
("AAA"), but no assurance can be given that such ratings will be obtained.
Moody's and Fitch receive fees in connection with their ratings issuances.
CASH MANAGEMENT AND TEMPORARY DEFENSIVE POSITIONS. For temporary
defensive purposes, or to manage cash pending investment or payout, the Fund may
invest up to 100% of its total assets in cash and cash equivalents, U.S.
Government and Agency Securities, commercial paper and certain other money
market instruments, as well as repurchase agreements collateralized by the
foregoing.
Pursuant to an exemptive order received from the SEC, the Fund also may
invest up to 25% of its total assets in shares of a money market fund managed by
NB Management to manage uninvested cash and cash collateral received in
connection with securities lending.
INVESTMENT STRATEGIES, TECHNIQUES AND RISKS
The following information supplements the discussion of the Fund's
investment objectives, policies and techniques that are described in the
Prospectus. The Fund may make the following investments, among others, some of
which are part of its principal investment strategies and some of which are not.
The principal risks of the Fund's principal strategies are discussed in the
Prospectus. The Fund may not buy all of the types of securities or use all of
the investment techniques that are described.
REAL ESTATE COMPANIES. The Fund will not directly invest in real estate
but rather in securities issued by Real Estate Companies. However, because of
its fundamental policy to concentrate its investments in the securities of
companies in the real estate industry, the Fund is subject to the risks
associated with the direct ownership of real estate. These risks include
declines in the value of real estate, risks associated with general and local
economic conditions, possible lack of availability of mortgage funds,
overbuilding, extended vacancies of properties, increased competition, increase
in property taxes and operating expenses, changes in zoning laws, losses due to
costs resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitation on rents, changes in neighborhood values and the
appeal of properties to tenants, and changes in interest rates.
4
Securities of Real Estate Companies include securities of REITs,
commercial and residential mortgage-backed securities and real estate
financings. Such instruments are sensitive to factors such as real estate values
and property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding and the management skill and creditworthiness of the issuer. Real
estate-related instruments may also be affected by tax and regulatory
requirements, such as those relating to the environment.
REITs are sometimes informally characterized as Equity REITs, Mortgage
REITs and Hybrid REITs. An Equity REIT invests primarily in the fee ownership or
leasehold ownership of land and buildings and derives its income primarily from
rental income. An Equity REIT may also realize capital gains (or losses) by
selling real properties in its portfolio that have appreciated (or depreciated)
in value. A Mortgage REIT invests primarily in mortgages on real estate, which
may secure construction, development or long-term loans. A Mortgage REIT
generally derives its income primarily from interest payments on the credit it
has extended. A Hybrid REIT combines the characteristics of Equity REITs and
Mortgage REITs, generally by holding both ownership interests and mortgage
interests in real estate.
The types of REITs described above are dependent upon management skill,
are not diversified and are subject to heavy cash flow dependency, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for
conduit income tax treatment under the Code, and failing to maintain exemption
from the 1940 Act.
REITs are subject to management fees and other expenses. Therefore,
investments in REITs will cause the Fund to bear its proportionate share of the
costs of the REITs' operations. At the same time, the Fund will continue to pay
its own management fees and expenses with respect to all of its assets,
including any portion invested in the shares of REITs. It is anticipated,
although not required, that under normal circumstances a majority of the Fund's
investments will consist of Equity REITs.
The Fund may also invest in mortgage-backed securities. These are
fixed-income securities that represent an interest in a pool of mortgages and
entitle the holder to a payout derived from the payment of principal and
interest on the underlying mortgages. Like other fixed-income securities, the
value of mortgage-backed securities generally rises when market interest rates
fall and falls when interest rates rise. These changes in value are more
pronounced the longer the duration of the pool. However, because mortgagors have
the option to refinance and pay off their mortgages early, the duration of a
mortgage pool is somewhat unpredictable. When interest rates decline
sufficiently, many mortgagors refinance. This will limit the Fund's ability to
benefit from increases in value caused by a decline in rates. When rates
increase, the value of mortgage-backed securities declines, and fewer mortgagors
refinance, thereby extending the duration of the pool and accentuating the
decline in value. Mortgage-backed securities are subject to the risk that
mortgagors will default on their payments and the value of the underlying
property will be inadequate to cover the loss. Mortgages that underlie
securities issued by U.S. Government instrumentalities (such as Ginnie Mae,
Fannie Mae and Freddie Mac, as defined below) generally must meet certain
standards intended to reduce that risk and are usually guaranteed against such
losses, but privately issued mortgage securities may not meet those standards or
be guaranteed. Interests in Mortgage REITs, although they are equity securities,
can be subject to many of the same risks as mortgage-backed securities.
5
POLICIES AND LIMITATIONS. Under normal market conditions, the Fund
invests at least 90% of its total assets in income-producing common equity
securities, preferred equity securities, securities convertible into equity
securities and non-convertible debt securities issued by Real Estate Companies.
Under normal conditions, the Fund invests at least 75% of its total assets in
income-producing equity securities issued by REITs.
BELOW-INVESTMENT GRADE SECURITIES. The Fund may invest in
below-investment grade debt securities rated Caa/CCC or above as well as
non-investment grade preferred and convertible preferred securities and unrated
securities determined by NB Management to be of comparable quality.
Below-investment grade quality debt securities are commonly referred to as "junk
bonds." Bonds rated Baa or BBB are considered "investment grade" securities,
although such bonds may be considered to possess some speculative
characteristics.
Below-investment grade securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments and, therefore, carry greater price volatility and
principal and income risk, including the possibility of issuer default and
bankruptcy and increased market price volatility. Issues rated CCC/Caa may be in
default.
Below-investment grade securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in below-investment grade
security prices because the advent of a recession could lessen the ability of an
issuer to make principal and interest payments on its debt securities. If an
issuer of below-investment grade securities defaults, in addition to risking
payment of all or a portion of interest and principal, the Fund may incur
additional expenses to seek recovery. In the case of below-investment grade
securities structured as zero coupon securities (see "Zero Coupon Securities,"
below), their market prices are affected to a greater extent by interest rate
changes, and therefore tend to be more volatile, than securities that pay
interest periodically and in cash. NB Management seeks to reduce these risks
through diversification, credit analysis and attention to current developments
and trends in both the economy and financial markets.
The secondary market on which below-investment grade securities are
traded may be less liquid than the market for higher-grade securities. Less
liquidity in the secondary trading market could adversely affect the price at
which the Fund could sell a below-investment grade security, and could adversely
affect the net asset value of the shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of below-investment grade securities, especially in a
thinly-traded market. When secondary markets for below-investment grade
securities are less liquid than the market for higher-grade securities, it may
be more difficult to value the securities because such valuation may require
more research, and elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly and the Fund may have greater difficulty selling its
portfolio securities. The Fund will be more dependent on NB Management's
research and analysis when investing in below-investment grade securities. NB
Management seeks to minimize the risks of investing in all securities through
diversification, in-depth credit analysis and attention to current developments
in interest rates and market conditions.
6
A general description of Moody's, Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), and Fitch ratings of bonds is set forth in
Appendix B hereto. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the bonds they rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, bonds with the same maturity, coupon and rating may have different
yields while obligations with the same maturity and coupon with different
ratings may have the same yield. For these reasons, the use of credit ratings as
the sole method of evaluating below-investment grade securities can involve
certain risks. For example, credit ratings evaluate the safety of principal and
interest payments, not the market value risk of below-investment grade
securities. Also, credit rating agencies may fail to change credit ratings in a
timely fashion to reflect events since the security was last rated. NB
Management does not rely solely on credit ratings when selecting securities for
the Fund, and develops its own independent analysis of issuer credit quality.
The Fund's credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security if a rating
agency or NB Management downgrades its assessment of the credit characteristics
of a particular issue. In determining whether to retain or sell such a security,
NB Management may consider such factors as its assessment of the credit quality
of the issuer of such security, the price at which such security could be sold
and the rating, if any, assigned to such security by any rating agency. However,
analysis of the creditworthiness of issuers of below-investment grade securities
may be more complex than for issuers of higher-quality debt securities.
POLICIES AND LIMITATIONS. The Fund may invest up to 25% of its total
assets in below-investment grade debt securities rated Caa/CCC or above as well
as non-investment grade convertible and non-convertible preferred securities and
unrated securities determined by NB Management to be of comparable quality.
WARRANTS. Warrants may be acquired by the Fund in connection with other
securities or separately and provide the Fund with the right to purchase at a
later date other securities of the issuer. Warrants are securities permitting,
but not obligating, their holder to subscribe for other securities or
commodities. Warrants do not carry with them the right to dividends or voting
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As a
result, warrants may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be
expected to be sold within seven days at approximately the price at which they
are valued. These may include unregistered or other restricted securities,
repurchase agreements maturing in greater than seven days, written
over-the-counter ("OTC") options, securities or other liquid assets being used
as cover for such options, certain loan participation interests, fixed time
deposits that are not subject to prepayment or provide for withdrawal penalties
upon prepayment (other than overnight deposits). Illiquid securities may also
include commercial paper under section 4(2) of the 1933 Act, as amended, and
7
Rule 144A securities (restricted securities that may be traded freely among
qualified institutional buyers pursuant to an exemption from the registration
requirements of the securities laws); these securities are considered illiquid
unless NB Management, acting pursuant to guidelines established by the Board,
determines they are liquid. Generally, foreign securities freely tradable in
their principal market are not considered restricted or illiquid. Illiquid
securities may be difficult for the Fund to value or dispose of due to the
absence of an active trading market. The Fund's sale of some illiquid securities
may be subject to legal restrictions that could be costly to it.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases
securities from a bank that is a member of the Federal Reserve System or from a
securities dealer that agrees to repurchase the securities from the Fund at a
higher price on a designated future date. The agreed-upon repurchase price
determines the yield during the Fund's holding period. Repurchase agreements are
considered to be loans collateralized by the underlying security that is the
subject of the repurchase contract. Repurchase agreements generally are for a
short period of time, usually less than a week. Costs, delays or losses could
result if the selling party to a repurchase agreement becomes bankrupt or
otherwise defaults. NB Management monitors the creditworthiness of sellers.
POLICIES AND LIMITATIONS. Repurchase agreements with a maturity of more
than seven days are considered to be illiquid securities. The Fund may enter
into a repurchase agreement only if (1) the underlying securities are of a type
that the Fund's investment policies and limitations would allow it to purchase
directly, (2) the market value of the underlying securities, including accrued
interest, at all times equals or exceeds the repurchase price and (3) payment
for the underlying securities is made only upon satisfactory evidence that the
securities are being held for the Fund's account by its custodian or a bank
acting as the Fund's agent.
SECURITIES LOANS. The Fund may lend portfolio securities to banks,
brokerage firms and other institutional investors judged creditworthy by NB
Management, provided that cash or equivalent collateral, equal to at least 100%
of the market value of the loaned securities, is continuously maintained by the
borrower with the Fund. The Fund may invest the cash collateral and earn income,
or it may receive an agreed-upon amount of interest income from a borrower who
has delivered equivalent collateral. During the time securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividends or interest
paid on such securities. These loans are subject to termination at the option of
the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment. NB Management believes the risk of
loss on these transactions is slight because, if a borrower were to default for
any reason, the collateral should satisfy the obligation. However, as with other
extensions of secured credit, loans of portfolio securities involve some risk of
loss of rights in the collateral should the borrower fail financially.
POLICIES AND LIMITATIONS. The Fund may lend its securities with a value
not exceeding 33-1/3% of its total assets to banks, brokerage firms or other
institutional investors judged creditworthy by NB Management. Borrowers are
required continuously to secure their obligations to return securities on loan
8
from the Fund by depositing collateral in a form determined to be satisfactory
by the Board. The collateral, which must be marked to market daily, must be
equal to at least 100% of the market value of the loaned securities, which will
also be marked to market daily.
RESTRICTED SECURITIES AND RULE 144A SECURITIES. The Fund may invest in
restricted securities, which are securities that may not be sold to the public
without an effective registration statement under the 1933 Act. Before they are
registered, such securities may be sold only in a privately negotiated
transaction or pursuant to an exemption from registration. In recognition of the
increased size and liquidity of the institutional market for unregistered
securities and the importance of institutional investors in the formation of
capital, the SEC has adopted Rule 144A under the 1933 Act. Rule 144A is designed
to facilitate efficient trading among institutional investors by permitting the
sale of certain unregistered securities to qualified institutional buyers. To
the extent privately-placed securities held by the Fund qualify under Rule 144A
and an institutional market develops for those securities, the Fund likely will
be able to dispose of the securities without registering them under the 1933
Act. To the extent that institutional buyers become, for a time, uninterested in
purchasing these securities, investing in Rule 144A securities could increase
the level of the Fund's illiquidity. NB Management, acting under guidelines
established by the Board, may determine that certain securities qualified for
trading under Rule 144A are liquid. Regulation S under the 1933 Act permits the
sale abroad of securities that are not registered for sale in the United States.
Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses, and a considerable period may elapse between
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities for which no
market exists are priced by a method that the Board believes accurately reflects
fair value.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the
Fund sells portfolio securities subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter-party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Fund.
POLICIES AND LIMITATIONS. Reverse repurchase agreements are considered
borrowings for purposes of the Fund's investment policies and limitations
concerning borrowings. While a reverse repurchase agreement is outstanding, the
Fund will deposit in a segregated account with its custodian cash or appropriate
liquid securities, marked to market daily, in an amount at least equal to the
Fund's obligations under the agreement.
FOREIGN SECURITIES. The Fund may invest in U.S. dollar-denominated
securities of non-U.S. issuers and foreign branches of U.S. banks that are
located in countries considered by NB Management to be industrialized; such
securities include negotiable certificates of deposit ("CDs"), bankers'
acceptances and commercial paper. Non-U.S. issuers are issuers organized and
doing business principally outside the United States and include banks, non-U.S.
governments and quasi-governmental organizations. While investments in foreign
securities are intended to reduce risk by providing further diversification,
such investments involve sovereign and other risks, in addition to the credit
9
and market risks normally associated with domestic securities. These additional
risks include the possibility of adverse political and economic developments
(including political instability, nationalization, expropriation or confiscatory
taxation) and the potentially adverse effects of unavailability of public
information regarding issuers, less governmental supervision and regulation of
financial markets, reduced liquidity of certain financial markets and the lack
of uniform accounting, auditing and financial reporting standards or the
application of standards that are different or less stringent than those applied
in the United States; different laws and customs governing securities tracking;
and possibly limited access to the courts to enforce the Fund's rights as
investor.
The Fund also may invest in equity, debt or other income-producing
securities that are denominated in or indexed to foreign currencies, including
(1) common and preferred stocks, (2) CDs, commercial paper, fixed time deposits
and bankers' acceptances issued by foreign banks, (3) obligations of other
corporations and (4) obligations of foreign governments and their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities. Investing in foreign currency-denominated securities involves the
special risks associated with investing in non-U.S. issuers, as described in the
preceding paragraph, and the additional risks of (1) adverse changes in foreign
exchange rates and (2) adverse changes in investment or exchange control
regulations (which could prevent cash from being brought back to the United
States). Additionally, dividends and interest payable on foreign securities (and
gains realized on disposition thereof) may be subject to foreign taxes,
including taxes withheld from those payments. Commissions on foreign securities
exchanges are often at fixed rates and are generally higher than negotiated
commissions on U.S. exchanges, although the Fund endeavors to achieve the most
favorable net results on its portfolio transactions.
Foreign securities often trade with less frequency and in less volume
than domestic securities and therefore may exhibit greater price volatility.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custody arrangements and
transaction costs of foreign currency conversions.
Foreign markets also have different clearance and settlement
procedures. In certain markets, there have been times when settlements have been
unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Fund is uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause it to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result in losses to the Fund due to subsequent
declines in value of the securities or, if the Fund has entered into a contract
to sell the securities, could result in possible liability to the purchaser.
Interest rates prevailing in other countries may affect the prices of
foreign securities and exchange rates for foreign currencies. Local factors,
including the strength of the local economy, the demand for borrowing, the
government's fiscal and monetary policies and the international balance of
payments, often affect interest rates in other countries. Individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
10
The Fund may invest in ADRs, European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs"), and International Depositary Receipts
("IDRs"). ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company evidencing its ownership of the underlying foreign
securities. Most ADRs are denominated in U.S. dollars and are traded on a U.S.
stock exchange. However, they are subject to the risk of fluctuation in the
currency exchange rate if, as is often the case, the underlying securities are
denominated in a foreign currency. Issuers of the securities underlying
sponsored ADRs, but not unsponsored ADRs, are contractually obligated to
disclose material information in the United States. Therefore, the market value
of unsponsored ADRs is less likely to reflect the effect of such information.
EDRs and IDRs are receipts typically issued by a European bank or trust company
evidencing its ownership of the underlying foreign securities. GDRs are receipts
issued by either a U.S. or non-U.S. banking institution evidencing its ownership
of the underlying foreign securities and are often denominated in U.S. dollars.
POLICIES AND LIMITATIONS. To limit the risks inherent in investing in
foreign currency-denominated securities of non-U.S. issuers located in countries
considered by NB Management to be industrialized, the Fund may not purchase such
securities if, as a result, more than 10% of its total assets (taken at market
value) would be invested in such securities. Within those limitations, however,
the Fund is not restricted in the amount it may invest in securities denominated
in any one foreign currency.
Investments in securities of foreign issuers are subject to the Fund's
quality standards. The Fund may invest only in securities of issuers in
countries whose governments are considered stable by NB Management.
FIXED-INCOME SECURITIES. While the emphasis of the Fund's investment
program is on common stocks and other equity securities, it may also invest in
money market instruments, U.S. Government and Agency Securities, and other
fixed-income securities. The Fund may invest in debt securities and debentures
rated both investment grade and below-investment grade.
U.S. Government Securities are obligations of the U.S. Treasury backed
by the full faith and credit of the United States. U.S. Government Agency
Securities are issued or guaranteed by U.S. Government agencies or by
instrumentalities of the U.S. Government, such as Ginnie Mae (also known as the
Government National Mortgage Association), Fannie Mae (also known as the Federal
National Mortgage Association), Freddie Mac (also known as the Federal Home Loan
Mortgage Corporation), Sallie Mae (also known as the Student Loan Marketing
Association), and the Tennessee Valley Authority. Some U.S. Government Agency
Securities are supported by the full faith and credit of the United States,
while others may by supported by the issuer's ability to borrow from the U.S.
Treasury, subject to the Treasury's discretion in certain cases, or only by the
credit of the issuer. U.S. Government Agency Securities include U.S. Government
Agency mortgage-backed securities. The market prices of U.S. Government and
Agency Securities are not guaranteed by the U. S. Government and generally
fluctuate inversely with changing interest rates.
"Investment grade" debt securities are those receiving one of the four
highest ratings from S&P, Moody's, Fitch or another nationally recognized
statistical rating organization ("rating agency") or, if unrated by any rating
agency, deemed by NB Management to be comparable to such rated securities
11
("Comparable Unrated Securities"). Securities rated by Moody's in its fourth
highest rating category (Baa) or Comparable Unrated Securities may be deemed to
have speculative characteristics.
The ratings of a rating agency represent its opinion as to the quality
of securities it undertakes to rate. Ratings are not absolute standards of
quality; consequently, securities with the same maturity, coupon and rating may
have different yields. Although the Fund may rely on the ratings of any rating
agency, it primarily refers to ratings assigned by S&P and Moody's, which are
described in Appendix B to this SAI.
Fixed-income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on its obligations ("credit
risk") and are subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and market
liquidity ("market risk"). The value of the fixed-income securities in which the
Fund may invest is likely to decline in times of rising market interest rates.
Conversely, when rates fall, the value of the Fund's fixed-income investments is
likely to rise. Typically, the longer the time to maturity of a given security,
the greater is the change in its value in response to a change in interest
rates. Foreign debt securities are subject to risks similar to those of other
foreign securities.
Lower-rated securities are more likely to react to developments
affecting market and credit risk than are more highly-rated securities, which
react primarily to movements in the general level of interest rates. Debt
securities in the lowest rating categories may involve a substantial risk of
default or may be in default. Changes in economic conditions or developments
regarding the individual issuer are more likely to cause price volatility and
weaken the capacity of the issuer of such securities to make principal and
interest payments than is the case for higher-grade debt securities. An economic
downturn affecting the issuer may result in an increased incidence of default.
The market for lower-rated securities may be thinner and less active than for
higher-rated securities. Pricing of thinly-traded securities requires greater
judgment than pricing of securities for which market transactions are regularly
reported. NB Management will invest in lower-rated securities only when it
concludes that the anticipated return on such an investment to the Fund warrants
exposure to the additional level of risk.
POLICIES AND LIMITATIONS. The Fund may invest in debt securities rated
CCC or higher by S&P, rated Caa or higher by Moody's, or rated CCC or higher by
Fitch, or unrated securities determined to be of comparable quality. The Fund
may invest in convertible bonds that NB Management believes present a good value
because they are convertible into equity securities and have an attractive
yield. The Fund may invest up to 20% of its total assets in debt securities.
COMMERCIAL PAPER. Commercial paper is a short-term debt security issued
by a corporation, bank or other issuer, usually for purposes such as financing
current operations. The Fund may invest in commercial paper that cannot be
resold to the public without an effective registration statement under the 1933
Act. While restricted commercial paper normally is deemed illiquid, NB
Management may in certain cases determine that such paper is liquid, pursuant to
guidelines established by the Board.
12
POLICIES AND LIMITATIONS. The Fund may invest in commercial paper only
if it has received the highest rating from S&P (A-1) or Moody's (P-1) or is
deemed by NB Management to be of comparable quality.
BANK OBLIGATIONS. The Fund may invest in bank obligations, including
negotiable CDs, banker's acceptances, fixed time deposits and deposit notes. A
CD is a short-term negotiable certificate issued by a commercial bank against
funds deposited in the bank and is either interest-bearing or purchased on a
discount basis. A bankers' acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of U.S. banks or foreign
banks that are payable at a stated maturity date and bear a fixed rate of
interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. Deposit notes are notes issued by commercial banks
that generally bear fixed rates on interest and typically have original
maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon that availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by governmental regulation. In addition, securities of foreign
banks and foreign branches of U.S. banks may involve investment risks in
addition to those relating to domestic bank obligations. Such risks include
future political and economic developments, the possible seizure or
nationalization of foreign deposits and the possible adoption of foreign
governmental restrictions that might adversely affect the payment of principal
and interest on such obligations. In addition, foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements and
non-U.S. issuers generally are subject to different accounting, auditing,
reporting and recordkeeping standards than those applicable to U.S. issuers.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities,
which are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or that specify a future date when the
securities begin to pay current interest. Zero coupon securities are issued and
traded at a discount from their face amount or par value. This discount varies
depending on prevailing interest rates, the time remaining until cash payments
begin, the liquidity of the security and the perceived credit quality of the
issuer.
Zero coupon bonds are redeemed at face value when they mature. The
discount on zero coupon securities ("original issue discount" or "OID") must be
taken into income ratably by the Fund prior to the receipt of any actual
payments. Because the Fund must distribute substantially all of its investment
company taxable income (including its accrued original issue discount) to its
stockholders each year to avoid payment of federal income and excise taxes, it
may have to dispose of portfolio securities under disadvantageous
13
circumstances to generate cash, or may be required to borrow, to satisfy its
distribution requirements. See "Tax Matters."
The market prices of zero coupon securities generally are more volatile
than the prices of securities that pay interest periodically. Zero coupon
securities are likely to respond to changes in interest rates to a greater
degree than other types of debt securities having a similar maturity and credit
quality. Because these securities usually trade at a deep discount, they will be
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities that make periodic
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero coupon securities
eliminate the reinvestment risk and lock in a rate of return to maturity.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Convertible securities generally have
features of both common stocks and debt securities. A convertible security
entitles the holder to receive the interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, such securities ordinarily
provide a stream of income with generally higher yields than common stocks of
the same or similar issuers, but lower than the yield on non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
non-convertible securities but rank senior to common stock in a corporation's
capital structure. The value of a convertible security is a function of (1) its
yield in comparison to the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth if converted
into the underlying common stock.
The price of a convertible security often reflects variations in the
price of the underlying common stock in a way that non-convertible debt may not.
Convertible securities are typically issued by smaller capitalization companies
whose stock prices may be volatile. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund will be required to convert it into the underlying common
stock, sell it to a third party or permit the issuer to redeem the security. Any
of these actions could have an adverse effect on the Fund and its ability to
achieve its investment objectives.
POLICIES AND LIMITATIONS. Convertible debt securities are subject to
the Fund's investment policies and limitations concerning fixed-income
securities.
PREFERRED STOCK. The Fund may invest in preferred stock. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors. Preferred
stockholders may have certain rights if dividends are not paid but generally
have no legal recourse against the issuer. Stockholders may suffer a loss of
value if dividends are not paid. The market prices of preferred stocks are
generally more sensitive to changes in the issuer's creditworthiness than are
the prices of debt securities.
14
SWAP AGREEMENTS. The Fund may enter into swap agreements to manage or
gain exposure to particular types of investments (including equity securities or
indices of equity securities in which the Fund otherwise could not invest
efficiently). In a swap agreement, one party agrees to make regular payments
equal to a floating rate on a specified amount in exchange for payments equal to
a fixed rate, or a different floating rate, on the same amount for a specified
period.
Swap agreements may involve leverage and may be highly volatile;
depending on how they are used, they may have a considerable impact on the
Fund's performance. The risks of swap agreements depend upon the other party's
creditworthiness and ability to perform, as well as the Fund's ability to
terminate its swap agreements or reduce its exposure through offsetting
transactions. Swap agreements may be illiquid. The swap market is relatively new
and is largely unregulated.
POLICIES AND LIMITATIONS. In accordance with SEC staff requirements,
the Fund will segregate cash or appropriate liquid securities in an amount equal
to its obligations under swap agreements; when an agreement provides for netting
of the payments by the two parties, the Fund will segregate only the amount of
its net obligation, if any.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares
of other investment companies. Such investment may be the most practical or only
manner in which the Fund can participate in certain foreign markets because of
the expenses involved or because other vehicles for investing in those countries
may not be available at the time the Fund is ready to make an investment. The
Fund at times may invest in instruments structured as investment companies to
gain exposure to the performance of a recognized securities index, such as the
Standard & Poor's 500 Composite Stock Index ("S&P 500 Index") or for other
appropriate purposes. As a shareholder in an investment company, the Fund would
bear its pro rata share of that investment company's expenses. Investment in
other funds may involve the payment of substantial premiums above the value of
such issuer's portfolio securities. The Fund does not intend to invest in such
funds unless, in the judgment of NB Management, the potential benefits of such
investment justify the payment of any applicable premium or sales charge.
POLICIES AND LIMITATIONS. Except for investments in a money market fund
managed by NB Management for cash management purposes, the Fund's investment in
securities of other registered investment companies is limited to (i) 3% of the
total voting stock of any one investment company, (ii) 5% of the Fund's total
assets with respect to any one investment company and (iii) 10% of the Fund's
total assets in the aggregate.
Pursuant to an exemptive order received from the SEC, the Fund also may
invest up to 25% of its total assets in shares of a money market fund managed by
NB Management to manage uninvested cash and cash collateral received in
connection with securities lending.
15
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS,
OPTIONS ON SECURITIES AND INDICES, FORWARD CONTRACTS
AND OPTIONS ON FOREIGN CURRENCIES
(COLLECTIVELY, "FINANCIAL INSTRUMENTS")
FUTURES CONTRACTS AND OPTIONS THEREON. The Fund may purchase and sell
interest rate futures contracts, stock and bond index futures contracts and
foreign currency futures contracts and may purchase and sell options thereon in
an attempt to hedge against changes in the prices of securities or, in the case
of foreign currency futures and options thereon, to hedge against changes in
prevailing currency exchange rates. Because the futures markets may be more
liquid than the cash markets, the use of futures contracts permits the Fund to
enhance portfolio liquidity and maintain a defensive position without having to
sell portfolio securities. The Fund views investment in (i) single stock
interest rate and securities index futures and options thereon as a maturity
management device and/or a device to reduce risk or preserve total return in an
adverse environment for the hedged securities and (ii) foreign currency futures
and options thereon as a means of establishing more definitely the effective
return on, or the purchase price of, securities denominated in foreign
currencies that are held or intended to be acquired by the Fund.
For purposes of managing cash flow, the Fund may purchase and sell
stock index futures contracts, and may purchase and sell options thereon, to
increase its exposure to the performance of a recognized securities index, such
as the S&P 500 Index.
A "sale" of a futures contract (or a "short" futures position) entails
the assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) entails the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures, including stock and bond index futures, are settled on a net cash
payment basis rather than by the sale and delivery of the securities underlying
the futures.
U.S. futures contracts (except certain currency futures) are traded on
exchanges that have been designated as "contract markets" by the Commodity
Futures Trading Commission ("CFTC"); futures transactions must be executed
through a futures commission merchant that is a member of the relevant contract
market. In both U.S. and foreign markets, an exchange's affiliated clearing
organization guarantees performance of the contracts between the clearing
members of the exchange.
Although futures contracts by their terms may require the actual
delivery or acquisition of the underlying securities or currency, in most cases
the contractual obligation is extinguished by being offset before the expiration
of the contract. A futures position is offset by buying (to offset an earlier
sale) or selling (to offset an earlier purchase) an identical futures contract
calling for delivery in the same month. This may result in a profit or loss.
While futures contracts entered into by the Fund will usually be liquidated in
this manner, the Fund may instead make or take delivery of underlying securities
or currency whenever it appears economically advantageous for it to do so.
"Margin" with respect to a futures contract is the amount of assets
that must be deposited by the Fund with, or for the benefit of, a futures
commission merchant or broker in order to initiate and maintain the Fund's
16
futures positions. The margin deposit made by the Fund when it enters into a
futures contract ("initial margin") is intended to assure its performance of the
contract. If the price of the futures contract changes -- increases in the case
of a short (sale) position or decreases in the case of a long (purchase)
position -- so that the unrealized loss on the contract causes the margin
deposit not to satisfy margin requirements, the Fund will be required to make an
additional margin deposit ("variation margin"). However, if favorable price
changes in the futures contract cause the margin deposit to exceed the required
margin, the excess variation margin will be paid to the Fund. In computing its
net asset value ("NAV"), the Fund marks to market the value of its open futures
positions. The Fund also must make margin deposits with respect to options on
futures that it has written (but not with respect to options on futures that it
has purchased). If the futures commission merchant or broker holding the margin
deposit goes bankrupt, the Fund could suffer a delay in recovering its funds and
could ultimately suffer a loss.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in the contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume a short futures
position (if the option is a call) or a long futures position (if the option is
a put). Upon exercise of the option, the accumulated cash balance in the
writer's futures margin account is delivered to the holder of the option. That
balance represents the amount by which the market price of the futures contract
at exercise exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option. Options on futures have characteristics
and risks similar to those of securities options, as discussed herein.
Although the Fund believes that the use of futures contracts and
options will benefit it, if NB Management's judgment about the general direction
of the markets or about interest rate or currency exchange rate trends is
incorrect, the Fund's overall return would be lower than if it had not entered
into any such contracts. The prices of futures contracts and options are
volatile and are influenced by, among other things, actual and anticipated
changes in interest or currency exchange rates, which in turn are affected by
fiscal and monetary policies and by national and international political and
economic events. At best, the correlation between changes in prices of futures
contracts or options and of securities being hedged can be only approximate due
to differences between the futures and securities markets or differences between
the securities or currencies underlying the Fund's futures or options position
and the securities held by or to be purchased for the Fund. The currency futures
or options market may be dominated by short-term traders seeking to profit from
changes in exchange rates. This would reduce the value of such contracts used
for hedging purposes over a short-term period. Such distortions are generally
minor and would diminish as the contract approaches maturity.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage; as a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, or
gain, to the investor. Losses that may arise from certain futures transactions
are potentially unlimited.
Most U.S. futures exchanges limit the amount of fluctuation in the
price of a futures contract or option thereon during a single trading day; once
the daily limit has been reached, no trades may be made on that day at a price
17
beyond that limit. The daily limit governs only price movements during a
particular trading day, however; it thus does not limit potential losses. In
fact, it may increase the risk of loss, because prices can move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing liquidation of unfavorable futures and options positions and
subjecting traders to substantial losses. If this were to happen with respect to
a position the Fund held, it could have an adverse impact on its NAV.
Single stock and narrow-based security index futures, and options
thereon, have not been permitted to trade in the United States until very
recently. Therefore, it may be very difficult, at least initially, to predict
how the markets in these instruments will behave, particularly in unusual
circumstances. In addition, as some of the markets on which such instruments
will trade are also new (such as derivatives transaction execution facilities or
"DTEFs"), they have no operating history. In addition, DTEFs are principal
markets; therefore, no clearing house in effect guarantees performance of the
counter-party to a contract executed on a DTEF.
New options and futures contracts and other financial products may be
developed from time to time. The Fund may invest in any such options, contracts
and products as may be developed to the extent consistent with its investment
objectives and the regulatory requirements applicable to investment companies.
POLICIES AND LIMITATIONS. The Fund may purchase and sell futures
contracts and options thereon in an attempt to hedge against changes in the
prices of securities or, in the case of foreign currency futures and options
thereon, to hedge against prevailing currency exchange rates. The Fund will not
engage in transactions in futures and options on futures for speculation.
The Fund may purchase and sell stock index futures contracts and
options thereon. For purposes of managing cash flow, the managers may use such
futures and options to increase the funds' exposure to the performance of a
recognized securities index, such as the S&P 500 Index.
CALL OPTIONS ON SECURITIES. The Fund may write covered call options and
may purchase call options on securities. The purpose of writing call options is
to hedge (i.e., to reduce, at least in part, the effect of price fluctuations of
securities held by the Fund on its NAV) or to earn premium income. Portfolio
securities on which call options may be written and purchased by the Fund are
purchased solely on the basis of investment considerations consistent with its
investment objectives.
When the Fund writes a call option, it is obligated to sell a security
to a purchaser at a specified price at any time until a certain date if the
purchaser decides to exercise the option. The Fund receives a premium for
writing the call option. So long as the obligation of the call option continues,
the Fund may be assigned an exercise notice, requiring it to deliver the
underlying security against payment of the exercise price. The Fund may be
obligated to deliver securities underlying an option at less than the market
price.
The writing of covered call options is a conservative investment
technique that is believed to involve relatively little risk but is capable of
enhancing the Fund's total return. When writing a covered call option, the Fund,
in return for the premium, gives up the opportunity for profit from a price
18
increase in the underlying security above the exercise price, but conversely
retains the risk of loss should the price of the security decline.
If a call option that the Fund has written expires unexercised, it will
realize a gain in the amount of the premium; however, that gain may be offset by
a decline in the market value of the underlying security during the option
period. If the call option is exercised, the Fund will realize a gain or loss
from the sale of the underlying security.
When the Fund purchases a call option, it pays a premium for the right
to purchase a security from the writer at a specified price until a specified
date.
POLICIES AND LIMITATIONS. The Fund may write covered call options and
may purchase call options on securities. The Fund may also write covered call
options and may purchase call options in related closing transactions. The Fund
writes only "covered" call options on securities it owns (in contrast to the
writing of "naked" or uncovered call options, which the Fund will not do).
The Fund would purchase a call option to offset a previously written
call option. The Fund also may purchase a call option to protect against an
increase in the price of the securities it intends to purchase.
PUT OPTIONS ON SECURITIES. The Fund may write and purchase put options
on securities. The Fund will receive a premium for writing a put option, which
obligates it to acquire a security at a certain price at any time until a
certain date if the purchaser decides to exercise the option. The Fund may be
obligated to purchase the underlying security at more than its current value.
When the Fund purchases a put option, it pays a premium to the writer
for the right to sell a security to the writer for a specified amount at any
time until a certain date. The Fund would purchase a put option in order to
protect itself against a decline in the market value of a security it owns.
Portfolio securities on which put options may be written and purchased
by the Fund are purchased solely on the basis of investment considerations
consistent with its investment objectives. When writing a put option, the Fund,
in return for the premium, takes the risk that it must purchase the underlying
security at a price that may be higher than the current market price of the
security. If a put option that the Fund has written expires unexercised, it will
realize a gain in the amount of the premium.
POLICIES AND LIMITATIONS. The Fund generally writes and purchases put
options on securities for hedging purposes (e.g., to reduce, at least in part,
the effect of price fluctuations of securities the Fund holds on its NAV).
GENERAL INFORMATION ABOUT SECURITIES OPTIONS. The exercise price of an
option may be below, equal to or above the market value of the underlying
security at the time the option is written. Options normally have expiration
dates between three and nine months from the date written. American-style
options are exercisable at any time prior to their expiration date. The
obligation under any option written by the Fund terminates upon expiration of
the option or, at an earlier time, when the Fund offsets the option by entering
into a "closing purchase transaction" to purchase an option of the same series.
19
If an option is purchased by the Fund and is never exercised or closed out, the
Fund will lose the entire amount of the premium paid.
Options are traded both on U.S. national securities exchanges and in
the OTC market. Exchange-traded options are issued by a clearing organization
affiliated with the exchange on which the option is listed; the clearing
organization in effect guarantees completion of every exchange-traded option. In
contrast, OTC options are contracts between the Fund and a counter-party, with
no clearing organization guarantee. Thus, when the Fund sells (or purchases) an
OTC option, it generally will be able to "close out" the option prior to its
expiration only by entering into a closing transaction with the dealer to whom
(or from whom) the Fund originally sold (or purchased) the option. There can be
no assurance that the Fund would be able to liquidate an OTC option at any time
prior to expiration. Unless the Fund is able to effect a closing purchase
transaction in a covered OTC call option it has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised or
until different cover is substituted. In the event of the counter-party's
insolvency, the Fund may be unable to liquidate its options position and the
associated cover. NB Management monitors the creditworthiness of dealers with
which the Fund may engage in OTC options transactions.
The premium received (or paid) by the Fund when it writes (or
purchases) an option is the amount at which the option is currently traded on
the applicable market. The premium may reflect, among other things, the current
market price of the underlying security, the relationship of the exercise price
to the market price, the historical price volatility of the underlying security,
the length of the option period, the general supply of and demand for credit,
and the interest rate environment. The premium received by the Fund for writing
an option is recorded as a liability on the Fund's statement of assets and
liabilities. This liability is adjusted daily to the option's current market
value.
Closing transactions are effected in order to realize a profit (or
minimize a loss) on an outstanding option, to prevent an underlying security
from being called, or to permit the sale or the put of the underlying security.
Furthermore, effecting a closing transaction permits the Fund to write another
call option on the underlying security with a different exercise price or
expiration date or both. There is, of course, no assurance that the Fund will be
able to effect closing transactions at favorable prices. If the Fund cannot
enter into such a transaction, it may be required to hold a security that it
might otherwise have sold (or purchase a security that it would not have
otherwise bought), in which case it would continue to be at market risk on the
security.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from writing the call or put option. Because increases in the market
price of a call option generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset, in whole or in part, by appreciation of the underlying
security owned by the Fund; however, the Fund could be in a less advantageous
position than if it had not written the call option.
The Fund pays brokerage commissions or spreads in connection with
purchasing or writing options, including those used to close out existing
positions. From time to time, the Fund may purchase an underlying security for
20
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering the security from its portfolio. In those cases,
additional brokerage commissions are incurred.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets.
POLICIES AND LIMITATIONS. The Fund may use American-style options. The
assets used as cover (or held in a segregated account) for OTC options written
by the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC call option written subject to this procedure
will be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
PUT AND CALL OPTIONS ON SECURITIES INDICES. For purposes of managing
cash flow, the Fund may purchase put and call options on securities indices to
increase its exposure to the performance of a recognized securities index, such
as the S&P 500 Index.
Unlike a securities option, which gives the holder the right to
purchase or sell a specified security at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (1) the difference between the exercise price of the
option and the value of the underlying securities index on the exercise date (2)
multiplied by a fixed "index multiplier." A securities index fluctuates with
changes in the market values of the securities included in the index. Options on
stock indices are currently traded on the Chicago Board Options Exchange, the
New York Stock Exchange ("NYSE"), the American Stock Exchange, and other U.S.
and foreign exchanges.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the securities
being hedged correlate with price movements in the selected securities index.
Perfect correlation is not possible because the securities held or to be
acquired by the Fund will not exactly match the composition of the securities
indices on which options are available.
Securities index options have characteristics and risks similar to
those of securities options, as discussed herein.
POLICIES AND LIMITATIONS. For purposes of managing cash flow, the Fund
may purchase put and call options on securities indices to increase the Fund's
exposure to the performance of a recognized securities index, such as the S&P
500 Index. All securities index options purchased by the Fund will be listed and
traded on an exchange.
FOREIGN CURRENCY TRANSACTIONS. The Fund may enter into contracts for
the purchase or sale of a specific currency at a future date (usually less than
one year from the date of the contract) at a fixed price ("forward contracts").
The Fund also may engage in foreign currency exchange transactions on a spot
21
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market.
The Fund enters into forward contracts in an attempt to hedge against
changes in prevailing currency exchange rates. The Fund does not engage in
transactions in forward contracts for speculation; it views investments in
forward contracts as a means of establishing more definitely the effective
return on, or the purchase price of, securities denominated in foreign
currencies. Forward contract transactions include forward sales or purchases of
foreign currencies for the purpose of protecting the U.S. dollar value of
securities held or to be acquired by the Fund or protecting the U.S. dollar
equivalent of dividends, interest, or other payments on those securities.
Forward contracts are traded in the interbank market directly between
dealers (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades; foreign exchange dealers realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies.
At the consummation of a forward contract to sell currency, the Fund
may either make delivery of the foreign currency or terminate its contractual
obligation to deliver by purchasing an offsetting contract. If the Fund chooses
to make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other assets of the Fund into such currency. If the
Fund engages in an offsetting transaction, it will incur a gain or a loss to the
extent that there has been a change in forward contract prices. Closing purchase
transactions with respect to forward contracts are usually made with the
currency dealer who is a party to the original forward contract.
NB Management believes that the use of foreign currency hedging
techniques, including "proxy-hedges," can provide significant protection of NAV
in the event of a general rise or decrease in the U.S. dollar against foreign
currencies. For example, the return available from securities denominated in a
particular foreign currency would diminish if the value of the U.S. dollar
increased against that currency. Such a decline could be partially or completely
offset by an increase in value of a hedge involving a forward contract to sell
that foreign currency or a proxy-hedge involving a forward contract to sell a
different foreign currency whose behavior is expected to resemble the currency
in which the securities being hedged are denominated but which is available on
more advantageous terms.
However, a hedge or proxy-hedge cannot protect against exchange rate
risks perfectly, and if NB Management is incorrect in its judgment of future
exchange rate relationships, the Fund could be in a less advantageous position
than if such a hedge had not been established. If the Fund uses proxy-hedging,
it may experience losses on both the currency in which it has invested and the
currency used for hedging if the two currencies do not vary with the expected
degree of correlation. Using forward contracts to protect the value of the
Fund's securities against a decline in the value of a currency does not
eliminate fluctuations in the prices of underlying securities. Because forward
contracts are not traded on an exchange, the assets used to cover such contracts
22
may be illiquid. The Fund may experience delays in the settlement of its foreign
currency transactions.
POLICIES AND LIMITATIONS. The Fund may enter into forward contracts for
the purpose of hedging and not for speculation.
OPTIONS ON FOREIGN CURRENCIES. The Fund may write and purchase covered
call and put options on foreign currencies.
Currency options have characteristics and risks similar to those of
securities options, as discussed herein. Certain options on foreign currencies
are traded on the OTC market and involve liquidity and credit risks that may not
be present in the case of exchange-traded currency options.
POLICIES AND LIMITATIONS. The Fund may use options on foreign
currencies to protect against declines in the U.S. dollar value of portfolio
securities or increases in the U.S. dollar cost of securities to be acquired or
to protect the U.S. dollar equivalent of dividends, interest, or other payments
on those securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions
including multiple options transactions, multiple interest transactions and any
combination of options and interest rate transactions, instead of a single
Financial Instrument as part of a single or combined strategy when, in the
judgment of NB Management, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions will normally
be entered into by the Fund based on NB Management's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase the risks or hinder achievement of the Fund's management objective.
COVER FOR FINANCIAL INSTRUMENTS. Transactions using Financial
Instruments, other than purchased options, expose the Fund to an obligation to
another party. The Fund will not enter into any such transactions unless it owns
either (1) an offsetting ("covering") position in securities, currencies or
other options, futures contracts or forward contracts, or (2) cash and liquid
assets held in a segregated account with a value, marked-to-market daily,
sufficient to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding cover
for these instruments and will, if the guidelines so require, set aside cash or
liquid assets in an account with its custodian in the prescribed amount as
determined daily.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Financial Instrument is open, unless
they are replaced with other appropriate assets. As a result, the commitment of
a large portion of the Fund's assets for cover or segregation could impede
portfolio management of the Fund's ability to meet redemption requests or
current obligations.
Securities held in a segregated account cannot be sold while the
futures, options or forward strategy covered by those securities is outstanding,
unless they are replaced with other suitable assets. As a result, segregation of
23
a large percentage of the Fund's assets could impede Fund management or the
Fund's ability to meet current obligations. The Fund may be unable promptly to
dispose of assets that cover, or are segregated with respect to, an illiquid
futures, options or forward position; this inability may result in a loss to the
Fund.
POLICIES AND LIMITATIONS. The Fund will comply with SEC guidelines
regarding "cover" for Financial Instruments and, if the guidelines so require,
set aside in a segregated account with its custodian the prescribed amount of
cash or appropriate liquid securities.
GENERAL RISKS OF FINANCIAL INSTRUMENTS. The primary risks in using
Financial Instruments are (1) imperfect correlation or no correlation between
changes in market value of the securities or currencies held or to be acquired
by the Fund and the prices of Financial Instruments; (2) possible lack of a
liquid secondary market for Financial Instruments and the resulting inability to
close out Financial Instruments when desired; (3) the fact that the skills
needed to use Financial Instruments are different from those needed to select
the Fund's securities; (4) the fact that, although use of Financial Instruments
for hedging purposes can reduce the risk of loss, they also can reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in hedged investments; and (5) the possible inability of the Fund to
purchase or sell a portfolio security at a time that would otherwise be
favorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to its need to maintain cover or to
segregate securities in connection with its use of Financial Instruments. There
can be no assurance that the Fund's use of Financial Instruments will be
successful.
The Fund's use of Financial Instruments may be limited by the
provisions of the Code with which it must comply if it is to qualify as a RIC.
See "Tax Matters." Financial Instruments may not be available with respect to
some currencies, especially those of so-called emerging market countries.
POLICIES AND LIMITATIONS. NB Management intends to reduce the risk of
imperfect correlation by investing only in Financial Instruments whose behavior
is expected to resemble or offset that of the Fund's underlying securities or
currency. NB Management intends to reduce the risk that the Fund will be unable
to close out Financial Instruments by entering into such transactions only if NB
Management believes there will be an active and liquid secondary market.
REGULATORY LIMITATIONS ON USING FINANCIAL INSTRUMENTS. To the extent
the Fund sells or purchases futures contracts or writes options thereon or
options on foreign currencies that are traded on an exchange regulated by the
CFTC other than for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish those positions
(excluding the amount by which options are "in-the-money") may not exceed 5% of
the Fund's net assets.
ACCOUNTING CONSIDERATIONS FOR FINANCIAL INSTRUMENTS. When the Fund
writes an option, an amount equal to the premium it receives is included in its
Statement of Assets and Liabilities as a liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When the Fund purchases an option, the premium the Fund pays is
24
recorded as an asset in that statement and is subsequently adjusted to the
current market value of the option.
In the case of a regulated futures contract the Fund purchases or
sells, an amount equal to the initial margin deposit is recorded as an asset in
its Statement of Assets and Liabilities. The amount of the asset is subsequently
adjusted to reflect changes in the amount of the deposit as well as changes in
the value of the contract.
BORROWING AND LEVERAGE. The Fund is authorized to borrow amounts up to
33 1/3% of its total assets (including the amount borrowed) minus liabilities
(other than the amount borrowed). The use of borrowed funds involves the
speculative factor known as "leverage." The Fund intends to use financial
leverage for investment purposes by issuing Preferred Shares. The issuance of
Preferred Shares would permit the Fund to assume leverage in an amount up to 50%
of its total assets. It is currently anticipated that, taking into account New
Preferred Shares being offered in the Fund's current Prospectus, the amount of
leverage will represent approximately 34% of the Fund's total assets (after
issuance). Preferred stock, including, when issued, New Preferred Shares, would
have a priority on the income and assets of the Fund over the Common Shares and
would have certain other rights with respect to voting and the election of
Directors. In certain circumstances, the net asset value of and dividends
payable on Common Shares could be adversely affected by such preferences. The
Fund's leveraged capital structure creates special risks not associated with
unleveraged funds having similar investment objectives and policies. The Fund
will utilize leverage only when there is an expectation that it will benefit the
Fund. To the extent the income or other gain derived from securities purchased
with the proceeds of borrowings or preferred stock issuances exceeds the
interest or dividends the Fund would have to pay thereon, the Fund's net income
or other gain would be greater than if leverage had not been used. Conversely,
if the income or other gain from the securities purchased through leverage is
not sufficient to cover the cost of such leverage, the Fund's total return would
be less than if leverage had not been used. If leverage is used, in certain
circumstances, the Fund could be required to liquidate securities it would not
otherwise sell in order to satisfy dividend or interest obligations. The Fund
may also borrow up to an additional 5% of its total assets for temporary
purposes without regard to the foregoing limitations. See "Investment
Objectives, Policies and Limitations." This could include, for example,
borrowing on a short-term basis in order to facilitate the settlement of
portfolio securities transactions.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a "when-issued" and "delayed delivery" basis. No income accrues to
the Fund on securities in connection with such transactions prior to the date it
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the securities at delivery may be more or less
than their purchase price, and yields generally available on securities when
delivery occurs may be higher than yields on the securities obtained pursuant to
such transactions. These transactions involve a commitment by the Fund to
purchase securities that will be issued at a future date (ordinarily within two
months, although the Fund may agree to a longer settlement period). The price of
the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases are
negotiated directly with the other party, and such commitments are not traded on
exchanges.
25
When-issued and delayed delivery transactions enable the Fund to "lock
in" what NB Management believes to be an attractive price or yield on a
particular security for a period of time, regardless of future changes in
interest rates. In periods of falling interest rates and rising prices, the Fund
might purchase a security on a when-issued or delayed delivery basis and sell a
similar security to settle such purchase, thereby obtaining the benefit of
currently higher yields. If the seller fails to complete the sale, the Fund may
lose the opportunity to obtain a favorable price.
The value of securities purchased on a when-issued or delayed delivery
basis and any subsequent fluctuations in their value are reflected in the
computation of the Fund's NAV starting on the date of the agreement to purchase
the securities. Because the Fund has not yet paid for the securities, this
produces an effect similar to leverage. A significant percentage of the Fund's
assets committed to the purchase of securities on a "when-issued" or "delayed
delivery" basis may increase the volatility of its net asset value and may limit
the flexibility to manage its investments. The Fund does not earn interest on
securities it has committed to purchase until the securities are paid for and
delivered on the settlement date.
POLICIES AND LIMITATIONS. The Fund will purchase securities on a
when-issued or delayed delivery basis only with the intention of completing the
transaction and actually taking delivery of the securities. If deemed advisable
as a matter of investment strategy, however, the Fund may dispose of or
renegotiate a commitment after it has been entered into. The Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. The Fund may realize capital gains or losses in
connection with these transactions.
When the Fund purchases securities on a when-issued or delayed delivery
basis, it will deposit in a segregated account with its custodian, until payment
is made, appropriate liquid securities having an aggregate market value
(determined daily) at least equal to the amount of the Fund's purchase
commitments. This procedure is designed to ensure that the Fund maintains
sufficient assets at all times to cover its obligations under when-issued and
delayed delivery purchases. Subject to the requirement of maintaining a
segregated account, no specified limitation exists as to the percentage of the
Fund's assets that may be used to acquire securities on a "when-issued" or
"delayed delivery" basis.
STRUCTURED NOTES AND OTHER HYBRID INSTRUMENTS. The Fund may invest in
"structured" notes, which are privately negotiated debt obligations where the
principal and/or interest is determined by reference to the performance of a
benchmark asset, market or interest rate, such as selected securities, an index
of securities or specified interest rates, or the differential performance of
two assets or markets, such as indices reflecting taxable and tax-exempt bonds.
Depending on the terms of the note, the Fund may forgo all or part of the
interest and principal that would be payable on a comparable conventional note.
The rate of return on structured notes may be determined by applying a
multiplier to the performance or differential performance of the referenced
index(es) or other asset(s). Application of a multiplier involves leverage that
will serve to magnify the potential for gain and the risk of loss. The Fund
currently intends that any use of structured notes will be for the purpose of
reducing the interest rate sensitivity of its portfolio (and, thereby,
decreasing its exposure to interest rate risk) and, in any event, that the
26
interest income on the notes will normally be exempt from federal income tax.
Like other sophisticated strategies, the Fund's use of structured notes may not
work as intended; for example, the change in the value of the structured notes
may not match very closely the change in the value of bonds that the structured
notes were purchased to hedge.
The Fund may invest in other types of "hybrid" instruments that combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some securities index or another interest rate (each
a "benchmark"). The interest rate or (unlike most debt obligations) the
principal amount payable at maturity of a hybrid security may be increased or
decreased, depending on changes in the value of the benchmark. Hybrids can be
used as an efficient means of pursuing a variety of investment goals, including
duration management and increased total return. Hybrids may not bear interest or
pay dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more steeply
and rapidly than the benchmark. These benchmarks may be sensitive to economic
and political events that cannot be readily foreseen by the purchaser of a
hybrid. Under certain conditions, the redemption value of a hybrid could be
zero. Thus, an investment in a hybrid may entail significant market risks that
are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed rate
or floating rate of interest. The purchase of hybrids also exposes the Fund to
the credit risk of the issuer of the hybrids. These risks may cause significant
fluctuations in the net asset value of the Fund.
Certain issuers of structured products, such as hybrid instruments, may
be deemed to be investment companies as defined in the 1940 Act. As a result,
the Fund's investments in these products may be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act. See "Investments in Other Investment Companies."
PORTFOLIO TRADING AND TURNOVER RATE
The Fund cannot accurately predict its turnover rate but anticipates
that its annual turnover rate will not exceed 50%. The Fund's turnover rate is
calculated by dividing (1) the lesser of the cost of the securities purchased or
the proceeds from the securities sold by the Fund during the fiscal year (other
than securities, including options, whose maturity or expiration date at the
time of acquisition was one year or less) by (2) the month-end average of the
value of such securities owned by the Fund during the fiscal year. The Fund
generally will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as it deems
advisable in view of prevailing or anticipated market conditions to accomplish
its investment objectives. For example, the Fund may sell portfolio securities
in anticipation of a movement in interest rates. Higher turnover rates can
result in corresponding increases in the Fund's transaction costs, which must be
borne by the Fund and its stockholders. High portfolio turnover may also result
in the realization of substantial net short-term capital gains, and any
distributions attributable to those gains will be taxable at ordinary income
rates for federal income tax purposes. Other than for consideration of tax
consequences, frequency of portfolio turnover will not be a limiting factor if
the Fund considers it advantageous to purchase or sell securities.
27
MANAGEMENT OF THE FUND
Directors and Officers
----------------------
The Board is broadly responsible for overseeing the management of the
business and affairs of the Fund, including general supervision of the duties
performed by NB Management and Neuberger Berman, LLC ("Neuberger Berman").
Subject to the provisions of the Fund's Articles of Incorporation (the
"Articles"), its Bylaws and Maryland law, the Board has all powers necessary and
convenient to carry out this responsibility, including the election and removal
of the Fund's officers. Among other things, the Board generally oversees the
portfolio management of the Fund and reviews and approves the Fund's management
and sub-advisory agreements and other principal agreements.
The following tables set forth information concerning the Directors and
officers of the Fund. All persons named as Directors and officers also serve in
similar capacities for other funds administered or managed by NB Management and
Neuberger Berman.
The Board of Directors
----------------------
-------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, Address(1) and Overseen by Outside Fund Complex by
Position with Fund Principal Occupation(s) (2) Director Director
-------------------------------------------------------------------------------------------------------------------------
CLASS I
-------------------------------------------------------------------------------------------------------------------------
Independent Fund Directors*
-------------------------------------------------------------------------------------------------------------------------
Faith Colish (68) Counsel, Carter Ledyard & Millburn 36 Director, American Bar
Director LLP (law firm) since October 2002; Retirement Association (ABRA)
prior thereto, Attorney at Law and since 1997 (not-for-profit
President, Faith Colish, A membership association).
Professional Corporation, 1980 to 2002.
-------------------------------------------------------------------------------------------------------------------------
C. Anne Harvey (66) Consultant, C. A. Harvey Associates, 36 Member, Individual Investors
Director since June 2001; Director, AARP, 1978 Advisory Committee to the New
to December 2000. York Stock Exchange Board of
Directors, 1998 to June 2002;
President, Board of Associates
to The National Rehabilitation
Hospital's Board of Directors,
since 2002; Member, American
Savings Education Council's
Policy Board (ASEC),
1998-2000; Member, Executive
Committee, Crime Prevention
Coalition of America, 1997 -
2000.
-------------------------------------------------------------------------------------------------------------------------
28
-------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, Address(1) and Overseen by Outside Fund Complex by
Position with Fund Principal Occupation(s) (2) Director Director
-------------------------------------------------------------------------------------------------------------------------
Cornelius T. Ryan (71) Founding General Partner, Oxford 36 Director, Capital Cash
Director Partners and Oxford Bioscience Management Trust (money market
Partners (venture capital fund), Naragansett Insured
partnerships) and President, Oxford Tax-Free Income Fund, Rocky
Venture Corporation. Mountain Equity Fund, Prime
Cash Fund, several private
companies and QuadraMed
Corporation (NASDAQ).
-------------------------------------------------------------------------------------------------------------------------
Peter P. Trapp (58) Regional Manager for Atlanta Region, 36
Director Ford Motor Credit Company since
August, 1997; prior thereto, President,
Ford Life Insurance Company, April 1995
until August 1997.
-------------------------------------------------------------------------------------------------------------------------
Director who is an "Interested Person"
-------------------------------------------------------------------------------------------------------------------------
Peter E. Sundman* (44) Executive Vice President, Neuberger 36 Executive Vice President,
Chief Executive Officer, Berman since 1999; Principal, Neuberger Berman Inc. (holding
Director and Chairman of Neuberger Berman from 1997 until 1999; company) since 1999 and Director
the Board Senior Vice President, NB Management from October 1999 through March
from 1996 until 1999. 2003; President and Director,
NB Management since 1999; Head of
Neuberger & Brman Inc.'s Mutual
Funds and Institutional Business
since 1999; Director and Vice
President, Neuberger & Berman
Agency, Inc. since 2000.
-------------------------------------------------------------------------------------------------------------------------
CLASS II
-------------------------------------------------------------------------------------------------------------------------
Independent Fund Directors*
-------------------------------------------------------------------------------------------------------------------------
John Cannon (73) Consultant. Formerly, Chairman and 36 Independent Trustee or
Director Chief Investment Officer, CDC Capital Director of three series of
Management (registered investment OppenheimerFunds: Limited Term
adviser), 1993-January 1999; prior New York Municipal Fund,
thereto, President and Chief Executive Rochester Fund Municipals, and
Officer, AMA Investment Advisors, an Oppenheimer Convertible
affiliate of the American Medical Securities Fund, since 1992.
Association.
-------------------------------------------------------------------------------------------------------------------------
Barry Hirsch (70) Attorney at Law. Senior Counsel, 36
Director Loews Corporation (diversified
financial corporation) May 2002
until April 2003; prior thereto,
Senior Vice President, Secretary
and General Counsel, Loews
Corporation.
-------------------------------------------------------------------------------------------------------------------------
John P. Rosenthal (70) Senior Vice President, Burnham 36 Director, 92nd Street Y
Director Securities Inc. (a registered (non-profit) since 1967;
broker-dealer) since 1991. Formerly, Director, Cancer
Treatment Holdings, Inc.
-------------------------------------------------------------------------------------------------------------------------
29
-------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, Address(1) and Overseen by Outside Fund Complex by
Position with Fund Principal Occupation(s) (2) Director Director
-------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (53) General Partner, Seip Investments LP 36 Director, H&R Block, Inc.
Director (a private investment partnership); (financial services company)
President and CEO, Westaff, Inc. since May 2001; Director,
(temporary staffing), May 2001 to General Magic (voice
January 2002; Senior Executive at the recognition software) since
Charles Schwab Corporation from 1983 November 2001; Director,
to 1999, including Chief Executive Forward Management, Inc.
Officer, Charles Schwab Investment (asset management) since 2001;
Management, Inc. and Trustee, Schwab Director, E-Finance
Family of Funds and Schwab Investments Corporation (credit
from 1997 to 1998 and Executive Vice decisioning services) since
President-Retail Brokerage, Charles 1999; Director, Save-Daily.com
Schwab Investment Management from 1994 (micro investing services)
to 1997. since 1999; Formerly,
Director, Offroad Capital Inc.
(pre-public internet commerce
company).
-------------------------------------------------------------------------------------------------------------------------
Director who is an "Interested Person"
-------------------------------------------------------------------------------------------------------------------------
Jack L. Rivkin* (63) Executive Vice President and Chief 36 Director, Dale Carnegie and
President and Director Investment Officer, Neuberger Berman Associates, Inc. (private
since 2002 and 2003, respectively; company) since 1998; Director,
Director and Chairman, NB Management Emagin Corp. (public company)
since December 2002; Executive Vice since 1997; Director,
President, Citigroup Investments, Inc. Solbright, Inc. (private
from September 1995 to February 2002; company) since 1998; Director,
Executive Vice President, Citigroup Infogate, Inc. (private
Inc. from September 1995 to February company) since 1997.
2002.
-------------------------------------------------------------------------------------------------------------------------
CLASS III
-------------------------------------------------------------------------------------------------------------------------
Independent Fund Directors*
-------------------------------------------------------------------------------------------------------------------------
Walter G. Ehlers (70) Consultant; Retired President and 36
Director Director, Teachers Insurance & Annuity
(TIAA) and College Retirement Equities
Fund (CREF).
-------------------------------------------------------------------------------------------------------------------------
Robert A. Kavesh (76) Marcus Nadler, Professor of Finance 36 Director, DEL Laboratories, Inc.
Director and Economics Emeritus, Stern New York (cosmetics and pharmaceuticals)
University School of Business. since 1978; The Caring Community
(not for profit).
-------------------------------------------------------------------------------------------------------------------------
Howard A. Mileaf (66) Retired. Formerly, Vice President and 36 Director, WHX Corporation
Director Special Counsel, WHX Corporation (holding company) since August
(holding company) 1993-2001. 2002; Director, Webfinancial
Corporation (holding company)
since December 2002; Director,
State Theatre of New Jersey
(not-for-profit theater) since
2000; Formerly, Director,
Kevlin Corporation
(manufacturer of microwave and
other products).
-------------------------------------------------------------------------------------------------------------------------
30
-------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, Address(1) and Overseen by Outside Fund Complex by
Position with Fund Principal Occupation(s) (2) Director Director
-------------------------------------------------------------------------------------------------------------------------
William E. Rulon (71) Retired. Senior Vice President, 36 Director, Pro-Kids Golf and
Director Foodmaker. Inc. (operator and Learning Academy (teach golf
franchiser of restaurants) until and computer usage to "at
January 1997. risk" children) since 1998;
Director, Prandium, Inc.
(restaurants) from March 2001
until July 2002.
-------------------------------------------------------------------------------------------------------------------------
Candace L. Straight (55) Private investor and consultant 36 Director, Providence
Director specializing in the insurance Washington (property and
industry; Advisory Director, Securitas casualty insurance company)
Capital LLC (a global private equity since December 1998; Director,
investment firm dedicated to making Summit Global Partners
investments in the insurance sector). (insurance brokerage firm)
since October 2000.
-------------------------------------------------------------------------------------------------------------------------
Director who is an "Interested Person"
-------------------------------------------------------------------------------------------------------------------------
Edward I. O'Brien* (75) Member, Investment Policy Committee, 36 Director, Legg Mason, Inc.
Director Edward Jones 1993 - 2001; President, (financial services holding
Securities Industry Association company) since 1993; Boston
Director, ("SIA") (securities industry's Financial Group (real estate
representative in government relations and tax shelters) 1993-1999.
and regulatory matters at the federal
and state levels) 1974 - 1992;
Adviser to SIA, November 1992 -
November 1993.
-------------------------------------------------------------------------------------------------------------------------
* Indicates a director who is an "interested person" within the meaning of the 1940 Act. Mr. Sundman and Mr. Rivkin are
interested persons of the Fund by virtue of the fact that each is an officer and/or director of NB Management and
Executive Vice President of Neuberger Berman. Mr. O'Brien is an interested person of the Fund by virtue of the fact that
he is a director of Legg Mason, Inc., a wholly owned subsidiary of which, from time to time, serves as a broker or dealer
to the Fund and other funds or accounts for which NB Management serves as investment manager.
(1) The business address of each listed person is 605 Third Avenue, New York, New York 10158.
(2) Except as otherwise indicated, each person has held the positions shown for at least the last five years. The Board
of Directors shall at all times be divided as equally as possible into three classes of Directors designated Class I,
Class II, and Class III. The terms of office of Class I, Class II, and Class III Directors shall expire at the annual
meetings of stockholders held in 2006, 2004, and 2005, respectively, and at each third annual meeting of stockholders
thereafter.
31
Information About the Officers of the Fund (other than those listed above)
--------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
POSITION AND LENGTH OF
NAME, AGE, AND ADDRESS (1) TIME SERVED (2) PRINCIPAL OCCUPATION(S)
----------------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (46) Secretary since 2003 Vice President-Mutual Fund Board Relations,
NB Management since 2000; Vice President,
Neuberger Berman since 2002 and employee
since 1999; Vice President, NB Management
from 1986 to 1999; Secretary, ten
registered investment companies for which NB
Management acts as investment manager and
administrator (four since 2002 and three since
2003).
----------------------------------------------------------------------------------------------------------------------------
Robert Conti (46) Vice President since 2003 Senior Vice President, Neuberger Berman
since 2003; Vice President, Neuberger Berman
from 1999 until 2003; Senior Vice President,
NB Management since 2000; Controller, NB
Management until 1996; Treasurer, NB
Management from 1996 until 1999; Vice
President, ten registered investment
companies for which NB Management acts as
investment manager and administrator (three
since 2000, four since 2002 and three since
2003).
----------------------------------------------------------------------------------------------------------------------------
Brian J. Gaffney (50) Vice President since 2003 Managing Director, Neuberger Berman since
1999; Senior Vice President, NB Management
since 2000; Vice President, NB Management
from 1997 until 1999; Vice President, ten
registered investment companies for which NB
Management acts as investment manager and
administrator (three since 2000, four since
2002 and three since 2003).
----------------------------------------------------------------------------------------------------------------------------
Sheila R. James (38) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999;
Employee, NB Management from 1991 to 1999;
Assistant Secretary, ten registered
investment companies for which NB Management
acts as investment manager and administrator
(seven since 2002 and three since 2003).
----------------------------------------------------------------------------------------------------------------------------
Kevin Lyons (48) Assistant Secretary Since 2003 Employee, Neuberger Berman since 1999;
Employee NB Management from 1993 to 1999;
Assistant Secretary, ten registered
investment companies for which NB Management
acts as investment manager and administrator
(seven since 2002 and three since 2003).
----------------------------------------------------------------------------------------------------------------------------
John M. McGovern (33) Assistant Treasurer since 2003 Employee, NB Management since 1993;
Assistant Treasurer, ten registered
investment companies for which NB Management
acts as investment manager and administrator
(seven since 2002 and three since 2003).
----------------------------------------------------------------------------------------------------------------------------
32
----------------------------------------------------------------------------------------------------------------------------
POSITION AND LENGTH OF
NAME, AGE, AND ADDRESS (1) TIME SERVED (2) PRINCIPAL OCCUPATION(S)
----------------------------------------------------------------------------------------------------------------------------
Barbara Muinos (44) Treasurer and Principal Financial Vice President, Neuberger Berman since 1999;
and Accounting Officer since 2003 Assistant Vice President, NB Management from
1993 to 1999; Treasurer and Principal
Financial and Accounting Officer, ten
registered investment companies for which
NB Management acts as investment manager
and administrator (seven since 2002 and
three since 2003); Assistant Treasurer
of three registered investment companies
for which NB Management acts as investment
manager and administrator from 1996
until 2002.
----------------------------------------------------------------------------------------------------------------------------
Frederic B. Soule (57) Vice President since 2003 Senior Vice President, Neuberger Berman
since 2003; Vice President, Neuberger Berman
from 1999 until 2003; Vice President, NB
Management from 1995 until 1999; Vice
President, ten registered investment
companies for which NB Management acts as
investment manager and administrator (three
since 2000, four since 2002 and three since
2003).
----------------------------------------------------------------------------------------------------------------------------
Trani Jo Wyman (33) Assistant Treasurer since 2003 Employee, NB Management since 1991;
Assistant Treasurer, ten registered
investment companies for which NB Management
acts as investment manager and administrator
(seven since 2002 and three since 2003).
----------------------------------------------------------------------------------------------------------------------------
--------------------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
Committees
----------
The Board has established several standing committees to oversee
particular aspects of the Fund's management. The standing committees of the
Board are described below.
AUDIT COMMITTEE. The Audit Committee's purposes are (a) to oversee
generally the Fund's accounting and financial reporting policies and practices,
its internal controls and, as appropriate, the internal controls of certain
service providers; (b) to oversee generally the quality and objectivity of the
Fund's financial statements and the independent audit thereof; and (c) to act as
a liaison between the Fund's independent auditors and the full Board. The Audit
Committee is composed entirely of Independent Fund Directors; its members are
John Cannon, Walter G. Ehlers, Cornelius T. Ryan (Chairman), and Peter P. Trapp.
CODE OF ETHICS COMMITTEE. The Code of Ethics Committee oversees the
administration of the Fund's Code of Ethics, which restricts the personal
securities transactions of employees, officers, and Directors. Its members are
33
John Cannon, Faith Colish, Robert A. Kavesh (Chairman), and Edward I. O'Brien.
All members except for Mr. O'Brien are Independent Fund Directors.
CONTRACT REVIEW COMMITTEE. The Contract Review Committee is responsible
for review and oversight of the Fund's principal contractual arrangements. Its
members are Faith Colish (Chairwoman), Barry Hirsch, Howard A. Mileaf, William
E. Rulon and Tom D. Seip. All members are Independent Fund Directors.
EXECUTIVE COMMITTEE. The Executive Committee has all the powers of the
Directors when the Directors are not in session. Its members are John Cannon,
Faith Colish, Jack L. Rivkin, John P. Rosenthal, William E. Rulon, Cornelius T.
Ryan and Peter E. Sundman (Chairman). All members except for Mr. Rivkin and Mr.
Sundman are Independent Fund Directors.
NOMINATING COMMITTEE. The Nominating Committee is responsible for
nominating individuals to serve as Directors, including as Independent Fund
Directors, as members of committees, and as officers of the Fund. The Nominating
Committee is composed entirely of Independent Fund Directors; its members are C.
Anne Harvey, Barry Hirsch, Howard A. Mileaf (Chairman), Cornelius T. Ryan and
Tom D. Seip. The Committee will consider nominees recommended by stockholders;
stockholders may send resumes of recommended persons to the attention of Claudia
A. Brandon, Secretary, Neuberger Berman Realty Income Fund Inc., 605 Third
Avenue, 2nd Floor, New York, NY, 10158-0180.
PORTFOLIO TRANSACTIONS COMMITTEE. The Portfolio Transactions Committee
from time to time reviews, among other things, quality of execution of portfolio
trades, actual and potential uses of portfolio brokerage commissions, agency
cross-transactions, information relating to the commissions charged by Neuberger
Berman to the Fund and to its other customers, and information concerning the
prevailing level of commissions charged by other brokers having comparable
execution capability. The Committee is composed entirely of Independent Fund
Directors; its members are Faith Colish, Walter G. Ehlers, C. Anne Harvey,
Candace L. Straight (Chairwoman) and Peter P. Trapp.
PRICING COMMITTEE. The Pricing Committee oversees the procedures for
pricing the Fund's portfolio securities, and from time to time may be called
upon to establish or ratify the fair value of portfolio securities for which
market prices are not readily available. Its members are Jack L. Rivkin, Robert
A. Kavesh, Edward I. O'Brien, John P. Rosenthal (Chairman), Tom D. Seip and
Peter P. Trapp. All members except for Mr. Rivkin and Mr. O'Brien are
Independent Fund Directors.
The Fund's Articles provide that the Fund will indemnify its Directors
and officers against liabilities and expenses to the extent permitted by
Maryland law and the 1940 Act. This means that the Fund will indemnify its
officers and Directors against liabilities and expenses reasonably incurred in
connection with litigation in which they may be involved because of their
offices with the Fund, unless it is adjudicated that they (a) engaged in bad
faith, willful misfeasance, gross negligence, or reckless disregard of the
duties involved in the conduct of their offices, or (b) did not act in good
34
faith in the reasonable belief that their action was in the best interest of the
Fund. In the case of settlement, such indemnification will not be provided
unless it has been determined (by a court or other body approving the settlement
or other disposition, by a majority of disinterested Directors based upon a
review of readily available facts, or in a written opinion of independent
counsel) that such officers or Directors have not engaged in willful
misfeasance, bad faith, gross negligence, or reckless disregard of their duties.
Compensation
------------
The Directors' compensation are allocated on a per fund basis based on
the number of funds in the Neuberger Berman Fund Complex. It is estimated that
the Directors will receive the amounts set forth in the following table from the
Fund for the fiscal year ending October 31, 2003. For the calendar year ended
December 31, 2002, the Directors received the compensation set forth in the
following table for serving as Trustees of other investment companies in the
"Fund Complex." Each officer and Director who is a Director, officer, partner or
employee of NB Management, Neuberger Berman or any entity controlling,
controlled by or under common control with NB Management or Neuberger Berman
serves without any compensation from the Fund.
The following table sets forth information concerning the compensation
of the Directors of the Fund. The Fund does not have any retirement plan for its
Directors.
TABLE OF COMPENSATION
Estimated Aggregate Total Compensation from
Compensation Fund and Neuberger Berman
Name and Position with the Fund from the Fund* Fund Complex Paid to Directors
------------------------------- -------------- ------------------------------
Independent Fund Directors
John Cannon $2,060 $77,500
Director
Faith Colish $2,060 $77,500
Director
Walter G. Ehlers $2,060 $77,500
Director
C. Anne Harvey $2,060 $77,500
Director
Barry Hirsch $2,060 $77,500
Director
Robert A. Kavesh $2,060 $77,500
Director
Howard A. Mileaf $2,060 $77,500
Director
35
Estimated Aggregate Total Compensation from
Compensation Fund and Neuberger Berman
Name and Position with the Fund from the Fund* Fund Complex Paid to Directors
------------------------------- -------------- ------------------------------
John P. Rosenthal $2,060 $70,000
Director
William E. Rulon $2,060 $77,500
Director
Cornelius T. Ryan $2,060 $77,500
Director
Tom Decker Seip $2,060 $77,500
Director
Candace L. Straight $2,060 $77,500
Director
Peter P. Trapp $2,060 $62,500
Director
Directors who are "Interested Persons"
Edward I. O'Brien $2,060 $70,000
Director
Jack L. Rivkin $0 $0
Director and President
Peter E. Sundman $0 $0
Director, Chairman of the Board
and Chief Executive Officer
* Since the Fund has not completed its first fiscal year, compensation
is estimated based upon payments to be made by the Fund during the current
fiscal year and upon relative net assets of the NB Management Fund Complex. The
estimate is for the fiscal year ending October 31, 2003.
Ownership of Securities
-----------------------
As of September 30, 2003, none of the Directors own Fund shares.
Set forth below is the dollar range of equity securities owned by each
Director as of 12/31/02.
--------------------------------------------------------------------------------
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
NAME OF DIRECTOR ALL REGISTERED INVESTMENT COMPANIES OVERSEEN
BY DIRECTOR IN FAMILY OF INVESTMENT COMPANIES*
--------------------------------------------------------------------------------
Independent Fund Directors
--------------------------------------------------------------------------------
John Cannon $50,001 - $100,000
--------------------------------------------------------------------------------
Faith Colish Over $100,000
--------------------------------------------------------------------------------
Walter G. Ehlers Over $100,000
--------------------------------------------------------------------------------
C. Anne Harvey $10,001 - $50,000
--------------------------------------------------------------------------------
Barry Hirsch Over $100,000
--------------------------------------------------------------------------------
Robert A. Kavesh $10,001 - $50,000
--------------------------------------------------------------------------------
Howard A. Mileaf Over $100,000
--------------------------------------------------------------------------------
36
--------------------------------------------------------------------------------
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
NAME OF DIRECTOR ALL REGISTERED INVESTMENT COMPANIES OVERSEEN
BY DIRECTOR IN FAMILY OF INVESTMENT COMPANIES*
--------------------------------------------------------------------------------
John P. Rosenthal Over $100,000
--------------------------------------------------------------------------------
William E. Rulon Over $100,000
--------------------------------------------------------------------------------
Cornelius T. Ryan Over $100,000
--------------------------------------------------------------------------------
Tom Decker Seip $1 - $10,000
--------------------------------------------------------------------------------
Candace L. Straight Over $100,000
--------------------------------------------------------------------------------
Peter P. Trapp $10,001 - $50,000
--------------------------------------------------------------------------------
Directors who are "Interested Persons"
--------------------------------------------------------------------------------
Edward I. O'Brien Over $100,000
--------------------------------------------------------------------------------
Jack L. Rivkin None
--------------------------------------------------------------------------------
Peter E. Sundman Over $100,000
--------------------------------------------------------------------------------
* Valuation as of December 31, 2002
Independent Fund Directors Ownership of Securities
--------------------------------------------------
As of 12/31/02, no Independent Fund Director (or his/her immediate
family members) owned securities of Neuberger Berman or securities of any entity
controlling, controlled by or under common control with Neuberger Berman (not
including registered investment companies).
Codes of Ethics
---------------
The Fund, NB Management and Neuberger Berman have personal securities
trading policies that restrict the personal securities transactions of
employees, officers, and Directors. Their primary purpose is to ensure that
personal trading by these individuals does not disadvantage any fund managed by
NB Management. The Fund managers and other investment personnel who comply with
the policies' preclearance and disclosure procedures may be permitted to
purchase, sell or hold certain types of securities which also may be or are held
in the funds they advise, but are restricted from trading in close conjunction
with their funds or taking personal advantage of investment opportunities that
may belong to the Fund. Text-only versions of the codes of ethics can be viewed
online or downloaded from the EDGAR Database on the SEC's internet web site at
www.sec.gov. You may also review and copy those documents by visiting the SEC's
Public Reference Room in Washington, DC. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 202-942-8090. In
addition, copies of the codes of ethics may be obtained, after mailing the
appropriate duplicating fee, by writing to the SEC's Public Reference Section,
450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.
37
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES
Investment Manager and Administrator
------------------------------------
NB Management serves as the investment manager to the Fund pursuant to
a management agreement with the Fund, dated as of April 24, 2003 ("Management
Agreement"). NB Management also provides investment management and advisory
services to private accounts of institutional and individual clients and to
mutual funds. As of June 30, 2003, NB Management and its affiliates had
approximately $63.7 billion in assets under management. NB Management is
located at 605 Third Avenue, New York, New York 10158-0180.
The Management Agreement provides, in substance, that NB Management
will make and implement investment decisions for the Fund in its discretion and
will continuously develop an investment program for the Fund's assets. The
Management Agreement permits NB Management to effect securities transactions on
behalf of the Fund through associated persons of NB Management. The Management
Agreement also specifically permits NB Management to compensate, through higher
commissions, brokers and dealers who provide investment research and analysis to
the Fund, although NB Management has no current plans to pay a material amount
of such compensation.
The Management Agreement provides that NB Management shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties. In the event that litigation
against NB Management, in connection with its obligations under the Management
Agreement or Administration Agreement (described below), ends with a
determination that NB Management acted without culpability, the Fund will
reimburse NB Management for reasonable attorney's fees and other expenses. In
the event a matter ends without a court ruling on NB Management's culpability,
the issue will be determined by a committee of disinterested Directors who were
not party to the suit or by an opinion of independent legal counsel. The Fund
may advance expenses to NB Management if (1) a committee of non-party
disinterested Directors or independent legal counsel determine that NB
Management is likely to prevail, and (2) the Fund is adequately assured of
repayment in the event of an adverse result.
NB Management provides to the Fund, without separate cost, office
space, equipment, and facilities and the personnel necessary to perform
executive, administrative, and clerical functions. NB Management pays all
salaries, expenses, and fees of the officers, Directors, and employees of the
Fund who are officers, Directors, or employees of NB Management. Two Directors
of NB Management (who are also officers of Neuberger Berman), who also serve as
officers of NB Management, currently serve as Directors and officers of the
Fund. See "Directors and Officers."
Pursuant to the Management Agreement, the Fund has agreed to pay NB
Management an annual management fee, payable on a monthly basis, at the annual
rate of 0.60% of the Fund's average daily total assets (including the assets
attributable to the proceeds from any Financial Leverage) minus liabilities
(other than liabilities related to any Financial Leverage) (the "Managed
38
Assets"). The liquidation preference of Preferred Shares is not a liability or
permanent equity.
NB Management provides facilities, services, and personnel to the Fund
pursuant to an administration agreement with the Fund, dated as of April 24,
2003 ("Administration Agreement"). Under the Administration Agreement, NB
Management also provides certain stockholder, stockholder-related, and other
services that are not furnished by the Fund's stockholder servicing agent. NB
Management provides the direct stockholder services specified in the
Administration Agreement and assists the stockholder servicing agent in the
development and implementation of specified programs and systems to enhance
overall stockholder servicing capabilities. NB Management solicits and gathers
stockholder proxies, performs services connected with the Fund's exchange
listing, and furnishes other services the parties agree from time to time should
be provided under the Administration Agreement.
For administrative services, the Fund pays NB Management at the annual
rate of 0.25% of average daily Managed Assets. With the Fund's consent, NB
Management may subcontract to third parties some of its responsibilities to the
Fund under the administration agreement. In addition, the Fund may compensate
such third parties for accounting and other services.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors.
From the commencement of the Fund's operations through October 31,
2011, NB Management has contractually agreed to waive a portion of the
management fees it is entitled to receive from the Fund in the amounts, and for
the time periods, set forth below:
----------------------------------------------------------------------------------------------------------------------
PERCENTAGE WAIVED (ANNUAL RATE AS A PERCENTAGE WAIVED (ANNUAL RATE AS A
PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO PERCENTAGE OF NET ASSETS ATTRIBUTABLE
FISCAL PERIOD COMMON SHARES - ASSUMING NO PREFERRED TO COMMON SHARES - ASSUMING THE
ENDING OCTOBER 31, SHARES ARE ISSUED OR OUTSTANDING) ISSUANCE PREFERRED SHARES(2))
----------------------------------------------------------------------------------------------------------------------
2003(1) 0.25% 0.38%
----------------------------------------------------------------------------------------------------------------------
2004 0.25% 0.38%
----------------------------------------------------------------------------------------------------------------------
2005 0.25% 0.38%
----------------------------------------------------------------------------------------------------------------------
2006 0.25% 0.38%
----------------------------------------------------------------------------------------------------------------------
2007 0.25% 0.38%
----------------------------------------------------------------------------------------------------------------------
2008 0.20% 0.30%
----------------------------------------------------------------------------------------------------------------------
2009 0.15% 0.23%
----------------------------------------------------------------------------------------------------------------------
2010 0.10% 0.15%
----------------------------------------------------------------------------------------------------------------------
2011 0.05% 0.08%
----------------------------------------------------------------------------------------------------------------------
(1) From the commencement of the Fund's operations.
(2) Assumes the issuance of Preferred Shares in an amount equal to 33% of the
Fund's net assets (after issuance).
NB Management has not agreed to waive any portion of its fees beyond
October 31, 2011.
39
The Management Agreement continues until June 30, 2004. The Management
Agreement is renewable thereafter from year to year with respect to the Fund, so
long as its continuance is approved at least annually (1) by the vote of a
majority of the Fund Directors who are not "interested persons" of NB Management
or the Fund ("Independent Fund Directors"), cast in person at a meeting called
for the purpose of voting on such approval, and (2) by the vote of a majority of
the Fund Directors or by a 1940 Act majority vote of the outstanding stock in
the Fund. The Administration Agreement continues for a period of two years after
the date the Fund became subject thereto. The Administration Agreement is
renewable from year to year, so long as its continuance is approved at least
annually (1) by the vote of a majority of the Independent Fund Directors, and
(2) by the vote of a majority of the Fund Directors or by a 1940 Act majority
vote of the outstanding stock in the Fund.
The Management Agreement is terminable, without penalty, on 60 days'
written notice either by the Fund or by NB Management. The Administration
Agreement is terminable, without penalty, on 60 days' written notice either by
NB Management or by the Fund. Each Agreement terminates automatically if it is
assigned.
Except as otherwise described in the Prospectus, the Fund pays, in
addition to the investment management fee described above, all expenses not
assumed by NB Management, including, without limitation, fees and expenses of
Directors who are not "interested persons" of NB Management or the Fund,
interest charges, taxes, brokerage commissions, expenses of issue of shares,
fees and expenses of registering and qualifying the Fund and its classes of
shares for distribution under federal and state laws and regulations, charges of
custodians, auditing and legal expenses, expenses of determining net asset value
of the Fund, reports to stockholders, expenses of meetings of stockholders,
expenses of printing and mailing prospectuses, proxy statements and proxies to
existing stockholders, and its proportionate share of insurance premiums and
professional association dues or assessments. The Fund is also responsible for
such nonrecurring expenses as may arise, including litigation in which the Fund
may be a party, and other expenses as determined by the Board. The Fund may have
an obligation to indemnify its officers and Directors with respect to such
litigation.
Sub-Adviser
-----------
NB Management has retained Neuberger Berman, 605 Third Avenue, New
York, NY 10158-3698, as sub-adviser with respect to the Fund pursuant to a
sub-advisory agreement dated as of April 24, 2003 ("Sub-Advisory Agreement").
The Sub-Advisory Agreement provides in substance that Neuberger Berman
will furnish to NB Management, upon reasonable request, the same type of
investment recommendations and research that Neuberger Berman, from time to
time, provides to its officers and employees for use in managing client
accounts. In this manner, NB Management expects to have available to it, in
addition to research from other professional sources, the capability of the
research staff of Neuberger Berman. This staff consists of numerous investment
analysts, each of whom specializes in studying one or more industries, under the
supervision of the Director of Research, who is also available for consultation
with NB Management. The Sub-Advisory Agreement provides that NB Management will
40
pay for the services rendered by Neuberger Berman based on the direct and
indirect costs to Neuberger Berman in connection with those services. Neuberger
Berman also serves as sub-adviser for all of the other investment companies
managed by NB Management.
The Sub-Advisory Agreement continues until June 30, 2004 and is
renewable from year to year, subject to approval of its continuance in the same
manner as the Management Agreement. The Sub-Advisory Agreement is subject to
termination, without penalty, with respect to the Fund by the Directors or a
1940 Act majority vote of the outstanding stock in the Fund, by NB Management,
or by Neuberger Berman on not less than 30 nor more than 60 days' prior written
notice. The Sub-Advisory Agreement also terminates automatically with respect to
the Fund if it is assigned or if the Management Agreement terminates with
respect to the Fund. Neuberger Berman and NB Management employ experienced
professionals that work in a competitive environment.
The Sub-Advisory Agreement provides that Neuberger Berman shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties.
Board Consideration of the Management and Sub-Advisory Agreements
-----------------------------------------------------------------
Neuberger Berman Inc., the parent company of NB Management and
Neuberger Berman, entered into an agreement with Lehman Brothers Holdings Inc.
("Lehman Brothers") on July 21, 2003, whereby Lehman Brothers agreed to acquire
Neuberger Berman Inc. and, as a result, indirectly assume control of NB
Management and Neuberger Berman (the "Transaction"), subject to certain
conditions. Upon completion of the Transaction, the Fund's then-existing
Management and Sub-Advisory Agreements with NB Management and Neuberger Berman,
respectively, automatically terminated. Prior to the Transaction, the Board met
to consider the new management and sub-advisory agreements, which are identical
to the previous Management and Sub-Advisory Agreements, except for the dates of
execution and termination.
In evaluating the New Agreements, the Board, including the Independent
Fund Directors, reviewed materials furnished by Neuberger Berman Inc., NB
Management, Neuberger Berman and Lehman Brothers and met with senior
representatives of Neuberger Berman Inc., NB Management, Neuberger Berman and
Lehman Brothers regarding their personnel, operations and financial condition.
The Directors also reviewed the terms of the Transaction and its possible
effects on the Fund and its stockholders. The Independent Fund Directors were
advised by independent legal counsel throughout this process.
The Board considered the following factors to be of primary importance
to its approval of the New Agreements: (1) that the terms of the management and
sub-advisory agreements are identical in all material respects to those of the
existing agreements; (2) assurances by a representative of Lehman Brothers that
NB Management and Neuberger Berman will maintain substantial operational
autonomy and continuity of management following the Transaction; (3) the
favorable history, reputation, qualification, and background of Neuberger Berman
Inc., NB Management, Neuberger Berman, and Lehman Brothers, as well as the
qualifications of their personnel and their respective financial conditions; (4)
the overall commitment of Lehman Brothers to retaining personnel currently
employed by NB Management and Neuberger Berman who currently provide services to
the Fund; (5) the fee and expense ratios of the Fund relative to comparable
mutual funds; (6) that the fee and expense ratios of the Fund appear to the
Board to be reasonable given the quality of services expected to be provided and
the fees are identical to those paid by the Fund in the past; (7) the commitment
of NB Management to maintain the Fund's current voluntary and contractual
expense limitation agreements to ensure Fund stockholders do not face an
increase in expenses upon consummation of the Transaction; (8) the performance
of the Fund relative to comparable mutual funds and unmanaged indices; (9) the
commitment of Neuberger Berman Inc. and its affiliates to pay the expenses of
the Fund in connection with the Transaction including all expenses in connection
with the solicitation of proxies so that stockholders of the Fund would not have
to bear such expenses; (10) the possible benefits that may be realized by the
Fund as a result of NB Management's and Neuberger Berman's combination with
Lehman Brothers, including the resources of Lehman Brothers that would be
available to each Fund; and (11) that the Transaction is expected to help ensure
continuity of management of the Fund and may reduce the potential for future
vulnerability to changes in control of NB Management and Neuberger Berman that
could be adverse to the Fund's interests.
In addition, the Board had previously considered the terms of the
Management and Sub-Advisory Agreements, which have terms substantially identical
to the New Agreements. In approving the Management and Sub-Advisory Agreements
for the Fund, the Board primarily considered the nature and quality of the
services to be provided under the Agreements and the overall fairness of the
Agreements to the Fund.
With respect to the nature and quality of the services provided, the
Board considered, among other things, the resources that NB Management plans to
devote to managing the Fund and the firm's equity research and trading
capabilities. They discussed the recent and long-term performance of the other
equity funds managed by NB Management and Neuberger Berman. They also considered
NB Management's and Neuberger Berman's positive compliance history, as the firms
have been free of significant compliance problems. With respect to the overall
fairness of the Management and Sub-Advisory Agreements, the Board primarily
considered the fee structure of the Agreements and the proposed indemnity
provision in the Management Agreement and Administration Agreement. The Board
reviewed information about the rates of compensation paid to investment
advisers, and the overall expense ratios, for funds pursuing a comparable
investment strategy to the Fund. The Board also considered the contractual
limits on the Fund's expenses undertaken by NB Management.
The Board concluded that the fees and other benefits likely to accrue
to NB Management and its affiliates by virtue of their relationship to the Fund
are reasonable in comparison with the benefits likely to accrue to the Fund. In
considering the fees, the Board took note of the likelihood that the Fund would
issue preferred stock and considered the effect of such issuance on the Fund's
net assets and, therefore, the fees. The Board also concluded that approval of
the Management and Sub-Advisory Agreements was in the best interests of the
Fund's stockholders. These matters also were considered separately by the
Independent Fund Directors meeting with experienced 1940 Act counsel selected by
the Independent Fund Directors.
42
Management and Control of NB Management and Neuberger Berman
------------------------------------------------------------
Neuberger Berman and NB Management are wholly owned subsidiaries of
Neuberger Berman Inc., a publicly owned holding company owned primarily by the
employees of Neuberger Berman, former principals and their affiliates. The
directors, officers and/or employees of NB Management, Neuberger Berman and
Neuberger Berman Inc. who are deemed "control persons," all of whom have offices
at the same address as NB Management and Neuberger Berman, are: Kevin
Handwerker, Jeffrey B. Lane, Robert Matza, Heidi L. Steiger, Jack L. Rivkin,
Peter E. Sundman. In addition, Marvin C. Schwartz owns 7.89% of Neuberger Berman
Inc. Mr. Sundman and Mr. Rivkin are also Directors and officers of the Fund.
PORTFOLIO TRANSACTIONS
Investment Decisions and Portfolio Transactions
-----------------------------------------------
Investment decisions for the Fund and for the other investment advisory
clients of NB Management are made independently of one another with a view to
achieving their respective investment objectives. Investment decisions are the
product of many factors in addition to basic suitability for the particular
client involved (including the Fund). Some securities considered for investments
by the Fund may also be appropriate for other clients served by NB Management.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time. If
a purchase or sale of securities consistent with the investment policies of the
Fund and one or more of these clients served by NB Management is considered at
or about the same time, transactions in such securities will be allocated among
the Fund and clients in a manner deemed fair and reasonable by NB Management. NB
Management may aggregate orders for the Fund with simultaneous transactions
entered into on behalf of its other clients. When this occurs, the transactions
are averaged as to price and allocated, in terms of amount, in accordance with a
formula considered to be equitable to the clients involved. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the security. In some instances, one client may sell a
particular security to another client. Although in some cases these arrangements
may have a detrimental effect on the price or volume of the securities as to the
Fund, in other cases it is believed that the Fund's ability to participate in
volume transactions may produce better executions for it. In any case, it is the
judgment of the Directors that the desirability of the Fund's having its
advisory arrangements with NB Management outweighs any disadvantages that may
result from contemporaneous transactions.
The Fund is subject to certain limitations imposed on all advisory
clients of Neuberger Berman (including the Fund, other Neuberger Berman Funds,
and other managed accounts) and personnel of Neuberger Berman and its
affiliates. These include, for example, limits that may be imposed in certain
industries or by certain companies, and policies of Neuberger Berman that limit
the aggregate purchases, by all accounts under management, of the outstanding
shares of public companies.
43
The Fund is included in an order from the Securities and Exchange
Commission that permits the Fund to pay Neuberger Berman, and Neuberger Berman
to receive, compensation for services as a securities lending intermediary,
subject to certain conditions. These services are provided by a separate
operating unit of Neuberger Berman under the supervision of NB Management who is
not involved in the securities lending intermediary's lending agency operations.
Neuberger Berman will receive as compensation a reasonable fee based on revenues
earned by the Fund through the securities lending program. The order also
permits Neuberger Berman and other affiliated broker-dealers of the Fund to
borrow portfolio securities from the Fund, subject to certain conditions.
The Board has delegated to Neuberger Berman the responsibility to vote
proxies related to the securities held in the Fund's portfolios. Under this
authority, Neuberger Berman is required by the Board to vote proxies related to
portfolio securities in the best interests of the Fund and its stockholders. The
Board permits Neuberger Berman to contract with a third party to obtain proxy
voting and related services, including research of current issues.
Neuberger Berman has implemented written Proxy Voting Policies and
Procedures ("Proxy Voting Policy") that are designed to reasonably ensure that
Neuberger Berman votes proxies prudently and in the best interest of its
advisory clients for whom Neuberger Berman has voting authority, including the
Fund. The Proxy Voting Policy also describes how Neuberger Berman addresses any
conflicts that may arise between its interests and those of its clients with
respect to proxy voting.
Neuberger Berman's Proxy Committee is responsible for developing,
authorizing, implementing and updating the Proxy Voting Policy, overseeing the
proxy voting process and engaging and overseeing any independent third-party
vendors as voting delegate to review, monitor and/or vote proxies. In order to
apply the Proxy Voting Policy noted above in a timely and consistent manner,
Neuberger Berman utilizes Institutional Shareholder Services Inc. ("ISS") to
vote proxies in accordance with Neuberger Berman's voting guidelines.
Neuberger Berman's guidelines adopt the voting recommendations of ISS.
Neuberger Berman retains final authority and fiduciary responsibility for proxy
voting. Neuberger Berman believes that this process is reasonably designed to
address material conflicts of interest that may arise between Neuberger Berman
and a client as to how proxies are voted.
In the event that an investment professional at Neuberger Berman
believes that it is in the best interests of a client or clients to vote proxies
in a manner inconsistent with Neuberger Berman's proxy voting guidelines or in a
manner inconsistent with ISS recommendations, the Proxy Committee will review
information submitted by the investment professional to determine that there is
no material conflict of interest between Neuberger Berman and the client with
respect to the voting of the proxy in that manner.
If the Proxy Committee determines that the voting of a proxy as
recommended by the investment professional presents a material conflict of
interest between Neuberger Berman and the client or clients with respect to the
voting of the proxy, the Proxy Committee shall: (i) take no further action, in
which case ISS shall vote such proxy in accordance with the proxy voting
guidelines or as ISS recommends; (ii) disclose such conflict to the client or
clients and obtain written direction from the client as to how to vote the
proxy; (iii) suggest that the client or clients engage another party to
determine how to vote the proxy; or (iv) engage another independent third party
to determine how to vote the proxy.
44
Beginning September 2004, information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 will be available without charge by calling 1-800-877-9700
(toll-free) or visiting www.nb.com or the website of the SEC, www.sec.gov.
Brokerage and Research Services
-------------------------------
Neuberger Berman acts as principal broker for the Fund, subject to
periodic evaluation by the Portfolio Transactions Committee of the quality and
cost of execution.
In effecting securities transactions, the Fund generally seeks to
obtain the best price and execution of orders. Commission rates, being a
component of price, are considered along with other relevant factors. The Fund
plans to use Neuberger Berman as its broker where, in the judgment of NB
Management, that firm is able to obtain a price and execution at least as
favorable as other qualified brokers. To the Fund's knowledge, no affiliate of
the Fund receives give-ups or reciprocal business in connection with its
securities transactions.
The use of Neuberger Berman as a broker for the Fund is subject to the
requirements of Section 11(a) of the Securities Exchange Act of 1934. Section
11(a) prohibits members of national securities exchanges from retaining
compensation for executing exchange transactions for accounts which they or
their affiliates manage, except where they have the authorization of the persons
authorized to transact business for the account and comply with certain annual
reporting requirements. The Fund and NB Management have expressly authorized
Neuberger Berman to retain such compensation, and Neuberger Berman has agreed to
comply with the reporting requirements of Section 11(a).
Under the 1940 Act, commissions paid by the Fund to Neuberger Berman in
connection with a purchase or sale of securities on a securities exchange may
not exceed the usual and customary broker's commission. Accordingly, it is the
Fund's policy that the commissions paid to Neuberger Berman must be (1) at least
as favorable as commissions contemporaneously charged by Neuberger Berman on
comparable transactions for its most favored unaffiliated customers, except for
accounts for which Neuberger Berman acts as a clearing broker for another
brokerage firm and customers of Neuberger Berman considered by a majority of the
Independent Directors not to be comparable to the Fund, and (2) at least as
favorable as those charged by other brokers having comparable execution
capability in NB Management's judgment. The Fund does not deem it practicable
and in its best interests to solicit competitive bids for commissions on each
transaction effected by Neuberger Berman. However, consideration regularly is
given to information concerning the prevailing level of commissions charged by
other brokers on comparable transactions during comparable periods of time. The
1940 Act generally prohibits Neuberger Berman from acting as principal in the
purchase of portfolio securities from, or the sale of portfolio securities to,
the Fund unless an appropriate exemption is available.
45
A committee of Independent Directors from time to time reviews, among
other things, information relating to the commissions charged by Neuberger
Berman to the Fund and to its other customers and information concerning the
prevailing level of commissions charged by other brokers having comparable
execution capability. In addition, the procedures pursuant to which Neuberger
Berman effects brokerage transactions for the Fund must be reviewed and approved
no less often than annually by a majority of the Independent Directors.
To ensure that accounts of all investment clients, including the Fund,
are treated fairly in the event that Neuberger Berman receives transaction
instructions regarding a security for more than one investment account at or
about the same time, Neuberger Berman may combine orders placed on behalf of
clients, including advisory accounts in which affiliated persons have an
investment interest, for the purpose of negotiating brokerage commissions or
obtaining a more favorable price. Where appropriate, securities purchased or
sold may be allocated, in terms of amount, to a client according to the
proportion that the size of the order placed by that account bears to the
aggregate size of orders contemporaneously placed by the other accounts, subject
to de minimis exceptions. All participating accounts will pay or receive the
same price.
Under policies adopted by the Board of Directors, Neuberger Berman may
enter into agency cross-trades on behalf of the Fund. An agency cross-trade is a
securities transaction in which the same broker acts as agent on both sides of
the trade and the broker or an affiliate has discretion over one of the
participating accounts. In this situation, Neuberger Berman would receive
brokerage commissions from both participants in the trade. The other account
participating in an agency cross-trade with the Fund cannot be an account over
which Neuberger Berman exercises investment discretion. A member of the Board of
Directors who is not affiliated with Neuberger Berman reviews confirmation of
each agency cross-trade in which the Fund participates.
The Fund expects that it will execute a portion of its transactions
through brokers other than Neuberger Berman. In selecting those brokers, NB
Management will consider the quality and reliability of brokerage services,
including execution capability, performance, and financial responsibility, and
may consider research and other investment information provided by those
brokers.
In certain instances Neuberger Berman specifically allocates brokerage
for research services (including research reports on issuers and industries as
well as economic and financial data). Such research may sometimes be available
for cash purchase. While the receipt of such services has not reduced Neuberger
Berman's normal internal research activities, Neuberger Berman's expenses could
be materially increased if it were to generate such additional information
internally. To the extent such research services are provided by others,
Neuberger Berman is relieved of expenses it may otherwise incur. Research
obtained in this manner may be used in servicing any or all clients of Neuberger
Berman and may be used in connection with clients other than those client's
whose brokerage commissions are used to acquire the research services described
herein, a practice specifically permitted by the federal securities laws. With
regard to allocation of brokerage to acquire research services, Neuberger Berman
always considers its best execution obligation.
A committee comprised of officers of NB Management and employees of
Neuberger Berman who are portfolio managers of several Neuberger Berman
registered investment companies, or series thereof, (collectively, "NB Funds")
and some of Neuberger Berman's managed accounts ("Managed Accounts") evaluates
46
semi-annually the nature and quality of the brokerage and research services
provided by other brokers. Based on this evaluation, the committee establishes a
list and projected rankings of preferred brokers for use in determining the
relative amounts of commissions to be allocated to those brokers. Ordinarily,
the brokers on the list effect a large portion of the brokerage transactions for
the NB Funds and the Managed Accounts that are not effected by Neuberger Berman.
However, in any semi-annual period, brokers not on the list may be used, and the
relative amounts of brokerage commissions paid to the brokers on the list may
vary substantially from the projected rankings. These variations reflect the
following factors, among others: (1) brokers not on the list or ranking below
other brokers on the list may be selected for particular transactions because
they provide better price and/or execution, which is the primary consideration
in allocating brokerage; (2) adjustments may be required because of periodic
changes in the execution capabilities of or research provided by particular
brokers or in the execution or research needs of the NB Funds and/or the Managed
Accounts; and (3) the aggregate amount of brokerage commissions generated by
transactions for the NB Funds and the Managed Accounts may change substantially
from one semi-annual period to the next.
The commissions paid to a broker other than Neuberger Berman may be
higher than the amount another firm might charge if NB Management determines in
good faith that the amount of those commissions is reasonable in relation to the
value of the brokerage and research services provided by the broker. NB
Management believes that those research services benefit the Fund by
supplementing the information otherwise available to NB Management. That
research may be used by NB Management in servicing other Neuberger Berman Funds
and, in some cases, by Neuberger Berman in servicing the Managed Accounts. On
the other hand, research received by NB Management from brokers effecting fund
transactions on behalf of the Other NB Funds and by Neuberger Berman from
brokers effecting fund transactions on behalf of the Managed Accounts may be
used for the Fund's benefit.
Steven R. Brown, who is a Vice President of NB Management and a
Managing Director of Neuberger Berman, is the person primarily responsible for
making decisions as to specific action to be taken with respect to the
investments of the Fund. He has full authority to take action with respect to
Fund transactions and may or may not consult with other personnel of NB
Management prior to taking such action.
NET ASSET VALUE
The net asset value attributable to Common Shares is calculated by
subtracting the Fund's total liabilities and the liquidation preference of any
outstanding Preferred Shares from total assets (the market value of the
securities the Fund holds plus cash and other assets). The net asset value per
Common Share is calculated by dividing its net asset value by the number of
Common Shares outstanding and rounding the result to the nearest full cent. The
Fund calculates its net asset value as of the close of regular trading on the
NYSE, usually 4 p.m. Eastern time, every day on which the NYSE is open.
Information that becomes known to the Fund or its agent after the Fund's net
asset value has been calculated on a particular day will not be used to
retroactively adjust the price of a security or the Fund's net asset value
determined earlier that day.
47
The Fund values its equity securities at the last reported sale price
on the principal exchange or in the principal over-the-counter market in which
such securities are traded, as of the close of regular trading on the NYSE on
the day the securities are being valued or, if there are no sales, at the last
available bid price on that day. Securities traded primarily on the Nasdaq Stock
Market are normally valued by the Fund at the Nasdaq Official Closing Price
("NOCP") provided by Nasdaq each business day. The NOCP is the most recently
reported price as of 4:00:02 p.m., Eastern time, unless that price is outside
the range of the "inside" bid and asked prices (i.e., the bid and asked prices
that dealers quote to each other when trading for their own accounts); in that
case, Nasdaq will adjust the price to equal the inside bid or asked price,
whichever is closer. Because of delays in reporting trades, the NOCP may not be
based on the price of the last trade to occur before the market closes. Debt
securities are valued at the last available bid price for such securities or, if
such prices are not available, at prices for securities of comparable maturity,
quality, and type. Foreign securities are translated from the local currency
into U.S. dollars using current exchange rates. The Fund values all other types
of securities and assets, including restricted securities and securities for
which market quotations are not readily available, by a method that the Board of
Directors believes accurately reflects fair value. Numerous factors may be
considered when determining the fair value of a security, including available
analyst, media or other reports, trading in futures or ADRs and whether the
issuer of the security being fair valued has other securities outstanding. The
Fund periodically verifies valuations provided by the pricing services.
Short-term securities with remaining maturities of less than 60 days may be
valued at cost which, when combined with interest earned, approximates market
value. The Fund's securities traded primarily in foreign markets may be traded
in such markets on days that the NYSE is closed. As a result, the net asset
value of the Fund may be significantly affected on days when holders of Common
Shares have no ability to trade the Common Shares on the NYSE.
If NB Management believes that the price of a security obtained under
the Fund's valuation procedures (as described above) does not represent the
amount that the Fund reasonably expects to receive on a current sale of the
security, the Fund will value the security based on a method that the Directors
of the Fund believe accurately reflects fair value. Common stock of closed-end
investment companies frequently trade at a discount from net asset value, but in
some cases trade at a premium. Since the market price of the Fund's Common
Shares is determined by such factors as trading volume of the shares, general
market and economic conditions and other factors beyond the control of the Fund,
the Fund cannot predict whether its Common Shares will trade at, below or above
its computed net asset value.
DESCRIPTION OF NEW PREFERRED SHARES
Under the Articles, the Fund is authorized to issue up to 1,000,000,000
shares of capital stock, all of it originally designated Common Shares. Pursuant
to the Articles, the Board may classify or reclassify any unissued shares of
capital stock without a stockholder vote into one or more classes of preferred
or other stock. Pursuant to that authority, the Board classified 3,000 shares as
Series A Preferred Shares, 3,000 shares as Series B Preferred Shares, 3,000
shares as Series C Preferred Shares and 3,000 shares as Series D Preferred
Shares. Of those shares, on June 23, 2003, the Fund issued 1,950 Series A
Preferred Shares, 1,950 Series B Preferred Shares, 1,950 Series C Preferred
Shares and 1,950 Series D Preferred Shares. The Fund currently is offering 330
Series A New Preferred Shares, 330 Series B New Preferred Shares, 330 Series C
New Preferred Shares and 330 Series D New Preferred Shares. All New Preferred
Shares will have a liquidation preference of $25,000 per share plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared).
48
New Preferred Shares will rank on parity with shares of any other class
or series of preferred stock of the Fund as to the payment of dividends and the
distribution of assets upon liquidation. All New Preferred Shares carry one vote
per share on all matters on which such shares are entitled to be voted. New
Preferred Shares will, when issued, be fully paid and non-assessable and have no
preemptive, exchange, conversion or cumulative voting rights.
As used in this Statement of Additional Information, unless otherwise
noted, the Fund's "net assets" include assets of the Fund attributable to any
outstanding Common and Preferred Shares, with no deduction for the liquidation
preference of Preferred Shares. Solely for financial reporting purposes,
however, the Fund is required to exclude the liquidation preference of Preferred
Shares from "net assets," so long as Preferred Shares have redemption features
that are not solely within the control of the Fund. The Fund believes that its
Preferred Shares will be treated for all regulatory and tax purposes as stock
(rather than indebtedness).
LIMITED ISSUANCE OF PREFERRED SHARES. Under the 1940 Act, the Fund
could issue Preferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's net assets, measured immediately after
issuance of Preferred Shares. "Liquidation value" means the original purchase
price of the shares being liquidated plus any accrued and unpaid dividends. In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares unless the liquidation value of Preferred
Shares is less than one-half of the value of the Fund's net assets (determined
after deducting the amount of such dividend or distribution) immediately after
the distribution. To the extent that the Fund has outstanding any senior
securities representing indebtedness (such as through the use of derivative
instruments that constitute senior securities), the aggregate amount of such
senior securities will be added to the total liquidation value of any
outstanding Preferred Shares for purposes of these asset coverage requirements.
The liquidation value of Preferred Shares is expected to be approximately 34% of
the value of the Fund's net assets. The Fund intends to purchase or redeem
Preferred Shares, if necessary, to keep the liquidation value of Preferred
Shares plus the aggregate amount of other senior securities representing
indebtedness at or below one-half of the value of the Fund's net assets.
DISTRIBUTION PREFERENCE. New Preferred Shares will have complete
priority over the Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Preferred Shares ("Preferred Stockholders") will be entitled to receive a
preferential liquidating distribution (expected to equal the original purchase
price per share plus accumulated and unpaid dividends thereon, whether or not
earned or declared) before any distribution of assets is made to holders of
Common Shares. After payment of the full amount of the liquidating distribution
to which they are entitled, Preferred Stockholders will not be entitled to any
further participation in any distribution of assets by the Fund. A consolidation
or merger of the Fund with or into any business trust or corporation or a sale
of all or substantially all of the assets of the Fund shall not be deemed to be
a liquidation, dissolution or winding up of the Fund.
49
VOTING RIGHTS. In connection with any issuance of New Preferred Shares,
the Fund must comply with Section 18(i) of the 1940 Act, which requires, among
other things, that New Preferred Shares be voting shares. Except as otherwise
provided in the Articles or the Fund's Bylaws or otherwise required by
applicable law, Preferred Stockholders will vote together with Common
Stockholders as a single class.
In connection with the election of the Fund's Directors, Preferred
Stockholders, voting as a separate class, will also be entitled to elect two of
the Fund's Directors, and the remaining Directors shall be elected by Common
Stockholders and Preferred Stockholders, voting together as a single class. In
addition, if at any time dividends on the Fund's outstanding New Preferred
Shares shall be unpaid in an amount equal to two full years' dividends thereon,
the holders of all outstanding Preferred Shares, voting as a separate class,
will be entitled to elect a majority of the Fund's Directors until all dividends
in arrears have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, shall be required to approve any
action requiring a vote of security holders under Section 13(a) of the 1940 Act
including, among other things, changes in the Fund's investment objectives, the
conversion of the Fund from a closed-end to an open-end company, or changes in
the investment restrictions described as fundamental policies under "Investment
Restrictions." The class or series vote of Preferred Stockholders described
above shall in each case be in addition to any separate vote of the requisite
percentage of Common Shares and Preferred Shares, voting together, necessary to
authorize the action in question.
Holders of New Preferred Shares would not be entitled to vote on
matters placed before stockholders if, at or prior to the time when a vote is
required, such shares shall have been (1) redeemed or (2) called for redemption
and sufficient funds shall have been deposited in trust to effect such
redemption.
REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES BY THE FUND. The
terms of the New Preferred Shares provide that they are redeemable at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends, that the Fund may tender for or purchase New Preferred
Shares and that the Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of New Preferred Shares by the Fund will
reduce the leverage applicable to Common Shares, while any resale of shares by
the Fund will increase such leverage.
50
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS
FOR NEW PREFERRED SHARES
GENERAL. DTC will act as the Securities Depository with respect to New
Preferred Shares. One certificate for each series of Preferred Shares will be
registered in the name of Cede & Co., as nominee of the Securities Depository.
Each such certificate will bear a legend to the effect that such certificate is
issued subject to the provisions restricting transfers of Preferred Shares
contained in the Fund's Articles Supplementary. The Fund will also issue
stop-transfer instructions to the transfer agent for New Preferred Shares. Prior
to the commencement of the right of holders of Preferred Shares to elect a
majority of the Directors, as described under "Description of New Preferred
Shares - Voting Rights" in the prospectus, Cede & Co. will be the holder of
record of New Preferred Shares and owners of such shares will not be entitled to
receive certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants, some of whom (and/or their representatives) own
DTC. DTC maintains lists of its participants and will maintain the positions
(ownership interests) held by each such participant in New Preferred Shares,
whether for its own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT. The Auction Agent will act as agent for
the Fund in connection with the auctions of Preferred Shares (the "Auctions").
In the absence of willful misconduct or gross negligence on its part, the
Auction Agent will not be liable for any action taken, suffered, or omitted or
for any error of judgment made by it in the performance of its duties under the
auction agency agreement between the Fund and the Auction Agent and will not be
liable for any error of judgment made in good faith unless the Auction Agent was
grossly negligent in ascertaining the facts pertinent to making such decision.
The Fund shall indemnify the Auction Agent and its officers, directors,
employees and agents for, and hold it harmless against, any loss, liability or
expense incurred without gross negligence or willful misconduct on the part of
the Auction Agent arising out of or in connection with its agency under the
auction agency agreement and under the broker-dealer agreements entered by the
Auction Agent pursuant to the auction agency agreement, including the costs and
expenses of defending itself against any claim of liability in connection with
its exercise or performance of any of its duties thereunder, except such as may
result from its gross negligence or willful misconduct.
The Auction Agent may conclusively rely upon, as evidence of the
identities of the holders of New Preferred Shares, the Auction Agent's registry
of holders, and the results of auctions and notices from any Broker-Dealer (or
other person, if permitted by the Fund) with respect to transfers described
under "The Auction - Secondary Market Trading and Transfers of New Preferred
Shares" in the prospectus and notices from the Fund. The Auction Agent is not
required to accept any such notice for an auction unless it is received by the
Auction Agent by 3:00 p.m., Eastern time, on the business day preceding such
Auction.
The Auction Agent may terminate its auction agency agreement with the
Fund upon at least 60 days notice to the Fund (30 days if such termination is
due to nonpayment of amounts due to it). If the Auction Agent should resign, the
51
Fund will use its best efforts to enter into an agreement with a successor
auction agent containing substantially the same terms and conditions as the
auction agency agreement. The Fund may remove the Auction Agent provided that
prior to such removal the Fund shall have entered into such an agreement with a
successor auction agent.
BROKER-DEALERS. The Auction Agent after each Auction for Preferred
Shares will pay to each Broker-Dealer, from funds provided by the Fund, a
service charge at the annual rate of 1/4 of 1% in the case of any Auction
immediately preceding a dividend period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealer in the case of any Auction
immediately preceding a dividend period of one year or longer, of the purchase
price of Preferred Shares placed by such Broker-Dealer at such Auction. For the
purposes of the preceding sentence, Preferred Shares will be placed by a
Broker-Dealer if such shares were (a) the subject of hold orders deemed to have
been submitted to the Auction Agent by the Broker-Dealer and were acquired by
such Broker-Dealer for its customers who are beneficial owners or (b) the
subject of an order submitted by such Broker-Dealer that is (i) a submitted bid
of an existing holder that resulted in the existing holder continuing to hold
such shares as a result of the Auction or (ii) a submitted bid of a potential
bidder that resulted in the potential holder purchasing such shares as a result
of the Auction or (iii) a valid hold order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The broker-dealer agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit orders in auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit hold orders and sell orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit orders in Auctions, but only if such orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any Auction, it might
have an advantage over other bidders because it would have knowledge of all
orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that auction, if
there are other Broker-Dealers.
CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION
The Articles of Incorporation include provisions that could limit the
ability of other entities or persons to acquire control of the Fund, to cause it
to engage in certain transactions or to modify its structure.
The Articles require a vote by at least 75% of the Directors and the
holders of at least 75% of the shares of capital stock of the Fund outstanding
and entitled to vote, except as described below, to authorize (1) the Fund's
conversion from a closed-end to an open-end investment company; (2) any merger
or consolidation or share exchange of the Fund with or into any other company;
(3) the dissolution or liquidation of the Fund; (4) any sale, lease, or exchange
of all or substantially all of the Fund's assets to any Principal Stockholder
52
(as defined below); (5) a change in the nature of the business of the Fund so
that it would cease to be an investment company registered under the 1940 Act;
(6) with certain exceptions, the issuance of any securities of the Fund to any
Principal Stockholder for cash; or (7) any transfer by the Fund of any
securities of the Fund to any Principal Stockholder in exchange for cash,
securities or other property having an aggregate fair market value of $1,000,000
or more; provided, with respect to (1) through (5), if such action has been
authorized by the affirmative vote of a majority of the entire Board, including
a majority of the Directors who are not "interested persons," of the Fund, as
defined in the 1940 Act ("Independent Directors"), then the affirmative vote of
the holders of only a majority of the Fund's shares of capital stock outstanding
and entitled to vote at the time is required; and provided, further, with
respect to (6) and (7), if such transaction has been authorized by the
affirmative vote of a majority of the entire Board, including a majority of the
Independent Directors, no stockholder vote is required to authorize such action.
The term "Principal Stockholder" means any person, entity or group that holds,
directly or indirectly, more than 5% of the outstanding shares of the Fund, and
includes any associates or affiliates of such person or entity or of any member
of the group. None of the foregoing provisions may be amended except by the vote
of the holders of at least 75% of the outstanding shares of capital stock of the
Fund outstanding and entitled to vote thereon. As discussed in the Prospectus,
certain of the actions described above also require approval by the holders of
Preferred Shares, tallied separately. Certain of the transactions described
above, even if approved by stockholders, may be prohibited by the 1940 Act.
The percentage votes required under these provisions, which are greater
than the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Fund's business or management and may have the effect
of depriving Common Stockholders of an opportunity to sell shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The Board
believes that the provisions of the Articles relating to such higher votes are
in the best interest of the Fund and its stockholders.
Reference should be made to the Articles on file with the Securities
and Exchange Commission for the full text of these provisions.
DISTRIBUTIONS ON COMMON SHARES
The Fund intends to distribute its net investment income on a monthly
basis. The Fund intends to distribute, at least annually, all of its net long-
and short-term capital gains, if any. Both monthly and annual distributions to
holders of Common Shares will be made only after paying any accrued dividends
on, or redeeming or liquidating, Preferred Shares and making interest and
required principal payments on any Borrowings.
The Fund intends to seek exemptive relief from the SEC to permit it to
adopt a Managed Dividend Policy. As more fully described below, a Managed
Dividend Policy would permit the Fund to make regular cash distributions to
Common Stockholders at a fixed rate per Common Share or at a fixed percentage of
its net asset value that may include periodic distributions of net long- and
short-term capital gains.
53
LEVEL-RATE DIVIDEND POLICY
The Fund made, and until it receives exemptive relief to implement a
Managed Dividend Policy it intends to continue to make, regular monthly cash
distributions to Common Stockholders at a fixed rate per Common Share based on
its projected performance, which rate may be adjusted from time to time
("Level-Rate Dividend Policy"). The Fund's ability to maintain a Level-Rate
Dividend Policy will depend on a number of factors, including the stability of
income received from its investments and dividends paid on Preferred Shares and
interest and required principal payments on any Borrowings.
Over time, all the Fund's net investment income will be distributed.
That income generally will consist of all dividend and interest income accrued
on portfolio assets less all expenses of the Fund, which will be accrued each
day. In addition, the Fund currently expects that a portion of the cash flow it
receives from Real Estate Companies that is initially characterized as
"dividends" will later be recharacterized by the Real Estate Companies as a
non-taxable return of capital to the Fund. In that event, amounts distributed to
Fund stockholders may have to be subsequently recharacterized as a return of
capital for tax purposes. See "Tax Matters." Pursuant to the requirements of the
1940 Act and other applicable laws, a notice would accompany each monthly
distribution with respect to the estimated source of the distributions unless
the exemptive order the Fund intends to seek eliminates that requirement.
To permit the Fund to maintain more stable monthly distributions, it
may initially distribute less than the entire amount of the net investment
income it earns in a particular period. The undistributed net investment income
may be available to supplement future distributions. The distributions the Fund
pays for any particular monthly period may be more or less than the amount of
net investment income it actually earns during the period, and the Fund may have
to sell a portion of its investment portfolio to make a distribution at a time
when independent investment judgment might not dictate such action.
Undistributed net investment income is included in the Common Shares' net asset
value, and, correspondingly, distributions from net investment income will
reduce the Common Shares' net asset value.
While the Fund intends to pay a level dividend, holders of Common
Shares should understand that there is no assurance that the Fund will always be
able to pay a dividend or that the dividend will be of any particular size.
MANAGED DIVIDEND POLICY
The Fund intends to file an exemptive application with the SEC seeking
an order under the 1940 Act facilitating the implementation of a Managed
Dividend Policy. If, and when, the Fund receives the requested relief, it may,
subject to the determination of its Board of Directors, implement a Managed
Dividend Policy. If implemented, the Managed Dividend Policy would supercede the
Level-Rate Dividend Policy.
Under a Managed Dividend Policy, the Fund could make regular cash
distributions to Common Stockholders, at a fixed rate per Common Share or a
fixed percentage of its net asset value, that may include periodic distributions
of net long- and short-term capital gains or, in certain circumstances, return
54
of capital. Under a Managed Dividend Policy, if, for any distribution, the sum
of net investment income and any net realized capital gains was less than the
amount of the distribution, the difference would be distributed from the Fund's
capital.
Distributions would be treated as ordinary dividend income and/or
long-term capital gain (see "Tax Matters") to the extent of the Fund's current
and accumulated earnings and profits ("E&P"). If, for any fiscal year, the
Fund's total distributions exceeded its E&P (an "Excess"), a Common
Stockholder's share of the Excess would generally be treated as a tax-free
return of capital up to the amount of his or her tax basis in his or her Common
Shares, with any part of that share that exceeds such basis being treated as
gain from the sale of those Common Shares. As with the Level-Rate Dividend
Policy, the Fund currently expects that a portion of the cash flow it receives
from Real Estate Companies that is initially characterized as "dividends" will
later be recharacterized by the Real Estate Companies as a non-taxable return of
capital to the Fund. In that event, amounts distributed to Fund stockholders may
have to be recharacterized after the distribution as a return of capital for tax
purposes. See "Tax Matters." Pursuant to the requirements of the 1940 Act and
other applicable laws, a notice would accompany each monthly distribution with
respect to the estimated source of the distribution unless the exemptive order
the Fund intends to seek eliminates that requirement.
Any Excess would decrease the Fund's total assets and, as a result,
would have the likely effect of increasing its expense ratio. There is a risk
that, if, at any time during a fiscal year, the Fund's E&P are less than the
distributions it makes under the Managed Dividend Policy, the Fund might not
realize sufficient net investment income and/or capital gains later in that year
to make up the shortfall (thus resulting in an Excess). In addition, in order to
make distributions, the Fund may have to sell a portion of its investment
portfolio at a time when independent investment judgment might not dictate such
action.
There is no guarantee that the Fund will receive an exemptive order
facilitating the implementation of a Managed Dividend Policy or, if such an
order is received, that the Board of Directors will implement a Managed Dividend
Policy.
The Board of Directors reserves the right to change the distribution
policy regarding Common Shares from time to time.
REPURCHASE OF COMMON SHARES; TENDER OFFERS;
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
stockholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which in turn
are affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Shares of a closed-end
investment company may frequently trade at prices lower than net asset value.
The Board regularly monitors the relationship between the market price and net
55
asset value of the Common Shares. If the Common Shares were to trade at a
substantial discount to net asset value for an extended period of time, the
Board may consider the repurchase of its Common Shares on the open market or in
private transactions, or the making of a tender offer for such shares, or the
conversion of the Fund to an open-end investment company. There can be no
assurance, however, that the Board will decide to take or propose any of these
actions, or that share repurchases or tender offers, if undertaken, will
actually reduce market discount. The Fund has no present intention to repurchase
its Common Shares and would do so only in the circumstances described in this
section.
Notwithstanding the foregoing, at any time when Preferred Shares are
outstanding, the Fund may not purchase, redeem or otherwise acquire any of its
Common Shares unless (1) all accrued dividends on Preferred Shares have been
paid and (2) at the time of such purchase, redemption or acquisition, the net
asset value of the Fund's portfolio (determined after deducting the acquisition
price of the Common Shares) is at least 200% of the liquidation value of the
outstanding Preferred Shares (expected to equal the original purchase price per
share plus any accrued and unpaid dividends thereon).
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board would have to comply with the Securities Exchange Act of 1934, as
amended, and the 1940 Act and the rules and regulations thereunder.
The Board may also from time to time consider submitting to the holders
of the shares of stock of the Fund a proposal to convert the Fund to an open-end
investment company. In determining whether to exercise its sole discretion to
submit this issue to stockholders, the Board would consider all factors then
relevant, including the relationship of the market price of the Common Shares to
net asset value, the extent to which the Fund's capital structure is leveraged
and the possibility of re-leveraging, the spread, if any, between the yields on
securities in the Fund's portfolio and interest and dividend charges on
Preferred Shares issued by the Fund and general market and economic conditions.
See "Anti-Takeover and Other Provisions in the Articles of
Incorporation" in the Prospectus and "Certain Provisions in the Articles of
Incorporation" in this SAI for a discussion of voting requirements applicable to
conversion of the Fund to an open-end company. If the Fund converted to an
open-end company, it would be required to redeem all Preferred Shares then
outstanding, and the Fund's Common Shares would no longer be listed on the NYSE.
Holders of common stock of an open-end investment company may require the
company to redeem their shares on any business day (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of
redemption. In order to avoid maintaining large cash positions or liquidating
favorable investments to meet redemptions, open-end companies typically engage
in a continuous offering of their common stock. Open-end companies are thus
subject to periodic asset in-flows and out-flows that can complicate portfolio
management.
56
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of the Common Shares will decrease
its total assets. This would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of Common Shares at a time when
Preferred Shares are outstanding will increase the leverage applicable to the
outstanding Common Shares then remaining. See the Fund's Prospectus under "Risks
- Risk of Financial Leverage."
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board would consider all relevant factors,
including the extent and duration of the discount, the liquidity of the Fund's
portfolio, the impact of any action that might be taken on the Fund or its
stockholders and market considerations. Based on these considerations, even if
the Fund's shares should trade at a discount, the Board may determine that, in
the interest of the Fund and its stockholders, no action should be taken.
TAX MATTERS
Set forth below is a discussion of the material federal income and
excise tax aspects concerning the Fund and the purchase, ownership and
disposition of Preferred Shares. This discussion does not purport to be complete
or to deal with all aspects of federal taxation that may be relevant to
stockholders in light of their particular circumstances. Unless otherwise noted,
this discussion assumes that you are a U.S. person and hold your New Preferred
Shares as capital assets. This discussion is based on present provisions of the
Code and the regulations promulgated thereunder and existing judicial decisions
and administrative pronouncements, all of which are subject to change or
differing interpretations (possibly with retroactive effect). Prospective
investors should consult their own tax advisers with regard to the federal tax
consequences of the purchase, ownership or disposition of New Preferred Shares,
as well as the tax consequences arising under the laws of any state, locality,
foreign country or other taxing jurisdiction.
TAXATION OF THE FUND
The Fund intends to qualify each taxable year for treatment as a RIC.
To qualify for that treatment, the Fund must, among other things:
(a) derive at least 90% of its gross income each taxable year
from dividends, interest, payments with respect to certain securities
loans and gains from the sale or other disposition of securities or
foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of
investing in securities or those currencies ("Income Requirement");
57
(b) distribute with respect to each taxable year at least 90%
of its investment company taxable income (consisting generally of net
investment income, the excess of net short-term capital gains over net
long-term capital losses and net gains or losses from certain foreign
currency transactions, if any, all determined without regard to any
deduction for dividends paid) for that year ("Distribution
Requirement"); and
(c) diversify its holdings so that, at the end of each quarter
of its taxable year, (1) at least 50% of the value of its total assets
is represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities limited in respect of any
one issuer to a value not greater than 5% of the value of the Fund's
total assets and to not more than 10% of the issuer's outstanding
voting securities, and (2) not more than 25% of the value of the Fund's
total assets is invested in the securities (other than those of the
U.S. Government or other RICs) of any one issuer or of two or more
issuers that the Fund controls and are engaged in the same, similar or
related trades or businesses.
If the Fund qualifies for treatment as a RIC, it generally
will not be subject to federal income tax on income and gains it timely
distributes to its stockholders (including Capital Gain Dividends, as
defined below). If the Fund failed to qualify for treatment as a RIC
for any taxable year, it would be taxed as an ordinary corporation on
the full amount of its taxable income for that year without being able
to deduct the distributions it makes to its stockholders and the
stockholders would treat all those distributions, including
distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), as dividends (that is,
generally as ordinary income) to the extent of the Fund's E&P. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions
before requalifying for treatment as a RIC.
To the extent the Fund fails to distribute in a calendar year at least
an amount equal to the sum of (1) 98% of its ordinary income for that year plus
(2) 98% of its capital gain net income for the one-year period ending October 31
of that year, plus 100% of any retained amount of either from the prior year, it
will be subject to a nondeductible 4% excise tax ("Excise Tax"). For these
purposes, the Fund will be treated as having distributed any amount with respect
to which it pays income tax. A distribution the Fund pays to stockholders in
January of any year generally will be deemed to have been paid on December 31 of
the preceding year if the distribution is declared and payable to stockholders
of record on a date in October, November or December of the preceding year. The
Fund intends generally to make distributions sufficient to avoid imposition of
the Excise Tax.
If at any time when Preferred Shares are outstanding, the Fund fails to
meet the Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred
Shares Asset Coverage (both as defined in the Fund's Articles Supplementary,
attached hereto as Appendix A), it will be required to suspend distributions to
58
Common Stockholders until such maintenance amount or asset coverage, as the case
may be, is restored. See "Description of New Preferred Shares - Dividends and
Rate Periods - Restriction on Dividends and Other Distributions" in the
prospectus. Such a suspension may prevent the Fund from satisfying the
Distribution Requirement and may therefore jeopardize its qualification for
treatment as a RIC or cause it to incur an income tax or Excise Tax liability,
or both. If the Fund fails to meet such maintenance amount or asset coverage
when Preferred Shares are outstanding, it will be required to redeem Preferred
Shares to maintain or restore such maintenance amount or asset coverage, as the
case may be, and avoid the adverse consequences to the Fund and its stockholders
of failing to qualify for treatment as a RIC. There can be no assurance,
however, that any such redemption would achieve such objective.
TAXATION OF THE STOCKHOLDERS
DISTRIBUTIONS. As long as the Fund qualifies for treatment as a RIC,
distributions it makes to its stockholders from its investment company taxable
income will be taxable to them as ordinary income to the extent of its E&P. The
Fund currently expects that most dividends it pays will not be eligible for the
dividends-received deduction available to corporations or the new reduced (15%)
maximum federal income tax rate on "qualified dividend income" received by
individuals under the Jobs and Growth Tax Relief Reconciliation Act of 2003
("2003 Tax Act"). Distributions of net capital gain that are properly designated
as such ("Capital Gain Dividends") will be taxable to each stockholder as
long-term capital gain, regardless of how long the stockholder has held Fund
shares. Under the 2003 Tax Act, Capital Gain Dividends the Fund pays to
individuals with respect to gains it recognizes on sales or exchanges of capital
assets between May 6, 2003, and December 31, 2008, also will be subject to a
maximum federal income tax rate of 15%.
As noted under "Investment Strategies, Techniques and Risks -
Securities Loans," the Fund may lend portfolio securities to institutional
investors and during the time securities are on loan, the borrower will pay the
Fund an amount equivalent to any dividends the borrower receives on the
securities. If securities are on loan over their ex-dividend date, the
"equivalent" payments will not be treated as dividends for purposes of the
reduced tax rate on individuals' dividends mentioned above.
Distributions on the Fund's shares are generally subject to federal
income tax as described herein, even though those distributions may economically
represent a return of a particular stockholder's investment. Those distributions
are likely to occur in respect of shares purchased when the Fund's NAV reflects
gains `that are either unrealized or realized but not distributed or income that
is not distributed. Those realized gains may be required to be distributed even
when the Fund's NAV also reflects unrealized losses. Distributions are taxable
to a stockholder even if they are paid from income or gains the Fund earned
before the stockholder's investment (and thus included in the price the
stockholder paid).
If the Fund makes a distribution to a stockholder in excess of its E&P,
the excess distribution will be treated as a "return of capital" to the extent
of the stockholder's tax basis in its shares and thereafter as capital gain. A
return of capital is not taxable, but it reduces a stockholder's tax basis in
59
its shares, thus reducing any loss or increasing any gain on a subsequent
taxable disposition by the stockholder of its shares. Current E&P will be, and
accumulated E&P may be, treated as first being used to pay distributions on
Preferred Shares, and only the remaining E&P will be treated as being used to
pay distributions on the Common Shares.
If (1) the Fund may redeem all or part of a series of Preferred Shares
upon payment of a premium, (2) based on all the facts and circumstances, the
Fund is more likely than not to redeem such series, and (3) such premium exceeds
a specified DE MINIMIS amount, it is possible that the holders of such series
may be required to accrue the premium as a dividend (to the extent of the Fund's
E&P) in advance of the receipt of cash representing such premium.
The Fund will notify stockholders annually as to the federal tax status
of Fund distributions to them.
SALE OR REDEMPTION OF SHARES. A stockholder's sale or other disposition
of Fund shares may give rise to a taxable gain or loss in an amount equal to the
difference between the amount realized and the stockholder's basis in those
shares. In general, any gain or loss realized on a taxable disposition of shares
will be treated as long-term capital gain or loss (and thus eligible, in the
case of individuals, for the 15% maximum federal income tax rate enacted by the
2003 Tax Act on net capital gain, as described above) if the shares have been
held for more than 12 months; otherwise, any such gain or loss will be treated
as short-term capital gain or loss. However, if a stockholder sells shares at a
loss within six months of their purchase, such loss will be treated as
long-term, rather than short-term, to the extent of any Capital Gain Dividends
the stockholder received with respect to the shares. All or a portion of any
loss realized on a taxable disposition of Preferred Shares will be disallowed if
other preferred shares issued by the Fund are purchased within 30 days before or
after the disposition. In that case, the basis in the newly purchased shares
will be adjusted to reflect the disallowed loss.
From time to time the Fund may make a tender offer for some of its
shares. A tender of shares pursuant to such an offer would be a taxable event.
If the Fund decides to make a tender offer, the tax consequences thereof will be
disclosed in the documents relating to the offer.
60
The Fund may, at its option, redeem Preferred Shares in whole or in
part and is required to redeem Preferred Shares to the extent required to
maintain the Preferred Shares Basic Maintenance Amount and the 1940 Act
Preferred Shares Asset Coverage. Gain or loss, if any, resulting from such a
redemption will be taxed as gain or loss from the sale or exchange of Preferred
Shares rather than as a dividend but only if the redemption distribution (a) is
deemed not to be essentially equivalent to a dividend, (b) is in complete
redemption of an owner's interest in the Fund, (c) is substantially
disproportionate with respect to the owner's interest in the Fund, or (d) with
respect to non-corporate owners, is in partial liquidation of the Fund. For
purposes of clauses (a), (b) and (c) above, a holder's ownership of Common
Shares will be taken into account.
Under recently promulgated U.S. Treasury regulations, if a stockholder
recognizes a loss with respect to shares of $2 million or more in any single
taxable year (or $4 million or more in the taxable year in which the loss is
recognized and the five succeeding taxable years) for an individual stockholder
or five times those amounts for a corporate stockholder, the stockholder must
file with the Internal Revenue Service a disclosure statement on Form 8886.
Direct stockholders of portfolio securities are in many cases excepted from this
reporting requirement, but under current guidance, stockholders of a RIC are not
excepted. Future guidance may extend the current exception from this reporting
requirement to stockholders of most or all RICs. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Stockholders should
consult their own tax advisers to determine the applicability of these
regulations in light of their individual circumstances.
BACKUP WITHHOLDING. The Fund generally is required to withhold and
remit to the U.S. Treasury 28% (except as noted below) of all distributions
(including Capital Gain Dividends) and redemption or repurchase proceeds
otherwise payable to any individual or certain other non-corporate stockholder
who fails to properly furnish the Fund with a correct taxpayer identification
number. Withholding at that rate also is required from all distributions
otherwise payable to such a stockholder who has under-reported dividend or
interest income or who fails to certify to the Fund that he or she is not
otherwise subject to that withholding (together with the withholding described
in the preceding sentence, "backup withholding"). The backup withholding rate
will increase to 31% for amounts paid after December 31, 2010, unless Congress
enacts tax legislation providing otherwise. Backup withholding is not an
additional tax, and any amounts withheld with respect to a stockholder may be
credited against the stockholder's federal income tax liability.
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
CERTAIN REAL ESTATE COMPANIES. Income that the Fund derives from a Real
Estate Company classified for federal tax purposes as a partnership (and not as
a corporation or REIT) ("RE Partnership") will be treated as qualifying income
under the Income Requirement only to the extent it is attributable to the RE
Partnership's income items that would be qualifying income if realized directly
by a RIC in the same manner as realized by the RE Partnership. The Fund will
restrict its investment in RE Partnerships to maintain its qualification as a
RIC.
61
The Fund may invest in REITs that hold residual interests in real
estate mortgage investment conduits ("REMICs"). Under U.S. Treasury regulations
that are authorized by the Code but have not yet been issued, some of a REIT's
income attributable to such an interest (an "excess inclusion") generally will
be allocated to the REIT's shareholders in proportion to the dividends they
receive; those regulations are expected to treat a RIC's excess inclusion income
similarly. Excess inclusion income so allocated to certain tax-exempt entities
(including qualified retirement plans, individual retirement accounts and public
charities) would constitute unrelated business taxable income to them. In
addition, if a "disqualified organization" (which term includes a governmental
unit and a tax-exempt entity) is a record holder of a RIC's shares at any time
during a taxable year, the RIC will be subject to tax equal to the portion of
its excess inclusion income for the year that is allocable to the disqualified
organization multiplied by the highest federal income tax rate imposed on
corporations. The Fund will not invest directly in REMIC residual interests and
does not intend to invest in REITs that, to its knowledge, invest in those
interests.
HEDGING TRANSACTIONS. The use of hedging strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures and forward currency contracts the Fund derives
with respect to its business of investing in securities or foreign currencies,
will be treated as qualifying income under the Income Requirement.
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (1)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (2) convert lower taxed long-term capital gain to higher taxed
short-term capital gain or ordinary income, (3) convert an ordinary loss or a
deduction to a capital loss (the deductibility of which is more limited), (4)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (5) adversely affect the timing as to when a purchase or sale of
securities is deemed to occur and (6) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections to mitigate the effect of these rules and
prevent its disqualification as a RIC.
FOREIGN SECURITIES. Dividends and interest the Fund receives, and gains
it realizes, may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions that would reduce the total return on its
securities. Tax treaties between certain countries and the United States may
reduce or eliminate these taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign investors.
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is any foreign corporation (with certain
exceptions) that, in general, meets either of the following tests: (1) at least
75% of its gross income for the taxable year is passive or (2) an average of at
least 50% of its assets produce, or are held for the production of, passive
income. Under certain circumstances, if the Fund holds stock of a PFIC, it will
be subject to federal income tax on a portion of any "excess distribution" the
62
Fund receives on the stock or of any gain on its disposition of the stock
(collectively, "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its stockholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its stockholders. Fund distributions attributable to
PFIC income will not be eligible for the 15% maximum federal income tax rate on
"qualified dividend income" described above.
If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the Fund's incurring the
foregoing tax and interest obligation, it would be required to include in income
each year its pro rata share of the QEF's annual ordinary earnings and net
capital gain -- which the Fund most likely would have to distribute to satisfy
the Distribution Requirement and avoid imposition of the Excise Tax -- even if
the Fund did not receive those earnings and gain from the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
The Fund may elect to "mark-to-market" any stock in a PFIC it owns at
the end of its taxable year. "Marking-to-market," in this context, means
including in ordinary income for each taxable year the excess, if any, of the
fair market value of the stock over the Fund's adjusted basis therein as of the
end of that year. Pursuant to the election, the Fund also may deduct (as an
ordinary, not capital, loss) the excess, if any, of its adjusted basis in PFIC
stock over the fair market value thereof as of the taxable year-end, but only to
the extent of any net mark-to-market gains with respect to that stock the Fund
included in income for prior taxable years under the election. The Fund's
adjusted basis in each PFIC's stock subject to the election would be adjusted to
reflect the amounts of income included and deductions taken thereunder.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. The Fund may acquire zero
coupon or other securities issued with OID. As a holder of those securities, the
Fund must include in gross income the OID that accrues on them during the
taxable year, even if it receives no corresponding payment on them during the
year. Because the Fund annually must distribute substantially all of its
investment company taxable income, including any OID, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of its
portfolio securities, if necessary. The Fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain.
* * *
The foregoing is a general summary of the provisions of the Code and
regulations thereunder currently in effect as they directly govern the taxation
of the Fund and its stockholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Stockholders are advised to consult their own tax advisers for more detailed
information concerning the federal (as well as state, local and foreign) income
and other tax consequences of purchasing, holding and disposing of Fund shares.
63
REPORTS TO STOCKHOLDERS
Stockholders of the Fund will receive unaudited semi-annual financial
statements, as well as year-end financial statements audited by the independent
auditors for the Fund. The Fund's statements show the investments owned by it
and the market values thereof and provide other information about the Fund and
its operations.
CUSTODIAN, AUCTION AGENT AND TRANSFER AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02110, serves as custodian for assets of the Fund. The custodian performs
custodial and fund accounting services. The Bank of New York, Attn: Corporate
Trust Administration, 100 Church Street, 8th Floor, New York, New York 10286,
ATTN: Corporate Trust, Dealing and Trading-Auction Desk, serves as the Auction
Agent, transfer agent and registrar for the Preferred Shares, as well as agent
for the Dividend Reinvestment Plan relating to the Common Shares.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116, serves as
independent auditors for the Fund. Ernst & Young LLP provides audit services,
tax return preparation and assistance and consultation in connection with review
of the Fund's filings with the Securities and Exchange Commission.
COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington
D.C. 20036, will pass upon certain legal matters in connection with shares
offered by the Fund, and also acts as counsel to the Fund.
REGISTRATION STATEMENT
A Registration Statement on Form N-2, including any amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Fund's Prospectus and this SAI do not contain
all of the information set forth in the Registration Statement, including any
exhibits and schedules thereto. For further information with respect to the Fund
and the shares offered or to be offered hereby, reference is made to the Fund's
Registration Statement. Statements contained in the Fund's Prospectus and this
SAI as to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies of
the Registration Statement may be inspected without charge at the SEC's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the SEC upon the payment of certain fees prescribed by the SEC.
64
REPORT OF INDEPENDENT AUDITORS
To the Shareholder and
Board of Directors of
Neuberger Berman Realty Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Neuberger Berman Realty Income Fund Inc., (the "Fund") as of April 14, 2003.
This financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Neuberger Berman Realty Income
Fund Inc., at April 14, 2003, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Boston, Massachusetts
April 18, 2003
65
NEUBERGER BERMAN REALTY INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 14, 2003
ASSETS
Cash $ 100,003
Deferred offering costs 200,000
------------
Total assets 300,003
------------
LIABILITIES
Payable for offering costs 200,000
------------
NET ASSETS AT VALUE $ 100,003
------------
NET ASSETS CONSIST OF:
Paid-in capital $ 100,003
------------
SHARES OUTSTANDING ($.0001 PAR VALUE;
1,000,000,000 SHARES AUTHORIZED) 6,981
------------
NET ASSET VALUE, PER SHARE $14.325
------------
MAXIMUM OFFERING PRICE PER SHARE ($14.325/95.5%) $15.000
------------
See Notes to Financial Statement.
66
NEUBERGER BERMAN REALTY INCOME FUND INC.
NOTES TO FINANCIAL STATEMENT
APRIL 14, 2003
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. ORGANIZATION:
Neuberger Berman Realty Income Fund Inc. (the "Fund") was organized as a
Maryland corporation on March 4, 2003. The Fund is registered under the
Investment Company Act of 1940, as amended, as a non-diversified, closed-end
management investment company. The Fund has had no operations to date, other
than the sale to Neuberger Berman LLC ("Neuberger"), the Fund's sub-adviser, on
April 14, 2003 of 6,981 shares of common stock for $100,003 ($14.325 per share).
2. ACCOUNTING POLICIES
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States requires Neuberger Berman
Management Inc. ("Management") to make estimates and assumptions that affect the
reported amounts of assets and liabilities. Actual results may differ from those
estimates.
3. CONCENTRATION OF RISK
The Fund may, for cash management purposes, during a reasonable start-up period
following the initial offering, or for defensive purposes, temporarily hold all
or a substantial portion of its assets in cash, high-quality, short-term money
market instruments, including shares of money market funds that are managed by
Management, or in high-quality debt securities. The ability of the issuers of
the money market instruments and debt securities held by the Fund to meet their
obligations may be affected by economic developments, including those particular
to a specific industry or region.
Following the start-up period, under normal market conditions, the Fund's
investments will be concentrated in income-producing common equity securities,
preferred securities, convertible securities and non-convertible debt securities
issued by companies deriving the majority of their revenue from the ownership,
construction, financing, management and/or sale of commercial, industrial,
and/or residential real estate. The value of Fund shares may fluctuate more due
to economic, legal, cultural or technological developments affecting the United
States real estate industry than would the shares of a fund not concentrated in
the real estate industry.
NOTE B -- INVESTMENT MANAGEMENT AGREEMENT, ADMINISTRATION AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an Investment Management Agreement, the Fund pays Management
a monthly fee at an annualized rate of 0.60% of the Fund's average daily Managed
Assets. Managed Assets means the total assets of the Fund less liabilities other
than the aggregate indebtedness entered into for purposes of leverage. For
purposes of calculating Managed Assets, the liquidation preference of any
preferred shares outstanding is not considered a liability.
Management has contractually agreed to waive a portion of the management fees it
is entitled to receive from the Fund at the following annual rates:
67
% of Average
Fiscal Period or Year Ended Daily Managed
October 31, Assets to be
Waived
------------------------------------------------
2003 - 2007 0.25
2008 0.20
2009 0.15
2010 0.10
2011 0.05
Management has not agreed to waive any portion of its fees and expenses beyond
October 31, 2011.
Pursuant to an Administration Agreement between Management and the Fund, the
Fund has agreed to pay Management an administration fee payable on a monthly
basis at the annual rate of 0.25% of the Fund's average daily Managed Assets.
Additionally, Management retains State Street Bank and Trust Company ("State
Street") as its sub-administrator under a Sub Administration Agreement.
Management pays State Street a fee for all services received under the
Sub-Administration Agreement.
Management and Neuberger, a member firm of the New York Stock Exchange and
sub-adviser to the Fund, are wholly owned subsidiaries of Neuberger Berman Inc.,
a publicly held company. Neuberger is retained by Management to furnish it with
investment recommendations and research information without added cost to the
Fund. Several individuals who are officers and/or directors of the Fund are also
employees of Neuberger and/or Management.
NOTE C -- ORGANIZATION EXPENSES AND OFFERING COSTS:
Based on an estimated Fund offering of 6,666,667 shares, organization and
offering costs are estimated to be $19,100 and $771,423, respectively.
Management has agreed to pay all organizational expenses and the amount by which
the aggregate of all of the Fund's offering costs (other than sales load) exceed
$0.03 per share. Such amount to be paid by Management is estimated to be
$590,523. The Fund will pay offering costs estimated at $200,000 from the
proceeds of the offering. Offering costs paid by the Fund will be charged as a
reduction of paid-in capital at the completion of the Fund offering.
NOTE D - FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and to comply
with the applicable provisions of the Internal Revenue Code of 1986, as amended,
such that it will not be subject to Federal income tax.
68
UNAUDITED FINANCIAL INFORMATION
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
SCHEDULE OF INVESTMENTS Neuberger Berman Realty Income Fund Inc.
----------------------------------------------------------------
MARKET VALUE(+)
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (102.9%)
APARTMENTS (16.9%)
135,100 Amli Residential Properties Trust $ 3,394
531,400 Apartment Investment & Management 20,469
410,500 Archstone-Smith Trust 10,780
100 Avalonbay Communities 5
464,200 Camden Property Trust 17,816
5,100 Equity Residential 150
413,100 Gables Residential Trust 13,033
171,100 Home Properties of New York 6,520
25,000 Post Properties 697
10,900 Town & Country Trust 255
28,400 United Dominion Realty Trust 513
----------------
73,632
COMMUNITY CENTERS (11.7%)
43,400 Developers Diversified Realty 1,272
30,000 Federal Realty Investment Trust 1,097
221,400 Heritage Property Investment Trust 6,354
922,400 New Plan Excel Realty Trust 21,529
301,100 Ramco-Gershenson Properties Trust 7,829
364,700 Tanger Factory Outlet Centers 12,830
----------------
50,911
DIVERSIFIED (14.8%)
555,900 Colonial Properties Trust 19,490
800,000 iStar Financial 30,368
177,600 Pennsylvania REIT 5,694
182,100 Vornado Realty Trust 8,680
----------------
64,232
HEALTH CARE (13.7%)
296,400 Health Care Property Investors 13,080
352,400 Health Care REIT 10,724
157,300 Healthcare Realty Trust 5,008
485,000 Nationwide Health Properties 8,090
1,312,900 Ventas, Inc. 22,792
----------------
59,694
INDUSTRIAL (7.1%)
622,229 EastGroup Properties 17,734
353,000 First Industrial Realty Trust 11,155
89,000 Keystone Property Trust 1,820
----------------
30,709
LODGING (0.4%)
51,000 Hospitality Properties Trust 1,626
See Notes to Schedule of Investments
69
SCHEDULE OF INVESTMENTS Neuberger Berman Realty Income Fund Inc. cont'd
-----------------------------------------------------------------------
MARKET VALUE(+)
NUMBER OF SHARES (000'S OMITTED)
OFFICE (18.5%)
5,000 Alexandria Real Estate Equities $ 235
100,000 American Financial Realty Trust 1,371
161,000 Arden Realty 4,485
345,500 Brandywine Realty Trust 8,724
275,000 CarrAmerica Realty 7,931
240,000 Equity Office Properties Trust 6,576
217,000 Glenborough Realty Trust 4,132
398,700 Highwoods Properties 9,274
366,000 HRPT Properties Trust 3,294
99,500 Mack-Cali Realty 3,764
942,000 Maguire Properties 18,840
299,400 Prentiss Properties Trust 9,087
233,600 Trizec Properties 2,896
----------------
80,609
OFFICE - INDUSTRIAL (8.9%)
168,000 Bedford Property Investors 4,366
251,300 Kilroy Realty 7,165
317,700 Liberty Property Trust 11,237
704,700 Reckson Associates Realty 15,997
----------------
38,765
REGIONAL MALLS (8.6%)
55,500 CBL & Associates Properties 2,781
100,000 Chelsea Property Group 4,663
10,000 Crown American Realty Trust 115
451,200 Glimcher Realty Trust 9,723
104,700 Macerich Co. 3,869
164,000 Mills Corp. 6,184
230,300 Simon Property Group 10,032
----------------
37,367
SELF STORAGE (2.3%)
119,700 Public Storage, Depositary Shares 3,346
75,700 Shurgard Storage Centers 2,631
128,400 Sovran Self Storage 4,080
----------------
10,057
TOTAL COMMON STOCKS
(COST $406,552) 447,602
----------------
PREFERRED STOCKS (41.0%)
APARTMENTS (5.0%)
7,200 Apartment Investment & Management, Ser. Q 191
8,600 Apartment Investment & Management, Ser. R 229
138,000 Apartment Investment & Management, Ser. T 3,502
377,800 Mid-America Apartment Communities, Ser. H 9,776
151,300 Post Properties, Ser. A 8,253
----------------
21,951
See Notes to Schedule of Investments
70
SCHEDULE OF INVESTMENTS Neuberger Berman Realty Income Fund Inc. cont'd
-----------------------------------------------------------------------
MARKET VALUE(+)
NUMBER OF SHARES (000'S OMITTED)
COMMUNITY CENTERS (7.6%)
743,644 Citigroup Global Markets $ 25,518
49,600 Ramco-Gershenson Properties Trust, Ser. B 1,369
60,000 Urstadt Biddle Properties, Ser. C 6,107(**)
----------------
32,994
DIVERSIFIED (7.1%)
398,600 Crescent Real Estate Equities, Ser. B 10,563
200,000 iStar Financial, Ser. E 5,144(&&)
580,000 Lexington Corp. Properties Trust, Ser. B 15,051
----------------
30,758
FINANCIAL SERVICES (0.9%)
156,000 Anthracite Capital, Ser. C 4,025
HEALTH CARE (4.3%)
685,000 Health Care REIT, Ser. D 17,575
13,200 LTC Properties, Ser. A 333
27,900 LTC Properties, Ser. B 702
1,000 Nationwide Health Properties 74
----------------
18,684
INDUSTRIAL (0.1%)
20,000 Keystone Property Trust, Ser. D 540
LODGING (0.6%)
81,700 Hospitality Properties Trust, Ser. B 2,186
3,800 Innkeepers USA Trust, Ser. A 95
5,300 LaSalle Hotel Properties, Ser. A 142
----------------
2,423
OFFICE (1.0%)
1,800 Glenborough Realty Trust, Ser. A 43
23,200 Highwoods Properties, Ser. B 571
91,400 Highwoods Properties, Ser. D 2,283
50,000 HRPT Properties Trust, Ser. B 1,356
----------------
4,253
See Notes to Schedule of Investments
71
SCHEDULE OF INVESTMENTS Neuberger Berman Realty Income Fund Inc. cont'd
-----------------------------------------------------------------------
MARKET VALUE(+)
NUMBER OF SHARES (000'S OMITTED)
OFFICE - INDUSTRIAL (2.8%)
480,000 Parkway Properties, Ser. D $ 12,384
REGIONAL MALLS (11.1%)
40,000 CBL & Associates Properties, Ser. B 2,194
225,300 Crown American Realty Trust, Ser. A 12,887
48,000 Glimcher Realty Trust, Ser. F 1,212
31,200 Mills Corp., Ser. B 828
206,200 Mills Corp., Ser. C 5,483
965,900 Mills Corp., Ser. E 25,355
7,700 Taubman Centers, Ser. A 196
----------------
48,155
SPECIALTY (0.5%)
76,500 Entertainment Properties Trust, Ser. A 2,116
TOTAL PREFERRED STOCKS
(COST $172,746) 178,283
----------------
PRINCIPAL AMOUNT
SHORT-TERM INVESTMENTS (0.4%)
$1,913,196 Neuberger Berman Institutional Cash Fund
Trust Class
(COST $1,913) 1,913(#)(@)
----------------
TOTAL INVESTMENTS (144.3%)
(COST $581,211) 627,798(##)
Cash, receivables and other assets, less liabilities (0.5%) 2,307
Auction Preferred Shares at redemption value [(44.8%)] (195,000)
----------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
(100.0%) $435,105
----------------
See Notes to Schedule of Investments
72
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
NOTES TO SCHEDULE OF INVESTMENTS
--------------------------------
+ Investment securities of the Fund are valued at the latest sales price
where that price is readily available; securities for which no sales were
reported, unless otherwise noted, are valued at the last available bid
price on that day. Securities traded primarily on the NASDAQ Stock Market
are normally valued by the Fund at the NASDAQ Official Closing Price
("NOCP") provided by NASDAQ each business day. The NOCP is the most
recently reported price as of 4:00:02 p.m., Eastern time, unless that
price is outside the range of the "inside" bid and asked prices (i.e., the
bid and asked prices that dealers quote to each other when trading for
their own accounts); in that case, NASDAQ will adjust the price to equal
the inside bid or asked price, whichever is closer. Because of delays in
reporting trades, the NOCP may not be based on the price of the last trade
to occur before the market closes. The Fund values all other securities by
a method the directors of Neuberger Berman Realty Income Fund Inc. believe
accurately reflects fair value. Numerous factors may be considered when
determining the fair value of a security, including available analyst,
media or other reports, trading in futures or ADRs and whether the issuer
of the security being fair valued has other securities outstanding.
Short-term debt securities with less than 60 days until maturity may be
valued at cost which, when combined with interest earned, approximates
market value.
# At cost, which approximates market value.
## At September 15, 2003, the cost of investments for U.S. Federal income tax
purposes was $581,211,000. Gross unrealized appreciation of investments
was $47,384,000 and gross unrealized depreciation of investments was
$797,000, resulting in net unrealized appreciation of $46,587,000, based
on cost for U.S. Federal income tax purposes.
** Security exempt from registration under the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers under Rule 144A. At September
15, 2003, these securities amounted to $6,107,000 or 1.4% of net assets.
&& Security is segregated as collateral for interest rate swap contracts.
@ Neuberger Berman Institutional Cash Fund is also managed by Neuberger
Berman Management Inc. (see Note A of Notes to Financial Statements).
See Notes to Financial Statements
73
SEPTEMBER 15, 2003 (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------
NEUBERGER BERMAN REALTY INCOME FUND INC.
(000's omitted except per share amounts)
Assets
INVESTMENTS IN SECURITIES, AT MARKET VALUE*
(NOTE A)-SEE SCHEDULE OF INVESTMENTS $ 627,798
Interest rate swaps, at market value (Note A) 5,243
Dividends and interest receivable 728
Prepaid expenses and other assets 40
--------------
TOTAL ASSETS 633,809
--------------
LIABILITIES
Dividends payable-- preferred shares 25
Dividends payable-- common shares 3,079
Net payable for swap contracts (Note A) 124
Payable for offering costs (Note A) 231
Payable to investment manager-net (Note B) 85
Payable to administrator (Note B) 61
Accrued expenses and other payables 99
--------------
TOTAL LIABILITIES 3,704
--------------
AUCTION PREFERRED SHARES SERIES A, B, C & D AT
REDEMPTION VALUE
12,000 shares authorized; 7,800 shares issued
and outstanding; $.0001 par value; $25,000
liquidation value per share (Note A) 195,000
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 435,105
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST
OF:
Common stock paid-in capital $ 389,008
Dividends in excess of net investment income (6,720)
Accumulated net realized gains (losses) on
investments 987
Net unrealized appreciation (depreciation) in
value of investments 51,830
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 435,105
--------------
COMMON SHARES OUTSTANDING ($.0001 PAR VALUE;
999,988,000 SHARES AUTHORIZED) 27,372
--------------
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 15.90
--------------
*COST OF INVESTMENTS $ 581,211
--------------
See Notes to Financial Statements
74
FOR THE PERIOD FROM APRIL 29, 2003 (COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 15, 2003 (UNAUDITED)
STATEMENT OF OPERATIONS
-----------------------
NEUBERGER BERMAN REALTY INCOME FUND INC.
(000's OMITTED)
Investment Income
Dividend income $7,743
Interest income 305
Interest Income from investments in affiliated
issuers (Note A) 31
--------------
Total income $8,079
--------------
EXPENSES:
Investment management fee (Note B) 1,219
Administration fee (Note B) 509
Auction agent fees (Note B) 110
Auditing fees (Note B) 21
Basic maintenance expense 5
Custodian fees (Note B) 47
Directors' fees and expenses 8
Legal fees 18
Net interest expense on interest rate swap contracts
(Note A) 498
Shareholder reports 19
Stock exchange listing fees 11
Stock transfer agent fees 13
Miscellaneous 9
--------------
Total expenses 2,487
Investment management fee waived and expenses reduced by
custodian fee expense offset arrangement (Note B) (510)
--------------
Total net expenses 1,977
--------------
Net investment income $6,102
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment securities sold 987
Change in net unrealized appreciation (depreciation) in
value of:
Investment securities (Note A) 46,587
Interest rate swap contracts (Note A) 5,243
--------------
Net gain (loss) on investments 52,817
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (507)
--------------
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS RESULTING FROM OPERATIONS $58,412
--------------
See Notes to Financial Statements
75
SEPTEMBER 15, 2003 (UNAUDITED)
STATEMENT OF CHANGES IN NET ASSETS
----------------------------------
Period from
NEUBERGER BERMAN REALTY INCOME FUND INC. April 29, 2003
(Commencement
of Operations)
to September 15,
(000'S OMITTED) 2003
(Unaudited)
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $6,102
Net realized gain (loss) on investments 987
Change in net unrealized appreciation (depreciation)
of investments 51,830
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (507)
---------------
Net increase (decrease) in net assets applicable to
common shareholders resulting from operations $58,412
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
---------------
Net investment income (12,315)
FROM CAPITAL SHARE TRANSACTIONS:
Net proceeds from issuance of common shares 343,180
Net proceeds from underwriters' over-allotment
option exercised 47,745
Proceeds from reinvestment of dividends 378
Payments for preferred shares offering costs (2,295)
---------------
Total net proceeds from capital share transactions 389,008
---------------
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS $435,105
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period -
---------------
End of period $435,105
===============
Accumulated dividends in excess of net investment
income at end of period ($6,720)
See Notes to Financial Statements
76
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS Neuberger Berman Realty Income Fund Inc.
----------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Realty Income Fund Inc. (the "Fund") was
organized as a Maryland corporation on March 4, 2003 as a non-diversified,
closed-end management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Fund had no operations until
April 29, 2003, other than matters relating to its organization and the
sale on April 14, 2003 of 6,981 shares of common stock for $100,003
($14.325 per share) to Neuberger Berman, LLC ("Neuberger"), the Fund's
sub-adviser. The Board of Directors of the Fund may classify or
re-classify any unissued shares of capital stock, into one or more classes
of preferred stock, without the approval of shareholders.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires Neuberger
Berman Management Inc. ("Management") to make estimates and assumptions at
the date of the financial statements. Actual results could differ from
those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in the
notes following the Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, including accretion of original issue discount, where applicable,
and accretion of discount on short-term investments, is recorded on the
accrual basis. Realized gains and losses from securities transactions are
recorded on the basis of identified cost.
4 FEDERAL INCOME TAXES: It is the intention of the Fund to qualify as a
regulated investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of investment company
taxable income and net capital gains (after reduction for any amounts
available for U.S. Federal income tax purposes as capital loss
carryforwards) sufficient to relieve it from all, or substantially all,
U.S. Federal income taxes. Accordingly, the Fund paid no U.S. Federal
income taxes and no provision for U.S. Federal income taxes was required.
5 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns income, net of
expenses, daily on its investments. It is the policy of the Fund to
declare and pay dividends to common shareholders from net investment
income on a monthly basis. Distributions from net realized capital gains,
if any, are normally distributed in December. Income dividends and capital
gain distributions to common shareholders are recorded on the ex-dividend
date. To the extent the Fund's net realized capital gains, if any, can be
offset by capital loss carryforwards, it is the policy of the Fund not to
distribute such gains. Dividends and distributions to preferred
shareholders are accrued and determined as described in Note A-7.
77
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
The Fund distinguishes between dividends on a tax basis and a financial
reporting basis and only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result
in temporary over-distributions for financial statement purposes are
classified as distributions in excess of net investment income or
accumulated net realized gains in the components of net assets on the
Statement of Assets and Liabilities.
6 EXPENSE ALLOCATION: Expenses directly attributable to the Fund are charged
to the Fund. Expenses not directly attributed to the Fund are allocated,
on the basis of relative net assets, except where a more appropriate
allocation of expenses can otherwise be made fairly.
7 REDEEMABLE PREFERRED SHARES: On June 5, 2003, the Fund re-classified
12,000 unissued shares of capital stock as Series A Auction Preferred
Shares, Series B Auction Preferred Shares, Series C Auction Preferred
Shares and Series D Auction Preferred Shares ("Preferred Shares"). On June
23, 2003, the Fund issued 1,950 Series A Auction Preferred Shares, 1,950
Series B Auction Preferred Shares, 1,950 Series C Auction Preferred Shares
and 1,950 Series D Auction Preferred Shares. All Preferred Shares have a
liquidation preference of $25,000 per share plus any accumulated unpaid
dividends, whether or not earned or declared by the Fund, but excluding
interest thereon ("Liquidation Value").
Dividends to preferred shareholders, which are cumulative, are accrued
daily and normally paid every 7 days. Dividend rates are normally reset
every 7 days based on the results of an auction. For the period from June
23, 2003 to September 15, 2003, dividend rates ranged from 1.05% to 1.20%
for Series A and Series B, 1.00% to 1.20% for Series C, and 1.07% to 1.20%
for Series D Preferred Shares. The Fund declared dividends to preferred
shareholders for the period September 16, 2003 to September 30, 2003 of
$23,358, $24,225, $23,762, and $23,077 for Series A, Series B, Series C,
and Series D, respectively.
The Fund may redeem Preferred Shares, in whole or in part, on the second
business day preceding any dividend payment date at Liquidation Value. The
Fund is also subject to certain restrictions relating to the Preferred
Shares. Failure to comply with these restrictions could preclude the Fund
from declaring any distributions to common shareholders or repurchasing
common shares and/or could trigger the mandatory redemption of Preferred
Shares at Liquidation Value. The holders of Preferred Shares are entitled
to one vote per share and, unless otherwise required by law, will vote
with holders of common stock as a single class, except that the Preferred
Shares will vote separately as a class on certain matters, as required by
law. The holders of the Preferred Shares, voting as a separate class, are
entitled at all times to elect two Directors of the Fund, and to elect a
majority of the Directors of the Fund if the Fund failed to pay dividends
on Preferred Shares for two consecutive years.
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap
transactions, with institutions that the Fund's investment manager has
determined are creditworthy, to reduce the risk that an increase in
short-term interest rates could reduce common share net earnings as a
result of leverage. The Fund agrees to pay the swap counterparty a
fixed-rate payment in exchange for the counterparty's paying the Fund a
variable-rate payment that is intended to approximate all or a portion of
the Fund's variable-rate payment obligation on the Fund's Preferred
Shares. The payment flows are netted against each other, with the
difference being paid by one party to the other. The Fund will segregate
cash or liquid securities having a value at least equal to the Fund's net
payment obligations under any swap transaction, marked to market daily.
78
NEUBERGER BERMAN REALTY INCOME FUND INC.SEPTEMBER 15, 2003 (UNAUDITED)
Risks may arise if the counterparty to a swap contract fails to comply
with the terms of its contract. The loss incurred by the failure of a
counterparty is generally limited to the net interest payment to be
received by the Fund, and/or the termination value at the end of the
contract. Additionally, risks may arise from movements in interest rates
unanticipated by Management.
The Fund records a net receivable or payable on a daily basis for the net
interest income or expense expected to be received or paid in the interest
period. Interest received or paid on these contracts is recorded as
interest income (or as an offset to interest income). Realized gains and
losses from terminated swaps are included in net realized gains or losses
in the Statement of Operations. At September 15, 2003, the Fund had
outstanding interest rate swap contracts as follows:
RATE TYPE
---------------------------------
PAYMENTS
NOTIONAL TERMINATION PAYMENTS MADE RECEIVED BY THE UNREALIZED
SWAP COUNTERPARTY AMOUNT DATE BY THE FUND FUND(1) APPRECIATION
Citibank, N.A. $83,000,000 June 26, 2007 2.22% 1.11% $2,204,666
Citibank, N.A. $82,000,000 June 26, 2008 2.58% 1.11% 3,038,510
----------
5,243,176
(1) 30 day LIBOR (London Interbank Offered Rate)
9 REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default under the repurchase
agreement. The Fund monitors, on a daily basis, the value of the
securities transferred to ensure that their value, including accrued
interest, is greater than amounts owed to the Fund under each such
repurchase agreement.
10 TRANSACTIONS WITH OTHER FUNDS MANAGED BY NEUBERGER BERMAN MANAGEMENT INC.:
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund may invest in the Neuberger Berman Institutional Cash
Fund (the "Cash Fund"), a fund managed by Management and having the same
directors and trustees as the Fund. The Cash Fund seeks to provide as high
a level of current income as is consistent with the preservation of
capital and the maintenance of liquidity. For any cash that the Fund
invests in the Cash Fund, Management waives a portion of its management
fee equal to the management fee it receives from the Cash Fund on those
assets.
11 ORGANIZATION EXPENSES AND OFFERING COSTS: Management has agreed to pay all
organizational expenses and the amount by which the Fund's offering costs
for common stock (other than sales load) exceed $0.03 per share. The costs
incurred by Management were approximately $139,000. Offering costs for
common stock paid by the Fund were charged as a reduction of common stock
paid-in-capital at the completion of the Fund's offering and amounted to
$820,409.
Additionally, estimated offering costs of $345,000 and a sales load of
$1,950,000 incurred through the issuance of Preferred Shares and paid by
79
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
the Fund were charged as a reduction of common stock paid-in-capital at
the completion of the Fund's preferred shares offering.
12 CONCENTRATION OF RISK: Under normal market conditions, the Fund's
investments will be concentrated in income-producing common equity
securities, preferred securities, convertible securities and
non-convertible debt securities issued by companies deriving the majority
of their revenue from the ownership, construction, financing, management
and/or sale of commercial, industrial, and/or residential real estate.
Values of the securities of such companies may fluctuate due to economic,
legal, cultural, geopolitical or technological developments affecting the
United States real estate industry.
NOTE B - MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER TRANSACTIONS WITH
AFFILIATES:
The Fund retains Management as its investment manager under a Management
Agreement. For such investment management services, the Fund pays
Management a fee at the annual rate of 0.60% of its average daily Managed
Assets. Managed Assets equal the total assets of the Fund less
liabilities, other than the aggregate indebtedness entered into for
purposes of leverage. For purposes of calculating Managed Assets, the
Liquidation Value of any Preferred Shares outstanding is not considered a
liability.
Management has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund at the following annual
rates:
Fiscal Period or Year Ended % of Average
October 31, Daily Managed Assets
-------------------------------------------------------------------
2003 - 2007 0.25
2008 0.20
2009 0.15
2010 0.10
2011 0.05
Management has not agreed to waive any portion of its fees beyond October
31, 2011.
For the period ended September 15, 2003, such waived fees amounted to
$508,555.
The Fund retains Management as its administrator under an Administration
Agreement ("Agreement"). Pursuant to this Agreement the Fund pays
Management an administration fee at the annual rate of 0.25% of its
average daily Managed Assets.
Additionally, Management retains State Street Bank and Trust Company
("State Street") as its sub-administrator under a Sub-Administration
Agreement. Management pays State Street a fee for all services received
under the agreement.
Management and Neuberger, a member firm of The New York Stock Exchange and
sub-adviser to the Fund, are wholly owned subsidiaries of Neuberger Berman
Inc., a publicly held company. Neuberger is retained by Management to
furnish it with investment recommendations and research information
without added cost to the Fund. Several individuals who are officers
and/or Directors of the Fund are also employees of Neuberger and/or
Management.
80
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
The Fund has entered into a commission recapture program, which enables it
to pay some of its operational expenses by recouping a portion of the
commissions it pays to a broker that is not a related party of the Fund.
Expenses paid through this program may include costs of custodial,
transfer agency or accounting services.
The Fund has an expense offset arrangement in connection with its
custodian contract. The impact of this arrangement, reflected in the
Statement of Operations under the caption Custodian fees, was a reduction
of $1,873.
In connection with the settlement of each preferred share auction, the
Fund pays, through the auction agent, a service fee to each participating
broker-dealer based upon the aggregate liquidation preference of the
preferred shares held by the broker-dealer's customers. For any auction
preceding a rate period of less than one year, the service fee is paid at
the annual rate of 1/4 of 1%; for any auction preceding a rate period of
one year or more, the service fee is paid at a rate agreed to by the Fund
and the broker-dealer.
In order to satisfy ratings agency requirements, the Fund is required to
provide each rating agency a report on a monthly basis verifying that it
is maintaining eligible assets having a discounted value equal to or
greater than the Preferred Shares Basic Maintenance Amount. The Fund pays
a fee to State Street, as Fund sub-administrator, for the preparation of
this report.
NOTE C - SECURITIES TRANSACTIONS:
During the period ended September 15, 2003, there were purchase and sale
transactions (excluding short-term securities and interest rate swap
contracts) of $581,700,000 and $688,000, respectively.
During the period ended September 15, 2003, brokerage commissions on
securities transactions amounted to $710,986, of which Neuberger received
$289,741, and other brokers received $421,245.
NOTE D - CAPITAL:
At September 15, 2003, the common shares outstanding and the common shares
owned by Neuberger for the Fund were as follows:
COMMON SHARES COMMON SHARES OWNED BY
OUTSTANDING NEUBERGER
27,372,139 6,981
Transactions in common shares of capital stock for the period ended
September 15, 2003 were as follows:
COMMON SHARES ISSUED IN CONNECTION WITH:
UNDERWRITERS' NET INCREASE
EXERCISE OF REINVESTMENT IN COMMON
INITIAL INITIAL PUBLIC OVER-ALLOTMENT DIVIDENDS AND SHARES
CAPITALIZATION OFFERING OPTION DISTRIBUTIONS OUTSTANDING
6,981 24,000,000 3,340,000 25,158 27,372,139
NOTE E - SUBSEQUENT EVENT:
On July 22, 2003, Lehman Brothers Holdings Inc. ("Lehman") and Neuberger
Berman Inc., the parent company of Management and Neuberger, announced
that they have entered into a definitive agreement whereby Lehman will
acquire Neuberger Berman Inc. and assume control of Management and
Neuberger (the "Transaction"). The Transaction is expected to be
completed, pending regulatory approval and satisfaction of other
conditions, in the fourth quarter of 2003. Upon completion of the
Transaction, the Fund's Management and Sub-Advisory Agreements will
automatically terminate. To provide for continuity of management, on
September 23, 2003, the shareholders of the Fund voted to approve new
management and sub-advisory agreements (see Report of Votes of
81
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
Shareholders). During the period ended September 15, 2003, brokerage
commissions on securities paid to Lehman amounted to $54,740.
NOTE F - UNAUDITED FINANCIAL INFORMATION:
The financial information included in this interim report is taken from
the records of the Fund without audit by independent auditors. Annual
reports contain audited financial statements.
82
NEUBERGER BERMAN REALTY INCOME FUND INC. SEPTEMBER 15, 2003 (UNAUDITED)
REPORT OF VOTES OF SHAREHOLDERS (UNAUDITED)
A special meeting of shareholders of Neuberger Berman Realty Income Fund Inc.
(the "Fund") was held on September 23, 2003. Upon completion of the expected
acquisition of Neuberger Berman Inc. by Lehman Brothers Holdings Inc. (the
"Transaction"), the Fund's Management and Sub-Advisory Agreements with Neuberger
Berman Management Inc. ("Management") and Neuberger Berman, LLC ("Neuberger"),
respectively, will automatically terminate. To provide for continuity of
management, the shareholders of the Fund voted on the following matters to
become effective upon completion of the Transaction:
PROPOSAL 1 - TO APPROVE A NEW MANAGEMENT AGREEMENT BETWEEN THE FUND AND
MANAGEMENT
VOTES FOR VOTES AGAINST ABSTENTIONS*
23,010,912.000 216,815.000 265,330.000
PROPOSAL 2 - TO APPROVE A NEW SUB-ADVISORY AGREEMENT BETWEEN MANAGEMENT AND
NEUBERGER
VOTES FOR VOTES AGAINST ABSTENTIONS*
22,998,502.000 224,413.000 270,142.000
* Abstentions were counted as shares that were present and entitled to vote
for purposes of determining a quorum and had a negative effect on the
proposals.
83
SEPTEMBER 15, 2003 (UNAUDITED)
FINANCIAL HIGHLIGHTS Neuberger Berman Realty Income Fund Inc.
-------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the Financial
Statements.
PERIOD FROM
APRIL 29, 2003^
TO SEPTEMBER 15, 2003
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 14.33
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON
SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS) .22
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND
UNREALIZED) 1.93
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED
SHAREHOLDERS
FROM NET INVESTMENT INCOME (.02)
---------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON
SHAREHOLDERS 2.13
---------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS:
FROM NET INVESTMENT INCOME (.45)
---------------
LESS CAPITAL CHARGES:
ISSUANCE OF COMMON SHARES (.03)
ISSUANCE OF PREFERRED SHARES (.08)
---------------
TOTAL CAPITAL CHARGES (.11)
---------------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 15.90
COMMON SHARE MARKET VALUE, END OF PERIOD $ 15.10
---------------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +14.30% **
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +3.66% **
RATIOS/SUPPLEMENTAL DATA&&
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END OF
PERIOD (IN MILLIONS) $ 435.1
PREFERRED STOCK, AT REDEMPTION VALUE ($25,000 PER SHARE
LIQUIDATION PREFERENCE) (IN MILLIONS) 195.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE
TO COMMON SHAREHOLDERS# 1.25% *
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE
TO COMMON SHAREHOLDERS++ 1.25% *
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED
STOCK DIVIDENDS TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS 3.86% *
RATIO OF PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS .32% *
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED
STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS 3.54% *
PORTFOLIO TURNOVER RATE 0%
ASSET COVERAGE PER SHARE OF PREFERRED STOCK, END OF PERIOD@ $ 80,786
See Notes to Financial Highlights
84
SEPTEMBER 15, 2003 (UNAUDITED)
NOTES TO FINANCIAL HIGHLIGHTS Neuberger Berman Realty Income Fund Inc.
----------------------------------------------------------------------
+ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during the
fiscal period. Total return based on per share market value assumes the
purchase of common shares at the market price on the first day and sales
of common shares at the market price on the last day of the period
indicated. Dividends and distributions, if any, are assumed to be
reinvested at prices obtained under the Fund's dividend reinvestment plan.
Results represent past performance and do not guarantee future results.
Total return would have been lower if Management had not waived a portion
of the management fee.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
++ After waiver of a portion of the management fee. Had Management not
undertaken such action the annualized ratio of net expenses to average
daily net assets applicable to common shareholders would have been:
PERIOD ENDED
SEPTEMBER 15, 2003(1)
1.57%
(1) Period from April 29, 2003 to September 15, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid dividends on preferred shares) from the Fund's total
assets and dividing by the number of AMPS outstanding.
&& Expense ratios do not include the effect of dividend payments to preferred
shareholders. Income ratios include income earned on assets attributable
to preferred shares. Each ratio of expenses to average net assets
applicable to common shareholders and each ratio of net investment income
(loss) to average net assets applicable to common shareholders includes
the effect of the net interest expense paid on interest rate swap
contracts of 0.32%.
85
APPENDIX A
ARTICLES SUPPLEMENTARY FOR PREFERRED SHARES
AND NEW PREFERRED SHARES
A-1
NEUBERGER BERMAN REALTY INCOME FUND INC.
ARTICLES SUPPLEMENTARY CREATING AND FIXING THE RIGHTS OF
AUCTION PREFERRED SHARES
SERIES A
SERIES B
SERIES C
SERIES D
("PREFERRED SHARES")
TABLE OF CONTENTS
PAGE
DESIGNATION............................................................1
DEFINITIONS............................................................2
PART I................................................................19
1. NUMBER OF AUTHORIZED SHARES........................................19
2. DIVIDENDS..........................................................19
(a) RANKING...................................................19
(b) CUMULATIVE CASH DIVIDENDS.................................19
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE..........19
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF.............19
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS...............20
(f) CURING A FAILURE TO DEPOSIT...............................22
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT................22
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND.....22
(i) DIVIDENDS PAID TO HOLDERS.................................22
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT
UNPAID DIVIDENDS..........................................22
3. RESERVED...........................................................23
4. DESIGNATION OF SPECIAL RATE PERIODS................................23
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD.......23
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD...............23
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD....................23
(d) NOTICE OF SPECIAL RATE PERIOD.............................24
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD..........24
5. VOTING RIGHTS......................................................25
(a) ONE VOTE PER SHARE OF PREFERRED SHARES....................25
(b) VOTING FOR ADDITIONAL DIRECTORS...........................25
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER
MATTERS...................................................27
i
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT STOCKHOLDER
APPROVAL..................................................28
(e) RELATIVE RIGHTS AND PREFERENCES...........................29
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING.................29
(g) VOTING FOR DIRECTORS SOLE REMEDY FOR FUND'S FAILURE TO
PAY DIVIDENDS.............................................29
(h) HOLDERS ENTITLED TO VOTE..................................29
6. 1940 ACT PREFERRED SHARES ASSET COVERAGE...........................29
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT..........................29
8. RESERVED...........................................................31
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS..................31
(a) DIVIDENDS ON SHARES OTHER THAN PREFERRED SHARES...........31
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO
COMMON SHARES UNDER THE 1940 ACT..........................32
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS...32
10. RESERVED........................................................33
11. REDEMPTION......................................................33
(a) OPTIONAL REDEMPTION.......................................33
(b) MANDATORY REDEMPTION......................................34
(c) NOTICE OF REDEMPTION......................................35
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES.................35
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION.................35
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY FUND...36
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN
ARE NO LONGER OUTSTANDING.................................36
(h) COMPLIANCE WITH APPLICABLE LAW............................36
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED...............36
(j) MODIFICATION OF REDEMPTION PROCEDURES.....................36
(k) PURCHASE OR OTHER ACQUISITION OF PREFERRED SHARES
OUTSIDE OF AN AUCTION.....................................36
12. LIQUIDATION RIGHTS..............................................37
(a) RANKING...................................................37
(b) DISTRIBUTIONS UPON LIQUIDATION............................37
ii
(c) PRO RATA DISTRIBUTIONS....................................37
(d) RIGHTS OF JUNIOR SHARES...................................38
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION...............38
13. FUTURES AND OPTIONS TRANSACTIONS: FORWARD COMMITMENTS...........38
14. MISCELLANEOUS...................................................43
(a) RESERVED..................................................43
(b) NO FRACTIONAL SHARES......................................43
(c) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR
OTHERWISE ACQUIRED BY THE FUND............................43
(d) BOARD MAY RESOLVE AMBIGUITIES.............................43
(e) HEADINGS NOT DETERMINATIVE................................43
(f) NOTICES...................................................43
PART II...............................................................44
1. ORDERS.............................................................44
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT............45
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE....................................................47
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES....................................48
5. NOTIFICATION OF ALLOCATIONS........................................51
6. AUCTION AGENT......................................................51
7. TRANSFER OF PREFERRED SHARES.......................................51
8. GLOBAL CERTIFICATE.................................................52
9. FORCE MAJEURE......................................................52
iii
NEUBERGER BERMAN REALTY INCOME FUND INC., a Maryland corporation (the
"Fund"), certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: Pursuant to the authority expressly vested in the Board of
Directors of the Fund by Article Sixth of the Fund's Articles of Incorporation
(which, as restated, amended or supplemented from time to time are, together
with these Articles Supplementary, herein called the "Charter"), the Board of
Directors has, by resolution, reclassified from the unissued common stock of the
Fund and authorized the issuance of 3,000 shares of auction preferred shares,
Series A, 3,000 shares of auction preferred shares, Series B, 3,000 shares of
auction preferred shares, Series C, and 3,000 shares of auction preferred
shares, Series D, par value $.0001 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon (whether
or not earned or declared).
SECOND: The preferences, rights, voting powers, restrictions, limitations
as to dividends and other distributions, qualifications, and terms and
conditions of redemption, and other rights and limitation of the shares of the
auction preferred shares, Series A, Series B, Series C, Series D and each other
series of auction preferred shares now or hereafter described in this Articles
Supplementary are as set forth in this Articles Supplementary.
THIRD: That to the extent permitted by Maryland law, any provisions of the
Articles of Incorporation that conflict with or are inconsistent with the
provisions of the Articles Supplementary are hereby amended to conform to the
terms of these Articles Supplementary.
DESIGNATION
Series A: 3,000 shares of preferred stock, par value $.0001 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared), are hereby
designated auction preferred shares, Series A ("Series A Shares"). Each Series A
Share shall have an Applicable Rate for its Initial Rate Period determined
pursuant to a resolution of the Board of Directors and an initial Dividend
Payment Date of July 2, 2003.
Series B: 3,000 shares of preferred stock, par value $.0001 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared), are hereby
designated auction preferred shares, Series B ("Series B Shares"). Each Series B
Share shall have an Applicable Rate for its Initial Rate Period determined
pursuant to a resolution of the Board of Directors and an initial Dividend
Payment Date of July 3, 2003.
Series C: 3,000 shares of preferred stock, par value $.0001 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared), are hereby
designated auction preferred shares, Series C ("Series C Shares"). Each Series C
Share shall have an Applicable Rate for its Initial Rate Period determined
pursuant to a resolution of the Board of Directors and an initial Dividend
Payment Date of July 3, 2003.
Series D: 3,000 shares of preferred stock, par value $.0001 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared), are hereby
designated auction preferred shares, Series D ("Series D Shares" and, together
with Series A Shares, Series B Shares and Series C Shares, "Preferred Shares").
1
Each Series D Share shall have an Applicable Rate for its Initial Rate Period
determined pursuant to a resolution of the Board of Directors and an initial
Dividend Payment Date of July 7, 2003.
Preferred Shares may be marketed under the name "auction preferred shares"
or "Preferred Shares" or such other name as the Board of Directors may approve
from time to time.
Each Preferred Share shall have such other preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law, as
are set forth in Part I and Part II of these Articles Supplementary. Subject to
the provisions of Section 5(c) of Part I hereof, the Board of Directors of the
Fund may, in the future, reclassify additional shares of the Fund's capital
stock as Preferred Shares, with the same preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption and other terms herein described, except that the
Applicable Rate for the Initial Rate Period, its initial Payment Date and any
other changes in the terms herein set forth shall be as set forth in the
Articles Supplementary reclassifying such shares as Preferred Shares.
Capitalized terms used in Part I and Part II of these Articles
Supplementary shall have the meanings (with the terms defined in the singular
having comparable meanings when used in the plural and vice versa) provided in
the "Definitions" section immediately following, unless the context otherwise
requires.
DEFINITIONS
As used in Parts I and II of these Articles Supplementary, the following
terms shall have the following meanings (with terms defined in the singular
having comparable meanings when used in the plural and vice versa), unless the
context otherwise requires:
(a) "AA FINANCIAL COMPOSITE COMMERCIAL PAPER RATE" on any date for any
Rate Period of shares of a series of Preferred Shares, shall mean (i) the
interest equivalent of the 7-day rate, in the case of a Rate Period which is a
Minimum Rate Period or shorter; for Rate Periods greater than 7 days but fewer
than or equal to 31 days, the 30-day rate; for Rate Periods greater than 31 days
but fewer than or equal to 61 days, the 60-day rate; for Rate Periods greater
than 61 days but fewer than or equal to 91 days, the 90 day rate; for Rate
Periods greater than 91 days but fewer than or equal to 270 days, the rate
described in (ii); for Rate Periods greater than 270 days, the Treasury Index
Rate, in each case on commercial paper on behalf of issuers whose corporate
bonds are rated AA by S&P, or the equivalent of such rating by another
nationally recognized rating agency, as announced by the Federal Reserve Bank of
New York for the close of business on the Business Day immediately preceding
such date; or (ii) if the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the interest equivalent of
such rates on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent
for the close of business on the Business Day immediately preceding such date
(rounded to the next highest .001 of 1%). If any Commercial Paper Dealer does
not quote a rate required to determine the AA Financial Composite Commercial
Paper Rate, such rate shall be determined on the basis of the quotations (or
quotation) furnished by the remaining Commercial Paper Dealers (or Dealer), if
any, or any Substitute Commercial Paper Dealer or Substitute Commercial Paper
Dealers selected by the Fund to provide such rate or rates not being supplied by
any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or,
if the Fund does not select any such Substitute Commercial Paper Dealer or
2
Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or
Commercial Paper Dealers or if there are no such Commercial Paper Dealers, by
the Auction Agent.
For purposes of this definition, the "interest equivalent" of a rate
stated on a discount basis (a "discount rate") for commercial paper of a given
number of days' maturity shall be equal to the quotient (rounded upwards to the
next higher one-thousandth (.001) of 1%) of (A) the discount rate divided by (B)
the difference between (x) 1.00 and (y) a fraction, the numerator of which shall
be the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360.
(b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of these Articles Supplementary.
(c) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided, however, that for
purposes of these Articles Supplementary no Broker-Dealer controlled by, in
control of or under common control with the Fund shall be deemed to be an
Affiliate nor shall any corporation or any Person controlled by, in control of
or under common control with such corporation, one of the trustees, directors,
or executive officers of which is a Director of the Fund be deemed to be an
Affiliate solely because such trustee, director or executive officer is also a
Director of the Fund.
(d) "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(e) "ALL HOLD RATE" shall mean 80% of the AA Financial Composite
Commercial Paper Rate.
(f) "ANNUAL VALUATION DATE" shall mean the last Business Day of December
of each year.
(g) "APPLICABLE RATE" shall mean, for each Rate Period (i) if Sufficient
Clearing Orders exist for the Auction in respect thereof, the Winning Bid Rate,
(ii) if Sufficient Clearing Orders do not exist for the Auction in respect
thereof, the Maximum Rate, and (iii) in the case of any Dividend Period if all
the shares of each Series are the subject of Submitted Hold Orders for the
Auction in respect thereof, the All Hold Rate.
(h) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(i) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the Fund
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of Preferred Shares so long as the Applicable Rate
for shares of such series is to be based on the results of an Auction.
(j) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Directors in accordance with Section 6 of Part II of
these Articles Supplementary.
(k) "AUCTION DATE" with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(l) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of these Articles Supplementary.
3
(m) "AVAILABLE PREFERRED SHARES" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles Supplementary.
(n) RESERVED.
(o) "BENEFICIAL OWNER" with respect to shares of a series of Preferred
Shares, means a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares of
such series.
(p) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of these Articles Supplementary.
(q) "BIDDER" and "BIDDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of these Articles Supplementary;
provided, however, that neither the Fund nor any affiliate thereof shall be
permitted to be a Bidder in an Auction, except that any Broker-Dealer that is an
affiliate of the Fund may be a Bidder in an Auction, but only if the Orders
placed by such Broker-Dealer are not for its own account.
(r) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Fund
or any duly authorized committee thereof.
(s) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of these Articles Supplementary, that is a member of,
or a participant in, the Securities Depository or is an affiliate of such member
or participant, has been selected by the Fund and has entered into a
Broker-Dealer Agreement that remains effective.
(t) "BROKER-DEALER AGREEMENT" shall mean an agreement between the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of these Articles Supplementary.
(u) "BUSINESS DAY" shall mean a day on which the New York Stock Exchange
is open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized or obligated by
law to close.
(v) "CHARTER" shall have the meaning specified on the first page of
these Articles Supplementary.
(w) "CLOSING TRANSACTION" shall have the meaning specified in paragraph
(a)(i)(A) of Section 13 of Part I of these Articles Supplementary.
(x) "CODE" means the Internal Revenue Code of 1986, as amended.
(y) "COMMERCIAL PAPER DEALERS" shall mean (1) Salomon Smith Barney Inc.,
Lehman Brothers Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and any other commercial paper dealer selected by the Fund as
to which Moody's, Fitch or any substitute rating agency then rating the
Preferred Shares shall not have objected; (2) in lieu of any thereof, their
respective affiliates or successors, if such entity is a commercial paper
dealer; and (3) in the event that any of the foregoing shall cease to quote
rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of
such issuers then making such quotations selected by the Fund.
(z) "COMMON SHARES" shall mean the outstanding shares of common stock,
par value $.0001 per share, of the Fund.
4
(aa) "CURE DATE" shall mean the Preferred Shares Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be.
(bb) "DATE OF ORIGINAL ISSUE" with respect to shares of a series of the
Preferred Shares, shall mean the date on which the Fund initially issued such
shares.
(cc) "DEPOSIT SECURITIES" shall mean cash and any obligations or
securities, including Short Term Money Market Instruments that are Eligible
Assets, rated at least AAA or F-1 by Fitch, P-1, MIG-1 or VMIG-1 by Moody's or
AAA or A-1 by S&P.
(dd) "DISCOUNTED VALUE" as of any Valuation Date, shall mean, (i) with
respect to a Fitch Eligible Asset or Moody's Eligible Asset that is not
currently callable or prepayable as of such Valuation Date at the option of the
issuer thereof, the quotient of the Market Value thereof divided by the Fitch
Discount Factor for a Fitch Eligible Asset or Moody's Discount Factor for a
Moody's Eligible Asset, (ii) with respect to a Fitch Eligible Asset or Moody's
Eligible Asset that is currently callable as of such Valuation Date at the
option of the issuer thereof, the quotient as calculated above or the call
price, whichever is lower, and (iii) with respect to a Fitch Eligible Asset or
Moody's Eligible Asset that is prepayable, the quotient as calculated above or
the par value, whichever is lower.
(ee) "DIVIDEND PAYMENT DATE" with respect to shares of a series of
Preferred Shares, shall mean any date on which dividends are payable on shares
of such series pursuant to the provisions of paragraph (d) of Section 2 of Part
I of these Articles Supplementary.
(ff) "DIVIDEND PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the period from and including the Date of Original Issue of
shares of a series of Preferred Shares to but excluding the initial Dividend
Payment Date for shares of such series and thereafter any period from and
including one Dividend Payment Date for shares of such series to but excluding
the next succeeding Dividend Payment Date for shares of such series.
(gg) "EXISTING HOLDER," with respect to shares of a series of Preferred
Shares, shall mean a Broker-Dealer (or any such other Person as may be permitted
by the Fund) that is listed on the records of the Auction Agent as a holder of
shares of such series.
(hh) "EXPOSURE PERIOD" shall mean the period commencing on a given
Valuation Date and ending 45 days thereafter.
(ii) "FAILURE TO DEPOSIT," with respect to shares of a series of
Preferred Shares, shall mean a failure by the Fund to pay to the Auction Agent,
not later than 12:00 noon, Eastern time, (A) on any Dividend Payment Date for
shares of such series, in funds available on such Dividend Payment Date in The
City of New York, New York, the full amount of any dividend (whether or not
earned or declared) to be paid on such Dividend Payment Date on any share of
such series or (B) on any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any share of such series after
notice of redemption is mailed pursuant to paragraph (c) of Section 11 of Part I
of these Articles Supplementary; provided, however, that the foregoing clause
(B) shall not apply to the Fund's failure to pay the Redemption Price in respect
of Preferred Shares when the related Notice of Redemption provides that
redemption of such shares is subject to one or more conditions precedent and any
such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption.
(jj) RESERVED.
5
(kk) "FITCH" shall mean Fitch Ratings and its successors.
(ll) "FITCH DISCOUNT FACTOR" means for the purposes of determining the
Preferred Shares Basic Maintenance Amount, the percentage determined below:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)
---------------------
REIT or Other Real Estate Company Preferred Shares 154%
REIT or Other Real Estate Company Common Stock 196%
(b) Corporate Debt Securities of REITs(1)(2):
TERM TO MATURITY AAA AA A BBB BB B CCC
---------------- --- -- - --- -- - ---
1 year........ 111% 114% 117% 120% 121% 127% 130%
2 year........ 116% 125% 125% 127% 132% 137% 137%
3 year........ 121% 123% 127% 131% 133% 140% 152%
4 year........ 126% 126% 129% 132% 136% 140% 164%
5 year........ 131% 132% 135% 139% 144% 149% 185%
7 year........ 140% 143% 146% 152% 159% 167% 228%
10 year....... 141% 143% 147% 153% 160% 168% 232%
12 year....... 144% 144% 150% 157% 165% 174% 249%
15 year....... 148% 151% 155% 163% 172% 182% 274%
20-30 year.... 152% 156% 160% 169% 180% 191% 306%
(1) The Fitch Discount Factors will also apply to interest rate swaps and
caps, whereby the rating on the counterparty will determine the appropriate
Discount Factor to apply.
(2) If a security is unrated by Fitch, but is rated by two other NRSROs,
then the lower of the ratings on the security from the two other NRSROs should
be used to determine the Fitch Discount Factor. If the security is not rated by
Fitch, but has a rating from only one other NRSRO, and the security is above
investment grade, then the security will be notched one rating category, i.e.,
considered to be rated one rating category lower than the rating category
assigned by that NRSRO, for purposes of computing the Discount Factor. If the
security is not rated by Fitch, but has a rating from only one other NRSRO, and
the security is below investment grade, then the security will be notched two
rating categories for purposes of computing the Discount Factor.
(c) Convertible Securities:
The Fitch Discount Factor applied to convertible securities is (A) 200%
for investment grade convertibles and (B) 222% for below investment grade
convertibles so long as such convertible securities have neither (x) conversion
premiums greater than 100% nor (y) a yield to maturity or yield to worst of
greater than 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible securities which have
conversion premiums of greater than 100% is (A) 152% for investment grade
convertibles, and (B) 179% for below investment grade convertibles so long as a
such convertible securities do not have a yield to maturity or yield to worst of
greater than 15.00% above the relevant Treasury curve.
6
The Fitch Discount Factor applied to convertible securities that have a
yield to maturity or yield to worst of greater than 15.00% above the relevant
Treasury curve is 370%.
(d) U.S. Treasury Securities:
REMAINING TERM TO MATURITY DISCOUNT FACTOR
-------------------------- ---------------
1 year............ 101.5%
2 year............ 103%
3 year............ 105%
4 year............ 107%
5 year............ 109%
5-7 year.......... 112%
7-10 year......... 114%
15 year........... 122%
20 year........... 130%
25 year........... 146%
30 year........... 154%
(e) Short-Term Instruments and Cash:
The Fitch Discount Factor applied to short-term portfolio securities,
other than 2a-7 Money Market Funds, will be (A) 100%, so long as such portfolio
securities or repurchase agreements mature or have a demand feature at par
exercisable within the Exposure Period and (B) 125%, so long as such portfolio
securities neither mature nor have a demand feature at par exercisable within
the exposure period and are rated at least F-1/AA by Fitch, P-1/Aa by Moody's,
or A-1/AA by S&P. The Fitch Discount Factor applied to 2a-7 Money Market Funds
will be 100% if the 2a-7 Money Market Funds are rated by Fitch and 115% if the
2a-7 Money Market Funds are not rated by Fitch. A Fitch Discount Factor of 100%
will be applied to cash.
(f) Other Securities:
The Fitch Discount Factor with respect to securities other than those
described above will be the percentage provided in writing by Fitch.
(mm) "FITCH ELIGIBLE ASSET" shall mean the following:
(a) Common Stock, Preferred Stock, and any debt security of REITs and
Real Estate Companies.
(b) Unrated debt securities issued by an issuer which (1) has not filed
for bankruptcy in the past three years; (2) is current on all interest and
principal on its fixed income obligations; (3) is current on all preferred stock
dividends.
(c) Interest rate swaps entered into according to International Swap
Dealers Association standards if (1) the counterparty to the swap transaction
7
has a short-term rating of not less than F-1, or, if the swap counterparty does
not have a short-term rating, the counterparty's senior unsecured long-term debt
rating is AA or higher by Fitch or the equivalent by another NRSRO and (2) the
original aggregate notional amount of the interest rate swap transaction or
transactions is not greater than the liquidation preference of the Preferred
Shares originally issued.
(d) U.S. Treasury securities and U.S. Treasury Strips.
(e) Short-Term Money Market Instruments as long as (i) such securities
are rated at least F-1 by Fitch or the equivalent by another NRSRO, (ii) in the
case of demand deposits, time deposits and overnight funds, the depository
institution or supporting entity is rated at least A by Fitch or the equivalent
by another NRSRO, (iii) such securities are of 2a-7 Money Market Funds, (iv)
such securities are repurchase agreements or (v) in all other cases, the
supporting entity (1) is rated at least A by Fitch and the security matures in
one month or (2) is rated at least AA by Fitch and matures within six months.
(f) Cash (including, for this purpose, interest and dividends due on
assets rated (i) BBB or higher by Fitch if the payment date is within 5 Business
Days of the Valuation Date, (ii) A or higher by Fitch if the payment is within
thirty days of the Valuation Date (iii) A+ or higher by Fitch if the payment
date is within the Exposure Period; provided, however, that such interest and
dividends may, at the Fund's discretion, be discounted at the same rate as the
related security or on such other basis as Fitch and the Fund may agree from
time to time) and receivables for Fitch Eligible Assets sold if the receivable
is due within five Business Days of the Valuation Date.
(nn) "FITCH HEDGING TRANSACTION" shall have the meaning specified in
paragraph 13(b)(1) of Part I of these Articles Supplementary.
(oo) RESERVED.
(pp) "FORWARD COMMITMENTS" shall have the meaning specified in paragraph
(a)(iv) of Section 13 of Part I of these Articles Supplementary.
(qq) "FUND" shall mean the entity named on the first page of these
Articles Supplementary, which is the issuer of the Preferred Shares.
(rr) RESERVED.
(ss) "HOLDER" with respect to shares of a series of Preferred Shares,
shall mean the registered holder of such shares as the same appears on the
record books of the Fund.
(tt) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these Articles
Supplementary.
(uu) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Fund an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.
(vv) "INITIAL RATE PERIOD" shall be the period from and including the Date
of Original Issue to but excluding July 2, 2003 with respect to Series A Shares,
July 3, 2003 with respect to Series B Shares, July 3, 2003, with respect to
Series C Shares and July 7, 2003 with respect to Series D Shares.
8
(ww) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a discount
basis security, which is equal to the yield on an equivalent interest-bearing
security.
(xx) RESERVED.
(yy) "LATE CHARGE" shall have the meaning specified in subparagraph
(e)(1)(B) of Section 2 of Part I of these Articles Supplementary.
(zz) "LIQUIDATION PREFERENCE" with respect to a given number of Preferred
Shares, means $25,000 times that number.
(aaa) "MARKET VALUE" of any asset of the Fund shall mean the market value
thereof determined in accordance with the Pricing Procedures of the Neuberger
Berman Funds.
(bbb) RESERVED.
(ccc) "MAXIMUM RATE" for shares of a series of Preferred Shares on any
date on which the Applicable Rate is determined, the applicable percentage of
the AA Financial Composite Commercial Paper Rate on the date of such Auction
determined as set forth below based on the lower of the credit ratings assigned
to the Preferred Shares by Moody's and Fitch subject to upward but not downward
adjustment in the discretion of the Board of Directors after consultation with
the Broker-Dealers; provided that immediately following any such increase the
Fund would be in compliance with the Preferred Shares Basic Maintenance Amount.
MOODY'S FITCH APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or Above AA- or Above 150%
A3 or A1 A- to A+ 160%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
(ddd) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days for Series A Shares, 7 Rate Period Days for Series B Shares,
7 Rate Period Days for Series C Shares and 7 Rate Period Days for Series D
Shares.
(eee) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(fff) "MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining
the Discounted Value of any Moody's Eligible Asset, the percentage determined as
follows. The Moody's Discount Factor for any Moody's Eligible Asset other than
the securities set forth below will be the percentage provided in writing by
Moody's.
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common Stock of REITs 154%
Preferred Stock of REITs
with Senior Implied or Unsecured Moody's (or Fitch) rating: 154%
without Senior Implied or Unsecured Moody's (or Fitch) rating: 208%
9
DISCOUNT FACTOR(1)(2)(3)
------------------------
Preferred Stock of Other Real Estate Companies
with Senior Implied or Unsecured Moody's (or Fitch) rating: 208%
without Senior Implied or Unsecured Moody's (or Fitch) rating 250%
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification that exceed 30% of
Moody's Eligible Assets but are not greater than 38% of Moody's Eligible Assets.
(2) A Discount Factor of 250% will be applied if dividends on such
securities have not been paid consistently (either quarterly or annually) over
the previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is below $500 million.
(b) Debt Securities of REITs and Other Real Estate Companies(1):
MATURITY
IN YEARS Aaa Aa A Baa Ba B NR(2)
-------- --- -- - --- -- - -----
1 or less 109% 112% 115% 118% 137% 150% 250%
2 or less (but longer than 1) 115% 118% 122% 125% 146% 160% 250%
3 or less (but longer than 2) 120% 123% 127% 131% 153% 168% 250%
4 or less (but longer than 3) 126% 129% 133% 138% 161% 176% 250%
5 or less (but longer than 4) 132% 135% 139% 144% 168% 185% 250%
7 or less (but longer than 5) 139% 143% 147% 152% 179% 197% 250%
10 or less (but longer than 7) 145% 150% 155% 160% 189% 208% 250%
15 or less (but longer than 10) 150% 155% 160% 165% 196% 216% 250%
20 or less (but longer than 15) 150% 155% 160% 165% 196% 228% 250%
30 or less (but longer than 20) 150% 173% 160% 165% 196% 229% 250%
Greater than 30 165% 173% 181% 189% 205% 240% 250%
(1) The Moody's Discount Factors for debt securities shall also be applied
to any interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) Unless conclusions regarding liquidity risk as well as estimates of
both the probability and severity of default for a Fund asset can be derived
from other sources as well as combined with a number of sources, unrated
fixed-income and convertible securities, which are securities that are not rated
by any of Moody's, S&P or Fitch, are limited to 10% of discounted Moody's
Eligible Assets. If a security is either rated below B or not rated by any of
Moody's, S&P or Fitch, the Fund will use the applicable percentage set forth in
the row of the table entitled "Unrated." Upon notice by Moody's, ratings
assigned by S&P or Fitch may be subject to adjustments in particular categories
10
of credits for which the S&P and/or Fitch rating does not seem to approximate a
Moody's rating equivalent.
(c) U.S. Treasury Securities and U.S. Treasury Strips:
U.S. TREASURY U.S. TREASURY
SECURITIES STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 114%
3 years or less (but longer than 2 year) 118% 120%
4 years or less (but longer than 3 year) 123% 127%
5 years or less (but longer than 4 year) 128% 133%
7 years or less (but longer than 5 year) 135% 145%
10 years or less (but longer than 7 year) 141% 159%
15 years or less (but longer than 10 year) 146% 184%
20 years or less (but longer than 15 year) 154% 211%
30 years or less (but longer than 20 year) 154% 236%
(d) Short-Term Instruments and Cash. The Moody's Discount Factor applied
to short-term portfolio securities, including without limitation corporate debt
securities and Short Term Money Market Instruments, other than 2a-7 Money Market
Funds, will be (i) 100%, so long as such portfolio securities or repurchase
agreements mature or have a demand feature at par exercisable within 49 days of
the relevant valuation date, (ii) 102%, so long as such portfolio securities
mature or have a demand feature at par not exercisable within 49 days of the
relevant valuation date, and (iii) 125%, if such securities are not rated by
Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-
1+/AA by S&P and mature or have a demand feature at par exercisable within 49
days of the relevant valuation date. The Moody's Discount Factor applied to 2a-7
Money Market Funds will be 100% if the 2a-7 Money Market Funds are rated by
Moody's and 115% if the 2a-7 Money Market Funds are not rated by Moody's. A
Moody's Discount Factor of 100% will be applied to cash.
(ggg) "MOODY'S ELIGIBLE ASSETS" shall mean the following:
(a) Common stock, preferred stock and any debt security of REITs and
Real Estate Companies.
(i) Common stock of REITs and preferred stock and any debt security
of REITs and Other Real Estate Companies: (A) which comprise at least 7 of the
14 Moody's Real Estate Industry/Property Sector Classifications ("Moody's Sector
Classifications") listed below and of which no more than 38% may constitute a
single such classification; (B) which in the aggregate constitute at least 40
separate classes of common stock, preferred stock, and debt securities, issued
by at least 30 issuers; (C) issued by a single issuer which in the aggregate
constitute no more than 7.0% of the Market Value of Moody's Eligible Assets, (D)
issued by a single issuer which, with respect to 50% of the Market Value of
Moody's Eligible Assets, constitute in the aggregate no more than 5% of Market
Value of Moody's Eligible Assets; and
11
(ii) Unrated debt securities issued by an issuer which: (A) has not
filed for bankruptcy within the past three years; (B) is current on all
principal and interest on its fixed income obligations; (C) is current on all
preferred stock dividends; (D) possesses a current, unqualified auditor's report
without qualified, explanatory language and (E) in the aggregate, do not exceed
10% of the discounted Moody's Eligible Assets;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ("ISDA") standards if (i) the counterparty to the swap
transaction has a short-term rating of not less than P-1 or, if the counterparty
does not have a short-term rating, the counterparty's senior unsecured long-term
debt rating is Aa3 or higher and (ii) the original aggregate notional amount of
the interest rate swap transaction or transactions is not to be greater than the
liquidation preference of the Preferred Shares originally issued. The interest
rate swap transaction will be marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips;
(d) Short-Term Money Market Instruments so long as (A) such securities
are rated at least P-1, (B) in the case of demand deposits, time deposits and
overnight funds, the depository institution is rated at least A2, (C) such
securities are of 2a-7 Money Market Funds, (D) such securities are repurchase
agreements, or (E) in all other cases, the supporting entity (1) is rated A2 and
the security matures within one month, (2) is rated A1 and the security matures
within three months or (3) is rated at least Aa3 and the security matures within
six months; provided, however, that for purposes of this definition, such
instruments (other than commercial paper rated by Fitch and not rated by
Moody's) need not meet any otherwise applicable Moody's rating criteria; and
(e) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within five
Business Days of the Valuation Date, (B) A2 or higher if the payment date is
within thirty days of the Valuation Date, and (C) A1 or higher if the payment
date is within 49 days of the relevant valuation date; provided, however, that
such interest and dividends may, at the Fund's discretion, be discounted at the
same rate as the related security or on such other basis as Moody's and the Fund
may agree from time to time) and receivables for Moody's Eligible Assets sold if
the receivable is due within five Business Days of the Valuation Date.
(hhh) "MOODY'S HEDGING TRANSACTION" shall have the meaning specified in
paragraph (a)(i) of Section 13 of Part I of these Articles Supplementary.
(iii) "MOODY'S REAL ESTATE INDUSTRY/PROPERTY SECTOR CLASSIFICATION" means,
for the purposes of determining Moody's Eligible Assets, each of the following
Industry Classifications (as defined by the National Association of Real Estate
Investment Trusts, "NAREIT"):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
12
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
15. Specialty
The Fund will use its discretion in determining which NAREIT Industry
Classification is applicable to a particular investment in consultation with the
independent auditor and/or Moody's, as necessary.
(jjj) RESERVED.
(kkk) RESERVED.
(lll) "1940 ACT" shall mean the Investment Company Act of 1940, as amended
from time to time.
(mmm) "1940 ACT CURE DATE," with respect to the failure by the Fund to
maintain the 1940 Act Preferred Shares Asset Coverage (as required by Section 6
of Part I of these Articles Supplementary) as of the last Business Day of each
month, shall mean the last Business Day of the following month.
(nnn) "1940 ACT PREFERRED SHARES ASSET COVERAGE" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Fund which are shares of
stock, including all outstanding Preferred Shares (or such other asset coverage
as may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are shares or stock of a closed-end
investment company as a condition of declaring dividends on its common shares or
stock).
(ooo) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of Preferred Shares pursuant to paragraph (c) of Section 11 of Part I
of these Articles Supplementary.
(ppp) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with respect
to a Special Rate Period of shares of a series of Preferred Shares pursuant to
subparagraph (d)(i) of Section 4 of Part I of these Articles Supplementary.
(qqq) "ORDER" and "ORDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of these Articles Supplementary.
(rrr) "OTHER REAL ESTATE COMPANIES" shall mean companies that generally
derive at least 50% of their revenue from real estate or have at least 50% of
their assets in real estate, but not including REITs.
13
(sss) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of Preferred Shares, the number of shares theretofore issued
by the Fund except, without duplication, (i) any shares of such series
theretofore cancelled or delivered to the Auction Agent for cancellation or
redeemed by the Fund, (ii) any shares of such series as to which the Fund or any
Affiliate thereof shall be an Existing Holder and (iii) any shares of such
series represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Fund.
(ttt) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
(uuu) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series of
Preferred Shares, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
(vvv) "POTENTIAL HOLDER," with respect to Preferred Shares, shall mean a
Broker-Dealer (or any such other person as may be permitted by the Fund) that is
not an Existing Holder of Preferred Shares or that is an Existing Holder of
Preferred Shares that wishes to become the Existing Holder of additional
Preferred Shares.
(www) "PREFERRED SHARES" shall have the meaning set forth on the first
page of these Articles Supplementary.
(xxx) "PREFERRED SHARES BASIC MAINTENANCE AMOUNT" as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i)(A) the product of the
number of Preferred Shares outstanding on such date (including Preferred Shares
held by an Affiliate of the Fund but not Preferred Shares held by the Fund)
multiplied by $25,000 (plus the product of the number of shares of any other
series of preferred stock outstanding on such date multiplied by the liquidation
preference of such shares) plus any redemption premium applicable to Preferred
Shares (or other preferred stock) then subject to redemption; (B) the aggregate
amount of dividends that will have accumulated at the respective Applicable
Rates (whether or not earned or declared) to (but not including) the first
respective Dividend Payment Dates for the Preferred Shares outstanding that
follows such Valuation Date; (C) the aggregate amount of dividends that would
accumulate on Preferred Shares outstanding from such first Dividend Payment
Dates therefor referenced in (B) of this paragraph through the 45th day after
such Valuation Date at the respective Applicable Rates referenced in (B) of this
paragraph; (D) the amount of anticipated non-interest expenses of the Fund for
the 90 days subsequent to such Valuation Date; (E) the amount of the current
outstanding balances of any indebtedness or obligations of the Fund senior in
right of payment to the Preferred Shares plus interest actually accrued together
with 30 days additional interest on the current outstanding balances calculated
at the current rate; and (F) any other current liabilities payable during the 30
days subsequent to such Valuation Date, including, without limitation,
indebtedness due within one year and any redemption premium due with respect to
the Preferred Shares for which a Notice of Redemption has been sent, as of such
Valuation Date, to the extent not reflected in any of (i)(A) through (i)(E)
(including, without limitation, any liabilities incurred for the purpose of
clearing securities transactions) less (ii) the sum of any cash plus the value
of any of the Fund's assets irrevocably deposited by the Fund for the payment of
any of (i)(A) through (i)(F) ("value," for purposes of this clause (ii), means
the Discounted Value of the security, except that if the security matures prior
to the relevant redemption payment date and is either fully guaranteed by the
U.S. Government or is rated at least P-1 by Moody's, it will be valued at its
face value).
14
(yyy) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to the
failure by the Fund to satisfy the Preferred Shares Basic Maintenance Amount (as
required by paragraph (a) of Section 7 of Part I of these Articles
Supplementary) as of a given Valuation Date, shall mean the seventh Business Day
following such Valuation Date.
(zzz) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer, Assistant Treasurer, Controller, Assistant
Controller or any Senior Vice President or Vice President of the Fund which sets
forth, as of the related Valuation Date, the assets of the Fund, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the
Preferred Shares Basic Maintenance Amount.
(aaaa) "PRICING SERVICE" shall mean any pricing service designated from
time to time in accordance with the Fund's pricing procedures.
(bbbb) "QUARTERLY VALUATION DATE" shall mean the last Business Day of each
March, June, September and December of each year, commencing on June 30, 2003.
(cccc) RESERVED.
(dddd) "RATE PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the Initial Rate Period of such shares that have a Moody's
rating of Aaa (if Moody's is then rating the Preferred Shares) and a Fitch
rating of AAA (if Fitch is then rating the Preferred Shares) and any Subsequent
Rate Period, including any Special Rate Period, of Preferred Shares.
(eeee) "RATE PERIOD DAYS," for any Rate Period or Dividend Period, means
the number of days that would constitute such Rate Period or Dividend Period but
for the application of paragraph (d) of Section 2 of Part I of these Articles
Supplementary or paragraph (b) of Section 4 of Part I of these Articles
Supplementary.
(ffff) "REIT," or real estate investment trust, means a company dedicated
to owning, and usually operating, income producing real estate, or to financing
real estate.
(gggg) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in Section 11 of Part I of these Articles Supplementary.
(hhhh) "REFERENCE RATE" shall mean, with respect to the determination of
the Maximum Rate, the applicable AA Financial Composite Commercial Paper Rate,
for a Rate Period of fewer than or equal to 270 days, or the applicable Treasury
Index Rate, for a Rate Period of more than 270 days.
(iiii) "REGISTRATION STATEMENT" shall mean the Fund's registration
statement on Form N-2 (333-105293) ("Registration Statement"), as the same may
be amended from time to time.
(jjjj) "S&P" shall mean Standard & Poor's Ratings Services and its
successors.
(kkkk) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the Preferred Shares.
(llll) "SELL ORDER" and "SELL ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these Articles
Supplementary.
15
(mmmm) "SHORT-TERM MONEY MARKET INSTRUMENTS" shall mean the following
types of instruments if, on the date of purchase or other acquisition thereof by
the Fund, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 or the equivalent if such commercial
paper matures in 30 days or A-1+ or the equivalent if such commercial
paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof or the District of Columbia or (B) a United States branch office
or agency of a foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) overnight funds;
(iv) U.S. Government Securities;
(v) registered investment companies that are money market funds
in compliance with Rule 2a-7 under the 1940 Act ("2a-7 Money Market
Funds"); and
(vi) overnight repurchase agreements.
(nnnn) "SPECIAL RATE PERIOD," with respect to Preferred Shares, shall have
the meaning specified in paragraph (a) of Section 4 of Part I of these Articles
Supplementary.
(oooo) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified in
subparagraph (a)(i) of Section 11 of Part I of these Articles Supplementary.
(pppp) "SUBMISSION DEADLINE" shall mean 1:00 P.M., Eastern time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
(qqqq) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of these Articles
Supplementary.
(rrrr) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of these
Articles Supplementary.
(ssss) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of these Articles
Supplementary.
(tttt) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of these
Articles Supplementary.
(uuuu) "SUBSEQUENT RATE PERIOD," with respect to Preferred Shares, shall
mean the period from and including the first day following the Initial Rate
Period of Preferred Shares to but excluding the next Dividend Payment Date for
Preferred Shares and any period thereafter from and including one Dividend
Payment Date for Preferred Shares to but excluding the next succeeding Dividend
Payment Date for Preferred Shares; provided, however, that if any Subsequent
Rate Period is also a Special Rate Period, such term shall mean the period
commencing on the first day of such Special Rate Period and ending on the last
day of the last Dividend Period thereof.
16
(vvvv) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean Credit Suisse First
Boston or Morgan Stanley & Co., Incorporated or their respective affiliates or
successors, if such entity is a commercial paper dealer or such other entity
designated by the Fund; provided, however, that none of such entities shall be a
Commercial Paper Dealer.
(wwww) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean Credit
Suisse First Boston or Merrill Lynch, Pierce, Fenner & Smith Incorporated or
their respective affiliates or successors, if such entity is a U.S. Government
securities dealer or such other entity designated by the Fund; provided,
however, that none of such entities shall be a U.S. Government Securities
Dealer.
(xxxx) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles Supplementary.
(yyyy) "TREASURY BILL" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or less.
(zzzz) "TREASURY FUTURES" shall have the meaning specified in paragraph
(a)(i) of Section 13 of Part I of these Articles Supplementary.
(aaaaa) "TREASURY INDEX RATE" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities having
the same number of 30-day periods to maturity as the length of the applicable
Dividend Period, determined, to the extent necessary, by linear interpolation
based upon the yield for such securities having the next shorter and next longer
number of 30-day periods to maturity treating all Dividend Periods with a length
greater than the longest maturity for such securities as having a length equal
to such longest maturity, in all cases based upon data set forth in the most
recent weekly statistical release published by the Board of Governors of the
Federal Reserve System (currently in H.15 (519)); provided, however, if the most
recent such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government Securities selected by the Fund.
(bbbbb) "TREASURY NOTE" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less but
more than 364 days.
(ccccc) "TREASURY NOTE RATE," on any date for any Rate Period, shall mean
(i) the yield on the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the Business Day next preceding such date; or (ii) in
the event that any such rate is not published in The Wall Street Journal, then
the yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from the U.S. Government Securities Dealers to the Auction
Agent. If any U.S. Government Securities Dealer does not quote a rate required
to determine the Treasury Note Rate, the Treasury Note Rate shall be determined
on the basis of the quotation or quotations furnished by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers and any
Substitute U.S. Government Securities Dealers selected by the Fund to provide
such rate or rates not being supplied by any U.S. Government Securities Dealer
or U.S. Government Securities Dealers, as the case may be, or, if the Fund does
17
not select any such Substitute U.S. Government Securities Dealer or Substitute
U.S. Government Securities Dealers, by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers.
(ddddd) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc., Morgan
Guaranty Trust Company of New York and any other U.S. Government Securities
Dealer selected by the Fund as to which Moody's (if Moody's is then rating the
Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares) shall
not have objected or their respective affiliates or successors, if such entity
is a U.S. Government Securities Dealer.
(eeeee) "U.S. TREASURY SECURITIES" means direct obligations of the United
States Treasury that are entitled to the full faith and credit of the United
States.
(fffff) "U.S. TREASURY STRIPS" means securities based on U.S. Treasury
Securities created through the Separate Trading of Registered Interest and
Principal of Securities program.
(ggggg) "VALUATION DATE" shall mean, for purposes of determining whether
the Fund is maintaining the Preferred Shares Basic Maintenance Amount, the last
Business Day of each month.
(hhhhh) "VOTING PERIOD" shall have the meaning specified in paragraph (b)
of Section 5 of Part I of these Articles Supplementary.
(iiiii) "WINNING BID RATE" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of these Articles Supplementary.
18
PART I
1. NUMBER OF AUTHORIZED SHARES. The number of authorized shares
constituting the Series A Shares is 3,000, of which 1,950 shares will be issued
on June 23, 2003. The number of authorized shares constituting the Series B
Shares is 3,000, of which 1,950 shares will be issued on June 23, 2003. The
number of authorized shares constituting the Series C Shares is 3,000, of which
1,950 shares will be issued on June 23, 2003. The number of authorized shares
constituting the Series D Shares is 3,000, of which 1,950 shares will be issued
on June 23, 2003.
2. DIVIDENDS.
(a) RANKING. The shares of a series of Preferred Shares shall rank on a
parity with each other, with shares of any other series of Preferred Shares and
with any other series of preferred stock as to the payment of dividends by the
Fund.
(b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of a series of
Preferred Shares shall be entitled to receive, when, as and if declared by the
Board of Directors, out of funds legally available therefor in accordance with
the Charter and applicable law, cumulative cash dividends at the Applicable Rate
for shares of such series, determined as set forth in paragraph (e) of this
Section 2, and no more (except to the extent set forth in Section 3 of this Part
I), payable on the Dividend Payment Dates with respect to shares of such series
determined pursuant to paragraph (d) of this Section 2. Holders of Preferred
Shares shall not be entitled to any dividend, whether payable in cash, property
or shares, in excess of full cumulative dividends, as herein provided, on
Preferred Shares. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on Preferred Shares which
may be in arrears, and, except to the extent set forth in subparagraph (e)(i) of
this Section 2, no additional sum of money shall be payable in respect of any
such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on
Preferred Shares of any series shall accumulate at the Applicable Rate for
shares of such series from the Date of Original Issue thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. Dividends shall be
payable for the Initial Rate Period on July 2, 2003, with respect to Series A
Shares, July 3, 2003 with respect to Series B Shares, July 3, 2003 with respect
to Series C Shares and July 7, 2003 with respect to Series D Shares, and, if
declared by the Board of Directors (which declaration may be by a single
resolution for multiple such dates), on each seventh day thereafter (or after
the Dividend Payment Date with respect to an intervening Special Rate Period),
with respect to Series A Shares, each seventh day thereafter (or after the
Dividend Payment Date with respect to an intervening Special Rate Period), with
respect to Series B Shares, each seventh day thereafter (or after the Dividend
Payment Date with respect to an intervening Special Rate Period), with respect
to Series C Shares, and each seventh day thereafter (or after the Dividend
Payment Date with respect to an intervening Special Rate Period), with respect
to Series D Shares (each date being a "Dividend Payment Date"); provided,
however, that:
(i) if the day on which dividends would otherwise be payable on Preferred
Shares is not a Business Day, then such dividends shall be payable on such
shares on the first Business Day that falls after such day, and
(ii) notwithstanding this paragraph (d) of Section 2, the Fund in its
discretion may establish the Dividend Payment Dates in respect of any Special
Rate Period of shares of a series of Preferred Shares consisting of more than 7
19
Rate Period Days, with respect to Series A Shares, 7 Rate Period Days, with
respect to Series B Shares, 7 Rate Period Days, with respect to Series C Shares,
and 7 Rate Period Days, with respect to Series D Shares; provided, however, that
such dates shall be set forth in the Notice of Special Rate Period relating to
such Special Rate Period, as delivered to the Auction Agent, which Notice of
Special Rate Period shall be filed with the Secretary of the Fund; and further
provided that (1) any such Dividend Payment Date shall be a Business Day and (2)
the last Dividend Payment Date in respect of such Special Rate Period shall be
the Business Day immediately following the last day thereof, as such last day is
determined in accordance with paragraph (b) of Section 4 of this Part I.
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.
(i) DIVIDEND RATES. The dividend rate on shares of a series of Preferred
Shares during the period from and after the Date of Original Issue of shares of
such series to and including the last day of the Initial Rate Period of shares
of such series shall be equal to the rate per annum set forth with respect to
shares of such series under "Designation." The initial dividend rate on any
series of preferred stock subsequently established by the Fund shall be the rate
set forth in or determined in accordance with the resolutions of the Board of
Directors establishing such series. For each Subsequent Rate Period of shares of
such series thereafter, the dividend rate on shares of such series shall be
equal to the rate per annum that results from an Auction for shares of such
series on the Auction Date next preceding such Subsequent Rate Period (but the
rate set at the Auction will not exceed the Maximum Rate); provided, however,
that if:
(A) subject to Section 9 of Part 2, an Auction for any Subsequent Rate
Period of a series of Preferred Shares is not held for any reason other than as
described below or if Sufficient Clearing Orders have not been made in an
Auction (other than as a result of all shares of any series being the subject of
Submitted Hold Orders), then the dividend rate on the shares of such series for
such Subsequent Rate Period will be the Maximum Rate of such series on the
Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
consisting of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), but, prior to 12:00 Noon,
Eastern time, on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall have been cured in
accordance with paragraph (f) of this Section 2 and the Fund shall have paid to
the Auction Agent a late charge ("Late Charge") equal to the sum of (1) if such
Failure to Deposit consisted of the failure timely to pay to the Auction Agent
the full amount of dividends with respect to any Dividend Period of shares of
such series, an amount computed by multiplying (x) 200% of the Reference Rate
for the Rate Period during which such Failure to Deposit occurs on the Dividend
Payment Date for such Dividend Period by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit has not been cured
in accordance with paragraph (f) of this Section 2 (including the day such
20
Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate obtained
against the aggregate Liquidation Preference of the outstanding shares of such
series and (2) if such Failure to Deposit consisted of the failure timely to pay
to the Auction Agent the Redemption Price of the shares, if any, of such series
for which Notice of Redemption has been mailed by the Fund pursuant to paragraph
(c) of Section 11 of this Part I, an amount computed by multiplying (x) 200% of
the Reference Rate for the Rate Period during which such Failure to Deposit
occurs on the redemption date by (y) a fraction, the numerator of which shall be
the number of days for which such Failure to Deposit is not cured in accordance
with paragraph (f) of this Section 2 (including the day such Failure to Deposit
occurs and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against the
aggregate Liquidation Preference of the outstanding shares of such series to be
redeemed, no Auction will be held, in respect of shares of such series for the
Subsequent Rate Period thereof and the dividend rate for shares of such series
for such Subsequent Rate Period will be the Maximum Rate on the Auction Date for
such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
consisting of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), and, prior to 12:00 Noon,
Eastern time, on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall not have been cured
in accordance with paragraph (f) of this Section 2 or the Fund shall not have
paid the applicable Late Charge to the Auction Agent, no Auction will be held in
respect of shares of such series for the first Subsequent Rate Period thereof
thereafter (or for any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Fund pays the applicable Late Charge
to the Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Fund cures such
Failure to Deposit), in each case no later than 12:00 Noon, Eastern time, on the
fourth Business Day prior to the end of such Rate Period), and the dividend rate
for shares of such series for each such Subsequent Rate Period for shares of
such series shall be a rate per annum equal to the Maximum Rate on the Auction
Date for such Subsequent Rate Period (but with the prevailing rating for shares
of such series, for purposes of determining such Maximum Rate, being deemed to
be "Below "Baa3"/BBB-"); or
(D) any Failure to Deposit shall have occurred with respect to shares of
such series during a Special Rate Period thereof consisting of more than 364
Rate Period Days, or during any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which a Failure to
Deposit occurred that has not been cured, and, prior to 12:00 Noon, Eastern
time, on the fourth Business Day preceding the Auction Date for the Rate Period
subsequent to such Rate Period, such Failure to Deposit shall not have been
cured in accordance with paragraph (f) of this Section 2 or, in the event
Moody's is then rating such shares, the Fund shall not have paid the applicable
Late Charge to the Auction Agent (such Late Charge, for purposes of this
subparagraph (D), to be calculated by using, as the Reference Rate, the
Reference Rate applicable to a Rate Period (x) consisting of more than 270 Rate
Period Days and (y) commencing on the date on which the Rate Period during which
Failure to Deposit occurs commenced), no Auction will be held with respect to
shares of such series for such Subsequent Rate Period (or for any Rate Period
thereof thereafter to and including the Rate Period during which (1) such
Failure to Deposit is cured in accordance with paragraph (f) of this Section 2
and (2) the Fund pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the event Moody's is
rating such shares at the time the Fund cures such Failure to Deposit), in each
case no later than 12:00 Noon, Eastern time, on the fourth Business Day prior to
the end of such Rate Period), and the dividend rate for shares of such series
for each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for such Subsequent
Rate Period (but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be "Below
"Baa3"/BBB-").
21
(ii) CALCULATION OF DIVIDENDS. The amount of dividends per share payable
on shares of a series of Preferred Shares on any date on which dividends on
shares of such series shall be payable shall be computed by multiplying the
Applicable Rate for shares of such series in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall be
365 if such Dividend Period consists of 7 Rate Period Days for Series A Shares,
7 Rate Period Days for Series B Shares, 7 Rate Period Days for Series C
Shares or 7 Rate Period Days for Series D Shares and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to
shares of a series of Preferred Shares shall have been cured (if such Failure to
Deposit is not solely due to the willful failure of the Fund to make the
required payment to the Auction Agent) with respect to any Rate Period of shares
of such series if, within the respective time periods described in subparagraph
(e)(i) of this Section 2, the Fund shall have paid to the Auction Agent (A) all
accumulated and unpaid dividends on shares of such series and (B) without
duplication, the Redemption Price for shares, if any, of such series for which
Notice of Redemption has been mailed by the Fund pursuant to paragraph (c) of
Section 11 of Part I of these Articles Supplementary; provided, however, that
the foregoing clause (B) shall not apply to the Fund's failure to pay the
Redemption Price in respect of Preferred Shares when the related Redemption
Notice provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT. The Fund shall pay to the
Auction Agent, not later than 12:00 Noon, Eastern time, on each Dividend Payment
Date for shares of a series of Preferred Shares, an aggregate amount of funds
available in The City of New York, New York, equal to the dividends to be paid
to all Holders of shares of such series on such Dividend Payment Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND. All moneys paid
to the Auction Agent for the payment of dividends shall be held in trust for the
payment of such dividends by the Auction Agent for the benefit of the Holders
specified in paragraph (i) of this Section 2. Any moneys paid to the Auction
Agent in accordance with the foregoing but not applied by the Auction Agent to
the payment of dividends will, to the extent permitted by law, be repaid to the
Fund at the end of 90 days from the date on which such moneys were so to have
been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on Preferred Shares shall be
paid on the Dividend Payment Date therefor to the Holders thereof as their names
appear on the record books of the Fund on the Business Day next preceding such
Dividend Payment Date.
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID DIVIDENDS.
Any dividend payment made on Preferred Shares shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such shares.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the Holders
as their names appear on the record books of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as may be fixed by the
Board of Directors.
22
3. RESERVED.
4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Fund, at its
option, may designate any succeeding Subsequent Rate Period of shares of a
series of Preferred Shares as a special rate period consisting of a specified
number of Rate Period Days, other than the number of Rate Period Days comprising
a Minimum Rate Period, that is evenly divisible by seven, subject to adjustment
as provided in paragraph (b) of this Section 4 (each such period, a "Special
Rate Period"). A designation of a Special Rate Period shall be effective only if
(A) notice thereof shall have been given in accordance with paragraph (c) and
subparagraph (d)(i) of this Section 4, (B) an Auction for shares of such series
shall have been held on the Auction Date immediately preceding the first day of
such proposed Special Rate Period and Sufficient Clearing Bids for shares of
such series shall have existed in such Auction, and (C) if any Notice of
Redemption shall have been mailed by the Fund pursuant to paragraph (c) of
Section 11 of this Part I with respect to any shares of such series, the
Redemption Price with respect to such shares shall have been deposited with the
Auction Agent. In the event the Fund wishes to designate any succeeding
Subsequent Rate Period for shares of a series of Preferred Shares as a Special
Rate Period consisting of more than 28 Rate Period Days, the Fund shall notify
Fitch (if Fitch is then rating the series of Preferred Shares) and Moody's (if
Moody's is then rating the series of Preferred Shares) in advance of the
commencement of such Subsequent Rate Period that the Fund wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide Fitch (if
Fitch is then rating the series of Preferred Shares) and Moody's (if Moody's is
then rating the series of Preferred Shares) with such documents as either may
request. In addition, full cumulative dividends, any amounts due with respect to
mandatory redemptions and any additional dividends payable prior to such date
must be paid in full or deposited with the Auction Agent. The Fund also must
have portfolio securities with a discounted value at least equal to the
Preferred Share Maintenance Amount.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the Fund
wishes to designate a Subsequent Rate Period as a Special Rate Period, but the
day following what would otherwise be the last day of such Special Rate Period
is not (a) a Wednesday that is a Business Day in case of Series A Shares, (b) a
Thursday that is a Business Day in the case of Series B Shares, (c) a Friday
that is a Business Day in the case of Series C Shares, or (d) a Monday that is
a Business Day in the case of Series D Shares, then the Fund shall designate
such Subsequent Rate Period as a Special Rate Period consisting of the period
commencing on the first day following the end of the immediately preceding Rate
Period and ending (a) on the first Tuesday that is followed by a Wednesday that
is a Business Day preceding what would otherwise be such last day in the case of
Series A Shares, (b) on the first Wednesday that is followed by a Thursday that
is a Business Day preceding what would otherwise be such last day in the
case of Series B Shares, (c) on the first Thursday that is followed by a
Friday that is a Business Day preceding what would otherwise be such last day
in the case of Series C Shares or (d) on the first Friday that is followed by
a Monday that is a Business Day preceding what would otherwise be such last
day in the case of Series D Shares.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Preferred Shares as a Special Rate Period pursuant to paragraph (a) of this
Section 4, not less than 7 (or such lesser number of days as determined by the
Fund with appropriate consultation with the Auction Agent and Broker-Dealers)
23
nor more than 30 days prior to the date the Fund proposes to designate as the
first day of such Special Rate Period (which shall be such day that would
otherwise be the first day of a Minimum Rate Period), notice shall be mailed by
the Fund by first-class mail, postage prepaid, to the Holders of shares of such
series. Each such notice shall state (A) that the Fund may exercise its option
to designate a succeeding Subsequent Rate Period of shares of such series as a
Special Rate Period, specifying the first day thereof and (B) that the Fund
will, by 11:00 A.M., Eastern time, on the second Business Day next preceding
such date (or by such later time or date, or both, as determined by the Fund
with appropriate consultation with the Auction Agent and Broker-Dealers) notify
the Auction Agent of either (x) its determination, subject to certain
conditions, to exercise such option, in which case the Fund shall specify the
Special Rate Period designated, or (y) its determination not to exercise such
option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M., Eastern time,
on the second Business Day next preceding the first day of any proposed Special
Rate Period of shares of a series of Preferred Shares as to which notice has
been given as set forth in paragraph (c) of this Section 4 (or such later time
or date, or both, as determined by the Fund with appropriate consultation with
the Auction Agent and Broker-Dealers), the Fund shall deliver to the Auction
Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the Fund
has determined to designate the next succeeding Rate Period of shares of such
series as a Special Rate Period, specifying the same and the first day thereof,
(B) the Auction Date immediately prior to the first day of such Special Rate
Period, (C) that such Special Rate Period shall not commence if (1) an Auction
for shares of such series shall not be held on such Auction Date for any reason
or (2) an Auction for shares of such series shall be held on such Auction Date
but Sufficient Clearing Bids for shares of such series shall not exist in such
Auction (other than because all Outstanding shares of such series are subject to
Submitted Hold Orders), (D) the scheduled Dividend Payment Dates for shares of
such series during such Special Rate Period and (E) the Special Redemption
Provisions, if any, applicable to shares of such series in respect of such
Special Rate Period, such notice to be accompanied by a Preferred Shares Basic
Maintenance Report showing that, as of the third Business Day next preceding
such proposed Special Rate Period, Moody's Eligible Assets (if Moody's is then
rating the series in question) and Fitch Eligible Assets (if Fitch is then
rating the series in question) each have an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount as of such Business Day
(assuming for purposes of the foregoing calculation that (a) the Maximum Rate is
the Maximum Rate on such Business Day as if such Business Day were the Auction
Date for the proposed Special Rate Period, and (b) if applicable, the Moody's
Discount Factors applicable to Moody's Eligible Assets and the Fitch Discount
Factors applicable to Fitch Eligible Assets are determined by reference to the
first Exposure Period longer than the Exposure Period then applicable to the
Fund, as described in the definitions of Moody's Discount Factor and Fitch
Discount Factor herein); or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period of shares of such series and that the
next succeeding Rate Period of shares of such series shall be a Minimum Rate
Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Fund fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Preferred Shares Basic Maintenance Report to the effect set
24
forth in such subparagraph (if either Moody's or Fitch is then rating the series
in question)) with respect to any designation of any proposed Special Rate
Period to the Auction Agent by 11:00 A.M., Eastern time, on the second Business
Day next preceding the first day of such proposed Special Rate Period (or by
such later time or date, or both, as determined by the Fund with appropriate
consultation with the Auction Agent and Broker-Dealers), the Fund shall be
deemed to have delivered a notice to the Auction Agent with respect to such
Special Rate Period to the effect set forth in subparagraph (d)(ii) of this
Section 4. In the event the Fund delivers to the Auction Agent a notice
described in subparagraph (d)(i) of this Section 4, it shall file a copy of such
notice with the Secretary of the Fund, and the contents of such notice shall be
binding on the Fund. In the event the Fund delivers to the Auction Agent a
notice described in subparagraph (d)(ii) of this Section 4, the Fund will
provide Moody's (if Moody's is then rating the series in question) and Fitch (if
Fitch is then rating the series in question) a copy of such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER SHARE OF PREFERRED SHARES. Except as otherwise provided
in the Charter or as otherwise required by law, (i) each Holder of Preferred
Shares shall be entitled to one vote for each Preferred Share held by such
Holder on each matter submitted to a vote of Stockholders of the Fund, and (ii)
the holders of outstanding shares of preferred stock, including Preferred
Shares, and of Common Shares shall vote together as a single class; provided,
however, that, at any meeting of the Stockholders of the Fund held for the
election of Directors, the holders of outstanding shares of preferred stock,
including Preferred Shares, represented in person or by proxy at said meeting,
shall be entitled, as a class, to the exclusion of the holders of all other
securities and classes of shares of stock of the Fund, to elect two Directors of
the Fund (regardless of the total number of Directors serving on the Fund's
Board of Directors), each share of preferred stock, including each Preferred
Share, entitling the holder thereof to one vote; provided, further, that if the
Board of Directors shall be divided into one or more classes, the Board of
Directors shall determine to which class or classes the Directors elected by the
holders of preferred stock shall be assigned and the holders of the preferred
stock shall only be entitled to elect the Directors so designated as being
elected by the holders of the preferred stock when their term shall have
expired; provided, finally, that such Directors appointed by the holders of
preferred shares shall be allocated as evenly as possible among the classes of
Directors. Subject to paragraph (b) of this Section 5, the holders of
outstanding Common Shares and shares of preferred stock, including Preferred
Shares, voting together as a single class, shall elect the balance of the
Directors.
(b) VOTING FOR ADDITIONAL DIRECTORS.
(i) VOTING PERIOD. Except as otherwise provided in the Charter or as
otherwise required by law, during any period in which any one or more of the
conditions described in subparagraphs (A) or (B) of this subparagraph (b)(i)
shall exist (such period being referred to herein as a "Voting Period"), the
number of Directors constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two Directors elected
exclusively by the holders of preferred stock, including Preferred Shares, would
constitute a majority of the Board of Directors as so increased by such smallest
number; and the holders of shares of preferred stock, including Preferred
Shares, shall be entitled, voting as a class on a one-vote-per-share basis (to
the exclusion of the holders of all other securities and classes of shares of
stock of the Fund), to elect such smallest number of additional Directors,
together with the two Directors that such holders are in any event entitled to
elect. A Voting Period shall commence:
25
(A) if at the close of business on any dividend payment date accumulated
dividends (whether or not earned or declared) on any outstanding shares of
preferred stock, including Preferred Shares, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or specified securities
shall not have been deposited with the Auction Agent for the payment of such
accumulated dividends; or
(B) if at any time holders of Preferred Shares are entitled under the 1940
Act to elect a majority of the Directors of the Fund.
Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) NOTICE OF SPECIAL MEETING. As soon as practicable after the accrual
of any right of the holders of preferred stock, including Preferred Shares, to
elect additional Directors as described in subparagraph (b)(i) of this Section
5, the Fund shall notify the Auction Agent and the Auction Agent shall call a
special meeting of such holders, by mailing a notice of such special meeting to
such holders, such meeting to be held not less than 10 nor more than 30 days
after the date of mailing of such notice. If the Fund fails to send such notice
to the Auction Agent or if the Auction Agent does not call such a special
meeting, it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed or on such other date as the Fund and the
Auction Agent may agree. At any such special meeting and at each meeting of
holders of preferred stock, including Preferred Shares, held during a Voting
Period at which Directors are to be elected, such holders, voting together as a
class (to the exclusion of the holders of all other securities and classes of
shares of stock of the Fund), shall be entitled to elect the number of Directors
prescribed in subparagraph (b)(i) of this Section 5 on a one-vote-per-share
basis.
(iii) TERMS OF OFFICE OF EXISTING DIRECTORS. The terms of office of all
persons who are Directors of the Fund at the time of a special meeting of
Holders and holders of other shares of preferred stock of the Fund to elect
Directors shall continue, notwithstanding the election at such meeting by the
Holders and such other holders of the number of Directors that they are entitled
to elect, and the persons so elected by the Holders and such other holders,
together with the two incumbent Directors elected by the Holders and such other
holders of shares of preferred stock of the Fund and the remaining incumbent
Directors elected by the holders of the Common Shares and preferred stock,
including Preferred Shares, shall constitute the duly elected Directors of the
Fund.
(iv) TERMS OF OFFICE OF CERTAIN DIRECTORS TO TERMINATE UPON TERMINATION OF
VOTING PERIOD. Simultaneously with the termination of a Voting Period, the terms
of office of the additional Directors elected by the Holders and holders of
other shares of preferred stock of the Fund pursuant to subparagraph (b)(i) of
this Section 5 shall terminate, the remaining Directors shall constitute the
Directors of the Fund and the voting rights of the Holders and such other
holders to elect additional Directors pursuant to subparagraph (b)(i) of this
Section 5 shall cease, subject to the provisions of the last sentence of
subparagraph (b)(i) of this Section 5.
26
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS.
(i) INCREASES IN CAPITALIZATION. So long as any Preferred Shares are
outstanding, the Fund shall not, without the affirmative vote or consent of the
Holders of at least a majority of the Preferred Shares outstanding at the time,
in person or by proxy, either in writing or at a meeting, voting as a separate
class: (a) authorize, create or issue any class or series of shares ranking
prior to or on a parity with Preferred Shares with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund, or authorize, create or issue additional shares
of any series of Preferred Shares (except that, notwithstanding the foregoing,
but subject to the provisions of paragraph (c) of Section 13 of this Part I, the
Board of Directors, without the vote or consent of the Holders of Preferred
Shares, may from time to time authorize and create, and the Fund may from time
to time issue additional shares of, any series of Preferred Shares, or classes
or series of preferred shares ranking on a parity with Preferred Shares with
respect to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund; provided,
however, that if Moody's or Fitch is not then rating the Preferred Shares, the
aggregate liquidation preference of all Preferred Shares of the Fund outstanding
after any such issuance, exclusive of accumulated and unpaid dividends, may not
exceed $275,000,000) or (b) amend, alter or repeal the provisions of the
Charter, or these Articles Supplementary, whether by merger, consolidation or
otherwise, so as to affect any preference, right or power of such Preferred
Shares or the Holders thereof; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division or split of a share of Preferred
Shares will be deemed to affect such preferences, rights or powers only if the
terms of such division adversely affect the Holders of Preferred Shares and
(iii) the authorization, creation and issuance of classes or series of shares
ranking junior to Preferred Shares with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, will be deemed to affect such preferences, rights or powers
only if Moody's or Fitch is then rating Preferred Shares and such issuance
would, at the time thereof, cause the Fund not to satisfy the 1940 Act Preferred
Shares Asset Coverage or the Preferred Shares Basic Maintenance Amount. So long
as any Preferred Shares are outstanding, the Fund shall not, without the
affirmative vote or consent of the Holders of at least a majority of the
Preferred Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee becoming
insolvent. If any action set forth above would adversely affect the rights of
one or more series (the "Affected Series") of Preferred Shares in a manner
different from any other series of Preferred Shares, the Fund will not approve
any such action without the affirmative vote or consent of the holders of at
least a majority of the shares of each such Affected Series outstanding at the
time, in person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class).
(ii) 1940 ACT MATTERS. Unless a higher percentage is provided for in the
Charter, (A) the affirmative vote of the Holders a "majority of the outstanding"
(as such term is defined in the 1940 Act) preferred stock of the Fund, including
Preferred Shares, voting as a separate class, shall be required to approve (A)
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares and (B) any action requiring a vote of security holders of
the Fund under Section 13(a) of the 1940 Act. In the event a vote of Holders of
27
Preferred Shares is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Fund shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) that
such vote is to be taken and the nature of the action with respect to which such
vote is to be taken. The Fund shall, not later than ten Business Days after the
date on which such vote is taken, notify Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) of
the results of such vote.
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT STOCKHOLDER APPROVAL. The Board
of Directors may, without the vote or consent of the Holders of the Preferred
Shares, or any other stockholder of the Fund, from time to time amend, alter or
repeal any or all of the definitions of the terms listed below, or any provision
of the Articles Supplementary viewed by Moody's or Fitch as a predicate for any
such definition, and any such amendment, alteration or repeal will not be deemed
to affect the preferences, rights or powers of the Preferred Shares or the
Holders thereof, provided the Board of Directors receives confirmation from
Moody's (if Moody's is then rating the Preferred Shares) and Fitch (if Fitch is
then rating the Preferred Shares), that any such amendment, alteration or repeal
would not impair the ratings then assigned to the Preferred Shares by Moody's
(if Moody's is then rating the Preferred Shares) or Fitch (if Fitch is then
rating the Preferred Shares):
Accountant's Confirmation Moody's Eligible Assets
Annual Valuation Date Moody's Hedging Transactions
Closing Transaction Moody's Real Estate Industry/Property Sector
Classification
Deposit Securities 1940 Act Cure Date
Discounted Value 1940 Act Preferred Shares Asset Coverage
Exposure Period Other Real Estate Company
Fitch Discount Factor Preferred Shares Basic Maintenance Amount
Fitch Eligible Assets Preferred Shares Basic Maintenance Cure Date
Fitch Hedging Transactions Preferred Shares Basic Maintenance Report
Forward Commitments Quarterly Valuation Date
Hedging Transactions Real Estate Index
Independent Accountant REIT
Market Value Treasury Futures
Moody's Discount Factor Valuation Date
In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred
stock, including each series of Preferred Shares, or any other stockholder of
the Fund, and without receiving any confirmation from any rating agency, after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would meet the Preferred Shares Basic Maintenance Amount
Test.
28
(e) RELATIVE RIGHTS AND PREFERENCES. Unless otherwise required by law or
provided elsewhere in the Charter, the Holders of Preferred Shares shall not
have any relative rights or preferences or other special rights other than those
specifically set forth herein.
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of Preferred
Shares shall have no preemptive rights or rights to cumulative voting.
(g) VOTING FOR DIRECTORS SOLE REMEDY FOR FUND'S FAILURE TO PAY DIVIDENDS.
In the event that the Fund fails to pay any dividends on the Preferred Shares,
the exclusive remedy of the Holders shall be the right to vote for Directors
pursuant to the provisions of this Section 5.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by these
Articles Supplementary, by the other provisions of the Charter, by statute or
otherwise, no Holder shall be entitled to vote any share of a series of
Preferred Shares and no share of a series of Preferred Shares shall be deemed to
be "outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum if, prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding for quorum
purposes, as the case may be, the requisite Notice of Redemption with respect to
such shares shall have been mailed as provided in paragraph (c) of Section 11 of
this Part I and the Redemption Price for the redemption of such shares shall
have been deposited in trust with the Auction Agent for that purpose. No share
of a series of Preferred Shares held by the Fund or any affiliate of the Fund
(except for shares held by a Broker-Dealer that is an affiliate of the Fund for
the account of its customers) shall have any voting rights or be deemed to be
outstanding for voting or other purposes.
6. 1940 ACT PREFERRED SHARES ASSET COVERAGE. The Fund shall maintain, as
of the last Business Day of each month in which any share of a series of
Preferred Shares is outstanding, the 1940 Act Preferred Shares Asset Coverage;
provided, however, that the redemption pursuant to Section 11(b) shall be the
sole remedy in the event the Fund fails to do so.
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
(a) So long as Preferred Shares are outstanding, the Fund shall
maintain, on each Valuation Date, and shall verify to its satisfaction that it
is maintaining on such Valuation Date, (i) Fitch Eligible Assets having an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount (if Fitch is then rating the Preferred Shares) and (ii)
Moody's Eligible Assets having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount (if Moody's is then rating
the Preferred Shares); provided, however, that the redemption pursuant to the
redemption pursuant to Section 11(b) shall be the sole remedy in the event the
Fund fails to do so.
(b) On or before 5:00 P.M., Eastern time, on the third Business Day
after a Valuation Date on which the Fund fails to satisfy the Preferred Shares
Basic Maintenance Amount, and on the third Business Day after the Preferred
Shares Basic Maintenance Cure Date with respect to such Valuation Date, the Fund
shall complete and deliver to Fitch (if Fitch is then rating the Preferred
Shares) and Moody's (if Moody's is then rating the Preferred Shares) a Preferred
Shares Basic Maintenance Report as of the date of such failure or such Preferred
Shares Basic Maintenance Cure Date, as the case may be. The Fund shall also
deliver a Preferred Shares Basic Maintenance Report to Moody's (if Moody's is
then rating the Preferred Shares) and Fitch (if Fitch is then rating the
29
Preferred Shares), in each case on or before the seventh Business Day after the
last Business Day of each month. A failure by the Fund to deliver a Preferred
Shares Basic Maintenance Report pursuant to the preceding sentence shall be
deemed to be delivery of a Preferred Shares Basic Maintenance Report indicating
the Discounted Value for all assets of the Fund is less than the Preferred
Shares Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to a Quarterly Valuation Date that is also an Annual Valuation Date,
the Fund shall cause the Independent Accountant to confirm in writing to Fitch
(if Fitch is then rating the Preferred Shares) and Moody's (if Moody's is then
rating the Preferred Shares) (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other Preferred Shares Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Fund during the quarter ending on such Annual Valuation Date), (ii) that, in
such Report (and in such randomly selected Report), the Fund correctly
determined in accordance with these Articles Supplementary whether the Fund had,
at such Annual Valuation Date (and at the Valuation Date addressed in such
randomly-selected Report), Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares) of an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares) of an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount, (iii) that, in
such Report (and in such randomly selected Report), the Fund determined whether
the Fund had, at such Annual Valuation Date (and at the Valuation Date addressed
in such randomly selected Report) in accordance with these Articles
Supplementary, with respect to the Fitch ratings on Real Estate Securities, the
issuer name and issue size and coupon rate listed in such Report, verified by
the Independent Accountant by reference to Bloomberg Financial Services or
another independent source approved by Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) and
the Independent Accountant shall provide a listing in its letter of any
differences, (iv) with respect to the Moody's ratings on Real Estate Securities,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by the Independent Accountant by reference to
Bloomberg Financial Services or another independent source approved by Moody's
(if Moody's is then rating the Preferred Shares) and Fitch (if Fitch is then
rating the Preferred Shares) and the Independent Accountant shall provide a
listing in its letter of any differences, (v) with respect to the bid or mean
price (or such alternative permissible factor used in calculating the Market
Value) provided by the custodian of the Fund's assets to the Fund for purposes
of valuing securities in the Fund's portfolio, that the Independent Accountant
has traced the price used in such Report to the bid or mean price listed in such
Report as provided to the Fund and verified that such information agrees (in the
event such information does not agree, the Independent Accountant will provide a
listing in its letter of such differences) and (vi) with respect to such
confirmation to Moody's (if Moody's is then rating the Preferred Shares) and
Fitch (if Fitch is then rating the Preferred Shares), that the Fund has
satisfied the requirements of Section 13 of this Part I of these Articles
Supplementary with respect to portfolio holdings as of the date of such Report
(such confirmation is herein called the "Accountant's Confirmation"); provided,
however, that the Accountant may base the conclusions related to (ii) through
(vi) above on a sample of at least 25 securities (or such other number of
securities as the Accountant and Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) may
agree from time to time).
30
(d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to any Valuation Date on which the Fund failed to satisfy the
Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Fund shall cause the Independent
Accountant to provide to Fitch (if Fitch is then rating the shares of series in
question) and Moody's (if Moody's is then rating the series in question) an
Accountant's Confirmation as to such Preferred Shares Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph (c)
or (d) of this Section 7 shows that an error was made in the Preferred Shares
Basic Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation was required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all Fitch Eligible Assets (if
Fitch is then rating the Preferred Shares) or Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares), as the case may be, of the Fund
was determined by the Independent Accountant, then in the absence of manifest
error the calculation or determination made by such Independent Accountant shall
be final and conclusive and shall be binding on the Fund, and the Fund shall
accordingly amend and deliver the Preferred Shares Basic Maintenance Report to
Fitch (if Fitch is then rating the Preferred Shares) and Moody's (if Moody's is
then rating the Preferred Shares) promptly following receipt by the Fund of such
Accountant's Confirmation.
(f) On or before 5:00 p.m., Eastern time, on the first Business Day
after the Date of Original Issue of any Preferred Shares, the Fund shall
complete and deliver to Fitch (if Fitch is then rating the Preferred Shares) and
Moody's (if Moody's is then rating the Preferred Shares) a Preferred Shares
Basic Maintenance Report as of the close of business on such Date of Original
Issue.
(g) On or before 5:00 p.m., Eastern time, on the seventh Business Day
after either (i) the Fund shall have redeemed Common Shares or (ii) the ratio of
the Discounted Value of Fitch Eligible Assets or the Discounted Value of Moody's
Eligible Assets to the Preferred Shares Basic Maintenance Amount on any
valuation date is less than or equal to 105% or (iii) whenever requested by
Moody's or Fitch, the Fund shall complete and deliver to Fitch (if Fitch is then
rating the Preferred Shares) or Moody's (if Moody's is then rating the Preferred
Shares), as the case may be, a Preferred Shares Basic Maintenance Report as of
the date of either such event.
8. RESERVED.
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON SHARES OTHER THAN PREFERRED SHARES. Except as set forth
in the next sentence, no dividends shall be declared or paid or set apart for
payment on the shares of any class or series of shares of stock of the Fund
ranking, as to the payment of dividends, on a parity with Preferred Shares for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid on the shares of each series of Preferred Shares through its
most recent Dividend Payment Date. When dividends are not paid in full upon the
shares of each series of Preferred Shares through its most recent Dividend
Payment Date or upon the shares of any other class or series of shares of stock
of the Fund ranking on a parity as to the payment of dividends with Preferred
Shares through their most recent respective dividend payment dates, all
dividends declared upon Preferred Shares and any other such class or series of
shares of stock ranking on a parity as to the payment of dividends with
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on Preferred Shares and such other class or series of shares
of stock shall in all cases bear to each other the same ratio that accumulated
dividends per share on the Preferred Shares and such other class or series of
31
shares of stock bear to each other (for purposes of this sentence, the amount of
dividends declared per share of Preferred Shares shall be based on the
Applicable Rate for such share for the Dividend Periods during which dividends
were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES
UNDER THE 1940 ACT. The Board of Directors shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other distribution,
upon the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long
as any Preferred Shares are outstanding, and except as set forth in paragraph
(a) of this Section 9 and paragraph (c) of Section 12 of this Part I, (A) the
Fund shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the Preferred Shares as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of the Common Shares or any other shares of the Fund
ranking junior to or on a parity with the Preferred Shares as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the
Preferred Shares as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up), or any such parity shares (except
by conversion into or exchange for shares of the Fund ranking junior to or on a
parity with Preferred Shares as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up), unless (i) full
cumulative dividends on shares of each series of Preferred Shares through its
most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent and (ii) the Fund has redeemed the full number of Preferred Shares
required to be redeemed by any provision for mandatory redemption pertaining
thereto, and (B) the Fund shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to Preferred Shares as to
the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of Common Shares or any other shares of
the Fund ranking junior to Preferred Shares as to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding up, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares (except by conversion into or
exchange for shares of the Fund ranking junior to Preferred Shares as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
32
Preferred Shares) and Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares) would each at least equal the Preferred Shares Basic
Maintenance Amount.
10. RESERVED.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of this paragraph (a),
Preferred Shares of any series may be redeemed, at the option of the Fund, as a
whole or from time to time in part, on the second Business Day preceding any
Dividend Payment Date for shares of such series, out of funds legally available
therefor, at a redemption price per share equal to the sum of $25,000 plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to (but not including) the date fixed for redemption; provided,
however, that (1) shares of a series of Preferred Shares may not be redeemed in
part if after such partial redemption fewer than 250 shares of such series of
Preferred Shares remain outstanding; (2) shares of a series of Preferred Shares
are redeemable by the Fund during the Initial Rate Period only on the second
Business Day next preceding the last Dividend Payment Date for such Initial Rate
Period; and (3) subject to subparagraph (ii) of this paragraph (a), the Notice
of Special Rate Period relating to a Special Rate Period of shares of a series
of Preferred Shares, as delivered to the Auction Agent and filed with the
Secretary of the Fund, may provide that shares of such series shall not be
redeemable during the whole or any part of such Special Rate Period (except as
provided in subparagraph (iv) of this paragraph (a)) or shall be redeemable
during the whole or any part of such Special Rate Period only upon payment of
such redemption premium or premiums as shall be specified therein ("Special
Redemption Provisions").
(ii) A Notice of Special Rate Period relating to shares of a series of
Preferred Shares for a Special Rate Period thereof may contain Special
Redemption Provisions only if the Fund's Board of Directors, after consultation
with the Broker-Dealer or Broker-Dealers for such Special Rate Period of shares
of such series, determines that such Special Redemption Provisions are in the
best interest of the Fund.
(iii) If fewer than all of the outstanding shares of a series of Preferred
Shares are to be redeemed pursuant to subparagraph (i) of this paragraph (a),
the number of shares of such series to be redeemed shall be determined by the
Board of Directors, and such shares shall be redeemed pro rata from the Holders
of shares of such series in proportion to the number of shares of such series
held by such Holders or by such other method that the Board of Directors deems
fair and equitable.
(iv) Subject to the provisions of subparagraph (v) of this paragraph (a),
shares of any series of Preferred Shares may be redeemed, at the option of the
Fund, as a whole but not in part, out of funds legally available therefor, on
the first day following any Dividend Period thereof included in a Rate Period
consisting of more than 364 Rate Period Days if, on the date of determination of
the Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the Treasury
Note Rate for such Rate Period, at a redemption price per share equal to the sum
of $25,000 plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed for
redemption.
(v) The Fund may not on any date mail a Notice of Redemption pursuant to
paragraph (c) of this Section 11 in respect of a redemption contemplated to be
effected pursuant to this paragraph (a) unless on such date (a) the Fund has
33
available Deposit Securities with maturity or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to Holders of Preferred Shares
by reason of the redemption of such shares on such redemption date and (b) the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and the Discounted Value of Fitch Eligible Assets (if Fitch is
then rating the Preferred Shares) each at least equal to the Preferred Shares
Basic Maintenance Amount, and would at least equal the Preferred Shares Basic
Maintenance Amount immediately subsequent to such redemption if such redemption
were to occur on such date. The Fund shall not be required to have available
Deposit Securities as described in clause (a) of this subparagraph (v) in
respect of a redemption of any Preferred Shares, as a whole or in part,
contemplated to be effected pursuant to paragraph 11(a) where such redemption is
subject to the issuance of shares of any other series of preferred stock of the
Fund. For purposes of determining in clause (b) of the preceding sentence
whether the Discounted Value of Moody's Eligible Assets and Fitch Eligible
Assets at least equals the Preferred Shares Basic Maintenance Amount, the
Moody's Discount Factors applicable to Moody's Eligible Assets and the Fitch
Discount Factor applicable to Fitch Discount Assets shall be determined by
reference, if applicable, to the first Exposure Period longer than the Exposure
Period then applicable to the Fund, as described in the definition of Moody's
Discount Factor and Fitch Discount Factor herein.
(b) MANDATORY REDEMPTION. The Fund shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Directors for redemption, certain of the Preferred Shares, if the Fund
fails to have either Moody's Eligible Assets with a Discounted Value or Fitch
Eligible Assets with a Discounted Value greater than or equal to the Preferred
Shares Basic Maintenance Amount, in accordance with the requirements of the
rating agency or agencies then rating the Preferred Shares, or fails to maintain
the 1940 Act Preferred Shares Asset Coverage and such failure is not cured on or
before the Preferred Shares Basic Maintenance Cure Date or the 1940 Act Cure
Date, as the case may be. The number of Preferred Shares to be redeemed shall be
equal to the lesser of (i) the minimum number of Preferred Shares, together with
all other preferred stock subject to redemption or retirement, the redemption of
which, if deemed to have occurred immediately prior to the opening of business
on the Cure Date, would have resulted in the Fund's having both Moody's Eligible
Assets with a Discounted Value and Fitch Eligible Assets with a Discounted Value
greater than or equal to the Preferred Shares Basic Maintenance Amount or
maintaining the 1940 Act Preferred Shares Asset Coverage, as the case may be, on
such Cure Date (provided, however, that if there is no such minimum number of
Preferred Shares and other preferred stock the redemption or retirement of which
would have had such result, all Preferred Shares and other preferred stock then
outstanding shall be redeemed), and (ii) the maximum number of Preferred Shares,
together with all other shares of preferred stock subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor in accordance with the Charter and applicable law. In determining the
Preferred Shares required to be redeemed in accordance with the foregoing, the
Fund shall allocate the number required to be redeemed to satisfy the Preferred
Shares Basic Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage,
as the case may be, pro rata among Preferred Shares and other preferred stock
(and, then, pro rata among each series of Preferred Shares) subject to
redemption or retirement. The Fund shall effect such redemption on the date
fixed by the Fund therefor, which date shall not be earlier than 20 days (or
such lesser number of days as determined by the Fund with appropriate
consultation with the Auction Agent and Broker-Dealers) nor later than 40 days
after such Cure Date, except that if the Fund does not have funds legally
available for the redemption of all of the required number of Preferred Shares
and other preferred stock that are subject to redemption or retirement or the
Fund otherwise is unable to effect such redemption on or prior to 40 days after
34
such Cure Date, the Fund shall redeem those Preferred Shares and other preferred
stock which it was unable to redeem on the earliest practicable date on which it
is able to effect such redemption. If fewer than all of the outstanding shares
of a series of Preferred Shares are to be redeemed pursuant to this paragraph
(b), the number of shares of such series to be redeemed shall be redeemed pro
rata from the Holders of shares of such series in proportion to the number of
shares of such series held by such Holders or by such other method that the
Board of Directors deems fair and equitable.
(c) NOTICE OF REDEMPTION. If the Fund shall determine or be required to
redeem shares of a series of Preferred Shares pursuant to paragraph (a) or (b)
of this Section 11, it shall mail a Notice of Redemption with respect to such
redemption by first class mail, postage prepaid, to each Holder of the shares of
such series to be redeemed, at such Holder's address as the same appears on the
record books of the Fund on the record date established by the Board of
Directors. Such Notice of Redemption shall be so mailed not less than 20 (or
such lesser number of days as determined by the Fund with appropriate
consultation with the Auction Agent and Broker-Dealers) nor more than 45 days
prior to the date fixed for redemption. Each such Notice of Redemption shall
state: (i) the redemption date; (ii) the number of Preferred Shares to be
redeemed and the series thereof; (iii) the CUSIP number for the shares of such
series; (iv) the Redemption Price; (v) the place or places where the
certificate(s) for such shares (properly endorsed or assigned for transfer, if
the Board of Directors shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of Preferred Shares
held by any Holder are to be redeemed, the Notice of Redemption mailed to such
Holder shall also specify the number of shares of such series to be redeemed
from such Holder. The Fund may provide in any Notice of Redemption relating to a
redemption contemplated to be effected pursuant to paragraph (a) of this Section
11 that such redemption is subject to one or more conditions precedent and that
the Fund shall not be required to effect such redemption unless each such
condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of Preferred Shares (whether or not earned or declared) are
in arrears, no Preferred Shares shall be redeemed unless all outstanding shares
of such series are simultaneously redeemed, and the Fund shall not purchase or
otherwise acquire any shares of such series; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
Holders of all outstanding shares of such series.
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Charter and applicable law, such redemption shall be made as soon as practicable
to the extent such funds become available. Failure to redeem Preferred Shares
shall be deemed to exist at any time after the date specified for redemption in
a Notice of Redemption when the Fund shall have failed, for any reason
whatsoever, to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been mailed;
provided, however, that the foregoing shall not apply in the case of the Fund's
failure to deposit in trust with the Auction Agent the Redemption Price with
35
respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed Preferred Shares
for which a Notice of Redemption has been mailed, dividends may be declared and
paid on Preferred Shares and shall include those Preferred Shares for which a
Notice of Redemption has been mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY FUND. All moneys
paid to the Auction Agent for payment of the Redemption Price of Preferred
Shares called for redemption shall be held in trust by the Auction Agent for the
benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day fixed for redemption thereby, in funds available on that
Business Day in The City of New York, New York) of funds sufficient to redeem
the Preferred Shares that are the subject of such notice, dividends on such
shares shall cease to accumulate and such shares shall no longer be deemed to be
outstanding for any purpose, and all rights of the Holders of the shares so
called for redemption shall cease and terminate, except the right of such
Holders to receive the Redemption Price, but without any interest or other
additional amount, except as provided in subparagraph (e)(i) of Section 2 of
this Part I and in Section 3 of this Part I. Upon surrender in accordance with
the Notice of Redemption of the certificates, if any, for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors shall so
require and the Notice of Redemption shall so state), the Redemption Price shall
be paid by the Auction Agent to the Holders of Preferred Shares subject to
redemption. In the case that fewer than all of the shares represented by any
such certificate are redeemed, a new certificate shall be issued, representing
the unredeemed shares, without cost to the Holder thereof. The Fund shall be
entitled to receive from the Auction Agent, promptly after the date fixed for
redemption, any cash deposited with the Auction Agent in excess of (i) the
aggregate Redemption Price of the Preferred Shares called for redemption on such
date and (ii) all other amounts to which Holders of Preferred Shares called for
redemption may be entitled. Any funds so deposited that are unclaimed at the end
of 90 days from such redemption date shall, to the extent permitted by law, be
repaid to the Fund, after which time the Holders of Preferred Shares so called
for redemption may look only to the Fund for payment of the Redemption Price and
all other amounts to which they may be entitled.
(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption pursuant
to this Section 11, the Fund shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the 1940 Act
and any applicable Maryland law, but shall effect no redemption except in
accordance with the 1940 Act and any applicable Maryland law.
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED. In the case of any
redemption pursuant to this Section 11, only whole Preferred Shares shall be
36
redeemed, and in the event that any provision of the Charter would require
redemption of a fractional share, the Auction Agent shall be authorized to round
up so that only whole shares are redeemed.
(j) MODIFICATION OF REDEMPTION PROCEDURES. Notwithstanding any of the
foregoing provisions of this Section 11, the Fund may modify any or all of the
requirements relating to the Notice of Redemption provided that (i) any such
modification does not materially and adversely affect any holder of the relevant
series of Preferred Shares, and (ii) the Fund receives notice from Moody's (if
Moody's is then rating the Preferred Shares) and Fitch (if Fitch is then rating
the Preferred Shares) that such modification would not impair the ratings
assigned by Moody's and Fitch to the Preferred Shares.
(k) PURCHASE OR OTHER ACQUISITION OF PREFERRED SHARES OUTSIDE OF AN
AUCTION. Except for the provisions described above, nothing contained in these
Articles Supplementary limits any right of the Fund to purchase or otherwise
acquire any shares of each series of Preferred Shares outside of an Auction at
any price, whether higher or lower than the price that would be paid in
connection with an optional or mandatory redemption, so long as, at the time of
any such purchase, there is no arrearage in the payment of dividends on, or the
mandatory or optional redemption price with respect to, any shares of each
series of Preferred Shares for which Notice of Redemption has been given and the
Fund meets the 1940 Act Preferred Shares Asset Coverage and the Preferred Shares
Basic Maintenance Amount Test after giving effect to such purchase or
acquisition on the date thereof. Any shares that are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the Outstanding shares of any series of Preferred Shares are redeemed or
otherwise acquired by the Fund, the Fund shall give notice of such transaction
to the Auction Agent, in accordance with the procedures agreed upon by the Board
of Directors.
12. LIQUIDATION RIGHTS.
(a) RANKING. The shares of a series of Preferred Shares shall rank on a
parity with each other, with shares of any other series of Preferred Shares and
with shares of any other series of preferred stock as to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of Preferred Shares then outstanding shall be entitled to receive and to
be paid out of the assets of the Fund available for distribution to its
Stockholders, before any payment or distribution shall be made on the Common
Shares or on any other class of shares of the Fund ranking junior to the
Preferred Shares upon dissolution, liquidation or winding up, an amount equal to
the Liquidation Preference with respect to such shares plus an amount equal to
all dividends thereon (whether or not earned or declared but excluding interest
thereon) accumulated but unpaid to (but not including) the date of final
distribution in same day funds. After the payment to the Holders of the
Preferred Shares of the full preferential amounts provided for in this paragraph
(b), the Holders of Preferred Shares as such shall have no right or claim to any
of the remaining assets of the Fund.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the Fund
available for distribution to the Holders of Preferred Shares upon any
dissolution, liquidation, or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to paragraph (b) of this Section 12, no
37
such distribution shall be made on account of any shares of any other class or
series of preferred stock ranking on a parity with the Preferred Shares with
respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the Preferred Shares, ratably, in proportion to the full distributable amounts
for which holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with the
Preferred Shares with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, after payment shall have
been made in full to the Holders of the Preferred Shares as provided in
paragraph (b) of this Section 12, but not prior thereto, any other series or
class or classes of shares ranking junior to the Preferred Shares with respect
to the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund shall, subject to the respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the sale of all
or substantially all the property or business of the Fund, nor the merger or
consolidation of the Fund into or with any corporation nor the merger or
consolidation of any corporation into or with the Fund shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary, for the purposes of
this Section 12.
13. FUTURES AND OPTIONS TRANSACTIONS; FORWARD COMMITMENTS.
(a) If Moody's is rating any Preferred Shares, then:
(i) For so long as any Preferred Shares are rated by Moody's, the Fund
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
confirmation from Moody's that engaging in such transactions would not impair
the ratings then assigned to such Preferred Shares by Moody's, except that the
Fund may purchase or sell exchange-traded futures contracts based on the NAREIT
Index (the "Real Estate Index") or United States Treasury Bonds, Bills or Notes
("Treasury Futures"), and purchase, write or sell exchange-traded put options on
such futures contracts and purchase, write or sell exchange-traded call options
on such futures contracts (collectively, "Moody's Hedging Transactions"),
subject to the following limitations:
(A) the Fund will not engage in any Moody's Hedging Transaction based on
the Real Estate Index (other than transactions which terminate a futures
contract or option held by the Fund by the Fund's taking an opposite position
thereto ("Closing Transactions")) which would cause the Fund at the time of such
transaction to own or have sold outstanding futures contracts based on the Real
Estate Index exceeding in number 10% of the average number of daily traded
futures contracts based on the Real Estate Index in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street Journal;
(B) the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Futures (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold
38
(I) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated at least Aa by Moody's (or, if not
rated by Moody's, rated AAA by S&P), or
(II) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 40% of the aggregate Market Value of all
securities of Real Estate Companies constituting Moody's Eligible Assets owned
by the Fund (other than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's,
rated A or AA by S&P) (for purpose of the foregoing clauses (I) and (II), the
Fund shall be deemed to own futures contracts that underlie any outstanding
options written by the Fund);
(C) the Fund will engage in Closing Transactions to close out any
outstanding futures contract based on the Real Estate Index if the amount of
open interest in the Real Estate Index as reported by The Wall Street Journal is
less than 100; and
(D) the Fund will not enter into an option on futures transaction
unless, after giving effect thereto, the Fund would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount.
(ii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Fund is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows:
(A) assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:
(I) Discounted Value and
(II) the exercise price of the call option written by the Fund;
(B) assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;
(C) assets subject to put options written by the Fund shall be valued at
the lesser of:
(I) the exercise price and
(II) the Discounted Value of the subject security.
(iii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) where the Fund is the seller under a futures contract, 10% of the
settlement price of the futures contract;
(D) where the Fund is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract;
39
(E) the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract and does not own the underlying
contract; and
(F) 105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.
(iv) For so long as any Preferred Shares are rated by Moody's, the Fund
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions that are permitted under Section
13(a)(ii) of this Part I), except that the Fund may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitation:
(A) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated P-1, MTG-1
or MIG-1 by Moody's and maturing prior to the date of the Forward Commitment
with a Market Value that equals or exceeds the amount of the Fund's obligations
under any Forward Commitments to which it is from time to time a party or
long-term fixed income securities with a Discounted Value that equals or exceeds
the amount of the Fund's obligations under any Forward Commitment to which it is
from time to time a party; and
(B) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the Preferred Shares
Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund pursuant
to such Forward Commitments shall be zero.
(b) If Fitch is rating any Preferred Shares, then:
(i) For so long as any Preferred Shares are rated by Fitch, the Fund
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
confirmation from Fitch that engaging in such transactions would not impair the
ratings then assigned to such Preferred Shares by Fitch, except that the Fund
may purchase or sell exchange-traded futures contracts based on the Real Estate
Index or Treasury Futures, and purchase, write or sell exchange-traded put
options on such futures contracts and purchase, write or sell exchange-traded
call options on such futures contracts (collectively, "Fitch Hedging
Transactions"), subject to the following limitations:
(A) the Fund will not engage in any Fitch Hedging Transaction based on
the Real Estate Index (other than Closing Transactions) which would cause the
Fund at the time of such transactions to own or have sold outstanding futures
contracts based on the Real Estate Index exceeding in number 10% of the average
number of daily traded futures contracts based on the Real Estate Index in the
30 days preceding the time of effecting such transaction (as reported by The
Wall Street Journal);
(B) the Fund will not engage in any Fitch Hedging Transaction based on
Treasury Futures (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold
40
(I) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 20% of the aggregate Market Value of Fitch
Eligible Assets owned by the Fund and rated at least AA by Fitch (or, if not
rated by Fitch, rated at least Aa by Moody's; or, if not rated by Moody's, rated
at least AA by S&P), or
(II) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 40% of the aggregate Market Value of all Real
Estate Securities constituting Fitch Eligible Assets owned by the Fund (other
than Fitch Eligible Assets already subject to a Fitch Hedging Transaction) and
rated at least BBB by Fitch (or, if not rated by Fitch, rated at least Baa by
Moody's, or, if not rated by Moody's, rated at least A by S&P) (for purposes of
the foregoing clauses (I) and (II), the Fund shall be deemed to own futures
contracts that underlie any outstanding options written by the Fund);
(C) the Fund will engage in Closing Transactions to close any
outstanding futures contract based on the Real Estate Index if the amount of
open interest in the Real Estate Index as reported by The Wall Street Journal is
less than 100; and
(D) the Fund will not enter into an option on future transaction unless,
after giving effect thereto, the Fund would continue to have Fitch Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.
(ii) For purposes of determining whether the Fund has Fitch Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of Fitch Eligible Assets
which the Fund is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows:
(A) assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:
(I) Discounted Value and
(II) the exercise price of the call option written by the Fund;
(B) assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;
(C) assets subject to put options written by the Fund shall be valued at
the lesser of:
(I) the exercise price and
(II) the Discounted Value of the subject security.
(iii) For purposes of determining whether the Fund has Fitch Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Fitch Eligible Assets held by the Fund:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) where the Fund is the seller under a futures contract, 10% of the
settlement price of the futures contract;
41
(D) where the Fund is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract;
(E) the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract and does not own the underlying
contract; and
(F) 105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.
(iv) For so long as any Preferred Shares are rated by Fitch, the Fund
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Fitch Hedging Transactions that are permitted under Section 13(b)(ii)
of this Part I), except that the Fund may enter into Forward Commitments,
subject to the following limitation:
(A) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated F-1 by Fitch
(or, if not rated by Fitch, rated P-1, MTG-1 or MIG-1 by Moody's) and maturing
prior to the date of the Forward Commitment with a Market Value that equals or
exceeds the amount of the Fund's obligations under any Forward Commitments to
which it is from time to time a party or long-term fixed income securities with
a Discounted Value that equals or exceeds the amount of the Fund's obligations
under any Forward Commitment to which it is from time to time a party; and
(B) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Fitch Eligible Assets
with an aggregate Discounted Value equal to or greater than the Preferred Shares
Maintenance Amount.
For purposes of determining whether the Fund has Fitch Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund pursuant
to such Forward Commitments shall be zero.
(c) For so long as any Preferred Shares are outstanding and Moody's or
Fitch or both is rating such shares, the Fund will not, unless it has received
confirmation from Moody's or Fitch or both, as applicable, that any such action
would not impair the rating then assigned by such rating agency to such shares,
engage in any one or more of the following transactions:
(i) borrow money, except that the Fund may, without obtaining the
confirmation described above, borrow money for the purpose of clearing
securities transactions if
(A) the Preferred Shares Basic Maintenance Amount would continue to be
satisfied after giving effect to such borrowing and
(B) such borrowing
(I) is privately arranged with a bank or other person and is evidenced
by a promissory note or other evidence of indebtedness that is not intended to
be publicly distributed or
(II) is for "temporary purposes," is evidenced by a promissory note or
other evidence of indebtedness and is in an amount not exceeding 5% of the value
of the total assets of the Fund at the time of the borrowing (for purposes of
the foregoing, "temporary purposes" means that the borrowing is to be repaid
within sixty days and is not to be extended or renewed);
42
(ii) except as provided in Section 5 of this Part I, issue additional
shares of any series of Preferred Shares or any class or series of shares
ranking prior to or on a parity with Preferred Shares with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Fund, or reissue any Preferred Shares previously purchased
or redeemed by the Fund;
(iii) engage in any short sales of securities;
(iv) lend securities;
(v) merge or consolidate into or with any other corporation or entity;
(vi) change a pricing service (which has been designated by management or
the Board of Directors); and
(vii) enter into reverse repurchase agreements.
In the event any Preferred Shares are outstanding and another
nationally-recognized statistical rating organization is rating such shares in
addition to or in lieu of Moody's or Fitch, the Fund shall comply with any
restrictions imposed by such rating agency, which restrictions may be more
restrictive than those imposed by Moody's or Fitch.
14. MISCELLANEOUS.
(a) AMENDMENT OF ANNEX A TO ADD ADDITIONAL SERIES. Subject to the
provisions of paragraph (c) of Section 10 of this Part I, the Board of Directors
may, by resolution duly adopted, without stockholder approval (except as
otherwise provided by these Articles Supplementary or required by applicable
law), approving an annex hereto, (1) reflect any amendments hereto which the
Board of Directors is entitled to adopt pursuant to the terms of these Articles
Supplementary without shareholder approval or (2) add additional series of
Preferred Shares or additional shares of a series of Preferred Shares (and terms
relating thereto) to the series and Preferred Shares described herein. Each such
additional series and all such additional shares shall be governed by the terms
of these Articles Supplementary.
(b) NO FRACTIONAL SHARES. No fractional Preferred Shares shall be
issued.
(c) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE ACQUIRED
BY THE FUND. Preferred Shares that are redeemed, exchanged or otherwise acquired
by the Fund shall return to the status of authorized and unissued Preferred
Shares.
(d) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by applicable
law, the Board of Directors may interpret or adjust the provisions of these
Articles Supplementary to resolve any inconsistency or ambiguity or to remedy
any formal defect, and may amend these Articles Supplementary with respect to
any series of Preferred Shares prior to the issuance of shares of such series.
(e) HEADINGS NOT DETERMINATIVE. The headings contained in these Articles
Supplementary are for convenience of reference only and shall not affect the
meaning or interpretation of these Articles Supplementary.
(f) NOTICES. All notices or communications, unless otherwise specified
in the Bylaws of the Fund or these Articles Supplementary, shall be sufficiently
given if in writing and delivered in person or by facsimile or mailed by
first-class mail, postage prepaid. Notices delivered pursuant to this Section 14
43
shall be deemed given on the earlier of the date received or the date five days
after which such notice is mailed, except as otherwise provided in these
Articles Supplementary or by the Maryland General Corporation Law for notices of
stockholders' meetings.
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of Preferred Shares:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for shares of such series for the next succeeding
Rate Period of such series;
(B) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell if the Applicable
Rate for shares of such series for the next succeeding Rate Period of shares of
such series shall be less than the rate per annum specified by such Beneficial
Owner; and/or
(C) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard to
the Applicable Rate for shares of such series for the next succeeding Rate
Period of shares of such series; and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive Auction
in a commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, of such series which each
such Potential Beneficial Owner offers to purchase if the Applicable Rate for
shares of such series for the next succeeding Rate Period of shares of such
series shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
44
(A) the number of Outstanding shares of such series specified in such Bid
if the Applicable Rate for shares of such series determined on such Auction Date
shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such series to
be determined as set forth in clause (iv) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in such Bid
if the rate specified therein shall be higher than the Maximum Rate for shares
of such series, or such number or a lesser number of Outstanding shares of such
series to be determined as set forth in clause (iii) of paragraph (b) of Section
4 of this Part II if the rate specified therein shall be higher than the Maximum
Rate for shares of such series and Sufficient Clearing Bids for shares of such
series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
a series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such Sell
Order; or
(B) such number or a lesser number of Outstanding shares of such series as
set forth in clause (iii) of paragraph (b) of Section 4 of this Part II if
Sufficient Clearing Bids for shares of such series do not exist; provided,
however, that a Broker-Dealer that is an Existing Holder with respect to shares
of a series of Preferred Shares shall not be liable to any Person for failing to
sell such shares pursuant to a Sell Order described in the proviso to paragraph
(c) of Section 2 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Fund)
with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker-Dealer's records, such Broker-Dealer believes it
is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of Preferred Shares subject to an Auction on any Auction Date
shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such Auction
Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding shares of such series
as set forth in clause (v) of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such Auction Date shall
be equal to the rate specified therein.
(c) No Order for any number of Preferred Shares other than whole shares
shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for Preferred
Shares of a series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
45
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series that are the subject
of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of
such series:
(A) the number of shares, if any, of such series subject to any Hold
Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid of
such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series, the rate and number of shares of such series specified in such Potential
Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding Preferred
Shares of a series held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding shares of such series held by such Existing Holder and
not subject to Orders submitted to the Auction Agent; provided, however, that if
an Order or Orders covering all of the Outstanding shares of such series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Rate Period consisting
of more than 28 Rate Period Days, the Auction Agent shall deem a Sell Order to
have been submitted by or on behalf of such Existing Holder covering the number
of outstanding shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
Preferred Shares of a series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be considered valid,
but only up to and including in the aggregate the number of Outstanding shares
of such series held by such Existing Holder, and if the number of shares of such
series subject to such Hold Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares subject to each
such Hold Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
46
(ii)(A) any Bid for shares of such series shall be considered valid up to
and including the excess of the number of Outstanding shares of such series held
by such Existing Holder over the number of shares of such series subject to any
Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing Holder
for shares of such series is submitted to the Auction Agent with the same rate
and the number of Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids shall be considered valid up to and
including the amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to cover the
number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding shares of
such series subject to any portion of Bids considered not valid in whole or in
part under this clause (ii) shall be treated as the subject of a Bid for shares
of such series by or on behalf of a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for shares of such series shall be considered valid
up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the sum of shares of such series
subject to valid Hold Orders referred to in clause (i) above and valid Bids
referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of Preferred
Shares is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Preferred Shares, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding Preferred Shares of such
series over the number of Outstanding shares of such series subject to Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
Preferred Shares" of such series);
(ii) from the Submitted Orders for shares of such series whether:
47
(A) the number of Outstanding shares of such series subject to Submitted
Bids of Potential Holders specifying one or more rates equal to or lower than
the Maximum Rate for shares of such series exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to Submitted
Bids of Existing Holders specifying one or more rates higher than the Maximum
Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to Submitted
Sell Orders (in the event such excess or such equality exists (other than
because the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing Bids" for shares of
such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for shares
of such series) which if:
(A)(I) each such Submitted Bid of Existing Holders specifying such lowest
rate and (II) all other such Submitted Bids of Existing Holders specifying lower
rates were rejected, thus entitling such Existing Holders to continue to hold
the shares of such series that are subject to such Submitted Bids; and
(B)(I) each such Submitted Bid of Potential Holders specifying such lowest
rate and (II) all other such Submitted Bids of Potential Holders specifying
lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series
which, when added to the number of Outstanding shares of such series to be
purchased by such Potential Holders described in subclause (B) above, would
equal not less than the Available Preferred Shares of such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise the
Fund of the Maximum Rate for shares of the series of Preferred Shares for which
an Auction is being held on the Auction Date and, based on such determination,
the Applicable Rate for shares of such series for the next succeeding Rate
Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist, the
Applicable Rate for all shares of such series for the next succeeding Rate
Period thereof shall be equal to the Winning Bid Rate for shares of such series
so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not exist
(other than because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), the Applicable Rate for all shares of such series for
the next succeeding Rate Period thereof shall be equal to the Maximum Rate for
shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, the Applicable Rate for all shares of such series for the
next succeeding Rate Period thereof shall be the All Hold Rate.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES.
Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
48
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have been made, all Submitted Sell Orders with respect to shares of such
series shall be accepted and, subject to the provisions of paragraphs (d) and
(e) of this Section 4, Submitted Bids with respect to shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids with respect to shares of such series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares of such
series shall be accepted, thus requiring each such Existing Holder to sell the
Preferred Shares subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be rejected, thus entitling each such Existing Holder to continue
to hold the Preferred Shares subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be rejected, thus entitling such Existing Holder to continue to
hold the Preferred Shares subject to such Submitted Bid, unless the number of
Outstanding Preferred Shares subject to all such Submitted Bids shall be greater
than the number of Preferred Shares ("remaining shares") in the excess of the
Available Preferred Shares of such series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) and (iii) of this paragraph
(a), in which event such Submitted Bid of such Existing Holder shall be rejected
in part, and such Existing Holder shall be entitled to continue to hold
Preferred Shares subject to such Submitted Bid, but only in an amount equal to
the number of Preferred Shares of such series obtained by multiplying the number
of remaining shares by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate number of
Outstanding Preferred Shares subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate for shares
of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of shares of
such series obtained by multiplying the number of shares in the excess of the
Available Preferred Shares of such series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) through (iv) of this
paragraph (a) by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares subject to such Submitted Bid and the denominator
of which shall be the aggregate number of Outstanding Preferred Shares subject
to such Submitted Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have not been made (other than because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such series shall be rejected:
49
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for shares
of such series shall be rejected, thus entitling such Existing Holders to
continue to hold the Preferred Shares subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for shares
of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of such
series and the Submitted Sell Orders for shares of such series of each Existing
Holder shall be accepted, thus entitling each Existing Holder that submitted or
on whose behalf was submitted any such Submitted Bid or Submitted Sell Order to
sell the shares of such series subject to such Submitted Bid or Submitted Sell
Order, but in both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series subject to
Submitted Bids described in clause (ii) of this paragraph (b) by a fraction, the
numerator of which shall be the number of Outstanding shares of such series held
by such Existing Holder subject to such Submitted Bid or Submitted Sell Order
and the denominator of which shall be the aggregate number of Outstanding shares
of such series subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Preferred Shares are
subject to Submitted Hold Orders, all Submitted Bids for shares of such series
shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of a series of Preferred
Shares on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, round up or down the number of Preferred
Shares of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole Preferred Shares.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of a series of Preferred Shares on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, allocate Preferred Shares of such series for purchase
among Potential Holders so that only whole Preferred Shares of such series are
purchased on such Auction Date as a result of such procedures by any Potential
Holder, even if such allocation results in one or more Potential Holders not
purchasing Preferred Shares of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Preferred Shares, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of such
series to be sold by Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, Preferred Shares of such series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a series of Preferred Shares with respect to whom a Broker-Dealer
50
submitted a Bid to the Auction Agent for such shares that was accepted in whole
or in part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial deliveries of Preferred
Shares that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of such series that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders and Potential Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver Preferred Shares of any series
or to pay for Preferred Shares of any series sold or purchased pursuant to the
Auction Procedures or otherwise.
5. RESERVED.
6. AUCTION AGENT.
For so long as any Preferred Shares are outstanding, the Auction Agent,
duly appointed by the Fund to so act, shall be in each case a commercial bank,
trust company or other financial institution independent of the Fund and its
affiliates (which however, may engage or have engaged in business transactions
with the Fund or its affiliates) and at no time shall the Fund or any of its
affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any Preferred Shares are outstanding, the Board of
Directors shall use its best efforts promptly thereafter to appoint another
qualified commercial bank, trust company or financial institution to act as the
Auction Agent. The Auction Agent's registry of Existing Holders of shares of a
series of Preferred Shares shall be conclusive and binding on the
Broker-Dealers. A Broker-Dealer may inquire of the Auction Agent between 3:00
p.m. Eastern time on the Business Day preceding an Auction for shares of a
series of Preferred Shares and 9:30 a.m. Eastern time on the Auction Date for
such Auction to ascertain the number of shares in respect of which the Auction
Agent has determined such Broker-Dealer to be an Existing Holder. If such
Broker-Dealer believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to such Broker-Dealer's inquiry,
such Broker-Dealer may so inform the Auction Agent of that belief. Such
Broker-Dealer shall not, in its capacity as Existing Holder of shares of such
series, submit Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such series
specified by the Auction Agent in response to such Broker-Dealer's inquiry.
7. TRANSFER OF PREFERRED SHARES.
Unless otherwise permitted by the Fund, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of Preferred Shares only in whole
shares and only pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in this Part II or to a Broker-Dealer,
provided, however, that (a) a sale, transfer or other disposition of Preferred
Shares from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this Section 7 if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other Person,
51
if permitted by the Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
8. GLOBAL CERTIFICATE.
Prior to the commencement of a Voting Period, (i) all of the shares of a
series of Preferred Shares outstanding from time to time shall be represented by
one global certificate registered in the name of the Securities Depository or
its nominee and (ii) no registration of transfer of shares of a series of
Preferred Shares shall be made on the books of the Fund to any Person other than
the Securities Depository or its nominee.
9. FORCE MAJEURE.
(a) Notwithstanding anything else set forth herein, if an Auction Date
is not a Business Day because the New York Stock Exchange is closed for business
for more than three consecutive business days due to an act of God, natural
disaster, act of war, civil or military disturbance, act of terrorism, sabotage,
riots or a loss or malfunction of utilities or communications services or the
Auction Agent is not able to conduct an Auction in accordance with the Auction
Procedures for any such reason, then the Auction Rate for the next Dividend
Period shall be the Auction Rate determined on the previous Auction Date.
(b) Notwithstanding anything else set forth herein, if a Dividend
Payment Date is not a Business Day because the New York Stock Exchange is closed
for business for more than three consecutive business days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications services
or the dividend payable on such date cannot be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend Period shall
be the next Business Day on which the Fund and its paying agent, if any, are
able to cause the dividend to be paid using their reasonable best efforts;
(ii) the affected Dividend Period shall end on the day it would have
ended had such event not occurred and the Dividend Payment Date had remained the
scheduled date; and
(iii) the next Dividend Period will begin and end on the dates on
which it would have begun and ended had such event not occurred and the Dividend
Payment Date remained the scheduled date.
52
IN WITNESS WHEREOF, NEUBERGER BERMAN REALTY INCOME FUND INC. has caused
these presents to be signed on June 18, 2003 in its name and on its behalf by
its President or a Vice President and witnessed by its Secretary or Assistant
Secretary and the said officers of the Fund acknowledge said instrument to be
the corporate act of the Fund, and state under penalties of perjury that to the
best of their knowledge, information and belief the matters and facts therein
set forth with respect to authorization and approval are true in all material
respects.
NEUBERGER BERMAN REALTY INCOME FUND INC.
/s/ Frederic B. Soule
----------------------------------------
Name: Frederic B. Soule
Title: Vice President
WITNESS:
/s/ Claudia A. Brandon
----------------------------
Name: Claudia A. Brandon
Title: Secretary
FORM OF ARTICLES SUPPLEMENTARY OF
NEUBERGER BERMAN REALTY INCOME FUND INC.
NEUBERGER BERMAN REALTY INCOME FUND INC., a Maryland corporation,
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in the Board of
Directors of the Fund by Article Sixth of the charter of the Fund, the Board of
Directors has, by resolution, reclassified 500 authorized and unissued shares of
common stock of the Fund as auction preferred shares, Series A, 500 authorized
and unissued shares of common stock of the Fund as auction preferred shares,
Series B, 500 authorized and unissued shares of common stock of the Fund as
auction preferred shares, Series C and 500 authorized and unissued shares of
common stock of the Fund as auction preferred shares, Series D, par value $.0001
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared),
thereby increasing the total number of authorized auction preferred shares,
Series A from 3,000 to 3,500, auction preferred shares, Series B from 3,000 to
3,500, auction preferred shares, Series C from 3,000 to 3,500 and auction
preferred shares, Series D from 3,000 to 3,500.
SECOND: All of the authorized auction preferred shares, Series A shall
be subject in all respects to the preferences, conversion or other rights,
voting powers, restrictions, qualifications, and terms and conditions of
redemption applicable to auction preferred shares, Series A set forth in the
Fund's charter; provided, however, that for the additional 500 shares of auction
preferred shares, Series A classified hereby the Initial Rate Period shall be 8
days and the Applicable Rate for the Initial Rate Period shall be determined
pursuant to a methodology set forth in a resolution of the Board of Directors.
THIRD: All of the authorized auction preferred shares, Series B shall
be subject in all respects to the preferences, conversion or other rights,
voting powers, restrictions, qualifications, and terms and conditions of
redemption applicable to auction preferred shares, Series B set forth in the
Fund's charter; provided, however, that for the additional 500 shares of auction
preferred shares, Series B classified hereby the Initial Rate Period shall be 9
days and the Applicable Rate for the Initial Rate Period shall be determined
pursuant to a methodology set forth in a resolution of the Board of Directors.
FOURTH: All of the authorized auction preferred shares, Series C shall
be subject in all respects to the preferences, conversion or other rights,
voting powers, restrictions, qualifications, and terms and conditions of
redemption applicable to auction preferred shares, Series C set forth in the
Fund's charter; provided, however, that for the additional 500 shares of auction
preferred shares, Series C classified hereby the Initial Rate Period shall be 10
days and the Applicable Rate for the Initial Rate Period shall be determined
pursuant to a methodology set forth in a resolution of the Board of Directors.
FIFTH: All of the authorized auction preferred shares, Series D shall
be subject in all respects to the preferences, conversion or other rights,
voting powers, restrictions, qualifications, and terms and conditions of
redemption applicable to auction preferred shares, Series D set forth in the
Fund's charter; provided, however, that for the additional 500 shares of auction
preferred shares, Series D classified hereby the Initial Rate Period shall be 13
days and the Applicable Rate for the Initial Rate Period shall be determined
pursuant to a methodology set forth in a resolution of the Board of Directors.
IN WITNESS WHEREOF, Neuberger Berman Realty Income Fund Inc. has caused
these presents to be signed on October ___, 2003 in its name and on its behalf
by its President or a Vice President and witnessed by its Secretary or Assistant
Secretary.
NEUBERGER BERMAN REALTY INCOME FUND INC.
By: _______________________________
Name:
Title:
WITNESS:
----------------------------
Name:
Title:
The undersigned President or a Vice President of Neuberger Berman
Realty Income Fund Inc., who executed on behalf of the Fund the foregoing
Articles Supplementary of which this Certificate is made a part, hereby
acknowledges in the name and on behalf of said Fund the foregoing Articles
Supplementary to be the corporate act of the Fund, and states under penalties of
perjury that to the best of his knowledge, information and belief the matters
and facts set forth therein with respect to the authorization and approval
thereof are true in all material respects.
-------------------------------
Name:
Title:
APPENDIX B
RATINGS OF CORPORATE BONDS AND COMMERCIAL PAPER
S&P CORPORATE BOND RATINGS:
--------------------------
AAA - Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest-rated issues only in a small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher-rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to pay interest and repay
principal for bonds in this category than for bonds in higher-rated categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Bonds rated BB are less vulnerable to nonpayment than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B - Bonds rated B are more vulnerable to nonpayment than obligations rated
`BB,' but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC - Bonds rated CCC are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - Bonds rated CC are currently highly vulnerable to nonpayment.
B-1
C - Bonds rated C may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued. A subordinated debt or preferred stock
obligation rated C is currently highly vulnerable to nonpayment. A C rating also
will be assigned to a preferred stock issue in arrears on dividends or sinking
fund payments but that is currently paying.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) Minus (-) - The ratings above may be modified by the addition of
a plus or minus sign to show relative standing within the major categories.
S&P COMMERCIAL PAPER RATINGS:
----------------------------
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, it is somewhat more susceptible to the adverse effects of
changes in circumstance and economic conditions than issues in the highest
rating category.
A-3 - Issues carrying this designation have adequate capacity for timely
payment. However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity for timely payment.
B - Issues with this rating are regarded as having only speculative
capacity for timely payment.
C - This rating is assigned to short-term debt obligations with high
vulnerability to nonpayment.
D - Debt with this rating is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless it is believed that
such payments will be made during such grace period.
MOODY'S CORPORATE BOND RATINGS:
------------------------------
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
B-2
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations that are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
MODIFIERS - Moody's may apply numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa to Caa. The modifier 1 indicates that the
issue ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
B-3
MOODY'S COMMERCIAL PAPER RATINGS:
--------------------------------
Prime-1 - Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
Prime-1 repayment ability will often be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 - Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations. This will
often be evidenced by many of the characteristics cited above, but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 - Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt-protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Note: A Moody's commercial paper rating may also be assigned as an
evaluation of the demand feature of a short-term or long-term security with a
put option.
FITCH INVESTMENT GRADE BOND RATINGS
-----------------------------------
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is highly unlikely to be affected by foreseeable events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated `AAA'. Because bonds rated
in the `AAA' and `AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated `F1+'.
B-4
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings. This is the
lowest investment grade category.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
Withdrawn: A rating will be withdrawn when an issue matures, is called, or
refinanced, or when Fitch Ratings deems the amount of information available to
be inadequate for rating purposes.
Rating Watch: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raised or lowered. Rating Watch is typically resolved over a relatively short
period.
FITCH HIGH YIELD BOND RATINGS
-----------------------------
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. A significant credit risk is
present. While bonds in this class are currently meeting debt service
requirements, the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and is contingent upon
a sustained, favorable business and economic environment.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations is solely reliant
upon sustained, favorable business or economic developments.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
B-5
DDD, DD, and D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. `DDD' represents the highest potential for recovery on these bonds, and
`D' represents the lowest potential for recovery.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the `DDD,' `DD,' or `D' categories.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
FITCH INVESTMENT GRADE SHORT-TERM RATINGS
-----------------------------------------
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
`F1+'.
F2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned `F1+' and `F1' ratings.
F3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated below
investment grade.
B: Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
C: High Default Risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D: Default. Issues assigned this rating are in actual or imminent payment
default.
* * * * * * * *
B-6
NOTES: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. The Fund is dependent on the Investment Adviser's
judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
B-7