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NEUBERGER & BERMAN INCOME TRUST AND PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 2, 1998
Neuberger & Berman
Limited Maturity Bond Trust
(and Neuberger & Berman
Limited Maturity Bond
Portfolio)
No-Load Mutual Fund
605 Third Avenue, 2nd Floor, New York, NY 10158-0180
Toll-Free 800-877-9700
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Neuberger & Berman LIMITED MATURITY Bond Trust ("Fund") is a
no-load mutual fund that offer shares pursuant to a Prospectus dated March 2,
1998. The Fund invests all of its net investable assets in Neuberger & Berman
LIMITED MATURITY Bond Portfolio ("Portfolio").
AN INVESTOR CAN BUY, OWN, AND SELL FUND SHARES ONLY THROUGH AN ACCOUNT
WITH AN ADMINISTRATOR, BROKER-DEALER, OR OTHER INSTITUTION THAT PROVIDES
ACCOUNTING, RECORDKEEPING, AND OTHER SERVICES TO INVESTORS AND THAT HAS AN
ADMINISTRATIVE SERVICES AGREEMENT WITH NEUBERGER & BERMAN MANAGEMENT
INCORPORATED (EACH AN "INSTITUTION").
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"), Institutional Services, 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
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INVESTMENT INFORMATION...................................................1
Investment Policies and Limitations.............................1
Rating Agencies.................................................4
Overview of the Fund............................................5
Additional Investment Information...............................6
Risks of Fixed Income Securities...............................25
CERTAIN RISK CONSIDERATIONS.............................................25
PERFORMANCE INFORMATION.................................................26
Yield Calculations.............................................26
Total Return Computations......................................26
Comparative Information........................................27
Other Performance Information..................................28
TRUSTEES AND OFFICERS...................................................29
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES.......................35
Investment Manager and Administrator...........................35
Sub-Adviser....................................................37
Investment Companies Managed ..................................38
Management and Control of N&B Management.......................39
DISTRIBUTION ARRANGEMENTS...............................................40
ADDITIONAL EXCHANGE INFORMATION.........................................41
ADDITIONAL REDEMPTION INFORMATION.......................................43
Suspension of Redemptions......................................43
Redemptions in Kind............................................44
DIVIDENDS AND OTHER DISTRIBUTIONS.......................................44
ADDITIONAL TAX INFORMATION..............................................45
Taxation of the Funds..........................................45
Taxation of the Portfolio......................................46
Taxation of the Fund's Shareholders............................48
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PORTFOLIO TRANSACTIONS..................................................48
Portfolio Turnover.............................................49
REPORTS TO SHAREHOLDERS.................................................49
CUSTODIAN AND TRANSFER AGENT............................................49
INDEPENDENT AUDITORS....................................................50
LEGAL COUNSEL...........................................................50
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.....................50
REGISTRATION STATEMENT..................................................51
FINANCIAL STATEMENTS....................................................52
Appendix A...............................................................1
RATINGS OF SECURITIES...........................................1
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INVESTMENT INFORMATION
The Fund is a separate series of Neuberger & Berman Income
Trust ("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 a Portfolio of Income Managers Trust ("Managers Trust")
that has an investment objective identical to, and a name similar to, that of
the Fund. The Portfolio, in turn, invests in securities in accordance 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. Any investment objective, 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
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. These percentages are required by the Investment Company Act of 1940
("1940 Act") and are 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
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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 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.
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All other fundamental investment policies and limitations and
the non-fundamental investment policies and limitations of the Fund are
identical to those of the Portfolio. Therefore, although the following discusses
the investment policies and limitations of the Portfolio, it applies equally to
the Fund.
For purposes of the investment limitation on concentration in
a particular industry, the Portfolio determines the "issuer" of a municipal
obligation that is not a general obligation note or bond based on the
obligation's characteristics. The most significant of these characteristics is
the source of funds for the repayment of principal and payment of interest on
the obligation. If an obligation is backed by an irrevocable letter of credit or
other guarantee, without which the obligation would not qualify for purchase
under the Portfolio's quality restrictions, the issuer of the letter of credit
or the guarantee is considered an issuer of the obligation. If an obligation
meets the Portfolio's quality restrictions without credit support, the Portfolio
treats the commercial developer or the industrial user, rather than the
governmental entity or the guarantor, as the only issuer of the obligation, even
if the obligation is backed by a letter of credit or other guarantee. Also, for
purposes of the investment limitation on concentration in a particular industry,
both mortgage-backed and asset-backed securities are grouped together as a
single industry. For purposes of the limitation on commodities, the Portfolio
does not consider foreign currencies or forward contracts to be physical
commodities.
Except for the limitation on borrowing and the limitation on
illiquid securities, any maximum percentage of securities or assets, contained
in any investment policy or limitation will not be considered to be exceeded
unless the percentage limitation is exceeded immediately after, and because of,
a transaction by the Portfolio. If events subsequent to a transaction result in
the Portfolio exceeding the percentage limitation on borrowing or illiquid
securities, N&B Management will take appropriate steps to reduce the percentage
of borrowings or the percentage held in illiquid securities, as may be required
by law, within a reasonable amount of time.
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; 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
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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
purchases of 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.
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
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portfolio securities, may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 ("1933 Act").
The Portfolio's non-fundamental investment policies and
limitations are as follows:
1. ILLIQUID SECURITIES. The Portfolio may not purchase any
security if, as a result, more than 15% 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.
2. BORROWING. The Portfolio may not purchase securities if
outstanding borrowings, including any reverse repurchase agreements, exceed 5%
of its total assets.
3. LENDING. Except for the purchase of debt securities and
engaging in repurchase agreements, the Portfolio may not make any loans other
than securities loans.
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.
RATING AGENCIES
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As discussed in the Prospectus, the Portfolio may purchase
securities rated by Standard & Poor's ("S&P"), Moody's Investors Service, Inc.
("Moody's"), or any other nationally recognized statistical rating organization
("NRSRO"). 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, securities with the same maturity, duration, coupon, and rating
may have different yields. Although the Portfolio may rely on the ratings of any
NRSRO, the Portfolio mainly refers to ratings assigned by S&P and Moody's, which
are described in Appendix A to this SAI. The Portfolio may also invest in
unrated securities that are deemed comparable in quality by N&B Management to
the rated securities in which the Portfolio may permissibly invest.
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OVERVIEW OF THE FUND
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The Fund pursues attractive current income with low risk to
principal. The Fund is managed on the basis of a strategy of investment in fixed
income sectors we believe are attractively priced, and the selection of the most
attractively priced issues in those sectors based on their perceived risk and
returns. Sector investments include corporate bonds, mortgage-backed securities,
asset backed securities, CMOs (Collateralized Mortgages Obligations), Treasuries
and Government agencies.
We also manage the duration of the portfolio. LIMITED
MATURITY'S portfolio of bonds has a maximum average duration of four years.
Duration measures a bond's exposure to interest rate risk. Duration incorporates
a bond's yield, coupon interest payments, final maturity and call features into
one measure. In general, the longer you extend a bond's duration, the greater
its potential return and exposure to interest rate fluctuations.
LIMITED MATURITY is appropriate for investors who seek to
participate in the returns of the bond market, but wish to avoid significant
fluctuations in principal value. In order to achieve its investment goal through
the Portfolio, the Fund has the flexibility to invest across the full range of
bond sectors (corporate, mortgage-backed securities, etc.) and may invest a
limited portion of its assets in foreign securities denominated in foreign
currencies as well as lower-rated "high yield" issues.
The investment strategy of this Fund is based upon the
demonstrated ability of short and intermediate duration portfolios to deliver
virtually all of the income of riskier long-term maturity portfolios. Thus, this
Fund limits its maximum average duration to four years. However, in order to
improve total return, it invests across a broad range of fixed income sectors
and within each sector seeks out securities that have a higher yield than
counterpart issues that we believe have a similar credit risk. It may
opportunistically invest in foreign issues when they offer higher yield than
U.S. issues. In addition, it may invest up to 10% of its net assets in "high
yield" issues when these issues offer the prospect of higher total return to the
Portfolio. It is the manager's belief that the combination of broad sector
diversification, active security selection and flexible maturity and duration
management can offer investors the prospect of total returns that will
approximate the bond market as a whole, with only moderate fluctuation in
principal value.
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ADDITIONAL INVESTMENT INFORMATION
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The Portfolio may make the following investments, among
others, although it may not buy all of the types of securities or use all of the
investment techniques that are described.
U.S. GOVERNMENT AND AGENCY SECURITIES. U.S. Government and
Agency Securities are direct obligations of the U.S. Government or its agencies
and instrumentalities, such as the Government National Mortgage Association
("GNMA"), Fannie Mae (also known as the Federal National Mortgage Association),
Freddie Mac (also known as the Federal Home Loan Mortgage Corporation), Student
Loan Marketing Association ("SLMA"), and Tennessee Valley Authority. Many agency
securities are not backed by the full faith and credit of the United States.
INFLATION-INDEXED SECURITIES. The Portfolio may invest in U.S.
Treasury securities whose principal value is adjusted daily in accordance with
changes to the Consumer Price Index. Such securities are backed by the full
faith and credit of the U.S. Government. Because the coupon rate on
inflation-indexed securities is lower than fixed-rate U.S. Treasury securities,
the Consumer Price Index would have to rise at least to the amount of the
difference between the coupon rate of the fixed rate U.S. Treasury issues and
the coupon rate of the inflation-indexed securities, assuming all other factors
are equal, in order for such securities to match the performance of the
fixed-rate Treasury securities. Inflation-indexed securities are expected to
react primarily to changes in the "real" interest rate (I.E., the nominal (or
stated) rate less the rate of inflation), while a typical bond reacts to changes
in the nominal interest rate. Accordingly, inflation-indexed securities have
characteristics of fixed-rate Treasuries having a shorter duration.
Any increase in principal value is taxable in the year the
increase occurs, even though holders do not receive cash representing the
increase until the security matures. Because the Fund must distribute
substantially all of its income to its shareholders to avoid payment of federal
income and excise taxes, the Portfolio may have to dispose of other investments
to obtain the cash necessary to distribute the accrued taxable income on
inflation-indexed securities.
REPURCHASE AGREEMENTS. In a repurchase agreement, 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. Repurchase agreements with a maturity of more than seven days are
considered to be illiquid securities. The Portfolio may not enter into a
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repurchase agreement with a maturity of more than seven days if, as a result,
more than 15% 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 a type
(excluding maturity and duration limitations) 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 repurchase price, 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 other institutional investors judged
creditworthy by N&B Management. Borrowers are required continuously to secure
their obligations to return securities on loan from a 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.
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.
Before they are registered, such securities may be sold only in a privately
negotiated transaction or pursuant to an exemption from registration. In
recognition of the increased size and liquidity of the institutional market for
unregistered securities and the importance of institutional investors in the
formation of capital, the SEC has adopted Rule 144A under the 1933 Act. Rule
144A is designed 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 registering them under the 1933 Act. To the extent that institutional
buyers become, for a time, uninterested in purchasing these securities,
investing in Rule 144A securities could increase the level of the Portfolio's
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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 are freely tradable in their
principal markets 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
restricted securities, including Rule 144A securities, are illiquid, purchases
thereof will be subject to the Portfolio's 15% limit on investments in illiquid
securities. Restricted securities for which no market exists are priced by a
method that the Portfolio Trustees believe accurately reflects fair value.
COMMERCIAL PAPER. Commercial paper is a short-term debt
security issued by a corporation, bank, municipality, or other issuer, usually
for purposes such as financing current operations. 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.
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 deposit in a
segregated account with its custodian cash or appropriate liquid securities,
marked to market daily, in an amount at least equal to the Portfolio's
obligations under the agreement. There is a risk that the counterparty to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Portfolio.
BANKING AND SAVINGS INSTITUTION SECURITIES. The Portfolio may
invest in banking and savings institution obligations, which include CDs, time
deposits, bankers' acceptances, and other short-term and long-term debt
obligations issued by commercial banks and savings institutions. CDs are
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receipts for funds deposited for a specified period of time at a specified rate
of return; time deposits generally are similar to CDs, but are uncertificated.
Bankers' acceptances are time drafts drawn on commercial banks by borrowers,
usually in connection with international commercial transactions. The CDs, time
deposits, and bankers' acceptances in which the Portfolio invests typically are
not covered by deposit insurance.
VARIABLE OR FLOATING RATE SECURITIES; DEMAND AND PUT FEATURES.
Variable rate securities provide for automatic adjustment of the interest rate
at fixed intervals (e.g., daily, monthly, or semi-annually); floating rate
securities provide for automatic adjustment of the interest rate whenever a
specified interest rate or index changes. The interest rate on variable and
floating rate securities (collectively, "Adjustable Rate Securities") ordinarily
is determined by reference to a particular bank's prime rate, the 90-day U.S.
Treasury Bill rate, the rate of return on commercial paper or bank CDs, an index
of short-term tax-exempt rates, or some other objective measure.
Adjustable Rate Securities in which the Portfolio invests
frequently permit the holder to demand payment of the obligations' principal and
accrued interest at any time or at specified intervals not exceeding one year.
The demand feature usually is backed by a credit instrument (e.g., a bank letter
of credit) from a creditworthy issuer and sometimes by insurance from a
creditworthy insurer. Without these credit enhancements, some Adjustable Rate
Securities might not meet the Portfolio's quality standards. Accordingly, in
purchasing these securities, the Portfolio relies primarily on the
creditworthiness of the credit instrument issuer or the insurer. The Portfolio
may not invest more than 5% of its total assets in securities backed by credit
instruments from any one issuer or by insurance from any one insurer (excluding
securities that do not rely on the credit instrument or insurance for their
ratings, i.e., stand on their own credit).
The Portfolio can also buy fixed rate securities accompanied
by a demand feature or by a put option, which permits the Portfolio to sell the
security to the issuer or third party at a specified price. The Portfolio may
rely on the creditworthiness of issuers of the credit enhancements in purchasing
these securities.
In calculating its dollar-weighted average maturity and
duration, the Portfolio is permitted to treat certain Adjustable Rate Securities
as maturing on a date prior to the date on which the final repayment of
principal must unconditionally be made. In applying such maturity shortening
devices, N&B Management considers whether the interest rate reset is expected to
cause the security to trade at approximately its par value.
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MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
represent direct or indirect participations in, or are secured by and payable
from, pools of mortgage loans. They may be issued or guaranteed by a U.S.
Government agency or instrumentality (such as GNMA, Fannie Mae, and Freddie
Mac), though not necessarily backed by the full faith and credit of the United
States, or may be issued by private issuers.
Because many mortgages are repaid early, the actual maturity
and duration of mortgage-backed securities are typically shorter than their
stated final maturity and their duration calculated solely on the basis of the
stated life and payment schedule. In calculating its dollar-weighted average
maturity and duration, the Portfolio may apply certain industry conventions
regarding the maturity and duration of mortgage-backed instruments. Different
analysts use different models and assumptions in making these determinations.
The Portfolio uses an approach that N&B Management believes is reasonable in
light of all relevant circumstances.
Mortgage-backed securities may be issued in the form of CMOs
or collateralized mortgage-backed bonds ("CBOs"). CMOs are obligations that are
fully collateralized, directly or indirectly, by a pool of mortgages; payments
of principal and interest on the mortgages are passed through to the holders of
the CMOs, although not necessarily on a pro rata basis, on the same schedule as
they are received. CBOs are general obligations of the issuer that are fully
collateralized, directly or indirectly, by a pool of mortgages. The mortgages
serve as collateral for the issuer's payment obligations on the bonds, but
interest and principal payments on the mortgages are not passed through either
directly (as with mortgage-backed "pass-through" securities issued or guaranteed
by U.S. Government agencies or instrumentalities) or on a modified basis (as
with CMOs). Accordingly, a change in the rate of prepayments on the pool of
mortgages could change the effective maturity or the duration of a CMO but not
that of a CBO (although, like many bonds, CBOs may be callable by the issuer
prior to maturity). To the extent that rising interest rates cause prepayments
to occur at a slower than expected rate, a CMO could be converted into a
longer-term security that is subject to greater risk of price volatility.
Governmental, government-related, and private entities (such
as commercial banks, savings institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers, including securities
broker-dealers and special purpose entities that generally are affiliates of the
foregoing established to issue such securities) may create mortgage loan pools
to back CMOs and CBOs. Such issuers may be the originators and/or servicers of
the underlying mortgage loans, as well as the guarantors of the mortgage-backed
securities. Pools created by non-governmental issuers generally offer a higher
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rate of interest than governmental and government-related pools because of the
absence of direct or indirect government or agency guarantees. Various forms of
insurance or guarantees, including individual loan, title, pool, and hazard
insurance and letters of credit, may support timely payment of interest and
principal of non-governmental pools. Governmental entities, private insurers,
and mortgage poolers issue these forms of insurance and guarantees. N&B
Management considers such insurance and guarantees, as well as the
creditworthiness of the issuers thereof, in determining whether a
mortgage-backed security meets the Portfolio's investment quality standards.
There can be no assurance that private insurers or guarantors can meet their
obligations under insurance policies or guarantee arrangements.
The Portfolio may buy mortgage-backed securities without
insurance or guarantees, if N&B Management determines that the securities meet
the Portfolio's quality standards. The Portfolio may not purchase
mortgage-backed securities that, in N&B Management's opinion, are illiquid if,
as a result, more than 15% of the Portfolio's net assets would be invested in
illiquid securities. N&B Management will, consistent with the Portfolio's
investment objective, policies and limitations, and quality standards, consider
making investments in new types of mortgage-backed securities as such securities
are developed and offered to investors.
ASSET-BACKED SECURITIES. Asset-backed securities represent
direct or indirect participations in, or are secured by and payable from, pools
of assets such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property, and
receivables from revolving credit (credit card) agreements. These assets are
securitized through the use of trusts and special purpose corporations. Credit
enhancements, such as various forms of cash collateral accounts or letters of
credit, may support payments of principal and interest on asset-backed
securities. Asset-backed securities are subject to the same risk of prepayment
described with respect to mortgage-backed securities. The risk that recovery on
repossessed collateral might be unavailable or inadequate to support payments,
however, is greater for asset-backed securities than for mortgage-backed
securities.
Certificates for Automobile ReceivablesSM ("CARSSM") represent
undivided fractional interests in a trust whose assets consist of a pool of
motor vehicle retail installment sales contracts and security interests in the
vehicles securing those contracts. Payments of principal and interest on the
underlying contracts are passed-through monthly to certificate holders and are
guaranteed up to specified amounts by a letter of credit issued by a financial
institution unaffiliated with the trustee or originator of the trust. Underlying
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installment sales contracts are subject to prepayment, which may reduce the
overall return to certificate holders. Certificate holders also may experience
delays in payment or losses on CARSSM if the trust does not realize the full
amounts due on underlying installment sales contracts because of unanticipated
legal or administrative costs of enforcing the contracts; depreciation, damage,
or loss of the vehicles securing the contracts; or other factors.
Credit card receivable securities are backed by receivables
from revolving credit card agreements ("Accounts"). Credit balances on Accounts
are generally paid down more rapidly than are automobile contracts. Most of the
credit card receivable securities issued publicly to date have been pass-through
certificates. In order to lengthen their maturity or duration, most such
securities provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder; principal
payments received on the Accounts are used to fund the transfer of additional
credit card charges made on the Accounts to the pool of assets supporting the
securities. Usually, the initial fixed period may be shortened if specified
events occur which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. An
issuer's ability to extend the life of an issue of credit card receivable
securities thus depends on the continued generation of principal amounts in the
underlying Accounts and the non-occurrence of the specified events. The
non-deductibility of consumer interest, as well as competitive and general
economic factors, could adversely affect the rate at which new receivables are
created in an Account and conveyed to an issuer, thereby shortening the expected
weighted average life of the related security and reducing its yield. An
acceleration in cardholders' payment rates or any other event that shortens the
period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related security could have a
similar effect on its weighted average life and yield.
Credit cardholders are entitled to the protection of state and
federal consumer credit laws. Many of those laws give a holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike the collateral for most other
asset-backed securities, Accounts are unsecured obligations of the cardholder.
U.S. DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES. These are
securities of foreign issuers (including banks, governments and
quasi-governmental organizations) and foreign branches of U.S. banks, including
negotiable CDs, bankers' acceptances, and commercial paper. These investments
are subject to each Portfolio's quality, maturity, and duration standards. While
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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 reporting standards or the application of standards that are different
or less stringent than those applied in the United States.
FOREIGN CURRENCY DENOMINATED FOREIGN SECURITIES. The Portfolio
may not purchase any such security if, as a result, more than 25% of its net
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.
The Portfolio invests in foreign currency denominated foreign securities of
issuers in countries whose governments are considered stable by N&B Management.
Foreign currency denominated foreign securities are denominated in or indexed to
foreign currencies, including (1) CDs, commercial paper, fixed time deposits,
and bankers' acceptances issued by foreign banks, (2) obligations of other
corporations, and (3) obligations of foreign governments, of their subdivisions,
agencies, and instrumentalities, international agencies, and supranational
entities. Investing in foreign currency denominated securities involves the
special risks associated with investing in non-U.S. issuers, as described in the
preceding section, and the additional risks of (1) adverse changes in foreign
exchange rates, (2) nationalization, expropriation, or confiscatory taxation,
and (3) adverse changes in investment or exchange control regulations (which
could prevent cash from being brought back to the United States). Additionally,
dividends and interest payable on foreign securities may be subject to foreign
taxes, including taxes withheld from those payments.
Foreign securities often trade with less frequency and in less
volume than domestic securities and therefore may exhibit greater price
volatility. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custody arrangements,
and transaction costs of foreign currency conversions.
Foreign markets also have different clearance and settlement
procedures. In certain markets, there have been times when settlements have been
unable to keep pace with the volume of securities transactions, making it
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difficult to conduct such transactions. 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 securities or, if the Portfolio has
entered into a contract to sell the securities, could result in possible
liability to the purchaser.
Interest rates prevailing in other countries may affect the
prices of foreign securities and exchange rates for foreign currencies. Local
factors, including the strength of the local economy, the demand for borrowing,
the government's fiscal and monetary policies, and the international balance of
payments, often affect the interest rates in other countries. Individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
DOLLAR ROLLS. In a "dollar roll," the Portfolio sells
securities for delivery in the current month and simultaneously agrees to
repurchase substantially similar (i.e., same type and coupon) securities on a
specified future date from the same party. A "covered roll" is a specific type
of dollar roll in which the Portfolio holds an offsetting cash position or a
cash-equivalent securities position that matures on or before the forward
settlement date of the dollar roll transaction. Dollar rolls are considered
borrowings for purposes of the Portfolio's investment policies and limitations
concerning borrowings. There is a risk that the contra-party will be unable or
unwilling to complete the transaction as scheduled, which may result in losses
to the Portfolio.
WHEN-ISSUED TRANSACTIONS. These transactions may involve
mortgage-backed securities such as GNMA, Fannie Mae, and Freddie Mac
certificates. These transactions involve a commitment by the Portfolio to
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purchase securities that will be issued at a future date (ordinarily within two
months, although the Portfolio may agree to a longer settlement period). The
price of the underlying securities (usually expressed in terms of yield) and the
date when the securities will be delivered and paid for (the settlement date)
are fixed at the time the transaction is negotiated. When-issued purchases are
negotiated directly with the other party, and such commitments are not traded on
exchanges.
When-issued transactions enable the Portfolio to "lock in"
what N&B Management believes to be an attractive price or yield on a particular
security for a period of time, regardless of future changes in interest rates.
In periods of falling interest rates and rising prices, the Portfolio might
purchase a security on a when-issued basis and sell a similar security to settle
such purchase, thereby obtaining the benefit of currently higher yields.
When-issued purchases are negotiated directly with the other party, and such
commitments are not traded on an exchange.
The value of securities purchased on a when-issued basis and
any subsequent fluctuations in their value are reflected in the computation of
the Portfolio's net asset value ("NAV") starting on the date of the agreement to
purchase the securities. Because the Portfolio has not yet paid for the
securities, this produces an effect similar to leverage. The Portfolio does not
earn interest on securities it has committed to purchase until the securities
are paid for and delivered on the settlement date.
The Portfolio will purchase securities on a when-issued basis
only with the intention of completing the transaction and actually purchasing
the securities. If deemed advisable as a matter of investment strategy, however,
the Portfolio may dispose of or renegotiate a commitment after it has been
entered into. The Portfolio also may sell securities it has committed to
purchase before those securities are delivered to the Portfolio on the
settlement date. The Portfolio may realize capital gains or losses in connection
with these transactions.
When the Portfolio purchases securities on a when-issued
basis, it will deposit in a segregated account with its custodian, until payment
is made, appropriate liquid securities having an aggregate market value
(determined daily) at least equal to the amount of the Portfolio's purchase
commitments. This procedure is designed to ensure that the Portfolio maintains
sufficient assets at all times to cover its obligations under when-issued
purchases.
FUTURES CONTRACTS AND OPTIONS THEREON. The Portfolio may
purchase and sell interest rate and bond index futures contracts and options
thereon and may purchase and sell foreign currency futures contracts (with
interest rate and bond index futures contracts, "Futures" or "Futures
Contracts") and options thereon. The Portfolio engages in interest rate and bond
index Futures and options transactions in an attempt to hedge against changes in
securities prices resulting from changes in prevailing interest rates; the
Portfolio engages in foreign currency Futures and options transactions in an
attempt to hedge against changes in prevailing currency exchange rates. Because
the futures markets may be more liquid than the cash markets, the use of Futures
permits the Portfolio to enhance portfolio liquidity and maintain a defensive
position without having to sell portfolio securities. The Portfolio does not
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engage in transactions in Futures or options thereon for speculation. The
Portfolio views investment in (1) interest rate and bond index Futures and
options thereon as a maturity or duration management device and/or a device to
reduce risk and preserve total return in an adverse interest rate environment
for the hedged securities and (2) foreign currency Futures and options thereon
as a means of establishing more definitely the effective return on, or the
purchase price of, securities denominated in foreign currencies 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 price at a specified future time. Certain
Futures, including bond index Futures, are settled on a net cash payment basis
rather than by the sale and delivery of the securities underlying the Futures.
U.S. Futures (except certain currency Futures) are traded on
exchanges that have been designated as "contract markets" by the Commodity
Futures Trading Commission ("CFTC"); Futures transactions must be executed
through a futures commission merchant that is a member of the relevant contract
market. 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. This may result in a profit or loss.
"Margin" with respect to Futures 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 on deposit to exceed the
required margin, the excess will be paid to the Portfolio. In computing its
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daily NAV, the Portfolio marks to market the value of its open Futures
positions. The Portfolio also must make margin deposits with respect to options
on Futures that it has written (but not with respect to options on futures that
it has purchased). If the futures commission merchant holding the deposit goes
bankrupt, the Portfolio could suffer a delay in recovering its funds and could
ultimately suffer a loss.
An option on a Futures Contract gives the purchaser the right,
in return for the premium paid, to assume a position in the contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume a short Futures
position (if the option is a call) or a long Futures position (if the option is
a put). Upon exercise of the option, the accumulated cash balance in the
writer's Futures margin account is delivered to the holder of the option. That
balance represents the amount by which the market price of the Futures Contract
at exercise exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option. Options on futures have characteristics
and risks similar to those of securities options, as discussed herein.
Although the Portfolio believes that the use of Futures
Contracts will benefit it, if N&B Management's judgment about the general
direction of the markets or about interest rate or currency exchange rate trends
is incorrect, the Portfolio's overall return would be lower than if it had not
entered into any such contracts. The prices of Futures 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 and of the securities
and currencies being hedged can be only approximate due to differences between
the futures and securities markets or differences between the securities or
currencies underlying the Portfolio's futures position and the securities held
by or to be purchased for the Portfolio. The currency futures market may be
dominated by short-term traders seeking to profit from changes in exchange
rates. This would reduce the value of such contracts used for hedging purposes
over a short-term period. Such distortions are generally minor and would
diminish as the contract approaches maturity.
Because of the low margin deposits required, Futures trading
involves an extremely high degree of leverage; as a result, a relatively small
price movement in a Futures Contract may result in an immediate and substantial
loss, or gain, to the investor. Losses that may arise from certain Futures
transactions are potentially unlimited.
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Most U.S. futures exchanges limit the amount of fluctuation in
the price of a Futures Contract or option thereon during a single trading day;
once the daily limit has been reached, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day, however; it thus does not limit potential losses. In
fact, it may increase the risk of loss, because prices can move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing liquidation of unfavorable Futures and options positions and
subjecting investors 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 and purchase put
and covered call options on securities to reduce the effect of price
fluctuations of securities held by the Portfolio on the Portfolio's and its
corresponding Fund's NAVs. The Portfolio may also write covered call options to
earn premium income. 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 Portfolio will receive a premium for writing a put option,
which obligates the Portfolio to acquire a security at a certain price at any
time until a certain date if the purchaser of the option decides to exercise the
option. 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 until a certain
date if the purchaser decides to exercise the option. The Portfolio receives a
premium for writing the option. When writing call options, the Portfolio writes
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.
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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 to protect against
an increase in the price of securities it intends to purchase or to offset a
previously written call option.
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 a 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 the option period. If the
call option is exercised, the Portfolio will realize a gain or loss from the
sale of the underlying security.
The exercise price of an option may be below, equal to, or
above the market value of the underlying security at the time the option is
written. Options normally have expiration dates between three and nine months
from the date written. The obligation under any option written by the Portfolio
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
an option of the same series. If an option is purchased by the Portfolio and is
never exercised or closed out, the Portfolio will lose the entire amount of the
premium paid.
Options are traded both on national securities exchanges and
in the over-the-counter ("OTC") market. Exchange-traded options in the U.S. 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 a counterparty, 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
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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 counterparty'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.
The assets used as cover (or held in a segregated account) 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 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 last reported sales price before the time the Portfolio's NAV is computed on
the day the option is being valued or, in the absence of any trades thereof on
that day, the mean between the bid and asked prices as of that time.
Closing transactions are effected in order to realize a profit
(or minimize a loss) on an outstanding option, to prevent an underlying security
from being called, or to permit the sale or the put of the underlying security.
Furthermore, effecting a closing transaction permits the Portfolio to write
another call option on the underlying security with a different exercise price
or expiration date or both. There is, of course, no assurance that the 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.
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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. 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; however, the Portfolio could be in a less
advantageous position than if it had not written the call option.
The Portfolio pays brokerage commissions or spreads 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. 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 foreign currency at a
future date at a fixed price ("Forward Contracts"). The Portfolio enters into
Forward Contracts in an attempt to hedge against 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, or the purchase price
of, 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 that are denominated in a
foreign currency or protecting the U.S. dollar equivalent of dividends,
interest, or other payments on those securities.
N&B Management believes that the use of foreign currency
hedging techniques, including "proxy-hedges," can provide significant protection
of NAV in the event of a general rise in the U.S. dollar against foreign
currencies. For example, the return available from securities denominated in a
particular foreign currency would diminish if the value of the U.S. dollar
increased against that currency. Such a decline could be partially or completely
offset by an increase in value of a hedge involving a Forward Contract to sell
that foreign currency or a proxy-hedge involving a Forward Contract to sell a
different foreign currency whose behavior is expected to resemble the currency
in which the securities being hedged are denominated but which is available on
more advantageous terms.
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However, a hedge or proxy-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 proxy-hedge had not been
established. If the Portfolio uses proxy-hedging, it may experience losses on
both the currency in which it has invested and the currency used for hedging if
the two currencies do not vary with the expected degree of correlation. Using
Forward Contracts to protect the value of the Portfolio's securities against a
decline in the value of a currency does not eliminate fluctuations in the prices
of the underlying securities. Because Forward Contracts are not traded on an
exchange, the assets used to cover such contracts may be illiquid. The Portfolio
may experience delays in the settlement of its foreign currency transactions.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may write and
purchase covered call and put options on foreign currencies. 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 dollar equivalent of dividends, interest, or other
payments on those securities. Currency options have characteristics and risks
similar to those of securities options, as discussed herein. Certain options on
foreign currencies are traded on the OTC market and involve liquidity and credit
risks that may not be present in the case of exchange-traded currency options.
REGULATORY LIMITATIONS ON USING FUTURES, OPTIONS ON FUTURES,
OPTIONS ON SECURITIES AND FOREIGN CURRENCIES, AND FORWARD CONTRACTS
(COLLECTIVELY, "HEDGING INSTRUMENTS"). 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 these positions (excluding the amount by which options
are "in-the-money") may not exceed 5% of the Portfolio's net assets.
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 the prescribed
amount of cash or appropriate liquid securities. 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 the Portfolio's ability to meet current
obligations. The Portfolio may be unable promptly to dispose of assets which
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cover, or are segregated with respect to, an illiquid Futures, options, or
forward position; this inability may result in a loss to the Portfolio.
GENERAL RISKS OF HEDGING INSTRUMENTS. The primary risks in
using Hedging Instruments are (1) imperfect correlation or no correlation
between changes in the market value of the securities or currencies held or to
be acquired by the Portfolio and changes in the 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 Instruments are
different from those needed to select the Portfolio's securities; (4) the fact
that, although use of Hedging 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 or
currency. 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.
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
certain provisions of the Internal Revenue Code of 1986, as amended ("Code"),
with which it must comply if the Fund is to continue to qualify as a regulated
investment company ("RIC"). See "Additional Tax Information -- Taxation of the
Portfolio."
INDEXED SECURITIES. The Portfolio may invest in securities
whose value is linked to interest rates, commodities, foreign currencies,
indices, or other financial indicators ("indexed securities"). Most indexed
securities are short- to intermediate-term fixed income securities whose values
at maturity or interest rates rise or fall according to the change in one or
more specified underlying instruments. The value of indexed securities may
increase or decrease if the underlying instrument appreciates, and they may have
return characteristics similar to direct investment in the underlying instrument
or to one or more options thereon. An indexed security may be more volatile than
the underlying instrument itself.
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ZERO COUPON AND STEP COUPON SECURITIES. The Portfolio may
invest in zero coupon and step coupon securities, which are debt obligations
that do not entitle the holder to any periodic payment of interest prior to
maturity or that specify a future date when the securities begin to pay current
interest. Zero coupon and step 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 and step coupon securities
("original issue discount" or "OID") must be taken into income ratably by the
Portfolio prior to the receipt of any actual payments. Because the Fund must
distribute substantially all of its net income (including its share of the
Portfolio's accrued OID) to its shareholders each year for income and excise tax
purposes, 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. See "Additional Tax Information."
The market prices of zero coupon securities generally are more
volatile than the prices of securities that pay interest periodically. Zero
coupon securities are likely to respond to changes in interest rates to a
greater degree than other types of debt securities having similar maturities and
credit quality.
MUNICIPAL OBLIGATIONS. The Portfolio may invest up to 5% of
its net assets in municipal obligations, which are securities issued by or on
behalf of states (as used herein, including the District of Columbia),
territories, and possessions of the United States and their political
subdivisions, agencies, and instrumentalities. Municipal obligations include
"general obligation" securities, which are backed by the full taxing power of a
municipality, and "revenue" securities, which are backed only by the income from
a specific project, facility, or tax. Municipal obligations also include
industrial development and private activity bonds which are issued by or on
behalf of public authorities, but are not backed by the credit of any
governmental or public authority. "Anticipation notes" are issued by
municipalities in expectation of future proceeds from the issuance of bonds or
from taxes or other revenues, and are payable from those bond proceeds, taxes,
or revenues. Municipal obligations also include tax-exempt commercial paper,
which is issued by municipalities to help finance short-term capital or
operating requirements.
The value of municipal obligations is dependent on the
continuing payment of interest and principal when due by the issuers of the
municipal obligations (or, in the case of industrial development bonds, the
24
<PAGE>
revenues generated by the facility financed by the bonds or, in certain other
instances, the provider of the credit facility backing the bonds). As with other
fixed income securities, an increase in interest rates generally will reduce the
value of the Portfolio's investments in municipal obligations, whereas a decline
in interest rates generally will increase that value. Efforts are underway that
may result in a restructuring of the federal income tax system. Any of these
factors could affect the value of municipal securities.
RISKS OF FIXED INCOME SECURITIES
- --------------------------------
Fixed income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on its obligations ("credit
risk") and are subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer, and market
liquidity ("market risk"). 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. Changes in economic conditions or developments regarding the individual
issuer are more likely to cause price volatility and weaken the capacity of the
issuer of such securities to make principal and interest payments than is the
case for higher-grade debt securities. An economic downturn affecting the issuer
may result in an increased incidence of default. The market for lower-rated
securities may be thinner and less active than for higher-rated securities.
Pricing of thinly traded securities requires greater judgment than pricing of
securities for which market transactions are regularly reported.
Subsequent to its purchase by a Portfolio, an issue of debt
securities may cease to be rated or its rating may be reduced, so that the
securities would no longer be eligible for purchase by that Portfolio. In such a
case, N&B Management will engage in an orderly disposition of the downgraded or
other securities to the extent necessary to ensure that the Portfolio's holdings
of securities that are considered by the Portfolio to be below investment grade
will not exceed 10% of its net assets. The Portfolio may hold up to 5% of its
net assets in securities that are downgraded after purchase to a rating below
that permissible by the Portfolio's investment policies.
CERTAIN RISK CONSIDERATIONS
The Fund's investment in the Portfolio may be affected by the
actions of other large investors in the Portfolio, if any. For example, if a
large investor in the Portfolio (other than the Fund) redeemed its interest in
the Portfolio, the Portfolio's remaining investors (including the Fund) might,
25
<PAGE>
as a result, experience higher pro rata operating expenses, thereby producing
lower returns.
Although the Portfolio seeks to reduce risk by investing in a
diversified portfolio of securities, diversification does not eliminate all
risk. There can, of course, be no assurance the Portfolio will achieve its
investment objective.
PERFORMANCE INFORMATION
The Fund's performance figures are based on historical results
and are not intended to indicate future performance. The yield and total return
of the Fund will vary. The share price 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.
YIELD CALCULATIONS
- ------------------
The Fund may advertise its "yield" based on a 30-day (or one
month) period. This YIELD is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period. The result then is annualized and shown as an annual
percentage of an investment.
The annualized yield for the Fund for the 30-day period ended
October 31, 1997 was 5.75%.
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 in performance
and, in that respect, differs from actual year-to-year results.
Although the Fund did not commence operations until August 30,
1993, the Fund's investment objective, limitations, and policies are the same as
those of another mutual fund administered by N&B Management, which has a name
similar to the Fund's and invests in the same Portfolio ("Sister Fund"). The
Sister Fund had a predecessor. The following total return data is for the Fund
since its inception and, for periods prior to the Fund's inception, its Sister
Fund and which, as used herein, includes data for the Sister Fund's predecessor.
26
<PAGE>
The total returns for periods prior to the Fund's inception would have been
lower had they reflected the higher fees of the Fund, as compared to those of
the Sister Fund and its predecessor.
The average annual total returns for the Fund, its Sister Fund
and that Sister Fund's predecessor for the one-, five- and ten-year periods
ended October 31, 1997, were +6.88%, +5.51%, and +7.18%, respectively. If an
investor had invested $10,000 in that predecessor's shares on June 9, 1986 and
had reinvested all capital gain distributions and income dividends, the value of
that investor's holdings would have been $21,542 on October 31, 1997.
N&B Management may from time to time reimburse the Fund or
Portfolio for a portion of its expenses. Such action has the effect of
increasing yield and total return. Actual reimbursements are described in the
Prospectus and in "Investment Management and Administration Services" below.
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 Investment Companies Service, IBC/Donoghue's
Money Market Fund Report, 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, The New York Times, Kiplinger's Personal
Finance, and Barron's Newspaper, or
(2) recognized bond, stock, and other indices such as the Shearson
Lehman Bond Index, the Standard & Poor's "500" Composite Stock
Price Index ("S&P 500 Index"), Dow Jones Industrial Average
("DJIA"), S&P/BARRA Index, Russell Index, and various other
domestic, international, and global indices and changes in the
U.S. Department of Labor Consumer Price Index. The S&P 500
Index is a broad index of common stock prices, while the DJIA
represents a narrower segment of industrial companies. Each
assumes reinvestment of distributions and is calculated
without regard to tax consequences or the costs of investing.
Each Portfolio may invest in different types of securities
from those included in some of the above indices.
27
<PAGE>
The Fund's performance also may be compared from time to time
with the following specific indices and other measures of performance:
THE FUND'S performance may be compared with the Merrill Lynch 1-3 year
Treasury Index and the Lehman Brothers Intermediate
Government/Corporate Bond Index, as well as the performance of Treasury
Securities, corporate bonds, and the Lipper Short Investment Grade Debt
Funds category.
The Fund may invest some of its assets in different types of securities
than those included in the index used as a comparison with the Fund's historical
performance. The Fund may also compare certain indices, which represent
different segments of the securities markets, for the purpose of comparing the
historical returns and the volatility in those particular market segments.
Measures of volatility show the range of historical price fluctuations. Standard
deviation may be used as a measure of volatility. There are other measures of
volatility, which may yield different results.
In addition, the Fund's performance may be compared at times
with that of various bank instruments (including bank money market accounts and
CDs of varying maturities) as reported in publications such as The Bank Rate
Monitor. Any such comparisons may be useful to investors who wish to compare the
Fund's past performance with that of certain of its competitors. Of course, past
performance is not a guarantee of future results. Unlike an investment in the
Fund, bank CDs pay a fixed rate of interest for a stated period of time and are
insured up to $100,000.
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. Evaluations of the Fund's performance, its
yield/total returns and comparisons may be used in advertisements and in
information furnished to current and prospective shareholders (collectively,
"Advertisements").
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 may include the Portfolio's
portfolio diversification by asset type. Information used in Advertisements 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
28
<PAGE>
goals, such as (1) funding retirement, (2) paying for children's education, and
(3) financially supporting aging parents.
Information (including charts and illustrations) showing the
effects of compounding interest may be included in Advertisements from time to
time. Compounding is the process of earning interest on principal plus interest
that was earned earlier. Interest can be compounded at different intervals, such
as annually, semi-annually, quarterly, monthly, or daily. For example, $1,000
compounded annually at 9% will grow to $1,090 at the end of the first year (an
increase of $90) and $1,188 at the end of the second year (an increase of $98).
The extra $8 that was earned on the $90 interest from the first year is the
compound interest. One thousand dollars compounded annually at 9% will grow to
$2,367 at the end of ten years and $5,604 at the end of twenty years. Other
examples of compounding are as follows: at 7% and 12% annually, $1,000 will grow
to $1,967 and $3,106, respectively, at the end of ten years and $3,870 and
$9,646, respectively, at the end of twenty years. All these examples are for
illustrative purposes only and are not indicative of the Fund's performance.
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 (including charts and illustrations) showing the
total return performance for government funds, 6-month CDs and money market
funds may be included in Advertisements from time to time.
Information regarding the effects of automatic investing and
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.
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 named as trustees
and officers also serve in similar capacities for other funds and their
corresponding portfolios, administered or managed by N&B Management and
Neuberger & Berman.
29
<PAGE>
<TABLE>
<CAPTION>
Name, Address Positions Held
and Age(1) with The Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
<S> <C> <C>
John Cannon (68) Trustee of each Trust Senior Vice President AMA Investment
CDC Associates, Inc. Advisers, Inc. (1991-1993); Chairman and
620 Sentry Parkway Chief Investment Officer of CDC Associates,
Suite 220 Inc. (registered investment adviser)
P.O. Box 1111 (1993-present).
Blue Bell, PA 19422
Stanley Egener* (63) Chairman of the Board, Principal of Neuberger & Berman; President
Chief Executive Officer, and Director of N&B Management; Chairman of
and Trustee of each Trust the Board, Chief Executive Officer, and
Trustee of eight other mutual funds for
which N&B Management acts as investment
manager or administrator.
Theodore P. Giuliano* (45) President and Trustee of Principal of Neuberger & Berman; Vice
each Trust President and Director of N&B Management;
President and Trustee of one other mutual
fund for which N&B Management serves as
administrator. Barry Hirsch (64) Trustee of
each Trust Senior Vice President,
Secretary, and Loews Corporation General
Counsel of Loews Corporation 667 Madison
Avenue (diversified financial corporation).
7h Floor New York, NY 10021 Robert A.
Kavesh (70) Trustee of each Trust Professor
of Finance and Economics at Stern 110
Bleecker Street School of Business, New
York University; Apt. 24B Director of Del
Laboratories, Inc. and New York, NY 10012
Greater New York Mutual Insurance Co.
William E. Rulon (65) Trustee of each Trust Retired. Senior Vice President of
1761 Hotel Circle South Foodmaker, Inc. (operator and franchiser of
San Diego, CA 92108 restau-rants) until January 1997; Secretary
of Foodmaker, Inc. until July 1996.
30
<PAGE>
Name, Address Positions Held
and Age(1) with The Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
Candace L. Straight (50) Trustee of each Trust Private investor and consultant
518 E. Passaic Avenue specializing in the insurance industry;
Bloomfield, NJ 07003 Principal of Head & Company, LLC (limited
liability company providing investment
banking and consulting services to the
insurance industry) until March 1996;
Director of Drake Holdings (U.K. motor
insurer) until June 1996.
Daniel J. Sullivan (58) 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 (51) Vice President and Senior Vice President and Treasurer of N&B
Principal Financial Officer Management since 1992; Treasurer of N&B
of each Trust Management 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.
31
<PAGE>
Name, Address Positions Held
and Age(1) with The Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
Claudia A. Brandon (41) Secretary of each Vice President of N&B Management;
Trust Secretary of eight other mutual funds for
which N&B Management acts as investment
manager or administrator.
Richard Russell (51) Treasurer and Principal Vice President of N&B Management since of
Accounting Officer each 1993; prior thereto, Assistant Vice
Trust President of N&B Management; Treasurer and
Principal Accounting Off-icer of eight
other mutual funds for which N&B Management
acts as investment manager or
administrator.
Stacy Cooper-Shugrue (35) Assistant Secretary Assistant Vice President of N&B Management
of each 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.
C. Carl Randolph (60) Assistant Secretary Principal of Neuberger & Berman since 1992;
of each 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.
Barbara DiGiorgio (39) Assistant Treasurer of Assistant Vice President of N&B Management
each Trust since 1993; prior thereto, employee of N&B
Management; Assistant Treasurer of eight
other mutual funds for which N&B Management
acts as investment manager or
administrator.
32
<PAGE>
Name, Address Positions Held
and Age(1) with The Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
Celeste Wischerth (37) Assistant Treasurer of Assistant Vice President of N&B Management
each Trust since 1994; prior thereto, employee of N&B
Management; Assistant Treasurer 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.
(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 Giuliano are
interested persons by virtue of the fact that they are officers and directors
of N&B Management and principals of Neuberger & Berman.
The Trust's Trust Instrument and Managers Trust's Declaration
of Trust provide that each such Trust 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 (a) engaged in bad faith, willful
misfeasance, gross negligence, or reckless disregard of the duties involved in
the conduct of their offices or (b) did not act in good faith in the reasonable
belief that their action was in the best interest of the Trust. 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.
33
<PAGE>
The following table sets forth information concerning the
compensation of the trustees and officers of the Trust. None of the Neuberger &
Berman Funds(R) has any retirement plan for its trustees or officers.
TABLE OF COMPENSATION
FOR FISCAL YEAR ENDED 10/31/97
------------------------------
<TABLE>
<CAPTION>
Total Compensation from Trusts in
Name and Position Aggregate Compensation the Neuberger & Berman Fund Complex
with The Trust from The Trust Paid To Trustees
-------------- ---------------------- -----------------------------------
<S> <C> <C>
John Cannon $496 $34,500
Trustee (2 other investment companies)
Charles DeCarlo $77 $8,000
Trustee (retired 12/96) (2 other investment companies)
Stanley Egener $0 $0
Chairman of the Board, (9 other investment companies)
Chief Executive
Officer, and Trustee
Theodore P. Giuliano $0 $0
President and Trustee (2 other investment companies)
Barry Hirsch $441 $30,500
Trustee (2 other investment companies)
Robert A. Kavesh $496 $35,000
Trustee (2 other investment companies)
Harold R. Logan $77 $8,000
Trustee (retired 12/96) (2 other investment companies)
William E. Rulon $441 $30,500
Trustee (2 other investment companies)
Candace L. Straight $441 $31,500
Trustee (2 other investment companies)
</TABLE>
At January 30, 1998, the trustees and officers of the Trust
and Managers Trust, as a group, owned beneficially or of record less than 1% of
the outstanding shares of the Fund.
34
<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, on behalf of the Portfolio, dated as of July 2, 1993
("Management Agreement"). The Management Agreement was approved by the holders
of the interests in the Portfolio on July 2, 1993.
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 pay a material amount of such compensation.
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
officers and directors of N&B Management (who also are principals of Neuberger &
Berman), 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 with the Trust
dated July 2, 1993 ("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. N&B Management enters into
administrative services agreements with Institutions, pursuant to which it
compensates such Institutions for accounting, recordkeeping and other services
that they provide in connection with investments in the Funds.
During the fiscal years ended October 31, 1997, 1996, and
1995, the Fund accrued management and administration fees of $246,420, $114,471
and $65,572, respectively.
35
<PAGE>
As noted in the Prospectus under "Management and
Administration -- Expenses," N&B Management has voluntarily undertaken to
reimburse the Fund for its Operating Expenses (including fees under the
Administration Agreement) and the Fund's pro rata share of the Portfolio's
Operating Expenses (including fees under the Management Agreement) that exceed,
in the aggregate, 0.80% per annum of the average daily net assets of the Fund.
N&B Management can terminate each undertaking by giving the Fund at least 60
days' prior written notice. From March 1, 1994 to February 28, 1995, N&B
Management reimbursed the Fund for its Operating Expenses (including fees under
the Administration Agreement) and its pro rata share of the Portfolio's
Operating Expenses (including fees under the Management Agreement) that
exceeded, in the aggregate, 0.70% per annum of the average daily net assets of
the Fund. "Operating Expenses" exclude interest, taxes, brokerage costs and
extraordinary expenses.
For the fiscal years ended October 31, 1997, 1996, and 1995,
N&B Management reimbursed the Fund the following amounts of expenses under the
above arrangements: $144,510, $168,733, and $123,568, respectively.
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. Each Agreement terminates automatically if it is assigned.
36
<PAGE>
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 July 2, 1993 ("Sub-Advisory Agreement"). The
Sub-Advisory Agreement was approved by the holders of the interests in the
Portfolio on July 2, 1993.
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 principals 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 Neuberger & Berman. This staff consists of numerous investment
analysts, each of whom specializes in studying one or more industries, under the
supervision of the Director of Research, who is also available for consultation
with 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 a 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 or 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 to the Fund.
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
- ----------------------------
As of December 31, 1997, the investment companies managed by
N&B Management had aggregate net assets of approximately $20.7 billion. N&B
Management currently serves as investment manager of the following investment
companies:
37
<PAGE>
<TABLE>
<CAPTION>
Name December 31, 1997
---- -----------------
<S> <C>
Neuberger & Berman Cash Reserves Portfolio.............................................$ 662,861,352
(investment portfolio for Neuberger & Berman Cash Reserves)
Neuberger & Berman Government Money Portfolio..........................................$ 297,594,922
(investment portfolio for Neuberger & Berman Government Money Fund)
Neuberger & Berman Limited Maturity Bond Portfolio.....................................$ 294,956,156
(investment portfolio for Neuberger & Berman Limited Maturity
Bond Fund and Neuberger & Berman Limited
Maturity Bond Trust)
Neuberger & Berman Municipal Money Portfolio...........................................$ 166,832,901
(investment portfolio for Neuberger & Berman Municipal Money Fund)
Neuberger & Berman Municipal Securities Portfolio.......................................$ 32,970,458
(investment portfolio for Neuberger & Berman Municipal Securities Trust)
Neuberger & Berman Focus Portfolio...................................................$ 1,530,971,078
(investment portfolio for Neuberger & Berman Focus Fund,
Neuberger & Berman Focus Trust, and Neuberger &
Berman Focus Assets)
Neuberger & Berman Genesis Portfolio.................................................$ 1,841,928,659
(investment portfolio for Neuberger & Berman Genesis Fund,
Neuberger & Berman Genesis Trust, and Neuberger
& Berman Genesis Assets)
Neuberger & Berman Guardian Portfolio.............................................. $ 8,328,032,611
(investment portfolio for Neuberger & Berman Guardian Fund,
Neuberger & Berman Guardian Trust, and
Neuberger & Berman Guardian Assets)
Neuberger & Berman International Portfolio.............................................$ 111,718,206
(investment portfolio for Neuberger & Berman International
Fund and Neuberger & Berman International Trust)
Neuberger & Berman Manhattan Portfolio.................................................$ 626,632,234
(investment portfolio for Neuberger & Berman Manhattan Fund,
Neuberger & Berman Manhattan Trust, and Neuberger & Berman
Manhattan Assets)
Neuberger & Berman Partners Portfolio................................................$ 3,830,066,838
(investment portfolio for Neuberger & Berman Partners Fund,
Neuberger & Berman Partners Trust, and
Neuberger & Berman Partners Assets)
38
<PAGE>
Neuberger & Berman Socially Responsive Portfolio.......................................$ 287,169,564
(investment portfolio for Neuberger & Berman Socially
Responsive Fund, Neuberger & Berman Socially Responsive Trust
and Neuberger & Berman NYCDC Socially Responsive Trust)
Advisers Managers Trust (eight series)...............................................$ 2,644,430,313
</TABLE>
The investment decisions concerning the Portfolio and the
other mutual funds 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. 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.
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, in terms of amount, 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 their advisory arrangements with N&B Management outweighs any
disadvantages that may result from contemporaneous transactions.
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; Theodore P.
Giuliano, Vice President and director; Michael M. Kassen, Vice President and
director; Irwin Lainoff, 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;
Patrick T. Byrne, Vice President; Brooke A. Cobb, Vice President; Robert W.
D'Alelio, Vice President; Roberta D'Orio, Vice President; Clara Del Villar, Vice
President; Brian J. Gaffney, Vice President; Joseph Galli, Vice President;
Robert I. Gendelman, Vice President; Josephine P. Mahaney, Vice President; Ellen
Metzger, Vice President and Secretary; Paul Metzger, Vice President; Janet W.
Prindle, Vice President; Kevin L. Risen, Vice President; Richard Russell, Vice
39
<PAGE>
President; Jennifer K. Silver, Vice President; Kent C. Simons, Vice President;
Frederic B. Soule, Vice President; Judith M. Vale, Vice President; Susan Walsh,
Vice President; Thomas Wolfe, Vice President; Andrea Trachtenberg, Vice
President of Marketing; Robert Conti, Treasurer; Ramesh Babu, Assistant Vice
President; Valerie Chang, Assistant Vice President; Stacy Cooper-Shugrue,
Assistant Vice President; Barbara DiGiorgio, Assistant Vice President; Michael
J. Hanratty, Assistant Vice President; Leslie Holliday-Soto, Assistant Vice
President; Jody L. Irwin, Assistant Vice President; Robert L. Ladd, Assistant
Vice President; Carmen G. Martinez, Assistant Vice President; Joseph S. Quirk,
Assistant Vice President; Ingrid Saukaitis, Assistant Vice President; Josephine
Velez, Assistant Vice President; Celeste Wischerth, Assistant Vice President;
and Loraine Olavarria, Assistant Secretary. Messrs. Cantor, Egener, Gendelman,
Giuliano, Kassen, Lainoff, Zicklin, Risen, Simons and Sundman and Mmes. Prindle,
Silver and Vale are principals of Neuberger & Berman.
Mr. Guiliano and Mr. Egener are trustees and officers, and
Messrs. Sullivan, Weiner, and Russell and Mmes. Brandon, Cooper-Shugrue,
DiGiorgio, and Wischerth are officers, of each Trust. C. Carl Randolph, a
principal 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 principals 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 to
Institutions. 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 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 to Institutions without
sales commission or other compensation and bears all advertising and promotion
expenses incurred in the sale of the Fund's shares.
From time to time, N&B Management may enter into arrangements
pursuant to which it compensates a registered broker-dealer or other third party
for services in connection with the distribution of Fund shares.
40
<PAGE>
The Trust, on behalf of the Fund, and the Distributor are
parties to a Distribution Agreement that continues until July 2, 1998. The
Distribution Agreement may be renewed annually if specifically 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
terminate automatically on its assignment, in the same manner as the Management
Agreement.
ADDITIONAL EXCHANGE INFORMATION
As more fully set forth in the section of the Prospectus
entitled "Shareholder Services -- Exchanging Shares," an Institution may
exchange shares of the Fund for shares of the equity funds that are briefly
described below, if made available through that Institution.
Fund shareholders who are considering exchanging shares into
any of the funds described below should note that each such fund (1) is a series
of a Delaware business trust (named "Neuberger & Berman Equity Trust") that is
registered with the SEC as an open-end management investment company; and (2)
invests all of its net investable assets in a corresponding portfolio that has
an investment objective, policies, and limitations identical to those of the
fund.
Neuberger & Berman Seeks long-term capital appreciation
Focus Trust through 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 Trust investments primarily in common stocks of
companies with small market
capitalizations (i.e., up to $1.5 billion)
at the time of the Portfolio's investment.
The corresponding portfolio uses a
value-oriented approach to the selection
of individual securities.
41
<PAGE>
Neuberger & Berman Seeks capital appreciation through
Guardian Trust investments primarily in 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 sister fund (and its predecessor) have
paid its shareholders 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
International Trust through investments primarily in a
diversified portfolio of equity securities
of foreign issuers. Assets will be
allocated among economically mature
countries and emerging industrialized
countries.
Neuberger & Berman Seeks capital appreciation, without regard
Manhattan Trust to income, through investments in
securities of small-, medium- and
large-capitalization companies (with a
current focus on medium-capitalization
companies) believed to have the maximum
potential for long-term capital
appreciation. The corresponding
portfolio's investment program involves
greater risks and share price volatility
than programs that invest in more
undervalued securities.
Neuberger & Berman Seeks capital growth through an investment
Partners Trust 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 a low
price-to-earnings ratio, 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.
Neuberger & Berman Seeks long-term capital appreciation
Socially Responsive through investments primarily in
Trust securities of companies that meet both
financial and social criteria.
42
<PAGE>
The Fund described herein, and any of the funds described
above, may terminate or modify their exchange privileges in the future.
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. The Equity Trusts share a 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.
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, (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. 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) exceeding $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 "Share Prices and Net Asset Value" in the Prospectus.
If payment is made in securities, an Institution generally will incur brokerage
expenses or other transactions costs in converting those securities into cash
and will be subject to fluctuation in the market prices 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 determined that it was in
the best interests of the Fund's shareholders as a whole.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund distributes to its shareholders substantially all of
its share of any net investment income (after deducting expenses incurred
directly by the Fund), any net realized capital gains (both long-term and
43
<PAGE>
short-term), and any net realized gains from foreign currency transactions
earned or realized by the Portfolio. The Portfolio's net investment income
consists of all income accrued on portfolio assets less accrued expenses but
does not include capital and foreign currency gains and losses. Net investment
income and net gains and losses are reflected in the Portfolio's NAV (and,
hence, the Fund's NAV) until they are distributed. 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).
Income dividends are declared daily; dividends declared for
each month are paid on the last Business Day of the month. Shares of the Fund
begin earning income dividends on the Business Day after the proceeds of the
purchase order have been converted to "federal funds" and continue to earn
dividends through the Business Day they are redeemed. Distributions of net
realized capital and foreign currency gains, if any, normally are paid once
annually, in December.
Dividends and other distributions are automatically reinvested
in additional shares of the Fund, unless the Institution elects to receive them
in cash ("cash election"). To the extent dividends and other distributions are
subject to federal, state, or local income taxation, they are taxable to the
shareholders whether received in cash or reinvested in Fund shares. A cash
election remains in effect until the Institution notifies the Fund in writing to
discontinue the election.
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 requirements. 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")
and (2) 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
44
<PAGE>
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 or securities of other RICs) of any one issuer.
Certain funds that invest in portfolios managed by N&B
Management, including the Sister Fund, have received a ruling from the Internal
Revenue Service ("Service") that each such fund, as an investor in a
corresponding portfolio of Managers Trust or Equity Managers Trust, 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 that ruling may not be relied on
as precedent by the Fund, N&B Management believes that the reasoning thereof
and, hence, its 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 ending on October 31 of that year, plus certain
other amounts.
See the next section for a discussion of the tax consequences
to the Fund of distributions to it from the Portfolio, investments by the
Portfolio in certain securities, and hedging and certain other transactions
engaged in by the Portfolio.
TAXATION OF THE PORTFOLIO
- -------------------------
The Portfolio has received a ruling from the Service to the
effect that, among other things, the Portfolio will be treated as a separate
partnership for federal income tax purposes and will not be a "publicly traded
partnership." 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, credits, and tax preference
items, 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
qualifies 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)
45
<PAGE>
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, (3) loss will be recognized if
a liquidation distribution consists solely of cash and/or unrealized
receivables, and (4) gain (and, in certain situations, loss) may be recognized
on an in-kind distribution by the Portfolio. The Fund's basis for its interest
in the Portfolio generally equals the amount of cash the Fund invests in the
Portfolio, increased by the Fund's share of the Portfolio's net income and
capital 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 and gains
realized 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
and/or total returns on its securities. Tax conventions 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.
The Portfolio's use of hedging strategies, such as writing
(selling) and purchasing Futures Contracts and options and entering into Forward
Contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains and losses the
Portfolio realizes in connection therewith. Gains from the disposition of
foreign currencies (except certain gains that may be excluded by future
regulations), and gains from transactions in Hedging Instruments derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income for the Fund under the Income
Requirement.
Exchange-traded Futures Contracts and listed options thereon
and certain Forward Contracts ("Section 1256 contracts") are required to be
marked to market (that is, treated as having been sold at market value) for
federal income tax purposes at the end of the Portfolio's taxable year. Sixty
percent of any net 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, and the remainder is
treated as short-term capital gain or loss. As of the date of this SAI, it is
not entirely clear whether that 60% portion will qualify for the reduced maximum
tax rates on noncorporate taxpayers' net capital gain (the excess of net
long-term capital gain over net short-term capital loss) enacted by the Taxpayer
46
<PAGE>
Relief Act of 1997 -- 20% (10% for taxpayers in the 15% marginal tax bracket)
for gain recognized on capital assets held for more than 18 months -- instead of
the 28% rate in effect before that legislation, which now applies to gain
recognized on capital assets held for more than one year but not more than 18
months. However, technical corrections legislation passed by the House of
Representatives late in 1997 would clarify that the 20% rate applies.
The Portfolio may invest in municipal bonds that are purchased
with market discount (that is, at a price less than the bond's principal amount
or, in the case of a bond that was issued with OID, a price less than the amount
of the issue price plus accrued OID) ("municipal market discount bonds"). If a
bond's market discount is less than the product of (1) 0.25% of the redemption
price at maturity times (2) the number of complete years to maturity after the
taxpayer acquired the bond, then no market discount is considered to exist. Gain
on the disposition of a municipal market discount bond purchased by the
Portfolio (other than a bond with a fixed maturity date within one year from its
issuance), generally is treated as ordinary (taxable) income, rather than
capital gain, to the extent of the bond's accrued market discount at the time of
disposition. Market discount on such a bond generally is accrued ratably, on a
daily basis, over the period from the acquisition date to the date of maturity.
In lieu of treating the disposition gain as above, the Portfolio may elect to
include market discount in its gross income currently, for each taxable year to
which it is attributable.
The Portfolio may acquire zero coupon or other securities
issued with OID. As a holder of those securities, the Portfolio (and, through
it, the Fund) must take into income 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 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.
47
<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.
PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities generally are
transacted with issuers, underwriters, or dealers that serve as primary
market-makers, who act as principals for the securities on a net basis. The
Portfolio typically does not pay brokerage commissions for such purchases and
sales. Instead, the price paid for newly issued securities usually includes a
concession or discount paid by the issuer to the underwriter, and the prices
quoted by market-makers reflect a spread between the bid and the asked prices
from which the dealer derives a profit.
In purchasing and selling portfolio securities other than as
described above (for example, in the secondary market), the Portfolio seeks to
obtain best execution at the most favorable prices through responsible
broker-dealers and, in the case of agency transactions, at competitive
commission rates. In selecting broker-dealers to execute transactions, N&B
Management considers such factors as the price of the security, the rate of
commission, the size and difficulty of the order, and the reliability,
integrity, financial condition, and general execution and operational
capabilities of competing broker-dealers. N&B Management also may consider the
brokerage and research services that broker-dealers provide to the Portfolio or
N&B Management. Under certain conditions, a Portfolio may pay higher brokerage
commissions in return for brokerage and research services, although the
Portfolio does not have a current arrangement to do so. In any case, the
Portfolio may effect principal transactions with a dealer who furnishes research
services, may designate any dealer to receive selling concessions, discounts, or
other allowances, or otherwise may deal with any dealer in connection with the
acquisition of securities in underwritings.
During the fiscal year ended October 31, 1997, the Portfolio
acquired securities of the following of its "regular brokers or dealers":
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Inc. At October
31, 1997, that Portfolio held the securities of its "regular brokers or dealers"
with an aggregate value as follows: Goldman, Sachs & Co., $5,211,285; and
Merrill Lynch, Pierce, Fenner & Smith Inc., $5,269,344.
No affiliate of the Portfolio receives give-ups or reciprocal
business in connection with its portfolio transactions. The Portfolio does not
effect transactions with or through broker-dealers in accordance with any
48
<PAGE>
formula or for selling shares of the Fund. However, broker-dealers who execute
portfolio transactions may from time to time effect purchases of Fund shares for
their customers. 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.
PORTFOLIO TURNOVER
- ------------------
The Portfolio's portfolio turnover rate is calculated by
dividing (1) the lesser of the cost of the securities purchased or the proceeds
from the securities sold by the Portfolio during the fiscal year (other than
securities, including options, whose maturity or expiration date at the time of
acquisition was one year or less) by (2) the month-end average of the value of
such securities owned by the Portfolio during the fiscal 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 auditors for the Fund and for the 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.
CUSTODIAN AND TRANSFER AGENT
The Fund and Portfolio have selected State Street Bank and
Trust Company ("State Street"), 225 Franklin Street, Boston, MA 02110 as
custodian for its securities and cash. State Street also serves as the Fund's
transfer agent, administering purchases, redemptions, and transfers of Fund
shares with respect to Institutions and the payment of dividends and other
distributions to Institutions. All correspondence should be mailed to Neuberger
& Berman Funds, Institutional Services, 605 Third Avenue, 2nd Floor, New York,
NY 10158-0180.
INDEPENDENT AUDITORS
The Fund and Portfolio have selected Ernst & Young LLP, 200
Clarendon Street, Boston, MA 02116, as the independent auditors 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. 20036-1800, as
their legal counsel.
11
<PAGE>
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 January
30, 1998:
Percentage of
Ownership at
Name and Address January 30, 1998
---------------- ----------------
LIMITED MATURITY: Chase Manhattan Bank TTEE Met
---------------- Life Defined 28.05%
Contribution Group
Attn David Otti
770 Broadway 10th Floor
New York, NY 10003
Nationwide Life Insurance 18.91%
QPVA
C/O IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218
D. Leon Leonhardt PSP 14.85%
For Partners & Principals
of Price Waterhouse Ltd.
DTD 6/28/85
3109 W DR Martin Luther King Blvd
Tampa, FL 33607
D Leon Leonhardt Retirement 8.90%
Benefit Accumulation Plan for
Employees of Price Waterhouse LLP
3109 W DR Martin Luther King Blvd
Tampa, FL 33607
National Financial Serv Corp 5.11%
For the Exclusive Benefit of
our Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
50
<PAGE>
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information
included in the Trust's registration statement filed with the SEC under the 1933
Act with respect to the securities offered by the Prospectus. 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 any 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 from the Fund's Annual Report to shareholders
for the fiscal year ended October 31, 1997:
The Statements of Assets and Liabilities of Neuberger & Berman
Limited Maturity Bond Trust and Portfolio, as of October 31,
1997, and the related Statements of Operations for the year
then ended, the Statements of Changes in Net Assets for each
of the two years in the period then ended, the Financial
Highlights for each of the periods indicated therein, the
notes to each of the foregoing for the fiscal year ended
October 31, 1997, and the reports of Ernst & Young LLP,
independent auditors, with respect to such audited financial
statements of Neuberger & Berman Limited Maturity Bond Trust
and Portfolio.
51
<PAGE>
Appendix A
RATINGS OF SECURITIES
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.
BB,B - Debt rated 'BB' is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. 'BB' indicates the
lowest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to
default then other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, or economic conditions which
could lead to an inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated to senior
debt that is assigned an actual implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but
current has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The 'B' rating category is
A-1
<PAGE>
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
PLUS (+) OR MINUS (-) - The ratings above may be modified by the
addition of a plus or minus sign to show relative standing within major
categories.
Moody's corporate bond ratings:
-------------------------------
Aaa - Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or an exceptionally
stable margin, and principal is secure. Although the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
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, 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.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
A-2
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maintenance of other terms of the contract over any long period of time may be
small.
MODIFIERS - Moody's may apply numerical modifiers 1, 2, and 3
in each generic rating classification described above. The modifier 1 indicates
that the company 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
company 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 issuers 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 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.
A-3
