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_________________________________________________________________
NEUBERGER & BERMAN SOCIALLY RESPONSIVE FUND AND PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 15, 1995
(as amended APRIL 8, 1996)
A No-Load Mutual Fund
605 Third Avenue, 2nd Floor, New York, NY 10158-0180
Toll-Free 800-877-9700
_________________________________________________________________
NEUBERGER & BERMAN SOCIALLY RESPONSIVE FUND ("FUND"), A
SERIES OF NEUBERGER & BERMAN EQUITY FUNDS ("TRUST"), IS A NO-LOAD MUTUAL
FUND THAT OFFERS SHARES PURSUANT TO A PROSPECTUS DATED DECEMBER 15, 1995
(AS AMENDED APRIL 1, 1996). THE FUND INVESTS ALL OF ITS NET INVESTABLE
ASSETS IN NEUBERGER & BERMAN SOCIALLY RESPONSIVE PORTFOLIO ("PORTFOLIO").
The Fund's Prospectus provides basic information that an
investor should know before investing. A copy of the Prospectus may be
obtained, without charge, from Neuberger & Berman Management Incorporated
("N&B Management"), 605 Third Avenue, 2nd Floor, New York, NY 10158-0180,
or by calling 800-877-9700.
This Statement of Additional Information ("SAI") is not a
prospectus and should be read in conjunction with 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 or its distributor. The Prospectus and
this SAI do not constitute an offering by the Fund or its distributor in
any jurisdiction in which such offering may not lawfully be made.
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Table of Contents
Page
INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Policies and Limitations . . . . . . . . . . . . 1
Janet W. Prindle, Portfolio Manager of the Portfolio . . . . 5
An Interview With Janet Prindle . . . . . . . . . . . . . . . 5
Background Information on Socially Responsive Investing . . 7
The Socially Responsive Database . . . . . . . . . . . . . . 8
Implementation of Social Policy . . . . . . . . . . . . . . 10
Additional Investment Information . . . . . . . . . . . . . 10
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 24
Total Return Computations . . . . . . . . . . . . . . . . . 25
Comparative Information . . . . . . . . . . . . . . . . . . 25
Other Performance Information . . . . . . . . . . . . . . . 26
CERTAIN RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . 27
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 27
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES . . . . . . . . . . 34
Investment Manager and Administrator . . . . . . . . . . . . 34
Sub-Adviser . . . . . . . . . . . . . . . . . . . . . . . . 37
Investment Companies Managed . . . . . . . . . . . . . . . . 38
Management and Control of N&B Management . . . . . . . . . . 40
DISTRIBUTION ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . 41
ADDITIONAL PURCHASE INFORMATION . . . . . . . . . . . . . . . . . . . 41
Automatic Investing and Dollar Cost Averaging . . . . . . . 41
ADDITIONAL EXCHANGE INFORMATION . . . . . . . . . . . . . . . . . . . 42
ADDITIONAL REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . 46
Suspension of Redemptions . . . . . . . . . . . . . . . . . 46
Redemptions in Kind . . . . . . . . . . . . . . . . . . . . 46
DIVIDENDS AND OTHER DISTRIBUTIONS . . . . . . . . . . . . . . . . . . 47
ADDITIONAL TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . 48
Taxation of the Fund . . . . . . . . . . . . . . . . . . . . 48
Taxation of the Portfolio . . . . . . . . . . . . . . . . . 49
Taxation of the Fund's Shareholders . . . . . . . . . . . . 52
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 52
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . 57
REPORTS TO SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 57
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . 57
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INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 57
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . 57
REGISTRATION STATEMENT . . . . . . . . . . . . . . . . . . . . . . . 58
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 59
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
RATINGS OF CORPORATE BONDS AND COMMERCIAL PAPER . . . . . . 60
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
THE ART OF INVESTMENT: A CONVERSATION WITH ROY NEUBERGER . . 63
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INVESTMENT INFORMATION
The Fund is a separate series of the Trust, a Delaware
business trust that is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company. The Fund
seeks its investment objective by investing all of its net investable
assets in the Portfolio, which is a series of Equity Managers Trust ("Man-
agers Trust") that has an investment objective identical to, and a name
similar to, that of the Fund. The Portfolio, in turn, invests in accord-
ance with an investment objective, policies, and limitations identical to
those of the Fund. (The Trust and Managers Trust, which is an open-end
management investment company managed by N&B Management, are together
referred to below as the "Trusts.")
The following information supplements the discussion in
the Prospectus of the investment objective, policies, and limitations of
the Fund and Portfolio. The investment objective and, unless otherwise
specified, the investment policies and limitations of the Fund and
Portfolio are not fundamental. Although any investment policy or
limitation that is not fundamental may be changed by the trustees of the
Trust ("Fund Trustees") or of Managers Trust ("Portfolio Trustees")
without shareholder approval, the Fund intends to notify its shareholders
before changing its investment objective or implementing any material
change in any non-fundamental policy or limitation. The fundamental
investment policies and limitations of the Fund or the Portfolio may not
be changed without the approval of the lesser of (1) 67% of the total
units of beneficial interest ("shares") of the Fund or Portfolio
represented at a meeting at which more than 50% of the outstanding Fund or
Portfolio shares are represented or (2) a majority of the outstanding
shares of the Fund or Portfolio. This vote is required by the Investment
Company Act of 1940 ("1940 Act") and is referred to in this SAI as a "1940
Act majority vote." Whenever the Fund is called upon to vote on a change
in a fundamental investment policy or limitation of the Portfolio, the
Fund casts its votes thereon in proportion to the votes of its
shareholders at a meeting thereof called for that purpose.
Investment Policies and Limitations
The Fund has the following fundamental investment policy,
to enable it to invest in the Portfolio:
Notwithstanding any other investment policy of the Fund,
the Fund may invest all of its net investable assets
(cash, securities, and receivables relating to
securities) in an open-end management investment company
having substantially the same investment objective,
policies, and limitations as the Fund.
All other fundamental investment policies and limitations
and the non-fundamental investment policies and limitations of the Fund
and the Portfolio are identical. Therefore, although the following dis-
cusses the investment policies and limitations of the Portfolio, it
applies equally to the Fund.
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Except for the limitation on borrowing and the limitation
on ownership of portfolio securities by officers and trustees, any
investment policy or limitation that involves a maximum percentage of
securities or assets will not be considered to be violated unless the
percentage limitation is exceeded immediately after, and because of, a
transaction by the Portfolio.
The Portfolio's fundamental investment policies and
limitations are as follows:
1. BORROWING. The Portfolio may not borrow money,
except that the Portfolio may (i) borrow money from banks for temporary or
emergency purposes and not for leveraging or investment and (ii) enter
into reverse repurchase agreements for any purpose; provided that (i) and
(ii) in combination do not exceed 33-1/3% of the value of its total assets
(including the amount borrowed) less liabilities (other than borrowings).
If at any time borrowings exceed 33-1/3% of the value of the Portfolio's
total assets, the Portfolio will reduce its borrowings within three days
(excluding Sundays and holidays) to the extent necessary to comply with
the 33-1/3% limitation.
2. COMMODITIES. The Portfolio 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 Portfolio 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.
3. DIVERSIFICATION. The Portfolio may not, with
respect to 75% of the value of its total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities ("U.S. Government
and Agency Securities")) if, as a result, (i) more than 5% of the value of
the Portfolio's total assets would be invested in the securities of that
issuer or (ii) the Portfolio would hold more than 10% of the outstanding
voting securities of that issuer.
4. INDUSTRY CONCENTRATION. The Portfolio 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. This
limitation does not apply to U.S. Government and Agency Securities.
5. LENDING. The Portfolio 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 objective, policies, and limitations, (i)
through the purchase of a portion of an issue of debt securities or (ii)
by engaging in repurchase agreements.
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6. REAL ESTATE. The Portfolio may not purchase real
estate unless acquired as a result of the ownership of securities or
instruments, but this restriction shall not prohibit the Portfolio from
purchasing securities issued by entities or investment vehicles that own
or deal in real estate or interests therein or instruments secured by real
estate or interests therein.
7. SENIOR SECURITIES. The Portfolio may not issue
senior securities, except as permitted under the 1940 Act.
8. UNDERWRITING. The Portfolio may not underwrite
securities of other issuers, except to the extent that the Portfolio, in
disposing of portfolio securities, may be deemed to be an underwriter
within the meaning of the Securities Act of 1933 ("1933 Act").
The following non-fundamental investment policies and
limitations apply to the portfolio:
1. BORROWING. The Portfolio may not purchase secu-
rities if outstanding borrowings, including any reverse repurchase agree-
ments, exceed 5% of its total assets.
2. LENDING. Except for the purchase of debt
securities and engaging in repurchase agreements, the Portfolio may not
make any loans other than securities loans.
3. INVESTMENTS IN OTHER INVESTMENT COMPANIES. The
Portfolio may not purchase securities of other investment companies,
except to the extent permitted by the 1940 Act and in the open market at
no more than customary brokerage commission rates. This limitation does
not apply to securities received or acquired as dividends, through offers
of exchange, or as a result of a reorganization, consolidation, or merger.
4. MARGIN TRANSACTIONS. The Portfolio may not
purchase securities on margin from brokers or other lenders, except that
the Portfolio 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 futures contracts shall
not constitute the purchase of securities on margin and shall not be
deemed to violate the foregoing limitation.
5. SHORT SALES. The Portfolio may not sell
securities short unless it owns, or has the right to obtain without
payment of additional consideration, securities equivalent in kind and
amount to the securities sold. Transactions in forward contracts, futures
contracts, and options shall not constitute selling securities short.
6. OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND
TRUSTEES. The Portfolio may not purchase or retain the securities of any
issuer if, to the knowledge of N&B Management, those officers and trustees
of Managers Trust and officers and directors of N&B Management who each
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owns individually more than 1/2 of 1% of the outstanding securities of
such issuer, together own more than 5% of such securities.
7. UNSEASONED ISSUERS. The Portfolio may not
purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 5% of the Portfolio's total assets
would be invested in the securities of business enterprises that,
including predecessors, have a record of less than three years of
continuous operation.
8. ILLIQUID SECURITIES. The Portfolio may not
purchase any security if, as a result, more than 10% of its net assets
would be invested in illiquid securities. Illiquid securities include
securities that cannot be sold within seven days in the ordinary course of
business for approximately the amount at which the Portfolio has valued
the securities, such as repurchase agreements maturing in more than seven
days.
9. FOREIGN SECURITIES. The Portfolio may not invest
more than 10% of the value of its total assets in securities of foreign
issuers, provided that this limitation shall not apply to foreign
securities denominated in U.S. dollars, including American Depositary
Receipts ("ADRs").
10. OIL AND GAS PROGRAMS. The Portfolio may not
invest in participations or other direct interests in oil, gas, or other
mineral leases or exploration or development programs, but the Portfolio
may purchase securities of companies that own interests in any of the
foregoing.
11. REAL ESTATE. The Portfolio may not invest in real
estate limited partnerships.
12. WARRANTS. The Portfolio does not intend to
invest in warrants (but may hold warrants obtained in units or attached to
securities).
JANET W. PRINDLE, PORTFOLIO MANAGER OF THE PORTFOLIO
----------------------------------------------------
How does Janet Prindle manage the Portfolio? "We select
securities through a two-phase detection process. The first is financial.
We analyze a universe of companies according to N&B Management's value-
oriented philosophy, looking for stocks which are undervalued for any
number of reasons. We focus on financial fundamentals including balance
sheet ratios and cash flow analysis, and we meet with company management
in an effort to understand how those unrecognized values might be realized
in the market. The second part of the process is social screening. Our
social research is based on the same kind of philosophy that governs our
financial approach: we believe that first-hand knowledge and experience
are our most important tools. Utilizing a proprietary database, we do
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careful, in-depth tracking and we analyze a large number of companies on
some eighty issues in six broad social categories. We use a wide variety
of sources to determine company practices and policies in these areas, and
we analyze performance in light of our knowledge of the issues and of the
best practices in each industry. We understand that, for many issues and
in many industries, absolute standards are elusive and often
counterproductive. Thus, in addition to quantitative measurements, we
place value on such indicators as management commitment, progress,
direction, and industry leadership."
AN INTERVIEW WITH JANET PRINDLE
-------------------------------
Q: FIRST THINGS FIRST. HOW DO YOU BEGIN YOUR STOCK SELECTION
PROCESS?
A: Our first question is always: On financial grounds alone, is a
company a smart investment? For a company's stock to meet our financial
test, it must pass a number of hurdles.
We look for bargains, just like the portfolio managers of other
Neuberger & Berman Equity Funds. More specifically, we search for
companies that we believe have terrific products, excellent customer
service, and solid balance sheets -- but because they may have missed
quarterly earnings expectations by a few pennies, because their sectors
are currently out of favor, because Wall Street overreacted to a temporary
setback, or because the company's merits aren't widely known, their stocks
are selling at a discount.
While we look at the stock's fundamentals carefully, that's not
all we examine. We meet an awful lot of CEOs and CFOs. Top officers of
over 400 companies visit Neuberger & Berman each year, and I'm also
frequently on the road visiting dozens of corporations. From the Fund's
inception, we've met with every company we own.
When I'm face to face with a CEO, I'm searching for answers to
two crucial questions: "Does the company have a vision of where it wants
to go?" and "Can the management team make it happen?" I've analyzed
companies for over three decades, and I always look for companies that
have both clear strategies and management talent.
Q: WHEN YOU EVALUATE A COMPANY'S BALANCE SHEET, WHAT MATTERS THE
MOST TO YOU?
A: Definitely a company's "free cash flow." Compare it to your
household's discretionary income -- the money you have left over each
month after you pay off your monthly debt and other expenses. With ample
free cash flow, a company can do any number of things. It can buy back
its stock. Make important acquisitions. Expand its research &
development spending. Or increase its dividend payments.
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When a company generates lots of excess cash flow, it has growth
capital at its disposal. It can invest for higher profits down the line
and improve shareholder value. Determining exactly how a company intends
to spend its excess cash is an entirely different matter -- and that's
where the information learned in our company meetings come in. Still,
you've got to have the extra cash in the first place. Which is why we pay
so much attention to it.
Q: SO YOU TAKE A HARD LOOK AT A COMPANY'S BALANCE SHEET AND ITS
MANAGEMENT. AFTER A COMPANY PASSES YOUR FINANCIAL TEST, WHAT DO YOU DO
NEXT?
A: After we're convinced of a company's merits on financial grounds
alone, we review its record as a corporate citizen. In particular, we
look for evidence of leadership in three key areas: concern for the
environment, workplace diversity, and enlightened employment practices.
It should be clear that our social screening always takes place
after we search far and wide for what we believe are the best investment
opportunities available. This is a crucial point, and I'll use an analogy
to explain it. Let's assume you're looking to fill a vital position in
your company. What you'd pay attention to first is the candidate's
competence: Can he or she do the job? So after interviewing a number of
candidates, you'd narrow your list to those that are highly qualified. To
choose from this smaller group, you might look at the candidate's
personality: Can he or she get along with everyone in your group?
Obviously, you wouldn't hire an unqualified person simply because
he or she is likable. What you'd probably do is give the job to a highly
qualified person who is also compatible with your group.
Now, let's turn to the companies that do make our financial cuts.
How do we decide whether they meet our social criteria? Once again, our
regular meetings with CEOs are key. We look for top management's support
of programs that put more women and minorities in the pipeline to be
future officers and board members; that minimize emissions, reduce waste,
conserve energy, and protect natural resources; and that enable employees
to balance work and family life with benefits such as flextime and
generous maternal and paternal leave.
We realize that companies are not all good or all bad. Instead
of looking for ethical perfection, we analyze how a company responds to
troublesome problems. If a company is cited for breaking a pollution law,
we evaluate its reaction. We also ask: is it the first time? Do its top
executives have a plan for making sure it doesn't happen again -- and how
committed are they?
If we're satisfied with the answers, a company makes it into our
portfolio. When all is said and done, we invest in companies that have
diverse work forces, strong CEOs, tough environmental standards, and
terrific balance sheets. In our judgment, financially strong companies
that are also good corporate citizens are more likely to enjoy a
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competitive advantage. These days, more and more people won't buy a
product unless they know it's environmentally friendly. In a similar
vein, companies that treat their workers well may be more productive and
profitable.
Q: WHY HAVE INVESTORS BEEN ATTRACTED TO THE FUND?
A: Our shareholders are looking to invest for the future in more
ways than one. While they care deeply about their own financial futures,
they're equally passionate about the world they leave to later
generations. They want to be able to meet their college bills and leave a
world where the air is a little cleaner and where the doors to the
executive suite are a little more open.
BACKGROUND INFORMATION ON SOCIALLY RESPONSIVE INVESTING
-------------------------------------------------------
In an era when many people are concerned about the
relationship between business and society, socially responsive investing
("SRI") is a mechanism for assuring that investors' social values are
reflected in their investment decisions. As such, SRI is a direct
descendent of the successful effort begun in the early 1970's to encourage
companies to divest their South African operations and subscribe to the
Sullivan Principles. Today, a growing number of individuals and
institutions are applying similar strategies to a broad range of problems.
Although there are many strategies available to the
socially responsive investor, including proxy activism, below-market loans
to community projects, and venture capital, the SRI strategies used by the
Portfolio generally fall into two categories:
AVOIDANCE INVESTING. Most socially responsive investors
seek to avoid holding securities of companies whose products or policies
are seen as being at odds with the social good. The most common
exclusions historically have involved tobacco companies and weapons
manufacturers.
LEADERSHIP INVESTING. A growing number of investors
actively look for companies with progressive programs that are exemplary
or companies which make it their business to try to solve some of the
problems of today's society.
The marriage of social and financial objectives would not
have surprised Adam Smith who was, first and foremost, a moral
philosopher. The Wealth of Nations is firmly rooted in the Enlightenment
conviction that the purpose of capital is the social good and the related
belief that idle capital is both wasteful and unethical. But, what very
likely would have surprised Smith is the sheer complexity of the social
issues we face today and the diversity of our attitudes toward the social
good. War and peace, race and gender, the distribution of wealth, and the
conservation of natural resources -- the social agenda is long and
compelling. It is also something about which reasonable people differ.
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What should society's priorities be? What can and should be done about
them? And what is the role of business in addressing them? Since
corporations are on the front lines of so many key issues in today's
world, a growing number of investors feel that a corporation's role cannot
be ignored. This is true of some of the most important issues of the day
such as equal opportunity and the environment.
THE SOCIALLY RESPONSIVE DATABASE
Neuberger & Berman, L.P. ("Neuberger & Berman"), the
Portfolio's sub-adviser, maintains a proprietary database of information
about the social impact of the companies it follows. N&B Management uses
the database to evaluate social issues after it deems a stock acceptable
from a financial standpoint for acquisition by the Portfolio. More and
more frequently, however, N&B Management is finding that, by monitoring
social issues, it gains insight into the financial well-being of a company
because of a convergence of social and financial criteria on a company's
bottom line. This is especially evident in the areas of product quality
and marketing, workforce diversity, and the environment. The aim of the
database is to be as accurate, comprehensive, and flexible as possible,
given that much of the information concerning corporate responsibility
comes from subjective sources. Information for the database is gathered
by Neuberger & Berman in many categories and then analyzed by N&B
Management in the following six categories of corporate responsibility:
WORKPLACE DIVERSITY AND EMPLOYMENT. N&B Management looks
for companies that show leadership in areas such as employee training and
promotion policies and benefits, such as flextime, generous profit
sharing, and parental leave. N&B Management looks for active programs to
promote women and minorities and takes into account their representation
among the officers and members of an issuer's board of directors. As a
basis for exclusion, N&B Management looks for Equal Employment Opportunity
Act infractions and Occupational Safety and Health Act violations;
examines each case in terms of severity, frequency, and time elapsed since
the incident; and considers actions taken by the company since the
violation. N&B Management also monitors companies' progress and attitudes
toward these issues.
ENVIRONMENT. A company's impact on the environment
depends largely on the industry. Therefore, N&B Management examines a
company's environmental record vis-a-vis those of its peers in the
industry. All companies operating in an industry with inherently high
environmental risks are likely to have had problems in such areas as toxic
chemical emissions, federal and state fines, and Superfund sites. For
these companies, N&B Management examines their problems in terms of
severity, frequency, and elapsed time. N&B Management then balances the
record against whatever leadership the company may have demonstrated in
terms of environmental policies, procedures, and practices. N&B
Management defines an environmental leadership company as one that puts
into place strong affirmative programs to minimize emissions, promote
safety, reduce waste at the source, insure energy conservation, protect
natural resources, and incorporate recycling into its processes and
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products. N&B Management looks for the commitment and active involvement
of senior management in all these areas. Several major manufacturers
which still produce substantial amounts of pollution are among the leaders
in developing outstanding waste source reduction and remediation programs.
PRODUCT. N&B Management considers company announcements,
press reports, and public interest publications relating to the health,
safety, quality, labeling, advertising, and promotion of both consumer and
industrial products. N&B Management takes note of companies with a strong
commitment to quality and with marketing practices which are ethical and
consumer-friendly. N&B Management pays particular attention to companies
whose products and services promote progressive solutions to social
problems.
PUBLIC HEALTH. N&B Management measures the participation
of companies in such industries and markets as alcohol, tobacco, gambling
and nuclear power. N&B Management also considers the impact of products
and marketing activities related to those products on nutritional and
other health concerns, both domestically and in foreign markets.
WEAPONS. N&B Management keeps track of domestic military
sales and, whenever possible, foreign military sales and categorizes them
as nuclear weapons related, other weapons related, and non-weapon military
supplies, such as micro-chip manufacturers and companies that make
uniforms for military personnel.
CORPORATE CITIZENSHIP. N&B Management gathers
information about a company's participation in community affairs, its
policies with respect to charitable contributions, and its support of
education and the arts. N&B Management looks for companies with a focus,
dealing with issues not just by making financial contributions, but also
by asking the questions: What can we do to help? What do we have to
offer? Volunteerism, high-school mentoring programs, scholarships and
grants, and in-kind donations to specific groups are just a few ways that
companies have responded to these questions.
IMPLEMENTATION OF SOCIAL POLICY
Companies deemed acceptable by N&B Management from a
financial standpoint are analyzed using Neuberger & Berman's database.
The companies are then evaluated by the portfolio managers to determine if
the companies' policies, practices, products, and services withstand
scrutiny in the following major areas of concern: the environment and
workplace diversity and employment. Companies are then further evaluated
to determine their track record in issues and areas of concern such as
public health, weapons, product, and corporate citizenship.
The issues and areas of concern that are tracked lend
themselves to objective analysis in varying degrees. Few, however, can be
resolved entirely on the basis of scientifically demonstrable facts.
Moreover, a substantial amount of important information comes from sources
that do not purport to be disinterested. Thus, the quality and usefulness
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of the information in the database depend upon Neuberger & Berman's
ability to tap a wide variety of sources and on the experience and
judgment of the people at N&B Management who interpret the information.
In applying the information in the database to stock
selection for the Portfolio, N&B Management considers several factors.
N&B Management examines the severity and frequency of various infractions,
as well as the time elapsed since their occurrence. N&B Management also
takes into account any remedial action which has been taken by the company
relating to these infractions. N&B Management notes any quality
innovations made by the company in its effort to create positive change
and looks at the company's overall social trend.
ADDITIONAL INVESTMENT INFORMATION
The Portfolio may make the following investments, among
others. It may not buy all of the types of securities or use all of the
investment techniques that are described.
REPURCHASE AGREEMENTS. Repurchase agreements are
agreements under which the Portfolio 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 Portfolio at a higher price
on a designated future date. Repurchase agreements generally are for a
short period of time, usually less than a week. The Portfolio may not
enter into a repurchase agreement with a maturity of more than seven days
if, as a result, more than 10% of the value of its net assets would then
be invested in such repurchase agreements and other illiquid securities.
The Portfolio may enter into a repurchase agreement only if (1) the
underlying securities are of the type that the Portfolio'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 value of the repurchase agreement, and
(3) payment for the underlying securities is made only upon satisfactory
evidence that the securities are being held for the Portfolio's account by
its custodian or a bank acting as the Portfolio's agent.
SECURITIES LOANS. In order to realize income, the
Portfolio may lend portfolio securities with a value not exceeding 33-1/3%
of its total assets to banks, brokerage firms, or institutional investors
judged creditworthy by N&B Management. Borrowers are required
continuously to secure their obligations to return securities on loan from
the Portfolio by depositing collateral in a form determined to be
satisfactory by the Portfolio Trustees. 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. N&B
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.
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RESTRICTED SECURITIES AND RULE 144A SECURITIES. The
Portfolio 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 or, if they are unregistered, 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 further 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 Portfolio qualify under
Rule 144A, and an institutional market develops for those securities, the
Portfolio likely will be able to dispose of the securities without regis-
tering 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 Portfolio's
illiquidity. N&B Management, acting under guidelines established by the
Portfolio Trustees, may determine that certain securities qualified for
trading under Rule 144A are liquid. Foreign securities that can be freely
sold in the markets in which they are principally traded are not
considered to be restricted. 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 Portfolio 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 Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market
conditions were to develop, the Portfolio might obtain a less favorable
price than prevailed when it decided to sell. To the extent privately
placed securities, including Rule 144A securities, are illiquid, purchases
thereof will be subject to the Portfolio's 10% limit on investments in
illiquid securities. Restricted securities for which no market exists are
priced at fair value as determined in accordance with procedures approved
and periodically reviewed by the Portfolio Trustees.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase
agreement, the Portfolio 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; these agreements are considered
borrowings for purposes of the Portfolio's investment policies and
limitations concerning borrowings. While a reverse repurchase agreement
is outstanding, the Portfolio will maintain with its custodian in a
segregated account cash, U.S. Government or Agency Securities, or other
liquid, high-grade debt securities, marked to market daily, in an amount
at least equal to the Portfolio's obligations under the agreement. There
is a risk that the contra-party to a reverse repurchase agreement will be
unable or unwilling to complete the transaction as scheduled, which may
result in losses to the Portfolio.
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FOREIGN SECURITIES. The Portfolio may invest in U.S.
dollar-denominated securities issued by foreign issuers (including banks,
governments, and quasi-governmental organizations) and foreign branches of
U.S. banks, including negotiable certificates of deposit ("CDs"), bankers'
acceptances and commercial paper. These investments are subject to the
Portfolio's quality standards. 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
and market risks normally associated with domestic securities. These
additional risks include the possibility of adverse political and economic
developments (including political instability) 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 standards or the application of
standards that are different or less stringent than those applied in the
United States.
The Portfolio 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 or their subdivisions, agencies, and instrumentali-
ties, international agencies, and supranational entities. Investing in
foreign currency denominated securities includes the special risks asso-
ciated with investing in non-U.S. issuers described in the preceding
paragraph and the additional risks of (1) adverse changes in foreign
exchange rates, (2) nationalization, expropriation, or confiscatory taxa-
tion, (3) adverse changes in investment or exchange control regulations
(which could prevent cash from being brought back to the United States),
and (4) expropriation or nationalization of foreign portfolio companies.
Additionally, dividends and interest payable on foreign securities 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 Portfolio endeavors to achieve the most favorable net results
on portfolio transactions. The Portfolio may invest only in securities of
issuers in countries whose governments are considered stable by N&B
Management.
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.
Prices of foreign securities and exchange rates for
foreign currencies may be affected by the interest rates prevailing in
other countries. Interest rates in other countries are often affected by
local factors, including the strength of the local economy, the demand for
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borrowing, the government's fiscal and monetary policies, and the
international balance of payments. 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.
Foreign markets also have different clearance and
settlement procedures, and, 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. Such
delays in settlement could result in temporary periods when a portion of
the assets of the Portfolio are uninvested and no return is earned
thereon. The inability of the Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the
Portfolio due to subsequent declines in value of the portfolio securities,
or, if the Portfolio has entered into a contract to sell the securities,
could result in possible liability to the purchaser.
In order to limit the risk inherent in investing in for-
eign currency denominated securities, the Portfolio may not purchase any
such security if, after such purchase, more than 10% of its total assets
(taken at market value) would be invested in foreign currency denominated
securities. Within that limitation, however, the Portfolio is not
restricted in the amount it may invest in securities denominated in any
one foreign currency.
FUTURES CONTRACTS AND OPTIONS THEREON. The Portfolio may
purchase and sell interest rate futures contracts, stock and bond index
futures contracts, and foreign currency 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 expected 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 Portfolio to enhance portfolio liquidity and
maintain a defensive position without having to sell portfolio securities.
The Portfolio does not engage in transactions in futures or options on
futures for speculation. The Portfolio views investment in (1) 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 (2) foreign
currency futures and options thereon as a means of establishing more
definitely the effective return on securities denominated in foreign
currencies that are held or intended to be acquired by the Portfolio.
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
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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.
"Margin" with respect to a futures contract is the amount
of assets that must be deposited by the Portfolio with, or for the benefit
of, a futures commission merchant in order to initiate and maintain the
Portfolio's futures positions. The margin deposit made by the Portfolio
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 Portfolio 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 will be paid to the Portfolio. In computing its daily
net asset value ("NAV"), the Portfolio marks to market the current value
of its open futures positions. The Portfolio also must make margin
deposits with respect to options on futures that it has written. If the
futures commission merchant holding the margin deposit goes bankrupt, the
Portfolio could suffer a delay in recovering its funds and could
ultimately suffer a loss.
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"), an agency of the U.S.
Government; futures transactions must be executed through a futures
commission merchant that is a member of the relevant contract market. The
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, without the parties having to make
or take delivery of the assets. 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.
Although the Portfolio believes that the use of futures
contracts will benefit it, if N&B Management's judgment about the general
direction of the markets is incorrect, the Portfolio's overall return
would be lower than if it had not entered into any such contracts.
Moreover, the spread between values in the cash and futures markets is
subject to distortion due to differences in the character of those
markets. Because of the possibility of distortion, even a correct
forecast of general market trends by N&B Management may not result in a
successful transaction.
An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the
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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 assumption of offsetting futures positions by the writer and
holder of the option is accompanied by delivery of the accumulated cash
balance in the writer's futures margin account. 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.
The prices of futures contracts 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 and of the securities and currencies being hedged can be
only approximate. Decisions regarding whether, when, and how to hedge
involve skill and judgment. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or
interest rate or currency exchange rate trends or lack of correlation
between the futures markets and the securities markets. 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 fluctua-
tion in the price of a futures contract or option thereon during a single
trading day; once the daily limit has been reached, no trades thereof may
be made on that day at a price beyond that limit. The daily limit only
governs price movements during a particular trading day, however; it thus
does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Prices can move to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing liquidation of futures and options positions and subjecting
traders to substantial losses. If this were to happen with respect to a
position held by the Portfolio, it could (depending on the size of the
position) have an adverse impact on the NAV of the Portfolio.
PUT AND CALL OPTIONS. The Portfolio may write or
purchase put and call options on securities. Generally, the purpose of
writing and purchasing these options is to reduce the effect of price
fluctuations of securities held by the Portfolio on the Portfolio's and
the Fund's NAVs. The Portfolio may also write covered call options to
earn premium income.
The obligation under any option terminates upon
expiration of the option or, at an earlier time, when the writer offsets
the option by entering into a "closing purchase transaction" to purchase
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an option of the same series. If an option is purchased by the Portfolio
and is never exercised, the Portfolio will lose the entire amount of the
premium paid.
The Portfolio will receive a premium for writing a put
option, which obligates the Portfolio to acquire a certain security at a
certain price at any time until a certain date if the purchaser of the
option decides to sell such security. The Portfolio may be obligated to
purchase the underlying security at more than its current value.
When the Portfolio 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 Portfolio would
purchase a put option in order to protect itself against a decline in the
market value of a security it owns.
When the Portfolio writes a call option, it is obligated
to sell a security to a purchaser at a specified price at any time the
purchaser requests until a certain date, and receives a premium for
writing the call option. The Portfolio intends to write only "covered"
call options on securities it owns. So long as the obligation of the call
option continues, the Portfolio may be assigned an exercise notice,
requiring it to deliver the underlying security against payment of the
exercise price. The Portfolio may be obligated to deliver securities
underlying a call option at less than the market price, thereby giving up
any additional gain on the security.
When the Portfolio 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. The Portfolio would purchase a
call option in order to protect against an increase in the price of
securities it intends to purchase or to offset a previously written call
option.
Portfolio securities on which call and put options may be
written and purchased by the Portfolio are purchased solely on the basis
of investment considerations consistent with the Portfolio's investment
objective. The writing of covered call options is a conservative
investment technique that is believed to involve relatively little risk
(in contrast to the writing of "naked" or uncovered call options, which
the Portfolio will not do), but is capable of enhancing the Portfolio's
total return. When writing a covered call option, the Portfolio, in
return for the premium, gives up the opportunity for profit from a price
increase in the underlying security above the exercise price, but
conversely retains the risk of loss should the price of the security
decline. When writing a put option, the Portfolio, in return for the
premium, takes the risk that it must purchase the underlying security at
the exercise price, which may be higher than the current market price of
the security. If a call or put option that the Portfolio has written
expires unexercised, the Portfolio will realize a gain in the amount of
the premium; however, in the case of a call option, that gain may be
offset by a decline in the market value of the underlying security during
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the option period. If the call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security.
Options are traded both on national securities exchanges
and in the over-the-counter ("OTC") market. Exchange-traded options in
the United States 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 Portfolio and its counter-
party with no clearing organization guarantee. Thus, when the Portfolio
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 Portfolio
originally sold (or purchased) the option. There can be no assurance that
the Portfolio would be able to liquidate an OTC option at any time prior
to expiration. Unless the Portfolio 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 Portfolio may be unable to liquidate its
options position and the associated cover. N&B Management monitors the
creditworthiness of dealers with which the Portfolio may engage in OTC
options transactions, and limits the Portfolio's counter-parties in such
transactions to dealers with a net worth of at least $20 million as
reported in their latest financial statements.
The assets used as cover for OTC options written by the
Portfolio will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Portfolio 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.
The premium received (or paid) by the Portfolio when it
writes (or purchases) an option is the amount at which the option is
currently traded on the applicable exchange, less (or plus) a commission.
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 general interest rate environment. The premium received
by the Portfolio for writing an option is recorded as a liability on the
Portfolio's statement of assets and liabilities. This liability is
adjusted daily to the option's current market value, which is the sales
price on the option's last reported trade on that day before the time the
Portfolio's NAV is computed or, in the absence of any trades thereof on
that day, the mean between the closing bid and ask prices.
Closing transactions are effected in order to realize a
profit on an outstanding option, to prevent an underlying security from
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being called, or to permit the sale or the put of the underlying security.
Furthermore, effecting a closing transaction permits the Portfolio to
write another call option on the underlying security with a different
exercise price or expiration date or both. If the Portfolio desires to
sell a security on which it has written a call option, it will seek to
effect a closing transaction prior to, or concurrently with, the sale of
the security. There is, of course, no assurance that the Portfolio will
be able to effect closing transactions at favorable prices. If the
Portfolio 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 Portfolio 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.
However, 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
Portfolio.
The Portfolio pays brokerage commissions in connection
with purchasing or writing options, including those used to close out
existing positions. These brokerage commissions normally are higher than
those applicable to purchases and sales of portfolio securities.
Options normally have expiration dates between three and
nine months from the date written. 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. From time to time, the Portfolio may
purchase an underlying security for 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.
FORWARD FOREIGN CURRENCY CONTRACTS. The Portfolio may
enter into contracts for the purchase or sale of a specific currency at a
future date at a fixed price ("forward contracts") in amounts not
exceeding 5% of its net assets. The Portfolio enters into forward
contracts in an attempt to hedge against expected changes in prevailing
currency exchange rates. The Portfolio 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 securities denominated in foreign currencies that are held or intended
to be acquired by it. 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 Portfolio or
protecting the U.S. dollar equivalent of dividends, interest, or other
payments on those securities.
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N&B Management believes that the use of foreign currency
hedging techniques, including "cross-hedges," can help protect against
declines in the U.S. dollar value of income available for distribution and
declines in the Portfolio's NAV resulting from adverse changes in currency
exchange rates. For example, the return available from securities denomi-
nated 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 involv-
ing a forward contract to sell that foreign currency or a cross-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 and which is available on more advantageous
terms. N&B Management believes that hedges and cross-hedges can,
therefore, provide significant protection of NAV in the event of a general
rise in the U.S. dollar against foreign currencies. However, a hedge or
cross-hedge cannot protect against exchange rate risks perfectly, and, if
N&B Management is incorrect in its judgment of future exchange rate
relationships, the Portfolio could be in a less advantageous position than
if such a hedge or cross-hedge had not been established. In addition,
because forward contracts are not traded on an exchange, the assets used
to cover such contracts may be illiquid. If the Portfolio uses cross-
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.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may write
and purchase covered call and put options on foreign currencies, in
amounts not exceeding 5% of its net assets. The Portfolio would engage in
such transactions 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. As with other types of
options, however, writing an option on foreign currency constitutes only a
partial hedge, up to the amount of the premium received, and the Portfolio
could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The risks of
currency options are similar to the risks of other options, 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.
GENERAL CONSIDERATIONS INVOLVING FUTURES, OPTIONS ON FUTURES,
OPTIONS ON SECURITIES, FORWARD CONTRACTS, AND OPTIONS ON
FOREIGN CURRENCIES (COLLECTIVELY, "HEDGING INSTRUMENTS")
FUTURES CONTRACTS AND OPTIONS THEREON; PUT AND CALL
OPTIONS. To the extent the Portfolio sells or purchases futures contracts
and/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 on those positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the Portfolio's net assets.
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In addition, pursuant to state securities laws, (1) the
aggregate premiums paid by the Portfolio on all options (both exchange-
traded and OTC) held by it at any time may not exceed 20% of its net
assets, and (2) the aggregate margin deposits required on all exchange-
traded futures contracts and related options held by the Portfolio at any
time may not exceed 5% of its total assets. Also, pursuant to an
undertaking to a state securities law administrator, the Portfolio may not
purchase puts, calls, straddles, spreads, or any combination thereof if,
by reason of such purchase, the value of its aggregate investment in such
instruments will exceed 5% of its total assets.
RISKS INVOLVED IN USING HEDGING INSTRUMENTS. The primary
risks in using Hedging Instruments are (1) imperfect correlation or no
correlation between changes in market value of the securities held or to
be acquired by the Portfolio and changes in market value of Hedging
Instruments; (2) possible lack of a liquid secondary market for Hedging
Instruments and the resulting inability to close out Hedging Instruments
when desired; (3) the fact that the skills needed to use Hedging Instru-
ments are different from those needed to select the Portfolio's
securities; (4) the fact that, although use of these 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 Portfolio 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
Portfolio 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 Hedging Instruments. N&B Management intends to reduce the risk
of imperfect correlation by investing only in Hedging Instruments whose
behavior is expected to resemble or offset that of the Portfolio's
underlying securities. N&B Management intends to reduce the risk that the
Portfolio will be unable to close out Hedging Instruments by entering into
such transactions only if N&B Management believes there will be an active
and liquid secondary market. Hedging Instruments used by the Portfolio
are generally considered "derivatives." There can be no assurance that
the Portfolio's use of Hedging Instruments will be successful.
The Portfolio's use of Hedging Instruments may be limited
by provisions of the Internal Revenue Code of 1986, as amended ("Code"),
with which the Portfolio must comply if the Fund is to continue to qualify
as a regulated investment company ("RIC"). See "Additional Tax
Information -- Taxation of the Portfolio."
COVER FOR HEDGING INSTRUMENTS. The Portfolio will comply
with SEC guidelines regarding cover for Hedging Instruments and, if the
guidelines so require, set aside in a segregated account with its
custodian cash, U.S. Government or Agency Securities, or other liquid,
high-grade debt securities in the prescribed amount. Securities held in a
segregated account cannot be sold while the futures, option, or forward
strategy covered by those securities is outstanding, unless they are
replaced with other suitable assets. As a result, segregation of a large
percentage of the Portfolio's assets could impede portfolio management or
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the Portfolio's ability to meet current obligations. The Portfolio may be
unable promptly to dispose of assets which cover, or are segregated with
respect to, an illiquid futures, option, or forward position; this
inability may result in a loss to the Portfolio.
FIXED INCOME SECURITIES. While the emphasis of the
Portfolio's investment program is on common stocks and other equity
securities (including preferred stocks and securities convertible into or
exchangeable for common stocks), the Portfolio may also invest in money
market instruments, U.S. Government or Agency Securities, and other fixed
income securities. The Portfolio may invest in corporate bonds and
debentures receiving one of the four highest ratings from Standard &
Poor's ("S&P"), Moody's Investors Service, Inc. ("Moody's"), or any other
nationally recognized statistical rating organization ("NRSRO"), or, if
not rated by any NRSRO, deemed comparable by N&B Management to such rated
securities ("Comparable Unrated Securities"). The ratings of an NRSRO
represent its opinion as to the quality of securities it undertakes to
rate. Ratings are not absolute standards of quality; consequently, secu-
rities with the same maturity, coupon, and rating may have different
yields. Among the NRSROs, the Portfolio relies primarily on ratings
assigned by S&P and Moody's, which are described in Appendix A 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 general market liquidity ("market
risk"). 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.
Subsequent to its purchase by the Portfolio, an issue of debt securities
may cease to be rated or its rating may be reduced, so that the securities
would not be eligible for purchase by the Portfolio. In such a case, the
Portfolio will engage in an orderly disposition of the downgraded
securities.
COMMERCIAL PAPER. Commercial paper is a short-term debt
security issued by a corporation or bank, among others, for purposes such
as financing current operations. The Portfolio may invest only in
commercial paper receiving the highest rating from S&P (A-1) or Moody's
(P-1), or deemed by N&B Management to be of equivalent quality.
The Portfolio 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, N&B Management may in certain cases determine that such paper is
liquid, pursuant to guidelines established by the Portfolio Trustees.
ZERO COUPON SECURITIES. The Portfolio may invest up to
5% of its net assets in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payment of interest prior
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<PAGE>
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.
The discount on zero coupon securities ("original issue
discount") is taken into account by the Portfolio prior to the receipt of
any actual payments. Because the Fund must distribute substantially all
of its net income (including its pro rata share of the Portfolio's
original issue discount) to its shareholders each year for income and
excise tax purposes (see "Additional Tax Information -- Taxation of the
Fund"), the Portfolio may have to dispose of portfolio securities under
disadvantageous circumstances to generate cash, or may be required to
borrow, to satisfy the Fund's distribution requirements.
The market prices of zero coupon securities generally are
more volatile than the prices of securities that pay interest periodi-
cally. Zero coupon securities are likely to respond to changes in
interest rates to a greater degree than other types of debt securities
having similar maturities and credit quality.
CONVERTIBLE SECURITIES. The Portfolio may invest in
convertible securities. A convertible security entitles the holder to
receive 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.
Convertible securities are typically issued by smaller
capitalization companies whose stock prices may be volatile. The price of
a convertible security often reflects variations in the price of the
underlying common stock in a way that non-convertible debt does not. 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 Portfolio is called for redemption, the
Portfolio 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 Portfolio's and the
Fund's ability to achieve their investment objectives.
PREFERRED STOCK. The Portfolio 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
- 22 -
<PAGE>
board of directors, although preferred shareholders may have certain
rights if dividends are not paid. Shareholders may suffer a loss of value
if dividends are not paid and generally have no legal recourse against the
issuer. The market prices of preferred stocks are generally more
sensitive to changes in the issuer's creditworthiness than are the prices
of debt securities.
PERFORMANCE INFORMATION
The Fund's performance figures are based on historical
earnings and are not intended to indicate future performance. The share
price and total return of the Fund will vary, and an investment in the
Fund, when redeemed, may be worth more or less than an investor's original
cost.
TOTAL RETURN COMPUTATIONS
-------------------------
The Fund may advertise certain total return information.
An average annual compounded rate of return ("T") may be computed by using
the redeemable value at the end of a specified period ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of time
("n") according to the formula:
n
P(1+T) = ERV
Average annual total return smooths out year-to-year
variations and, in that respect, differs from actual year-to-year results.
The average annual total returns for the Fund for the
one-year period ended August 31, 1995, and for the period from March 16,
1994 (commencement of operations) through August 31, 1995, were 17.82% and
12.42%, respectively. N&B Management reimbursed the Fund for certain
expenses during the periods mentioned above, which has the effect of
increasing total return. Of course, past performance cannot guarantee
future results.
COMPARATIVE INFORMATION
-----------------------
From time to time the Fund's performance may be compared
with:
(1) data (that may be expressed as rankings or
ratings) published by independent services or
publications (including newspapers, newsletters, and
financial periodicals) that monitor the performance of
mutual funds, such as Lipper Analytical Services, Inc.,
C.D.A. Investment Technologies, Inc., Wiesenberger
- 23 -
<PAGE>
Investment Companies Service, Investment Company Data
Inc., Morningstar, Inc., Micropal Incorporated, and
quarterly mutual fund rankings by Money, Fortune, Forbes,
Business Week, Personal Investor, and U.S. News & World
Report magazines, The Wall Street Journal, New York
Times, Kiplingers Personal Finance, and Barron's News-
paper, or
(2) recognized stock and other indices, such as
the S&P 500 Composite Stock Price Index ("S&P 500
Index"), S&P Small Cap 600 Index ("S&P 600 Index"), S&P
Mid Cap 400 Index ("S&P 400 Index"), Russell 2000 Stock
Index, Dow Jones Industrial Average ("DJIA"), Wilshire
1750, Nasdaq Composite Index, Value Line Index, U.S.
Department of Labor Consumer Price Index ("Consumer Price
Index"), College Board Survey of Colleges Annual
Increases of College Costs, Kanon Bloch's Family
Performance Index, the Barra Growth Index, the Barra
Value Index, and various other domestic, international,
and global indices. The S&P 500 Index is a broad index
of common stock prices, while the DJIA represents a
narrower segment of industrial companies. The S&P 600
Index includes stocks that range in market value from $27
million to $880 million, with an average of $302 million.
The S&P 400 Index measures mid-sized companies with an
average market capitalization of $1.2 billion. Each
assumes reinvestment of distributions and is calculated
without regard to tax consequences or the costs of
investing. The Portfolio may invest in different types
of securities from those included in some of the above
indices.
The Fund may also be compared to various socially
responsive indices, including The Domini Social Index and those developed
by the quantitative department of Prudential Securities, such as that
department's Large and Mid-Cap portfolio indices for various breakdowns
("Sin" Stock Free, Cigarette-Stock Free, S&P Composite, etc.).
Evaluations of the Fund's performance, its total return,
and comparisons may be used in advertisements and in information furnished
to current and prospective shareholders (collectively, "Advertisements").
The Fund may also be compared to individual asset classes such as common
stocks, small-cap stocks, or Treasury bonds, based on information supplied
by Ibbotson and Sinquefield.
OTHER PERFORMANCE INFORMATION
From time to time, information about the Portfolio's
portfolio allocation and holdings as of a particular date may be included
in Advertisements for the Fund. This information, for example, may
include the Portfolio's diversification by asset type or by the social
characteristics of companies owned. Information used in Advertisements
- 24 -
<PAGE>
may include statements or illustrations relating to the appropriateness of
types of securities and/or mutual funds that may be employed to meet
specific financial goals, such as (1) funding retirement, (2) paying for
children's education, and (3) financially supporting aging parents.
N&B Management believes that many of its common stock
funds may be attractive investment vehicles for conservative investors who
are interested in long-term appreciation from stock investments, but who
have a moderate tolerance for risk. Such investors may include, for
example, individuals (1) planning for or facing retirement, (2) receiving
or expecting to receive lump-sum distributions from individual retirement
accounts ("IRAs"), self-employed individual retirement plans ("Keogh
plans"), or other retirement plans, (3) anticipating rollovers of CDs or
IRAs, Keogh plans, or other retirement plans, and (4) receiving a
significant amount of money as a result of inheritance, sale of a
business, or termination of employment.
Information relating to inflation and its effects on the
dollar also may be included in Advertisements. For example, after ten
years, the purchasing power of $25,000 would shrink to $16,621, $14,968,
$13,465, and $12,100, respectively, if the annual rates of inflation
during that period were 4%, 5%, 6%, and 7%, respectively. (To calculate
the purchasing power, the value at the end of each year is reduced by the
inflation rate for the ten-year period.)
Information regarding the effects of automatic invest-
ment, systematic withdrawal plans, investing at market highs and/or lows,
and investing early versus late for retirement plans also may be included
in Advertisements, if appropriate.
From time to time the investment philosophy of N&B Man-
agement's founder, Roy R. Neuberger, may be included in the Fund's
Advertisements. This philosophy is described in further detail in "The
Art of Investing: A Conversation with Roy Neuberger," attached as Appendix
B to this SAI.
CERTAIN RISK CONSIDERATIONS
Although the Portfolio seeks to reduce risk by investing
in a diversified portfolio, diversification does not eliminate all risk.
There can, of course, be no assurance that the Portfolio will achieve its
investment objective, and an investment in the Fund involves certain risks
that are described in the sections entitled "Investment Program" and
"Description of Investments" in the Prospectus and "Investment
Information" in this SAI.
TRUSTEES AND OFFICERS
The following table sets forth information concerning the
trustees and officers of the Trusts, including their addresses and
principal business experience during the past five years. Some persons
- 25 -
<PAGE>
named as trustees and officers also serve in similar capacities for other
funds, and (where applicable) their corresponding portfolios, administered
or managed by N&B Management and Neuberger & Berman.
<TABLE>
<CAPTION>
Name, Address Positions Held
and Age(1) With the Trusts Principal Occupation(s)(2)
------------- --------------- --------------------------
<S> <C> <C>
Faith Colish (60) Trustee of each Trust Attorney at Law, Faith Colish, A
63 Wall Street Professional Corporation.
24th Floor
New York, NY 10005
Donald M. Cox (73) Trustee of each Trust Retired. Formerly Senior Vice President
435 East 52nd Street and Director of Exxon Corporation;
New York, NY 10022 Director of Emigrant Savings Bank.
Stanley Egener* (61) Chairman of the Board, Chief Partner of Neuberger & Berman; President
Executive Officer, and and Director of N&B Management; Chairman
Trustee of each Trust of the Board, Chief Executive Officer, and
Trustee of eight other mutual funds for
which N&B Management acts as investment
manager or administrator.
Alan R. Gruber (68) Trustee of each Trust Chairman and Chief Executive Officer of
Orion Capital Corporation Orion Capital Corporation (property and
600 Fifth Avenue casualty insurance); Director of Trenwick
24th Floor Group, Inc. (property and casualty
New York, NY 10020 reinsurance); Chairman of the Board and
Director of Guaranty National Corporation
(property and casualty insurance);
formerly Director of Ketema, Inc.
(diversified manufacturer).
Howard A. Mileaf (59) Trustee of each Trust Vice President and Special Counsel to WHX
WHX Corporation Corporation (holding company) since 1992;
110 East 59th Street formerly Vice President and General
New York, NY 10022 Counsel of Keene Corporation (manufacturer
of industrial products); Director of
Kevlin Corporation (manufacturer of
microwave and other products).
- 26 -
<PAGE>
Name, Address Positions Held
and Age(1) With the Trusts Principal Occupation(s)(2)
------------- --------------- --------------------------
Edward I. O'Brien* (67) Trustee of each Trust Until 1993, President of the Securities
12 Woods Lane Industry Association ("SIA") (securities
Scarsdale, NY 10583 industry's representative in government
relations and regulatory matters at the
federal and state levels); until November
1993, employee of the SIA; Director of
Legg Mason, Inc.
John T. Patterson, Jr. (67) Trustee of each Trust President of SOBRO (South Bronx Overall
90 Riverside Drive Economic Development Corporation).
Apartment 1B
New York, NY 10024
John P. Rosenthal (63) Trustee of each Trust Senior Vice President of Burnham
Burnham Securities Inc. Securities Inc. (a registered broker-
Burnham Asset Management dealer) since 1991; formerly Partner of
Corp. Silberberg, Rosenthal & Co. (member of
1325 Avenue of the Americas National Association of Securities
17th Floor Dealers, Inc.); Director, Cancer Treatment
New York, NY 10019 Holdings, Inc.
Cornelius T. Ryan (64) Trustee of each Trust General Partner of Oxford Partners and
Oxford Bioscience Partners Oxford Bioscience Partners (venture
315 Post Road West capital partnerships) and President of
Westport, CT 06880 Oxford Venture Corporation; Director of
Capital Cash Management Trust (money
market fund) and Prime Cash Fund.
Gustave H. Shubert (67) Trustee of each Trust Senior Fellow/Corporate Advisor and
13838 Sunset Boulevard Advisory Trustee of Rand (a non-profit
Pacific Palisades, CA 90272 public interest research institution)
since 1989; Honorary Member of the Board
of Overseers of the Institute for Civil
Justice, the Policy Advisory Committee of
the Clinical Scholars Program at the
University of California, the American
Association for the Advancement of
Science, the Counsel on Foreign Relations,
and the Institute for Strategic Studies
(London); advisor to the Program
Evaluation and Methodology Division of the
U.S. General Accounting Office; formerly
Senior Vice President and Trustee of Rand.
- 27 -
<PAGE>
Name, Address Positions Held
and Age(1) With the Trusts Principal Occupation(s)(2)
------------- --------------- --------------------------
Lawrence Zicklin* (59) President and Trustee of Partner of Neuberger & Berman; Director of
each Trust N&B Management; President and/or Trustee
of five other mutual funds for which N&B
Management acts as investment manager or
administrator.
Daniel J. Sullivan (56) Vice President of each Trust Senior Vice President of N&B Management
since 1992; prior thereto, Vice President
of N&B Management; Vice President of eight
other mutual funds for which N&B
Management acts as investment manager or
administrator.
Michael J. Weiner (49) Vice President and Principal Senior Vice President of N&B Management
Financial Officer of each since 1992; Treasurer of N&B Management
Trust from 1992 to 1996; prior thereto, Vice
President and Treasurer of N&B Management
and Treasurer of certain mutual funds for
which N&B Management acted as investment
adviser; Vice President and Principal
Financial Officer of eight other mutual
funds for which N&B Management acts as
investment manager or administrator.
Claudia A. Brandon (39) Secretary of each Trust Vice President of N&B Management;
Secretary of eight other mutual funds for
which N&B Management acts as investment
manager or administrator.
Richard Russell (49) Treasurer and Principal Vice President of N&B Management since
Accounting Officer of each 1993; prior thereto, Assistant Vice
Trust President of N&B Management; Treasurer and
Principal Accounting Officer of eight
other mutual funds for which N&B
Management acts as investment manager or
administrator.
Stacy Cooper-Shugrue (33) Assistant Secretary of each Assistant Vice President of N&B Management
Trust since 1993; prior thereto, employee of N&B
Management; Assistant Secretary of eight
other mutual funds for which N&B
Management acts as investment manager or
administrator.
- 28 -
<PAGE>
Name, Address Positions Held
and Age(1) With the Trusts Principal Occupation(s)(2)
------------- --------------- --------------------------
C. Carl Randolph (58) Assistant Secretary of each Partner of Neuberger & Berman since 1992;
Trust prior thereto, employee of Neuberger &
Berman; Assistant Secretary of eight other
mutual funds for which N&B Management acts
as investment manager or administrator.
</TABLE>
____________________
(1) Unless otherwise indicated, the business address of each listed
person is 605 Third Avenue, New York, NY 10158-0180.
(2) Except as otherwise indicated, each individual has held the
positions shown for at least the last five years.
* Indicates a trustee who is an "interested person" of each Trust
within the meaning of the 1940 Act. Messrs. Egener and Zicklin are
interested persons by virtue of the fact that they are officers and/or
directors of N&B Management and partners of Neuberger & Berman. Mr.
O'Brien is an interested person 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 Portfolio and other
funds for which N&B Management serves as investment manager.
The Trust's Trust Instrument and Managers Trust's
Declaration of Trust each provides that it will indemnify its trustees and
officers against liabilities and expenses reasonably incurred in
connection with litigation in which they may be involved because of their
offices with the Trust, unless it is adjudicated that they engaged in bad
faith, willful misfeasance, gross negligence, or reckless disregard of the
duties involved in the conduct of their offices. 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 trustees based upon a review
of readily available facts, or in a written opinion of independent
counsel) that such officers or trustees have not engaged in willful
misfeasance, bad faith, gross negligence, or reckless disregard of their
duties.
For the fiscal year ended August 31, 1995, the Fund and
Portfolio paid fees and expenses of $926 to Fund and Portfolio Trustees
who were not affiliated with N&B Management or Neuberger & Berman.
The following table sets forth information concerning the
compensation of the trustees and officers of the Trust. None of the
Neuberger & Berman Funds has any retirement plan for its trustees or
officers.
- 29 -
<PAGE>
<TABLE>
<CAPTION>
TABLE OF COMPENSATION
FOR FISCAL YEAR ENDED 8/31/95
-----------------------------
Total Compensation from Trusts
Aggregate in the Neuberger & Berman Fund
Name and Position with Compensation Complex Paid
the Trust from the Trust to Trustees
---------------------- --------------------- ------------------------------
<S> <C> <C>
Faith Colish $14,140 $39,000
Trustee (5 other investment companies)
Donald M. Cox $14,140 $31,000
Trustee (3 other investment companies)
Stanley Egener $ 0 $0
Chairman of the Board, Chief (9 other investment companies)
Executive Officer, and Trustee
Alan R. Gruber $14,140 $31,000
Trustee (3 other investment companies)
Howard A. Mileaf $15,571 $36,500
Trustee (4 other investment companies)
Edward I. O'Brien $14,587 $31,500
Trustee (3 other investment companies)
John T. Patterson, Jr. $14,604 $34,500
Trustee (4 other investment companies)
John P. Rosenthal $13,916 $33,000
Trustee (4 other investment companies)
Cornelius T. Ryan $15,571 $33,500
Trustee (3 other investment companies)
Gustave H. Shubert $13,916 $30,000
Trustee (3 other investment companies)
Lawrence Zicklin $ 0 $0
President and Trustee (5 other investment companies)
</TABLE>
- 30 -
<PAGE>
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES
INVESTMENT MANAGER AND ADMINISTRATOR
------------------------------------
Because all of the Fund's net investable assets are
invested in the Portfolio, the Fund does not need an investment manager.
N&B Management serves as the Portfolio's investment manager pursuant to a
management agreement with Managers Trust, dated as of August 2, 1993
("Management Agreement"). The Management Agreement was approved by the
holders of the interests in the Portfolio on March 9, 1994. The Portfolio
was authorized to become subject to the Management Agreement by vote of
the Portfolio Trustees on October 20, 1993, and became subject to it on
March 14, 1994.
The Management Agreement provides, in substance, that N&B
Management will make and implement investment decisions for the Portfolio
in its discretion and will continuously develop an investment program for
the Portfolio's assets. The Management Agreement permits N&B Management
to effect securities transactions on behalf of the Portfolio through
associated persons of N&B Management. The Management Agreement also
specifically permits N&B Management to compensate, through higher
commissions, brokers and dealers who provide investment research and
analysis to the Portfolio, although N&B Management has no current plans to
do so.
N&B Management provides to the Portfolio, without
separate cost, office space, equipment, and facilities and the personnel
necessary to perform executive, administrative, and clerical functions.
N&B Management pays all salaries, expenses, and fees of the officers,
trustees, and employees of Managers Trust who are officers, directors, or
employees of N&B Management. Two directors of N&B Management (who also
are partners of Neuberger & Berman), one of whom also serves as an officer
of N&B Management, presently serve as trustees and officers of the Trusts.
See "Trustees and Officers." The Portfolio pays N&B Management a
management fee based on the Portfolio's average daily net assets, as
described in the Prospectus.
N&B Management provides similar facilities, services and
personnel to the Fund pursuant to an administration agreement dated May 1,
1995 ("Administration Agreement"). For such administrative services, the
Fund pays N&B Management a fee based on the Fund's average daily net
assets, as described in the Prospectus.
Under the Administration Agreement, N&B Management also
provides to the Fund and its shareholders certain shareholder,
shareholder-related, and other services that are not furnished by the
Fund's shareholder servicing agent. N&B Management provides the direct
shareholder services specified in the Administration Agreement, assists
the shareholder servicing agent in the development and implementation of
specified programs and systems to enhance overall shareholder servicing
capabilities, solicits and gathers shareholder proxies, performs services
- 31 -
<PAGE>
connected with the qualification of the Fund's shares for sale in various
states, and furnishes other services the parties agree from time to time
should be provided under the Administration Agreement.
From time to time, N&B Management or the Fund may enter
into arrangements with registered broker-dealers or other third parties
pursuant to which it pays the broker-dealer or third party a per account
fee or a fee based on a percentage of the aggregate net asset value of
Fund shares purchased by the broker-dealer or third party on behalf of its
customers, in payment for administrative and other services rendered to
such customers.
During the fiscal year ended August 31, 1995, and the
period from March 16, 1994 (commencement of operations) to August 31,
1994, the Fund accrued management and administration fees of $37,197 and
$3,082, respectively. For those same periods, N&B Management reimbursed
the Fund for $78,940 and $25,172, respectively, of expenses.
Prior to May 1, 1995, the shareholder services described
above were provided pursuant to a separate agreement between the Trust and
N&B Management. As compensation for these services, the Fund paid N&B
Management a monthly fee calculated at the annual rate of 0.04% of the
average daily net assets of the Fund. For the period from September 1,
1994 to April 30, 1995, and for the period from March 16, 1994 (commence-
ment of operations) until August 31, 1994, the Fund paid and accrued
$1,085 and $174, respectively, for these services
The Management Agreement continues with respect to the
Portfolio for a period of two years after the date the Portfolio became
subject thereto. The Management Agreement is renewable thereafter from
year to year with respect to the Portfolio, so long as its continuance is
approved at least annually (1) by the vote of a majority of the Portfolio
Trustees who are not "interested persons" of N&B Management or Managers
Trust ("Independent Portfolio Trustees"), 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 Portfolio Trustees or by a 1940 Act majority vote of the
outstanding interests in the Portfolio. The Administration Agreement
continues with respect to the Fund for a period of two years after the
date the Fund became subject thereto. The Administration Agreement is
renewable 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 Trustees who are not "interested persons" of N&B Management or
the Trust ("Independent Fund Trustees"), 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 Trustees or by a 1940 Act majority vote of the
outstanding shares in the Fund.
The Management Agreement is terminable, without penalty,
with respect to the Portfolio on 60 days' written notice either by
Managers Trust or by N&B Management. The Administration Agreement is
terminable, without penalty, with respect to the Fund on 60 days' written
notice either by N&B Management or by the Trust if authorized by the Fund
- 32 -
<PAGE>
Trustees, including a majority of the Independent Fund Trustees. Each
Agreement terminates automatically if it is assigned.
In addition to the voluntary expense reimbursement
described in the Prospectus under "Management and Administration --
Expenses," N&B Management has agreed in the Management Agreement to
reimburse the Fund's expenses, as follows. If, in any fiscal year, the
Fund's Aggregate Operating Expenses (as defined below) exceed the most
restrictive expense limitation imposed under the securities laws of the
states in which the Fund's shares are qualified for sale ("State Expense
Limitation"), then N&B Management will pay to the Fund the amount of that
excess, less the amount of any reduction of the administration fee payable
by the Fund under a similar State Expense Limitation contained in the
Administration Agreement. N&B Management will have no obligation to pay
the Fund, however, for any expenses that exceed the pro rata portion of
the management fees attributable to the Fund's interest in its
corresponding Portfolio. At the date of this SAI, the most restrictive
State Expense Limitation to which the Fund expects to be subject is 2 1/2%
of the first $30 million of average net assets, 2% of the next $70 million
of average net assets, and 1-1/2% of average net assets over $100 million.
For purposes of the State Expense Limitation, the term
"Aggregate Operating Expenses" means the Fund's operating expenses plus
its pro rata portion of the Portfolio's operating expenses (including any
fees or expense reimbursements payable to N&B Management and any
compensation payable thereto pursuant to (1) the Administration Agreement
or (2) any other agreement or arrangement with Managers Trust in regard to
the Portfolio; but excluding (with respect to both the Fund and the
Portfolio) interest, taxes, brokerage commissions, litigation and
indemnification expenses, and other extraordinary expenses not incurred in
the ordinary course of business).
SUB-ADVISER
-----------
N&B Management retains Neuberger & Berman, 605 Third
Avenue, New York, NY 10158-3698, as sub-adviser with respect to the
Portfolio pursuant to a sub-advisory agreement dated August 2, 1993 ("Sub-
Advisory Agreement"). The Sub-Advisory Agreement was approved by the
holders of the interests in the Portfolio on March 9, 1994. The Portfolio
was authorized to become subject to the Sub-Advisory Agreement by vote of
the Portfolio Trustees on October 20, 1993 and became subject to it on
March 14, 1994.
The Sub-Advisory Agreement provides in substance that
Neuberger & Berman will furnish to N&B Management, upon reasonable
request, the same type of investment recommendations and research that
Neuberger & Berman, from time to time, provides to its partners and
employees for use in managing client accounts. In this manner, N&B
Management expects to have available to it, in addition to research from
other professional sources, the capability of the research staff of
- 33 -
<PAGE>
Neuberger & Berman. This staff consists of approximately fourteen
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 N&B Management. The Sub-Advisory
Agreement provides that N&B Management will 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 mutual funds managed by N&B
Management.
The Sub-Advisory Agreement continues with respect to the
Portfolio for a period of two years after the date the Portfolio became
subject thereto, and is renewable thereafter 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 Portfolio by the Portfolio Trustees, by a
1940 Act majority vote of the outstanding interests in the Portfolio, by
N&B Management, or by Neuberger & Berman on not less than 30 nor more than
60 days' written notice. The Sub-Advisory Agreement also terminates
automatically with respect to the Portfolio if it is assigned or if the
Management Agreement terminates with respect to the Portfolio.
Most money managers that come to the Neuberger & Berman
organization have at least fifteen years experience. Neuberger & Berman
and N&B Management employ experienced professionals that work in a
competitive environment.
INVESTMENT COMPANIES MANAGED
----------------------------
N&B Management currently serves as investment manager of
the following investment companies. As of December 31, 1995, these
companies, along with three investment companies advised by Neuberger &
Berman, had aggregate net assets of approximately $11.9 billion, as shown
in the following list:
Approximate
Net Assets at
Name December 31, 1995
Neuberger & Berman Cash Reserves Portfolio . . . . . . . . . $433,504,363
(investment portfolio for Neuberger & Berman Cash Reserves)
Neuberger & Berman Government Money Portfolio . . . . . . . . $275,569,350
(investment portfolio for Neuberger & Berman Government Money
Fund)
Neuberger & Berman Limited Maturity Bond Portfolio . . . . . $318,037,698
(investment portfolio for Neuberger & Berman Limited Maturity
Bond Fund and Neuberger & Berman Limited Maturity Bond Trust)
- 34 -
<PAGE>
Approximate
Net Assets at
Name December 31, 1995
Neuberger & Berman Municipal Money Portfolio . . . . . . . . $152,876,653
(investment portfolio for Neuberger & Berman Municipal Money
Fund)
Neuberger & Berman Municipal Securities Portfolio . . . . . . $43,859,557
(investment portfolio for Neuberger & Berman Municipal Securities
Trust)
Neuberger & Berman New York Insured Intermediate Portfolio . $11,742,945
(investment portfolio for Neuberger & Berman New York Insured
Intermediate Fund)
Neuberger & Berman Ultra Short Bond Portfolio . . . . . . . . $102,724,936
(investment portfolio for Neuberger & Berman Ultra Short Bond
Fund and Neuberger & Berman Ultra Short Bond Trust)
Neuberger & Berman Focus Portfolio . . . . . . . . . . . . $1,057,224,027
(investment portfolio for Neuberger & Berman Focus Fund,
Neuberger & Berman Focus Trust and Neuberger & Berman Focus
Assets)
Neuberger & Berman Genesis Portfolio . . . . . . . . . . . . $152,439,092
(investment portfolio for Neuberger & Berman Genesis Fund and
Neuberger & Berman Genesis Trust)
Neuberger & Berman Guardian Portfolio . . . . . . . . . . $5,321,221,497
(investment portfolio for Neuberger & Berman Guardian Fund,
Neuberger & Berman Guardian Trust and Neuberger & Berman Guardian
Assets)
Neuberger & Berman International Portfolio . . . . . . . . . $33,320,099
(investment portfolio for Neuberger & Berman International Fund)
Neuberger & Berman Manhattan Portfolio . . . . . . . . . . . $638,295,408
(investment portfolio for Neuberger & Berman Manhattan Fund,
Neuberger & Berman Manhattan Trust and Neuberger & Berman
Manhattan Assets)
Neuberger & Berman Partners Portfolio . . . . . . . . . . . $1,741,742,815
(investment portfolio for Neuberger & Berman Partners Fund,
Neuberger & Berman Partners Trust and Neuberger & Berman Partners
Assets)
Neuberger & Berman Socially Responsive Portfolio . . . . . $115,240,931
(investment portfolio for Neuberger & Berman Socially Responsive
Fund, Neuberger & Berman Socially Responsive Trust, and Neuberger
& Berman NYCDC Socially Responsive Trust)
- 35 -
<PAGE>
Advisers Managers Trust
(six series) . . . . . . . . . . . . . . . . . . . $1,306,566,805
In addition, Neuberger & Berman serves as investment
adviser to three investment companies, Plan Investment Fund, Inc., AHA
Investment Fund, Inc., and AHA Full Maturity, with assets of $64,302,128,
$99,396,468, and $26,077,793, respectively, at December 31, 1995.
The investment decisions concerning the Portfolio and the
other funds and portfolios managed by N&B Management (collectively, "Other
N&B Funds") have been and will continue to be made independently of one
another. In terms of their investment objectives, most of the Other N&B
Funds differ from the Portfolio. Even where the investment objectives are
similar, however, the methods used by the Other N&B Funds and the
Portfolio to achieve their objectives may differ.
There may be occasions when the Portfolio and one or more
of the Other N&B Funds or other accounts managed by Neuberger & Berman are
contemporaneously engaged in purchasing or selling the same securities
from or to third parties. When this occurs, the transactions are averaged
as to price and allocated as to amounts in accordance with a formula
considered to be equitable to the funds involved. Although in some cases
this arrangement may have a detrimental effect on the price or volume of
the securities as to the Portfolio, in other cases it is believed that the
Portfolio's ability to participate in volume transactions may produce
better executions for it. In any case, it is the judgment of the
Portfolio Trustees that the desirability of the Portfolio's having its
advisory arrangements with N&B Management outweighs any disadvantages that
may result from contemporaneous transactions. The investment results
achieved by all of the funds managed by N&B Management have varied from
one another in the past and are likely to vary in the future.
MANAGEMENT AND CONTROL OF N&B MANAGEMENT
----------------------------------------
The directors and officers of N&B Management, all of whom
have offices at the same address as N&B Management, are Richard A. Cantor,
Chairman of the Board and director; Stanley Egener, President and
director; Theresa A. Havell, Vice President and director; Irwin Lainoff,
director; Marvin C. Schwartz, director; Lawrence Zicklin, director; Daniel
J. Sullivan, Senior Vice President; Peter E. Sundman, Senior Vice
President; Michael J. Weiner, Senior Vice President; Claudia A. Brandon,
Vice President; Robert Conti, Treasurer; William Cunningham, Vice
President; Clara Del Villar, Vice President; Mark R. Goldstein, Vice
President; Farha-Joyce Haboucha, Vice President; Michael M. Kassen, Vice
President; Michael Lamberti, Vice President; Josephine P. Mahaney, Vice
President; Lawrence Marx III, Vice President; Ellen Metzger, Vice
President and Secretary; Janet W. Prindle, Vice President; Felix Rovelli,
Vice President; Richard Russell, Vice President; Kent C. Simons, Vice
President; Frederick B. Soule, Vice President; Judith M. Vale, Vice
President; Thomas Wolfe, Vice President; Andrea Trachtenberg, Vice
- 36 -
<PAGE>
President of Marketing; Patrick T. Byrne, Assistant Vice President; Stacy
Cooper-Shugrue, Assistant Vice President; Robert Cresci, Assistant Vice
President; Barbara DiGiorgio, Assistant Vice President; Roberta D'Orio,
Assistant Vice President; Joseph G. Galli, Assistant Vice President;
Robert I. Gendelman, Assistant Vice President; Leslie Holliday-Soto,
Assistant Vice President; Jody L. Irwin, Assistant Vice President; Carmen
G. Martinez, Assistant Vice President; Paul Metzger, Assistant Vice
President; Susan Switzer, Assistant Vice President; Susan Walsh, Assistant
Vice President; and Celeste Wischerth, Assistant Vice President. Messrs.
Cantor, Egener, Lainoff, Schwartz, Zicklin, Goldstein, Kassen, Marx, and
Simons and Mmes. Havell and Prindle are general partners of Neuberger &
Berman.
Messrs. Egener and Zicklin are trustees and officers, and Messrs.
Sullivan, Weiner, and Russell and Mmes. Brandon and Cooper-Shugrue are
officers, of each Trust. C. Carl Randolph, a general partner of Neuberger
& Berman, also is an officer of each Trust.
All of the outstanding voting stock in N&B Management is owned by
persons who are also general partners of Neuberger & Berman.
DISTRIBUTION ARRANGEMENTS
N&B Management serves as the distributor ("Distributor")
in connection with the offering of the Fund's shares on a no-load basis.
In connection with the sale of its shares, the Fund has authorized the
Distributor to give only the information, and to make only the statements
and representations, contained in the Prospectus and this SAI or that
properly may be included in sales literature and advertisements in
accordance with the 1933 Act, the 1940 Act, and applicable rules of self-
regulatory organizations. Sales may be made only by the Prospectus, which
may be delivered either personally, through the mails, or by electronic
means. The Distributor is the Fund's "principal underwriter" within the
meaning of the 1940 Act and, as such, acts as agent in arranging for the
sale of the Fund's shares without sales commission or other compensation
and bears all advertising and promotion expenses incurred in the sale of
the Fund's shares.
The Distributor or one of its affiliates may, from time
to time, deem it desirable to offer to the Fund's shareholders, through
use of its shareholder list, the shares of other mutual funds for which
the Distributor acts as distributor or other products or services. Any
such use of the Fund's shareholder list, however, will be made subject to
terms and conditions, if any, approved by a majority of the Independent
Fund Trustees. This list will not be used to offer the Fund's
shareholders any investment products or services other than those managed
or distributed by N&B Management or Neuberger & Berman.
The Trust, on behalf of the Fund, and the Distributor are
parties to a Distribution Agreement that continues until August 2, 1996.
The Distribution Agreement may be renewed annually if specifically
- 37 -
<PAGE>
approved by (1) the vote of a majority of the Fund Trustees or a 1940 Act
majority vote of the Fund's outstanding shares and (2) the vote of a
majority of the Independent Fund Trustees, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution
Agreement may be terminated by either party and will automatically
terminate on its assignment, in the same manner as the Management
Agreement.
ADDITIONAL PURCHASE INFORMATION
AUTOMATIC INVESTING AND DOLLAR COST AVERAGING
---------------------------------------------
Shareholders may arrange to have a fixed amount automa-
tically invested in Fund shares each month. To do so, a shareholder must
complete an application, available from the Distributor, electing to have
automatic investments funded either through (1) redemptions from his or
her account in a money market fund for which N&B Management serves as
investment manager (subject to a minimum monthly investment of $100) or
(2) withdrawals from the shareholder's checking account (in which case the
minimum monthly investment is $100). A shareholder who elects to parti-
cipate in automatic investing through his or her checking account must
include a voided check with the completed application. A completed
application should be sent to Neuberger & Berman Management Incorporated,
605 Third Avenue, 2nd Floor, New York, NY 10158-0180.
Automatic investing enables a shareholder to take advan-
tage of "dollar cost averaging." As a result of dollar cost averaging, a
shareholder's average cost of Fund shares generally would be lower than if
the shareholder purchased a fixed number of shares at the same pre-set
intervals. Additional information on dollar cost averaging may be
obtained from the Distributor.
ADDITIONAL EXCHANGE INFORMATION
As more fully set forth in the section of the Prospectus
entitled "Shareholder Services -- Exchange Privilege," shareholders may
redeem at least $1,000 worth of the Fund's shares and invest the proceeds
in shares of one or more of the Other N&B Funds that are briefly described
below, provided that the minimum investment requirements of the other
fund(s) are met.
- 38 -
<PAGE>
EQUITY FUNDS
------------
Neuberger & Berman Seeks long-term capital appreciation through
Focus Fund investments principally in common stocks
selected from 13 multi-industry economic
sectors. The corresponding portfolio uses a
value-oriented approach to select individual
securities and then focuses its investments
in the sectors in which the undervalued
stocks are clustered. Through this approach,
90% or more of the portfolio's investments
are normally made in not more than six
sectors.
Neuberger & Berman Seeks capital appreciation through
Genesis Fund investments principally in common stocks of
companies with small market capitalizations,
up to $750 million. The corresponding
portfolio uses a value-oriented approach to
the selection of individual securities.
Neuberger & Berman Seeks capital appreciation through
Guardian Fund investments primarily in a large number of
common stocks of long-established, high-
quality companies that N&B Management
believes are well-managed. The corresponding
portfolio uses a value-oriented approach to
the selection of individual securities.
Current income is a secondary objective. The
fund (or its predecessor) has paid its share-
holders an income dividend every quarter, and
a capital gain distribution every year, since
its inception in 1950, although there can be
no assurance that it will be able to continue
to do so.
Neuberger & Berman Seeks long-term capital appreciation through
International Fund investments primarily in a diversified
portfolio of equity securities of foreign
issuers. Assets will be allocated among
economically mature countries and emerging
industrialized countries.
- 39 -
<PAGE>
Neuberger & Berman Seeks capital appreciation, without regard to
Manhattan Fund income, through investments generally in
securities of medium- to large-capitalization
companies that N&B Management believes have
the maximum potential for increasing total
NAV. The corresponding portfolio's "growth
at a reasonable price" investment approach
involves greater risks and share price
volatility than programs that invest in more
conservative securities.
Neuberger & Berman Seeks capital growth through an investment
Partners Fund approach that is designed to increase capital
with reasonable risk. Its investment program
seeks securities believed to be undervalued
based on strong fundamentals such as low
price-to-earnings ratios, consistent cash
flow and the company's track record through
all parts of the market cycle. The
corresponding portfolio uses the value-
oriented investment approach to the selection
of individual securities.
INCOME FUNDS
------------
Neuberger & Berman A money market fund seeking maximum safety
Government Money Fund and liquidity and the highest available
current income. The corresponding portfolio
invests only in U.S. Treasury obligations and
other money market instruments backed by the
full faith and credit of the United States.
It seeks to maintain a constant purchase and
redemption price of $1.00.
Neuberger & Berman A money market fund seeking the highest
Cash Reserves current income consistent with safety and
liquidity. The corresponding portfolio in-
vests in a diversified portfolio of high-
quality money market instruments. It seeks
to maintain a constant purchase and
redemption price of $1.00.
Neuberger & Berman Seeks a higher total return than is available
Ultra Short Bond Fund from money market funds, with minimal risk to
principal and liquidity. The corresponding
portfolio invests in a diversified portfolio
of high-quality money market instruments and
short-term debt securities.
- 40 -
<PAGE>
Neuberger & Berman Seeks the highest current income consistent
Limited Maturity Bond with low risk to principal and liquidity; and
Fund secondarily, total return. The corresponding
portfolio invests in a diversified portfolio
of short- to intermediate-term debt
securities, primarily investment grade;
maximum 10% below Baa or BBB (as rated by
Moody's and S&P, respectively), but no lower
than B.
MUNICIPAL FUNDS
---------------
Neuberger & Berman A money market fund seeking the maximum
Municipal Money Fund current income exempt from federal income tax
consistent with safety and liquidity. The
corresponding portfolio invests in high-
quality, short-term tax-exempt municipal
securities. It seeks to maintain a constant
purchase and redemption price of $1.00.
Neuberger & Berman A short- to intermediate-term bond fund
Municipal Securities seeking high current tax-exempt income with
Trust low risk to principal, limited price
fluctuation, and liquidity; and secondarily,
total return. The corresponding portfolio
invests in municipal securities rated A or
better.
Neuberger & Berman An intermediate-term bond fund which seeks a
New York Insured high level of current income exempt from
Intermediate Fund federal income tax and New York State and New
York City personal income taxes, consistent
with preservation of capital.
The Fund and any of the Other N&B Funds may terminate or
modify its exchange privilege in the future.
Fund shareholders who are considering exchanging shares
into any of the funds listed above should note that (1) the Income and
Municipal Funds listed above are series of a Delaware business trust
(named "Neuberger & Berman Income Funds") that is registered with the SEC
as an open-end management investment company, (2) like the Fund, the
Equity Funds listed above are series of the Trust, (3) each series of
Neuberger & Berman Income Funds invests all of its net investable assets
in a corresponding portfolio of Income Managers Trust, an open-end
management investment company that is managed by N&B Management, (4)
Neuberger & Berman International Fund is a series of the Trust that
invests all of its net investable assets in Neuberger & Berman
International Portfolio, which is a series of Global Managers Trust, an
open-end management investment company managed by N&B Management, and (5)
- 41 -
<PAGE>
each of the other series of the Trust invests all of its net investable
assets in a corresponding portfolio of Managers Trust. Each such port-
folio has an investment objective identical to that of its corresponding
fund and invests in accordance with investment policies and limitations
identical to those of that fund.
Before effecting an exchange, Fund shareholders must
obtain and should review a currently effective prospectus of the fund into
which the exchange is to be made. In this regard, it should be noted that
the Income and Municipal Funds share a prospectus, while the Equity Funds
share a separate prospectus. An exchange is treated as a sale for federal
income tax purposes and, depending on the circumstances, a short- or long-
term capital gain or loss may be realized.
There can be no assurance that Neuberger & Berman Cash
Reserves, Neuberger & Berman Government Money Fund, or Neuberger & Berman
Municipal Money Fund, each of which is a money market fund that seeks to
maintain a constant purchase and redemption share price of $1.00, will be
able to maintain that price. An investment in any of the above-referenced
funds, as in any other mutual fund, is neither insured nor guaranteed by
the U.S. Government.
ADDITIONAL REDEMPTION INFORMATION
SUSPENSION OF REDEMPTIONS
-------------------------
The right to redeem the Fund's shares may be suspended or
payment of the redemption price postponed (1) when the New York Stock
Exchange ("NYSE") is closed (other than weekend and holiday closings),
(2) when trading on the NYSE is restricted, (3) when an emergency exists
as a result of which it is not reasonably practicable for the Portfolio to
dispose of securities it owns or fairly to determine the value of its net
assets, or (4) for such other period as the SEC may by order permit for
the protection of the Fund's shareholders; provided that applicable SEC
rules and regulations shall govern whether the conditions prescribed in
(2) or (3) exist. If the right of redemption is suspended, shareholders
may withdraw their offers of redemption, or they will receive payment at
the NAV per share in effect at the close of business on the first day the
NYSE is open ("Business Day") after termination of the suspension.
REDEMPTIONS IN KIND
-------------------
The Fund reserves the right, under certain conditions, to
honor any request for redemption, or a combination of requests from the
same shareholder in any 90-day period, totalling $250,000 or 1% of the net
assets of the Fund, whichever is less, by making payment in whole or in
part in securities valued as described under "Account and Share
Information -- Share Prices and Net Asset Value" in the Prospectus. If
payment is made in securities, a shareholder generally will incur
- 42 -
<PAGE>
brokerage expenses in converting those securities into cash and will be
subject to fluctuations in the market price of those securities until they
are sold. The Fund does not redeem in kind under normal circumstances,
but would do so when the Fund Trustees determine that it is in the best
interests of the Fund's shareholders as a whole. Redemptions in kind will
be made with readily marketable securities to the extent possible.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund distributes to its shareholders amounts equal to
substantially all of its proportionate share of any net investment income
(after deducting expenses incurred directly by the Fund), net capital
gains (both long-term and short-term), and net gains from foreign currency
transactions earned or realized by the Portfolio. The Fund calculates its
net investment income and share price as of the close of regular trading
on the NYSE on each Business Day (usually 4:00 p.m. Eastern time).
The Portfolio's net investment income consists of all
income accrued on portfolio assets less accrued expenses, but does not
include realized gains and losses. Net investment income and realized
gains and losses are reflected in the Portfolio's NAV (and, hence, the
Fund's NAV) until they are distributed. Dividends from net investment
income and distributions of net realized capital and foreign currency
gains, if any, normally are paid once annually, in December.
Dividends and/or other distributions are automatically
reinvested in additional shares of the Fund, unless and until the
shareholder elects to receive them in cash ("cash election"). Share-
holders may make a cash election on the original account application or at
a later date by writing to State Street Bank and Trust Company ("State
Street"), c/o Boston Service Center, P.O. Box 8403, Boston, MA 02266-8403.
To the extent dividends and other distributions are subject to federal,
state, or local income taxation, they are taxable to shareholders whether
received in cash or reinvested in Fund shares.
A cash election remains in effect until the shareholder
notifies State Street in writing to discontinue the election. If it is
determined, however, that the U.S. Postal Service cannot properly deliver
Fund mailings to the shareholder, the Fund will terminate the
shareholder's cash election. Thereafter, the shareholder's dividends and
other distributions will be automatically reinvested in additional Fund
shares until the shareholder notifies State Street or the Fund in writing
of his or her correct address and requests in writing that the cash
election be reinstated.
- 43 -
<PAGE>
ADDITIONAL TAX INFORMATION
TAXATION OF THE FUND
--------------------
In order to continue to qualify for treatment as a RIC
under the Code, the Fund must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital
gain, and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional require-
ments. These requirements include the following: (1) the Fund must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, and gains from the
sale or other disposition of securities or foreign currencies, or other
income (including gains from Hedging Instruments) derived with respect to
its business of investing in securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any
of the following, that were held for less than three months -- (i) Hedging
Instruments (other than those on foreign currencies) or (ii) foreign
currencies or Hedging Instruments thereon that are not directly related to
the Fund's principal business of investing in securities (or options and
futures with respect thereto) ("Short-Short Limitation"); and (3) at the
close of each quarter of the Fund's taxable year, (i) at least 50% of the
value of its total assets must be 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 an amount that does not exceed
5% of the value of the Fund's total assets and does not represent more
than 10% of the issuer's outstanding voting securities, and (ii) not more
than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities) of any one issuer.
Certain funds that invest in portfolios managed by N&B
Management, including funds that invest in other portfolios of Managers
Trust, have received rulings from the Internal Revenue Service ("Service")
that each such fund, as an investor in its corresponding portfolio, will
be deemed to own a proportionate share of the portfolio's assets and
income for purposes of determining whether the fund satisfies all the
requirements described above to qualify as a RIC. Although those rulings
may not be relied on as precedent by the Fund, N&B Management believes
that the reasoning thereof and, hence, their conclusion apply to the Fund
as well.
The Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for that year and
capital gain net income for the one-year period ended on October 31 of
that year, plus certain other amounts.
See the next section for a discussion of the tax conse-
quences to the Fund of distributions to it from the Portfolio, investments
- 44 -
<PAGE>
by the Portfolio in certain securities, and hedging transactions engaged
in by the Portfolio.
TAXATION OF THE PORTFOLIO
Certain portfolios managed by N&B Management, including
other portfolios of Managers Trust, have received rulings from the Service
to the effect that, among other things, each such portfolio will be
treated as a separate partnership for federal income tax purposes and will
not be a "publicly traded partnership." Although those rulings may not be
relied on as precedent by the Portfolio, N&B Management believes the
reasoning thereof and, hence, their conclusion apply to the Portfolio as
well. As a result, the Portfolio is not subject to federal income tax;
instead, each investor in the Portfolio, such as the Fund, is required to
take into account in determining its federal income tax liability its
share of the Portfolio's income, gains, losses, deductions, and credits,
without regard to whether it has received any cash distributions from the
Portfolio. The Portfolio also is not subject to Delaware or New York
income or franchise tax.
Because the Fund is deemed to own a proportionate share
of the Portfolio's assets and income for purposes of determining whether
the Fund satisfies the requirements to qualify as a RIC, the Portfolio
intends to continue to conduct its operations so that the Fund will be
able to continue to satisfy all those requirements.
Distributions to the Fund from the Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result
in the Fund's recognition of any gain or loss for federal income tax
purposes, except that (1) gain will be recognized to the extent any cash
that is distributed exceeds the Fund's basis for its interest in the
Portfolio before the distribution, (2) income or gain will be recognized
if the distribution is in liquidation of the Fund's entire interest in the
Portfolio and includes a disproportionate share of any unrealized
receivables held by the Portfolio, and (3) loss will be recognized if a
liquidation distribution consists solely of cash and/or unrealized
receivables. The Fund's basis for its interest in the Portfolio generally
equals the amount of cash and the basis of any property the Fund invests
in the Portfolio, increased by the Fund's share of the Portfolio's net
income and gains and decreased by (a) the amount of cash and the basis of
any property the Portfolio distributes to the Fund and (b) the Fund's
share of the Portfolio's losses.
Dividends and interest received by the Portfolio may be
subject to income, withholding, or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield on its
securities. Tax treaties between certain countries and the United States
may reduce or eliminate these foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments
by foreign investors.
- 45 -
<PAGE>
The Portfolio may invest in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is a foreign corporation that, in
general, meets either of the following tests: (1) at least 75% of its
gross income 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 Portfolio holds stock of a PFIC, the Fund
(indirectly through its interest in the Portfolio) will be subject to
federal income tax on a portion of any "excess distribution" received on
the stock or of any gain on disposition of the stock (collectively, "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. 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 that income is
distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat
the PFIC as a "qualified electing fund," then in lieu of the Fund's
incurring the foregoing tax and interest obligation, the Fund would be
required to include in income each year its pro rata share of the
Portfolio's pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term
capital gain over net short-term capital loss) -- which most likely would
have to be distributed by the Fund to satisfy the Distribution Requirement
and to avoid imposition of the Excise Tax -- even if those earnings and
gain were not received by the Portfolio. In most instances it will be
very difficult, if not impossible, to make this election because of
certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as
the Fund, would be entitled to elect to mark to market their stock in
certain PFICs. Marking to market, in this context, means recognizing as
gain for each taxable year the excess, as of the end of that year, of the
fair market value of each such PFIC's stock over the adjusted basis in
that stock (including mark to market gain for each prior year for which an
election was in effect).
The Portfolio's use of hedging strategies, such as
writing (selling) and purchasing options and futures contracts and
entering into forward contracts, involves complex rules that will
determine for income tax purposes the character and timing of recognition
of the gains and losses the Portfolio realizes in connection therewith.
Gains from the sale or other disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
Hedging Instruments derived by the Portfolio with respect to its business
of investing in securities or foreign currencies, will qualify as permis-
sible income for the Fund under the Income Requirement. However, income
from the disposition by the Portfolio of Hedging Instruments (other than
those on foreign currencies) will be subject to the Short-Short Limitation
for the Fund if they are held for less than three months. Income from the
disposition of foreign currencies, and Hedging Instruments on foreign
currencies, that are not directly related to the Portfolio's principal
business of investing in securities (or options and futures with respect
- 46 -
<PAGE>
thereto) also will be subject to the Short-Short Limitation for the Fund
if they are held for less than three months.
If the Portfolio satisfies certain requirements, any
increase in value of a position that is part of a "designated hedge" will
be offset by any decrease in value (whether realized or not) of the
offsetting hedging position during the period of the hedge for purposes of
determining whether the Fund satisfies the Short-Short Limitation. Thus,
only the net gain (if any) from the designated hedge will be included in
gross income for purposes of that limitation. The Portfolio will consider
whether it should seek to qualify for this treatment for its hedging
transactions. To the extent the Portfolio does not so qualify, it may be
forced to defer the closing out of certain Hedging Instruments beyond the
time when it otherwise would be advantageous to do so, in order for the
Fund to continue to qualify as a RIC.
Exchange-traded futures contracts and listed options
thereon ("Section 1256 contracts") are required to be marked to market
(that is, treated as having been sold at market value) at the end of the
Portfolio's taxable year. Sixty percent of any gain or loss recognized as
a result of these "deemed sales," and 60% of any net realized gain or loss
from any actual sales, of Section 1256 contracts are treated as long-term
capital gain or loss; the remainder is treated as short-term capital gain
or loss.
The Portfolio may acquire zero coupon securities or other
securities issued with original issue discount ("OID"). As a holder of
those securities, the Portfolio (and, through it, the Fund) must take into
account the OID that accrues on the securities during the taxable year,
even if it receives no corresponding payment on the securities during the
year. Because the Fund annually must distribute substantially all of its
investment company taxable income (including its share of the Portfolio's
accrued OID) to satisfy the Distribution Requirement and to avoid
imposition of the Excise Tax, the Fund may be required in a particular
year to distribute as a dividend an amount that is greater than its
proportionate share of the total amount of cash the Portfolio actually
receives. Those distributions will be made from the Fund's (or its
proportionate share of the Portfolio's) cash assets or, if necessary, from
the proceeds of sales of the Portfolio's securities. The Portfolio may
realize capital gains or losses from those sales, which would increase or
decrease the Fund's investment company taxable income and/or net capital
gain. In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the Short-Short
Limitation, any such gains would reduce the Portfolio's ability to sell
other securities, or certain Hedging Instruments, held for less than three
months that it might wish to sell in the ordinary course of its portfolio
management.
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<PAGE>
TAXATION OF THE FUND'S SHAREHOLDERS
-----------------------------------
If Fund shares are sold at a loss after being held for
six months or less, the loss will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received on those shares. Investors also should be aware that if shares
of the Fund are purchased shortly before the record date for a dividend or
other distribution, the purchaser will receive some portion of the
purchase price back as a taxable distribution.
The Fund is required to withhold 31% of all dividends,
capital gain distributions, and redemption proceeds payable to any
individuals and certain other non-corporate shareholders who do not
provide the Fund with a correct taxpayer identification number.
Withholding at that rate also is required from dividends and capital gain
distributions payable to such shareholders who otherwise are subject to
backup withholding.
As described under "How to Sell Shares" in the
Prospectus, the Fund may close a shareholder's account with the Fund and
redeem the remaining shares if the account balance falls below the
specified minimum and the shareholder fails to reestablish the minimum
balance after being given the opportunity to do so. If an account that is
closed pursuant to the foregoing was maintained for an IRA or a qualified
retirement plan (including a simplified employee pension plan, Keogh plan,
corporate profit-sharing and money purchase pension plan, Code
section 401(k) plan, and Code section 403(b)(7) account), the Fund's
payment of the redemption proceeds to the accountholder may result in
adverse tax consequences for the accountholder. The accountholder should
consult his or her tax adviser regarding any such consequences.
PORTFOLIO TRANSACTIONS
Neuberger & Berman acts as the Portfolio's principal
broker in the purchase and sale of its portfolio securities and in connec-
tion with the purchase and sale of options on its securities.
Transactions in portfolio securities for which Neuberger & Berman serves
as broker will be effected in accordance with Rule 17e-1 under the 1940
Act.
During the period from March 14, 1994 (commencement of
operations) through August 31, 1994, and the fiscal year ended August 31,
1995, the Portfolio paid brokerage commissions of $46,374 and $138,378,
respectively, of which $46,050 and $95,964, respectively, were paid to
Neuberger & Berman. Transactions in which the Portfolio used Neuberger &
Berman as broker comprised 72.32% of the aggregate dollar amount of
transactions involving the payment of commissions, and 69.35% of the
aggregate brokerage commissions paid by the Portfolio, during the fiscal
year ended August 31, 1995. 93.17% of the $42,414 paid to other brokers
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by the Portfolio during that fiscal year (representing commissions on
transactions involving approximately $17,590,257) was directed to those
brokers because of research services they provided. During the fiscal
year ended August 31, 1995, the Portfolio acquired none of the securities
of its "regular brokers or dealers" (as defined in the 1940 Act) ("Regular
B/Ds"); at that date, the Portfolio held none of the securities of its
Regular B/Ds.
Portfolio securities are, from time to time, loaned by
the Portfolio to Neuberger & Berman in accordance with the terms and
conditions of an order issued by the SEC. The order exempts such
transactions from provisions of the 1940 Act that would otherwise prohibit
such transactions, subject to certain conditions. Among the conditions of
the order, securities loans made by the Portfolio to Neuberger & Berman
must be fully secured by cash collateral. Under the order, the portion of
the income on cash collateral which may be shared with Neuberger & Berman
is determined with reference to concurrent arrangements between Neuberger
& Berman and non-affiliated lenders with which it engages in similar
transactions. In addition, where Neuberger & Berman borrows securities
from the Portfolio in order to relend them to others, Neuberger & Berman
is required to pay the Portfolio, on a quarterly basis, certain "excess
earnings" that Neuberger & Berman otherwise has derived from the relending
of the borrowed securities. When Neuberger & Berman desires to borrow a
security that the Portfolio has indicated a willingness to lend, Neuberger
& Berman must borrow such security from the Portfolio, rather than from an
unaffiliated lender, unless the unaffiliated lender is willing to lend
such security on more favorable terms (as specified in the order) than the
Portfolio. If the Portfolio's expenses exceed its income in any
securities loan transaction with Neuberger & Berman, Neuberger & Berman
must reimburse the Portfolio for such loss.
During the fiscal year ended August 31, 1995, and the
period March 14, 1994 (commencement of operations) to August 31, 1994, the
Portfolio earned no interest income from the collateralization of
securities loans.
The Portfolio may also lend securities to unaffiliated
entities, including brokers or dealers, banks and other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned, is continuously maintained by the borrower with the Portfolio.
During the time securities are on loan, the borrower will pay the
Portfolio an amount equivalent to any dividends or interest paid on such
securities. The Portfolio 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. These loans are subject to
termination at the option of the Portfolio or the borrower. The Portfolio
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 Portfolio
does not have the right to vote securities on loan, but would terminate
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the loan and regain the right to vote if that were considered important
with respect to the investment.
A committee of Independent Portfolio Trustees from time
to time reviews, among other things, information relating to securities
loans by the Portfolio.
In effecting securities transactions, the Portfolio gen-
erally 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 Portfolio plans to continue to use Neuberger &
Berman as its principal broker where, in the judgment of N&B Management
(the Portfolio's investment manager and an affiliate of the broker), that
firm is able to obtain a price and execution at least as favorable as
other qualified brokers. To the Portfolio's knowledge, however, no
affiliate of the Portfolio receives give-ups or reciprocal business in
connection with its securities transactions.
The use of Neuberger & Berman as a broker for the
Portfolio 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 Portfolio Trustees have expressly authorized Neuberger
& Berman to retain such compensation, and Neuberger & Berman complies with
the reporting requirements of Section 11(a).
Under the 1940 Act, commissions paid by the Portfolio 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 Portfolio's policy that the
commissions to be paid to Neuberger & Berman must, in N&B Management's
judgment, be (1) at least as favorable as those charged by other brokers
having comparable execution capability and (2) 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 Portfolio Trustees not to be comparable to the
Portfolio. The Portfolio does not deem it practicable and in its best
interest 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 Portfolio unless an appropriate exemption is
available.
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A committee of Independent Portfolio Trustees, from time
to time, reviews among other things, information relating to the
commissions charged by Neuberger & Berman to the Portfolio 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 Portfolio must be reviewed
and approved no less often than annually by a majority of the Independent
Portfolio Trustees.
The Portfolio expects that it will continue to execute a
portion of its transactions through brokers other than Neuberger & Berman.
In selecting those brokers, N&B Management considers the quality and
reliability of brokerage services, including execution capability,
performance, and financial responsibility, and may consider research and
other investment information provided by, and sale of Fund shares effected
through, those brokers.
To ensure that accounts of all investment clients,
including the Portfolio, are treated fairly in the event that transaction
instructions for more than one investment account regarding the same
security are received by Neuberger & Berman at or about the same time,
Neuberger & Berman may combine transaction 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 transaction order
actually placed by the account bears to the aggregate size of transaction
orders simultaneously made by the other accounts, subject to de minimis
exceptions, with all participating accounts paying or receiving the same
price.
A committee comprised of officers of N&B Management and
partners of Neuberger & Berman who are portfolio managers of the Portfolio
and/or Other N&B Funds (collectively, "N&B Funds") and some of Neuberger &
Berman's managed accounts ("Managed Accounts") evaluates 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 N&B 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 or research capabilities of particular
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brokers, or in the execution or research needs of the N&B Funds and/or the
Managed Accounts; and (3) the aggregate amount of brokerage commissions
generated by transactions for the N&B Funds and the Managed Accounts may
change substantially from one semi-annual period to the next.
The commissions charged by a broker other than Neuberger
& Berman may be higher than the amount another firm might charge if N&B
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. N&B Management believes that those
research services benefit the Portfolio by supplementing the research
otherwise available to N&B Management. That research may be used by N&B
Management in servicing Other N&B Funds and, in some cases, by Neuberger &
Berman in servicing the Managed Accounts. On the other hand, research
received by N&B Management from brokers effecting portfolio transactions
on behalf of the Other N&B Funds and by Neuberger & Berman from brokers
effecting portfolio transactions on behalf of the Managed Accounts may be
used for the Portfolio's benefit.
Janet W. Prindle, a Vice President of N&B Management and
a partner of Neuberger & Berman, is the person primarily responsible for
making decisions as to specific action to be taken with respect to the
investment portfolio of the Portfolio. She has full authority to take
action with respect to portfolio transactions and may or may not consult
with other personnel of N&B Management prior to taking such action. If
Ms. Prindle is unavailable to perform her responsibilities, Farha-Joyce
Haboucha, who is a Vice President of N&B Management, will assume
responsibility for the Portfolio.
PORTFOLIO TURNOVER
------------------
The portfolio turnover rate is the lesser of the cost of
the securities purchased or the value of the securities sold, excluding
all securities, including options, whose maturity or expiration date at
the time of acquisition was one year or less, divided by the average
monthly value of such securities owned during the year.
REPORTS TO SHAREHOLDERS
Shareholders of the Fund receive unaudited semi-annual
financial statements, as well as year-end financial statements audited by
the independent accountants for the Fund and Portfolio. The Fund's
statements show the investments owned by the Portfolio and the market
values thereof and provide other information about the Fund and its
operations, including the Fund's beneficial interest in the Portfolio.
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<PAGE>
CUSTODIAN AND TRANSFER AGENT
The Fund and Portfolio have each selected State Street,
225 Franklin Street, Boston, MA 02110, as custodian for its securities and
cash. All correspondence should be mailed to Neuberger & Berman Funds,
c/o Boston Service Center, P.O. Box 8403, Boston, MA 02266-8403. State
Street also serves as the Fund's transfer and shareholder servicing agent,
administering purchases, redemptions, and transfers of Fund shares and the
payment of dividends and other distributions through its Boston Service
Center.
INDEPENDENT ACCOUNTANTS
The Fund and Portfolio have selected Coopers & Lybrand
L.L.P., One Post Office Square, Boston, MA 02109, as the independent
accountants who will audit their financial statements.
LEGAL COUNSEL
The Fund and Portfolio have selected Kirkpatrick &
Lockhart LLP, 1800 Massachusetts Avenue, N.W., 2nd Floor, Washington, D.C.
20036, as their legal counsel.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth the name, address, and
percentage of ownership of each person who was known by the Fund to own
beneficially or of record 5% or more of the Fund's outstanding shares at
November 30, 1995:
Percentage of
Ownership at
Name and Address November 30, 1995
---------------- -----------------
Charles Schwab & Co., Inc.* 30.30%
Attn: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
Neuberger & Berman* 6.13%
Attn: Steve Gallaro, Operations Control
11 Broadway, 12th Floor
New York, NY 10004-1303
Lilo J. Leeds
17 Hilltop Drive
Great Neck, NY 11021-1140
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<PAGE>
Percentage of
Ownership at
Name and Address November 30, 1995
---------------- -----------------
* Charles Schwab & Co., Inc. and Neuberger & Berman hold these
shares of record for the accounts of certain of their clients
and have informed the Fund of their policy to maintain the
confidentiality of holdings in their client accounts unless
disclosure is expressly required by law.
At December 6, 1995, the trustees and officers of the
Trust and the corresponding Managers Trust, as a group, owned beneficially
or of record less than 1% of the outstanding shares of the Fund.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the infor-
mation included in the Trust's registration statement filed with the SEC
under the 1933 Act with respect to the securities offered by the
Prospectus. Certain portions of the registration statement have been
omitted pursuant to SEC rules and regulations. The registration
statement, including the exhibits filed therewith, may be examined at the
SEC's offices in Washington, D.C.
Statements contained in this SAI and in the Prospectus 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 the contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The following financial statements and related documents
are incorporated herein by reference to the Fund's Annual Report to
shareholders for the fiscal year ended August 31, 1995:
The audited financial statements of the Fund and
Portfolio and notes thereto for the fiscal year ended
August 31, 1995, and the reports of Coopers & Lybrand
L.L.P., independent accountants, with respect to such
audited financial statements of the Fund and Portfolio.
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Appendix A
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 higher rated issues only
in 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 principal and interest. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in higher
rated categories.
Plus (+) or Minus (-) - The ratings above may be modified
by the addition of a plus or minus sign to show relative standing within
the major categories.
Moody's corporate bond ratings:
Aaa - Bonds rated Aaa are judged to be of the best qual-
ity. 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. Although the
various protective elements are likely to change, such changes that can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
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-rated
securities, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger than in Aaa-rated securities.
A - Bonds rated A possess many favorable investment
attributes and are considered to be upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
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<PAGE>
but elements may be present that suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are 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. These bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Modifiers - Moody's may apply numerical modifiers 1, 2,
and 3 in each generic rating classification described above. The modifier
1 indicates that the security 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 issuer ranks in the lower end of its generic
rating category.
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 (+).
A-2 - This designation denotes satisfactory capacity for
timely payment. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's commercial paper ratings:
Issuers rated Prime-1 (or related supporting
institutions), also known as P-1, have a superior capacity for repayment
of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well-established
industries.
- High rates of return on funds employed.
- Conservative capitalization structures 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.
Issuers rated Prime-2 (or related supporting
institutions), also known as P-2, have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by
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<PAGE>
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.
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<PAGE>
Appendix B
THE ART OF INVESTMENT: A CONVERSATION WITH ROY NEUBERGER
The Art of Investing:
A Conversation with Roy Neuberger
"I firmly believe that if you want to
manage your own money, you must be a
student of the market. If you are
unwilling or unable to do that, find
someone else to manage your money for
you."
NEUBERGER & BERMAN
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[THIS PAGE IS BLANK - IT IS AN INSIDE PAGE OF THIS BROCHURE]
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<PAGE>
[PICTURE OF ROY NEUBERGER]
During my more than sixty-five
years of buying and selling securities,
I've been asked many questions about my
approach to investing. On the pages
that follow are a variety of my
thoughts, ideas and investment
principles which have served me well
over the years. If you gain useful
knowledge in the pursuit of profit as
well as enjoyment from these comments,
I shall be more than content.
\s\ Roy R. Neuberger
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<TABLE>
<CAPTION>
<S> <C>
YOU'VE BEEN ABLE TO CONDENSE SOME OF THE
CHARACTERISTICS OF SUCCESSFUL INVESTING INTO
FIVE "RULES." WHAT ARE THEY?
Rule #1: Be flexible. My philosophy has
necessarily changed from time to time because
of events and because of mistakes. My views
change as economic, political, and
technological changes occur both on and
sometimes off our planet. It is imperative
that you be willing to change your thoughts to
meet new conditions.
Rule #2: Take your temperament into account.
Recognize whether you are by nature very
speculative or just the opposite - fearful,
timid of taking risks. But in any event --
Diversify your investments, Rule #3: Be broad-gauged. Diversify your
make sure that some of your investments, make sure that some of your
principal is kept safe, and principal is kept safe, and try to increase
try to increase your income your income as well as your capital.
as well as your capital.
[PICTURE OF ROY NEUBERGER]
Rule #4: Always remember there are many ways to
skin a cat! Ben Graham and David Dodd did it by
understanding basic values. Warren Buffet
invested his portfolio in a handful of long-
term holdings, while staying involved with the
companies' managements. Peter Lynch chose to
understand, first-hand, the products of many
hundreds of the companies he invested in.
George Soros showed his genius as a hedge fund
investor who could decipher world currency
trends. Each has been successful in his own
way. But to be successful, remember to
- 2 -
<PAGE>
Rule #5: Be skeptical. To repeat a few well-
worn useful phrases:
A. Dig for yourself.
B. Be from Missouri.
C. If it sounds too good to be true, it
probably is.
IN YOUR 65 YEARS OF INVESTING ARE THERE ANY
GENERAL PATTERNS YOU'VE OBSERVED AS TO HOW THE
MARKET BEHAVES?
Every decade that I've been involved with Wall
Street has a nuance of its own, an economic and
social climate that influences investors. But
generally, bull markets tend to be longer than
bear markets, and stock prices tend to go up
more slowly and erratically than they go down.
Bear markets tend to be shorter and of greater
intensity. The market rarely rises or declines
concurrently with business cycles longer than
six months.
AS A LEGENDARY "VALUE INVESTOR," HOW DO YOU
DEFINE VALUE INVESTING?
Value investing means finding the best values -
- either absolute or relative. Absolute means
a stock has a low market price relative to its
own fundamentals. Relative value means the
price is attractive relative to the market as a
whole.
COULD YOU DESCRIBE A STOCK WITH "GOOD VALUE"?
A classic example is a company that has a low
price to earnings ratio, a low price to book
ratio, free cash flow, a strong balance sheet,
undervalued corporate assets, unrecognized
earnings turnaround and is selling at a
discount to private market value.
These characteristics usually lead to companies
that are under-researched and have a high
degree of inside ownership and entrepreneurial
management.
- 3 -
<PAGE>
One of my colleagues at Neuberger & Berman says
he finds his value stocks either "under a
cloud" or "under a rock." "Under a cloud"
stocks are those Wall Street in general doesn't
like, because an entire industry is out of
favor and even the good stocks are being
dropped. "Under a rock" stocks are those Wall
Street is ignoring, so you have to uncover them
on your own.
ARE THERE OTHER KEY CRITERIA YOU USE TO JUDGE
STOCKS?
I'm more interested in longer-term trends in
earnings than short-term trends. Earnings
gains should be the product of long-term
strategies, superior management, taking
advantage of business opportunities and so on.
If these factors are in their proper place,
short-term earnings should not be of major
concern. Dividends are an important extra
because, if they're stable, they help support
the price of the stock.
WHAT ABOUT SELLING STOCKS?
Most individual investors should invest for the
long term but not mindlessly. A sell
discipline, often neglected by investors, is
vitally important.
"One should fall in love One should fall in love with ideas, with
with ideas, with people or people, or with idealism. But in my book, the
with idealism. But in my last thing to fall in love with is a particular
book, the last thing to security. It is after all just a sheet of paper
fall in love with is a indicating a part ownership in a corporation
particular security." and its use is purely mercenary. If you must
love a security, stay in love with it until it
gets overvalued; then let somebody else fall in
love.
[PICTURE OF ROY NEUBERGER]
- 4 -
<PAGE>
ANY OTHER ADVICE FOR INVESTORS?
I firmly believe that if you want to manage
your own money, you must be a student of the
market. If you're unwilling or unable to do
that, find someone else to manage your money
for you. Two options are a well-managed no-
load mutual fund or, if you have enough assets
for separate account management, a money
manager you trust with a good record.
HOW WOULD YOU DESCRIBE YOUR PERSONAL INVESTING
STYLE?
Every stock I buy is bought to be sold. The
market is a daily event, and I continually
review my holdings looking for selling
opportunities. I take a profit occasionally on
something that has gone up in price over what
was expected and simultaneously take losses
whenever misjudgment seems evident. This
creates a reservoir of buying power that can be
used to make fresh judgments on what are the
best values in the market at that time. My
active investing style has worked well for me
over the years, but for most investors I
recommend a longer-term approach.
I tend not to worry very must about the day to
day swings of the market, which are very hard
to comprehend. Instead, I try to be rather
clever in diagnosing values and trying to win
70 to 80 percent of the time.
YOU BEGAN INVESTING IN 1929. WHAT WAS YOUR
EXPERIENCE WITH THE "GREAT CRASH"?
- 5 -
<PAGE>
The only money I managed in the Panic of 1929
was my own. My portfolio was down about 12
percent, and I had an uneasy feeling about the
market and conditions in general. Those were
the days of 10 percent margin. I studied the
lists carefully for a stock that was overvalued
in my opinion and which I could sell short as a
hedge. I came across RCA at about $100 per
share. It had recently split 5 for 1 and
appeared overvalued. There were no dividends,
little income, a low net worth and a weak
financial position. I sold RCA short in the
amount equal to the dollar value of my long
portfolio. It proved to be a timely and
profitable move.
HOW DID THE CRASH OF 1929 AFFECT YOUR INVESTING
STYLE?
I am prematurely bearish when the market goes
up for a long time and everybody is happy
because they are richer. I am very bullish
when the market has gone down perceptibly and I
feel it has discounted any troubles we are
going to have.
HOW IMPORTANT ARE PSYCHOLOGICAL FACTORS TO
MARKET BEHAVIOR?
There are many factors in addition to economic
statistics or security analysis in a buy or
sell decision. I believe psychology plays an
important role in the Market. Some people
follow the crowd in hopes they'll be swept
along in the right direction, but if the crowd
is late in acting, this can be a bad move.
I like to be contrary. When things look bad, I
become optimistic. When everything looks rosy,
and the crowd is optimistic, I like to be a
seller. Sometimes I'm too early, but I
generally profit.
AS A RENOWNED ART COLLECTOR, DO YOU FIND
SIMILARITIES BETWEEN SELECTING STOCKS AND
SELECTING WORKS OF ART?
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Both are an art, although picking stocks is a
minor art compared with painting, sculpture or
"When things look bad, I literature. I started buying art in the 30s,
become optimistic. When and in the 40s it was a daily, almost hourly
everything looks rosy, and occurrence. My inclination to buy the works of
the crowd is optimistic, I living artists comes from Van Gogh, who sold
like to be a seller." only one painting during his lifetime. He died
in poverty, only then to become a legend and
have his work sold for millions of dollars.
[PICTURE OF ROY NEUBERGER]
There are more variables to consider now in
both buying art and picking stocks. In the
modern stock markets, the heavy use of futures
and options has changed the nature of the
investment world. In past times, the stock
market was much less complicated, as was the
art world.
Artists rose and fell on their own merits
without a lot of publicity and attention. As
more and more dealers are involved with
artists, the price of their work becomes
inflated. So I almost always buy works of
unknown, relatively undiscovered artists,
which, I suppose is similar to value investing.
But the big difference in my view of art and
stocks is that I buy a stock to sell it and
make money. I never bought paintings or
sculptures for investment in my life. The
objective is to enjoy their beauty.
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<PAGE>
WHAT DO YOU CONSIDER THE BUSINESS MILESTONES IN
YOUR LIFE?
Being a founder of Neuberger & Berman and
creating one of the first no-load mutual funds.
I started on Wall Street in 1929, and during
the depression I managed my own money and that
of my clientele. We all prospered, but I
wanted to have my own firm. In 1939 I became a
founder of Neuberger & Berman, and for about 10
years we managed money for individuals with
substantial financial assets. But I also
wanted to offer the smaller investor the
benefits of professional money management, so
in 1950 I created the Guardian Mutual Fund (now
known as the Neuberger & Berman Guardian Fund).
The Fund was kind of an innovation in its time
because it didn't charge a sales commission. I
thought the public was being overcharged for
mutual funds, so I wanted to create a fund that
would be offered directly to the public without
a sales charge. Now of course the "no-load"
fund business is a huge industry. I managed
the Fund myself for over 28 years.
[PICTURE OF ROY NEUBERGER]
YOU'RE IN YOUR NINETIES AND STILL YOU GO INTO
THE OFFICE EVERY DAY TO MANAGE YOUR
INVESTMENTS. WHY?
I like the fun of being nimble in the stock
market, and I'm addicted to the market's
fascinations.
WHAT CLOSING WORDS OF ADVICE DO YOU HAVE ABOUT
INVESTING?
Realize that there are opportunities at all
times for the adventuresome investor. And stay
in good physical condition. It's a strange
thing. You do not dissipate your energies by
using them. Exercise your body and your brain
every day, and you'll do better in investments
and in life.
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<PAGE>
ROY NEUBERGER: A BRIEF BIOGRAPHY
Roy Neuberger is a founder of the investment
management firm Neuberger & Berman, and a
renowned value investor. He is also a
recognized collector of contemporary American
art, much of which he has given away to museums
and colleges across the country.
During the 1920s, Roy studied art in
Paris. When he realized he didn't possess the
talent to become an artist, he decided to
collect art, and to support this passion, Roy
turned to investing -- a pursuit for which his
talents have proven more than adequate.
A TALENT FOR INVESTING
Roy began his investment career by joining
a brokerage firm in 1929, seven months before
the "Great Crash." Just weeks before "Black
Monday," he shorted the stock of RCA, thinking
it was overvalued. He profited from the
falling market and gained a reputation for
market prescience and stock selection that has
lasted his entire career.
NEUBERGER & BERMAN'S FOUNDING
Roy's investing acumen attracted many
people who wished to have him manage their
money. In 1939, at the age of 36, after
purchasing a seat on the New York Stock
Exchange, Roy founded Neuberger & Berman to
provide money management services to people who
lacked the time, interest or expertise to
manage their own assets.
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<PAGE>
NEUBERGER & BERMAN -- OVER FIVE DECADES OF
GROWTH
Neuberger & Berman has grown through the
years and now manages approximately $30 billion
of equity and fixed income assets, both
domestic and international, for individuals,
institutions, and its family of no-load mutual
funds. Today, as when the firm was founded,
Neuberger & Berman follows a value approach to
investing, designed to enable clients to
advance in good markets and minimize losses
when conditions are less favorable.
For more complete information about the
Neuberger & Berman Guardian Fund,
including fees and expenses, call
Neuberger & Berman Management at 800-877-
9700 for a free prospectus. Please read
it carefully, before you invest or send
money.
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<PAGE>
Neuberger & Berman Management
Inc.[SERVICE MARK]
605 Third Avenue, 2nd
Floor
New York, NY 10158-
0006
Shareholder Services
(800) 877-9700
[COPYRIGHT
SYMBOL]1995 Neuberger
& Berman
PRINTED ON RECYCLED PAPER
WITH SOY BASED INKS
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