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NEUBERGER & BERMAN MILLENNIUM TRUST AND PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 19, 1998
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 MILLENNIUM TRUST ("Fund"), a series of Neuberger
& Berman Equity Trust ("Trust"), is a no-load mutual fund that offers shares
pursuant to a Prospectus dated October 19, 1998. The Fund invests all of its net
investable assets in Neuberger & Berman MILLENNIUM 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
PAGE
INVESTMENT INFORMATION.......................................................1
Investment Policies and Limitations....................................1
Investment Insight.....................................................3
Additional Investment Information......................................3
PERFORMANCE INFORMATION.....................................................15
Total Return Computations.............................................15
Comparative Information...............................................15
Other Performance Information.........................................16
CERTAIN RISK CONSIDERATIONS.................................................17
TRUSTEES AND OFFICERS.......................................................17
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES...........................22
Investment Manager and Administrator..................................22
Sub-Adviser...........................................................23
Investment Companies Managed..........................................24
Management and Control of N&B Management..............................26
DISTRIBUTION ARRANGEMENTS...................................................27
ADDITIONAL EXCHANGE INFORMATION.............................................28
ADDITIONAL REDEMPTION INFORMATION...........................................29
Suspension of Redemptions.............................................29
Redemptions in Kind...................................................29
DIVIDENDS AND OTHER DISTRIBUTIONS...........................................30
ADDITIONAL TAX INFORMATION..................................................30
Taxation of the Fund..................................................30
Taxation of the Portfolio.............................................31
Taxation of the Fund's Shareholders...................................33
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PORTFOLIO TRANSACTIONS......................................................33
Portfolio Turnover....................................................36
REPORTS TO SHAREHOLDERS.....................................................36
CUSTODIAN AND TRANSFER AGENT................................................36
INDEPENDENT ACCOUNTANTS.....................................................36
LEGAL COUNSEL...............................................................36
REGISTRATION STATEMENT......................................................37
Appendix A..................................................................45
RATINGS OF CORPORATE BONDS AND COMMERCIAL PAPER.......................45
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INVESTMENT INFORMATION
The Fund is a separate operating series of the Trust, a Delaware
business trust that is registered with the Securities and Exchange Commission
("SEC") as an open-end management investment company. The Fund seeks its
investment objective by investing all of its net investable assets in the
Portfolio, a series of Equity Managers Trust ("Managers Trust") that has an
investment objective identical 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 in proportion to the
votes of its shareholders at a meeting thereof called for that purpose.
INVESTMENT POLICIES AND LIMITATIONS
The Fund has the following fundamental investment policy, to
enable it to invest in the Portfolio:
Notwithstanding any other investment policy of the Fund, the Fund may
invest all of its net investable assets (cash, securities, and receivables
relating to securities) in an open-end management investment company
having substantially the same investment objective, policies, and
limitations as the Fund.
All other fundamental investment policies and limitations and the
non-fundamental investment policies and limitations of the Fund 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.
Except for the limitation on borrowing, any investment policy or
limitation that involves a maximum percentage of securities or assets will not
be considered to be violated unless the percentage limitation is exceeded
immediately after, and because of, a transaction by the Portfolio.
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The Portfolio's fundamental investment policies and limitations
are as follows:
1. BORROWING. The Portfolio may not borrow money, except that the
Portfolio may (i) borrow money from banks for temporary or emergency purposes
and not for leveraging or investment and (ii) enter into reverse repurchase
agreements for any purpose; provided that (i) and (ii) in combination do not
exceed 33-1/3% of the value of its total assets (including the amount borrowed)
less liabilities (other than borrowings). If at any time borrowings exceed
33-1/3% of the value of the Portfolio's total assets, the Portfolio will reduce
its borrowings within three days (excluding Sundays and holidays) to the extent
necessary to comply with the 33-1/3% limitation.
2. COMMODITIES. The Portfolio may not purchase physical commodities
or contracts thereon, unless acquired as a result of the ownership of securities
or instruments, but this restriction shall not prohibit the Portfolio from
purchasing futures contracts or options (including options on futures contracts,
but excluding options or futures contracts on physical commodities) or from
investing in securities of any kind.
3. DIVERSIFICATION. The Portfolio may not, with respect to 75% of
the value of its total assets, purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) 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
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
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
portfolio securities, may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 ("1933 Act").
For purposes of the limitation on commodities, the Portfolio does
not consider foreign currencies or forward contracts to be physical commodities.
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The Portfolio's non-fundamental investment policies and
limitations are as follows:
1. BORROWING. The Portfolio may not purchase securities if
outstanding borrowings, including any reverse repurchase agreements, exceed
5% of its total assets.
2. LENDING. Except for the purchase of debt securities and
engaging in repurchase agreements, the Portfolio may not make any loans other
than securities loans.
3. 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.
4. FOREIGN SECURITIES. The Portfolio may not invest more than
20% of the value of its total assets in securities of foreign issuers,
provided that this limitation shall not apply to foreign securities
denominated in U.S. dollars, including American Depositary Receipts ("ADRs").
5. 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.
INVESTMENT INSIGHT
RAPID PROFIT GROWTH
Neuberger&Berman Millennium Trust looks for fast growing companies with
"long legs" -- companies whose earnings have grown at least 15% a year for some
time (even beating Wall Street estimates in the process) AND are expected to
keep growing rapidly. To evaluate a company's growth prospects, the Fund's
co-managers take a close look at its financial condition and its management.
FINANCIAL STRENGTH AND QUALITY OF MANAGEMENT
Does a company have the financial and managerial wherewithal to exploit
opportunities thoroughly as they arise and continue to grow despite setbacks? To
seek the answer, the co-managers spend a great deal of time researching each
company. They look for manageable debt levels, positive cash flow, and a
top-flight management team -- indicators that a company can not only survive,
but also thrive in an uncertain marketplace. The co-managers also meet with many
of the CEOs and CFOs to satisfy themselves that senior management can take a
company to the next level.
STOCK PRICE
As a small company gets larger and more complex, the need to examine its
stock price and P/E ratio becomes more crucial. Too often, small companies post
an exorbitant stock price even before they've earned any money. That's why the
co-managers spend so much time evaluating companies -- from researching
competitors, suppliers and customers to meticulously examining the financials.
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ADDITIONAL INVESTMENT INFORMATION
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.
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.
POLICIES AND LIMITATIONS. Repurchase agreements with a maturity of
more than seven days are considered to be illiquid securities. The Portfolio may
not enter into a 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 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. The Portfolio may lend securities to unaffiliated
entities, including banks, brokerage firms, and other institutional investors
judged creditworthy by N&B Management, provided that cash or equivalent
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collateral, equal to at least 100% of the market value of the loaned securities,
is continuously maintained by the borrower with the Portfolio. The Portfolio may
invest the cash collateral and earn income, or it may receive an agreed upon
amount of interest income from a borrower who has delivered equivalent
collateral. During the time securities are on loan, the borrower will pay the
Portfolio an amount equivalent to any dividends or interest paid on such
securities. These loans are subject to termination at the option of the
Portfolio or the borrower. The Portfolio may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Portfolio does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if that were considered
important with respect to the investment. 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.
POLICIES AND LIMITATIONS. 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 the Portfolio by depositing collateral in a form
determined to be satisfactory by the Portfolio Trustees. The collateral, which
must be marked to market daily, must be equal to at least 100% of the market
value of the loaned securities, which will also be marked to market daily.
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 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
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 market 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. Restricted
securities for which no market exists are priced by a method that the Portfolio
Trustees believe accurately reflects fair value.
POLICIES AND LIMITATIONS. 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.
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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. There is a risk that the counter-party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Portfolio.
POLICIES AND LIMITATIONS. Reverse repurchase 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.
FOREIGN SECURITIES. The Portfolio may invest in U.S.
dollar-denominated securities of foreign issuers (including banks, governments,
and quasi-governmental organizations) and foreign branches of U.S. banks,
including negotiable certificates of deposit ("CDs"), bankers' acceptances and
commercial paper. While investments in foreign securities are intended to reduce
risk by providing further diversification, such investments involve sovereign
and other risks, in addition to the credit and market risks normally associated
with domestic securities. These additional risks include the possibility of
adverse political and economic developments (including political instability,
nationalization, expropriation, or confiscatory taxation) and the potentially
adverse effects of unavailability of public information regarding issuers, less
governmental supervision and regulation of financial markets, reduced liquidity
of certain financial markets, and the lack of uniform accounting, auditing, and
financial reporting standards or the application of standards that are different
or less stringent than those applied in the United States.
The Portfolio also may invest in equity, debt, or other
income-producing securities that are denominated in or indexed to foreign
currencies, including (1) common and preferred stocks, (2) CDs, commercial
paper, fixed time deposits, and bankers' acceptances issued by foreign banks,
(3) obligations of other corporations, and (4) obligations of foreign
governments and their subdivisions, agencies, and instrumentalities,
international agencies, and supranational entities. Investing in foreign
currency denominated securities involves the special risks associated with
investing in non-U.S. issuers, as described in the preceding paragraph, and the
additional risks of (1) adverse changes in foreign exchange rates, and (2)
adverse changes in investment or exchange control regulations (which could
prevent cash from being brought back to the United States). Additionally,
dividends and interest payable on foreign securities may be subject to foreign
taxes, including taxes withheld from those payments. Commissions on foreign
securities exchanges are often at fixed rates and are generally higher than
negotiated commissions on U.S. exchanges, although the Portfolio endeavors to
achieve the most favorable net results on portfolio transactions.
Foreign securities often trade with less frequency and in less
volume than domestic securities and therefore may exhibit greater price
volatility. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custody arrangements
and transaction costs of foreign currency conversions.
Foreign markets also have different clearance and settlement
procedures. In certain markets, there have been times when settlements have been
unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the 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
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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 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.
POLICIES AND LIMITATIONS. In order to limit the risks inherent in
investing in foreign currency denominated securities, the Portfolio may not
purchase any such security if, as a result, more than 20% of its total assets
(taken at market value) would be invested in foreign currency denominated
securities. Within that limitation, however, the Portfolio is not restricted in
the amount it may invest in securities denominated in any one foreign currency.
Investments in securities of foreign issuers are subject to the Portfolio's
quality standards. The Portfolio may invest only in securities of issuers in
countries whose governments are considered stable by N&B Management.
FUTURES, OPTIONS ON FUTURES, OPTIONS ON SECURITIES AND INDICES,
FORWARD CONTRACTS, AND OPTIONS ON FOREIGN
CURRENCIES (COLLECTIVELY, "FINANCIAL INSTRUMENTS")
FUTURES CONTRACTS AND OPTIONS THEREON. The Portfolio may purchase
and sell interest rate futures contracts, stock and bond index futures
contracts, and foreign currency futures contracts and may purchase and sell
options thereon in an attempt to hedge against changes in the prices of
securities or, in the case of foreign currency futures and options thereon, to
hedge against changes in prevailing currency exchange rates. Because the futures
markets may be more liquid than the cash markets, the use of futures contracts
permits the Portfolio to enhance portfolio liquidity and maintain a defensive
position without having to sell portfolio securities. The Portfolio does not
engage in transactions in futures or options on futures for speculation. The
Portfolio views investment in (i) interest rate and securities index futures and
options thereon as a maturity management device and/or a device to reduce risk
or preserve total return in an adverse environment for the hedged securities,
and (ii) foreign currency futures and options thereon as a means of establishing
more definitely the effective return on, or the purchase price of, securities
denominated in foreign currencies that are held or intended to be acquired by
the 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 stock and bond index
futures, are settled on a net cash payment basis rather than by the sale and
delivery of the securities underlying the futures.
U.S. futures contracts (except certain currency futures) are traded
on exchanges that have been designated as "contract markets" by the CFTC;
futures transactions must be executed through a futures commission merchant that
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is a member of the relevant contract market. In both U.S. and foreign markets,
an exchange's affiliated clearing organization guarantees performance of the
contracts between the clearing members of the exchange.
Although futures contracts by their terms may require the actual
delivery or acquisition of the underlying securities or currency, in most cases
the contractual obligation is extinguished by being offset before the expiration
of the contract. A futures position is offset by buying (to offset an earlier
sale) or selling (to offset an earlier purchase) an identical futures contract
calling for delivery in the same month. This may result in a profit or loss.
"Margin" with respect to a futures contract is the amount of assets
that must be deposited by the Portfolio with, or for the benefit of, a futures
commission merchant in order to initiate and maintain the Portfolio's futures
positions. The margin deposit made by the Portfolio when it enters into a
futures contract ("initial margin") is intended to assure its performance of the
contract. If the price of the futures contract changes -- increases in the case
of a short (sale) position or decreases in the case of a long (purchase)
position -- so that the unrealized loss on the contract causes the margin
deposit not to satisfy margin requirements, the Portfolio will be required to
make an additional margin deposit ("variation margin"). However, if favorable
price changes in the futures contract cause the margin deposit to exceed the
required margin, the excess will be paid to the Portfolio. In computing its NAV,
the Portfolio marks to market the value of their 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 margin 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 contracts are volatile and are
influenced by, among other things, actual and anticipated changes in interest or
currency exchange rates, which in turn are affected by fiscal and monetary
policies and by national and international political and economic events. At
best, the correlation between changes in prices of futures contracts and of
securities being hedged can be only approximate due to differences between the
futures and securities markets or differences between the securities or
currencies underlying the 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.
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Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage; as a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, or gain, to the investor. Losses that may arise from certain futures
transactions are potentially unlimited.
Most U.S. futures exchanges limit the amount of fluctuation in the
price of a futures contract or option thereon during a single trading day; once
the daily limit has been reached, no trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day, however; it thus does not limit potential losses. In
fact, it may increase the risk of loss, because prices can move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing liquidation of unfavorable futures and options positions and
subjecting traders to substantial losses. If this were to happen with respect to
a position held by the Portfolio, it could (depending on the size of the
position) have an adverse impact on the Portfolio's NAV.
POLICIES AND LIMITATIONS. The Portfolio may purchase and sell
futures contracts and may purchase and sell options thereon in an attempt to
hedge against changes in the prices of securities or, in the case of foreign
currency futures and options thereon, to hedge against prevailing currency
exchange rates. The Portfolio does not engage in transactions in futures and
options on futures for speculation.
CALL OPTIONS ON SECURITIES. The Portfolio may write covered call
options and may purchase call options on securities. The purpose of writing call
options is to hedge (I.E., to reduce, at least in part, the effect of price
fluctuations of securities held by the Portfolio on the Portfolio's and the
Fund's NAVs) or to earn premium income. Portfolio securities on which call
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.
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 call option. 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 an option at less
than the market price.
The writing of covered call options is a conservative investment
technique that is believed to involve relatively little risk but is capable of
enhancing the 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.
If a call option that the Portfolio has written expires unexercised,
the Portfolio will realize a gain in the amount of the premium; however, that
gain may be offset by a decline in the market value of the underlying security
during the option period. If the call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security.
When the Portfolio purchases a call option, it pays a premium for
the right to purchase a security from the writer at a specified price until a
specified date. The Portfolio would purchase a call option to offset a
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previously written call option. The Portfolio also may purchase a call option to
protect against an increase in the price of securities it intends to purchase.
POLICIES AND LIMITATIONS. The Portfolio may write covered call
options and may purchase call options in related closing transactions. The
Portfolio writes only "covered" call options on securities it owns (in contrast
to the writing of "naked" or uncovered call options, which the Portfolio will
not do).
The Portfolio would purchase a call option to offset a previously
written call option. The Portfolio also may purchase a call option to protect
against an increase in the price of securities it intends to purchase.
PUT OPTIONS ON SECURITIES. 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 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 might purchase a put option in
order to protect itself against a decline in the market value of a security it
owns.
Portfolio securities on which put options may be written and
purchased by the Portfolio are purchased solely on the basis of investment
considerations consistent with the Portfolio's investment objective. 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 that may be higher than
the current market price of the security. If a put option that the Portfolio has
written expires unexercised, the Portfolio will realize a gain in the amount of
the premium.
POLICIES AND LIMITATIONS. The Portfolio generally writes and
purchases put options on securities for hedging purposes (I.E., to reduce, at
least in part, the effect of price fluctuations of securities held by the
Portfolio on the Portfolio's and the Fund's NAVs).
GENERAL INFORMATION ABOUT SECURITIES OPTIONS. The exercise price of
an option may be below, equal to, or above the market value of the underlying
security at the time the option is written. Options normally have expiration
dates between three and nine months from the date written. American-style
options are exercisable at any time prior to their expiration date. The
obligation under any option written by the Portfolio terminates upon expiration
of the option or, at an earlier time, when the Portfolio 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 U.S. national securities exchanges and in
the over-the-counter ("OTC") market. Exchange-traded options are issued by a
clearing organization affiliated with the exchange on which the option is
listed; the clearing organization in effect guarantees completion of every
exchange-traded option. In contrast, OTC options are contracts between the
Portfolio and a counter-party, with no clearing organization guarantee. Thus,
when the Portfolio sells (or purchases) an OTC option, it generally will be able
- 9 -
<PAGE>
to "close out" the option prior to its expiration only by entering into a
closing transaction with the dealer to whom (or from whom) the Portfolio
originally sold (or purchased) the option. There can be no assurance that the
Portfolio would be able to liquidate an OTC option at any time prior to
expiration. Unless the Portfolio is able to effect a closing purchase
transaction in a covered OTC call option it has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised or
until different cover is substituted. In the event of the counter-party's
insolvency, the Portfolio may be unable to liquidate its options position and
the associated cover. N&B Management monitors the creditworthiness of dealers
with which the Portfolio may engage in OTC options transactions.
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 market. The premium may reflect, among other things, the current
market price of the underlying security, the relationship of the exercise price
to the market price, the historical price volatility of the underlying security,
the length of the option period, the general supply of and demand for credit,
and the interest rate environment. The premium received by the 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.
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.
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. 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.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets.
POLICIES AND LIMITATIONS. The Portfolio may use American-style
options. 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
- 10 -
<PAGE>
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.
FOREIGN CURRENCY TRANSACTIONS. The Portfolio may enter into
contracts for the purchase or sale of a specific currency at a future date
(usually less than one year from the date of the contract) at a fixed price
("forward contracts"). The Portfolio also may engage in foreign currency
exchange transactions on a spot (I.E., cash) basis at the spot rate prevailing
in the foreign currency exchange market.
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. Forward contract transactions include forward sales or purchases of
foreign currencies for the purpose of protecting the U.S. dollar value of
securities held or to be acquired by the Portfolio or protecting the U.S. dollar
equivalent of dividends, interest, or other payments on those securities.
Forward contracts are traded in the interbank market directly
between dealers (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades; foreign exchange dealers realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies.
At the consummation of a forward contract to sell currency, the
Portfolio may either make delivery of the foreign currency or terminate its
contractual obligation to deliver by purchasing an offsetting contract. If the
Portfolio chooses to make delivery of the foreign currency, it may be required
to obtain such currency through the sale of portfolio securities denominated in
such currency or through conversion of other assets of the Portfolio into such
currency. If the Portfolio engages in an offsetting transaction, it will incur a
gain or a loss to the extent that there has been a change in forward contract
prices. Closing purchase transactions with respect to forward contracts are
usually made with the currency dealer who is a party to the original forward
contract.
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.
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 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 underlying securities. Because
- 11 -
<PAGE>
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.
POLICIES AND LIMITATIONS. The Portfolio may enter into forward
contracts for the purpose of hedging and not for speculation.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may write and purchase
covered call and put options on foreign currencies. Currency options have
characteristics and risks similar to those of securities options, as discussed
herein. Certain options on foreign currencies are traded on the OTC market and
involve liquidity and credit risks that may not be present in the case of
exchange-traded currency options.
POLICIES AND LIMITATIONS. The Portfolio would use options on
foreign currencies to protect against declines in the U.S. dollar value of
portfolio securities or increases in the U.S. dollar cost of securities to be
acquired or to protect the U.S. dollar equivalent of dividends, interest, or
other payments on those securities.
REGULATORY LIMITATIONS ON USING FINANCIAL INSTRUMENTS. To the extent
the Portfolio sells or purchases futures contracts or writes options thereon or
options on foreign currencies that are traded on an exchange regulated by the
CFTC other than for BONA FIDE hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on those positions (excluding the amount
by which options are "in-the-money") may not exceed 5% of the Portfolio's net
assets.
COVER FOR FINANCIAL INSTRUMENTS. Securities held in a segregated
account cannot be sold while the futures, options, or forward strategy covered
by those securities is outstanding, unless they are replaced with other suitable
assets. As a result, segregation of 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
cover, or are segregated with respect to, an illiquid futures, options, or
forward position; this inability may result in a loss to the Portfolio.
POLICIES AND LIMITATIONS. The Portfolio will comply with SEC
guidelines regarding "cover" for Financial Instruments and, if the guidelines so
require, set aside in a segregated account with its custodian the prescribed
amount of cash or appropriate liquid securities.
GENERAL RISKS OF FINANCIAL INSTRUMENTS. The primary risks in using
Financial Instruments are (1) imperfect correlation or no correlation between
changes in market value of the securities or currencies held or to be acquired
by the Portfolio and the prices of Financial Instruments; (2) possible lack of a
liquid secondary market for Financial Instruments and the resulting inability to
close out Financial Instruments when desired; (3) the fact that the skills
needed to use Financial Instruments are different from those needed to select
the Portfolio's securities; (4) the fact that, although use of Financial
Instruments for hedging purposes can reduce the risk of loss, they also can
reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments; and (5) the possible inability
of the Portfolio to purchase or sell the Portfolio security at a time that would
otherwise be favorable for it to do so, or the possible need for the Portfolio
to sell the Portfolio security at a disadvantageous time, due to its need to
maintain cover or to segregate securities in connection with its use of
Financial Instruments. There can be no assurance that the Portfolio's use of
Financial Instruments will be successful.
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<PAGE>
The Portfolio's use of Financial Instruments may be limited by the
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 RIC. See "Additional
Tax Information." Hedging instruments may not be available with respect to some
currencies, especially those of so-called emerging market countries.
POLICIES AND LIMITATIONS. N&B Management intends to reduce the risk
of imperfect correlation by investing only in Financial Instruments whose
behavior is expected to resemble or offset that of the Portfolio's underlying
securities or currency. N&B Management intends to reduce the risk that the
Portfolio will be unable to close out Financial Instruments by entering into
such transactions only if N&B Management believes there will be an active and
liquid secondary market.
FIXED INCOME SECURITIES. While the emphasis of the Portfolio's
investment program is on common stocks and other equity securities, it may also
invest in money market instruments, U.S. Government and Agency Securities, and
other fixed income securities. The Portfolio may invest in investment grade
corporate bonds and debentures. "Investment grade" debt securities are those
receiving one of the four highest ratings from Standard & Poor's ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), or any other nationally recognized
statistical rating organization ("NRSRO") or, if not rated by any NRSRO, deemed
comparable by N&B Management to such rated securities ("Comparable Unrated
Securities"). Securities rated by Moody's in its fourth highest rating category
(Baa) or Comparable Unrated Securities may be deemed to have speculative
characteristics.
The ratings of 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, coupon, and rating may have
different yields. Although the Portfolio may rely on the ratings of any NRSRO,
the Portfolio primarily refers to ratings assigned by S&P and Moody's, which are
described in Appendix A to this SAI.
Fixed income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on its obligations ("credit
risk") and are subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer, and market
liquidity ("market risk"). The value of the fixed income securities in which the
Portfolio may invest is likely to decline in times of rising market interest
rates. Conversely, when rates fall, the value of the Portfolio's fixed income
investments is likely to rise. Foreign fixed income securities are subject to
risks similar to those of other foreign securities.
Lower-rated securities are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. Subsequent
to its purchase by the Portfolio, an issue of debt securities may cease to be
rated or its rating may be reduced, so that the securities would no longer be
eligible for purchase by the Portfolio. In such a case, the Portfolio will
engage in an orderly disposition of the downgraded securities.
POLICIES AND LIMITATIONS. The Portfolio normally may invest up
to 35% of its total assets in debt securities.
COMMERCIAL PAPER. Commercial paper is a short-term debt security
issued by a corporation or bank, 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
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<PAGE>
may in certain cases determine that such paper is liquid, pursuant to guidelines
established by the Portfolio Trustees.
POLICIES AND LIMITATIONS. The Portfolio may invest only in
commercial paper receiving the highest rating from S&P (A-1) or Moody's (P-1) or
deemed by N&B Management to be of comparable quality.
ZERO COUPON SECURITIES. The Portfolio may invest in zero coupon
securities, which are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or that specify a future date
when the securities begin to pay current interest. Zero coupon securities are
issued and traded at a discount from their face amount or par value. This
discount varies depending on prevailing interest rates, the time remaining until
cash payments begin, the liquidity of the security, and the perceived credit
quality of the issuer.
The discount on zero coupon securities ("original issue discount")
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 original issue discount)
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 a similar maturity and
credit quality.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock,
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. Convertible securities generally
have features of both common stocks and debt securities. A convertible security
entitles the holder to receive the interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, such securities ordinarily
provide a stream of income with generally higher yields than common stocks of
the same or similar issuers, but lower than the yield on non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
non-convertible securities but rank senior to common stock in a corporation's
capital structure. The value of a convertible security is a function of (1) its
yield in comparison to the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth if converted
into the underlying common stock. Convertible debt securities are subject to the
Portfolio's investment policies and limitations concerning fixed income
securities.
The price of a convertible security often reflects variations in the
price of the underlying common stock in a way that non-convertible debt may not.
Convertible securities are typically issued by smaller capitalization companies
whose stock prices may be volatile. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Portfolio is called
for redemption, the Portfolio will be required to convert it into the underlying
- 14 -
<PAGE>
common stock, sell it to a third party or permit the issuer to redeem the
security. Any of these actions could have an adverse effect on the Portfolio's
and the Fund's ability to achieve their investment objectives.
POLICIES AND LIMITATIONS. The Portfolio may invest up to 20% of its
net assets in convertible securities. The Portfolio does not intend to purchase
any convertible securities that are not investment grade. Convertible securities
are subject to the Portfolio's investment policies and limitations concerning
fixed income securities.
PREFERRED STOCK. The Portfolio may invest in preferred stock. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors. Preferred
shareholders may have certain rights if dividends are not paid but generally
have no legal recourse against the issuer. Shareholders may suffer a loss of
value if dividends are not paid. The market prices of preferred stocks are
generally more sensitive to changes in the issuer's creditworthiness than are
the prices of debt securities.
PERFORMANCE INFORMATION
The Fund's performance figures are based on historical results and
are not intended to indicate future performance. The share price and total
return of the Fund will vary, and an investment in the Fund, when redeemed, may
be worth more or less than an investor's original cost. As of the date of this
SAI, the Fund was new and had no performance history.
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:
P(1+T)n(SUPERSCRIPT) = ERV
Average annual total return smoothes out year-to-year variations in
performance and, in that respect, differs from actual year-to-year results.
N&B Management may from time to time reimburse the Fund for a
portion of its expenses. Such action has the effect of increasing 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, Investment Company Data
Inc., Morningstar, Inc., Micropal Incorporated, and quarterly mutual fund
- 15 -
<PAGE>
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 stock and other indices, such as the S&P "500"
Composite Stock Price Index ("S&P 500 Index"), S&P Small Cap 600 Index
("S&P 600 Index"), S&P Mid Cap 400 Index ("S&P 400 Index"), Russell 2000
Stock Index, Russell Midcap Growth Index, Dow Jones Industrial Average
("DJIA"), Wilshire 1750 Index, Nasdaq Composite Index, Montgomery
Securities Growth Stock Index, Value Line Index, U.S. Department of Labor
Consumer Price Index ("Consumer Price Index"), College Board Annual Survey
of Colleges, Kanon Bloch's Family Performance Index, the Barra Growth
Index, the Barra Value Index and various other domestic, international,
and global indices. The S&P 500 Index is a broad index of common stock
prices, while the DJIA represents a narrower segment of industrial
companies. The S&P 600 Index includes stocks that range in market value
from $39 million to $2.7 billion, with an average of $616 million. The S&P
400 Index measures mid-sized companies that have an average market
capitalization of $2.2 billion. Each assumes reinvestment of distributions
and is calculated without regard to tax consequences or the costs of
investing. The Portfolio may invest in different types of securities from
those included in some of the above indices.
Evaluations of the Fund's performance, its total returns, and
comparisons may be used in advertisements and in information furnished to
current and prospective shareholders (collectively, "Advertisements"). The Fund
may also be compared to individual asset classes such as common stocks,
small-cap stocks, or Treasury bonds, based on information supplied by Ibbotson
and Sinquefield.
OTHER PERFORMANCE INFORMATION
From time to time, information about the Portfolio's portfolio
allocation and holdings as of a particular date may be included in
Advertisements for the Fund. This information 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
goals, such as (1) funding retirement, (2) paying for children's education, and
(3) financially supporting aging parents.
N&B Management believes that many of its common stock funds may be
attractive investment vehicles for conservative investors who are interested in
long-term appreciation from stock investments, but who have a moderate tolerance
for risk. Such investors may include, for example, individuals (1) planning for
or facing retirement, (2) receiving or expecting to receive lump-sum
distributions from individual retirement accounts ("IRAs"), self-employed
individual retirement plans ("Keogh plans"), or other retirement plans, (3)
anticipating rollovers of CDs or IRAs, Keogh plans, or other retirement plans,
and (4) receiving a significant amount of money as a result of inheritance, sale
of a business, or termination of employment.
Investors who may find the Fund to be an attractive investment
vehicle also include parents saving to meet college costs for their children.
For instance, the cost of a college education is rapidly approaching the cost of
the average family home. Estimates of total four-year costs (tuition, room and
board, books and other expenses) for students starting college in various years
may be included in Advertisements, based on the College Board Annual Survey of
Colleges.
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<PAGE>
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.)
CERTAIN RISK CONSIDERATIONS
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.
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, LLC ("Neuberger & Berman").
<TABLE>
<CAPTION>
Name, Age, and Positions Held
Address(1) With the Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
<S> <C> <C>
Faith Colish (63) Trustee of each Attorney at Law, Faith Colish, A
63 Wall Street Trust Professional Corporation.
24th Floor
New York, NY 10005
Stanley Egener* (64) Chairman of the Principal of Neuberger & Berman;
Board, Chief President and Director of N&B
Executive Officer, Management; Chairman of the
and Trustee of Board, Chief Executive Officer
each Trust and Trustee of nine other mutual
funds for which N&B Management
acts as investment manager or
administrator.
Howard A. Mileaf (61) Trustee of each Vice President and Special
WHX Corporation Trust Counsel to WHX Corporation
110 East 59th Street (holding company) since 1992;
30th Floor Director of Kevlin Corporation
New York, NY 10022 (manufacturer of microwave and
other products).
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<PAGE>
Name, Age, and Positions Held
Address(1) With the Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
Edward I. O'Brien* (70) Trustee of each Until 1993, President of the
12 Woods Lane Trust Securities Industry Association
Scarsdale, NY 10583 ("SIA") (securities industry's
representative in
government relations and
regulatory matters at the
federal and state levels);
until November 1993,
employee of the SIA;
Director of Legg Mason,
Inc.
John T. Patterson, Jr. (70) Trustee of each Retired. Formerly, President of
183 Ledge Drive Trust SOBRO (South Bronx Overall
Torrington, CT 06790 Economic Development Corporation).
John P. Rosenthal (65) Trustee of each Senior Vice President of Burnham
Burnham Securities Inc. Trust Securities Inc. (a registered
Burnham Asset Management Corp. broker-dealer) since 1991;
1325 Avenue of the Americas Director, Cancer Treatment
17th Floor Holdings, Inc.
New York, NY 10019
Cornelius T. Ryan (67) Trustee of each General Partner of Oxford
Oxford Bioscience Trust Partners and Oxford Bioscience
Partners Partners (venture capital
315 Post Road West partnerships) and President of
Westport, CT 06880 Oxford Venture Corporation;
Director of Capital Cash
Management Trust (money
market fund) and Prime Cash
Fund.
Gustave H. Shubert (69) Trustee of each Senior Fellow/Corporate Advisor
13838 Sunset Boulevard Trust and Advisory Trustee of Rand (a
Pacific Palisades, CA 90272 non-profit public interest
research institution) since
1989; Honorary Member of
the Board of Overseers of
the Institute for Civil
Justice, the Policy
Advisory Committee of the
Clinical Scholars Program
at the University of
California, the American
Association for the
Advancement of Science, the
Counsel on Foreign
Relations, and the
Institute for Strategic
Studies (London); advisor
to the Program Evaluation
and Methodology Division of
the U.S. General Accounting
Office; formerly Senior
Vice President and Trustee
of Rand.
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<PAGE>
Name, Age, and Positions Held
Address(1) With the Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
Lawrence Zicklin* (62) President and Principal of Neuberger & Berman;
Trustee of each Director of N&B Management;
Trust President and/or Trustee of six
other mutual funds for
which N&B Management acts
as investment manager or
administrator.
Daniel J. Sullivan (58) Vice President of Senior Vice President of N&B
each Trust Management since 1992; Vice
President of nine other
mutual funds for which N&B
Management acts as
investment manager or
administrator.
Michael J. Weiner (51) Vice President and Senior Vice President of N&B
Principal Management since 1992; Treasurer
Financial Officer of N&B Management from 1992 to
of each Trust 1996; Vice President and
Principal Financial Officer
of nine other mutual funds
for which N&B Management
acts as investment manager
or administrator.
Claudia A. Brandon (42) Secretary of each Vice President of N&B Management;
Trust Secretary of nine other mutual
funds for which N&B Management
acts as investment manager or
administrator.
Richard Russell (51) Treasurer and Vice President of N&B Management
Principal since 1993; prior thereto,
Accounting Officer Assistant Vice President of N&B
of each Trust Management; Treasurer and
Principal Accounting
Officer of nine other
mutual funds for which N&B
Management acts as
investment manager or
administrator.
Stacy Cooper-Shugrue (35) Assistant Assistant Vice President of N&B
Secretary of each Management since 1993; prior
Trust thereto, employee of N&B
Management; Assistant
Secretary of nine other
mutual funds for which N&B
Management acts as
investment manager or
administrator.
C. Carl Randolph (61) Assistant Principal of Neuberger & Berman
Secretary of each since 1992; Assistant Secretary
Trust of nine other mutual funds for
which N&B Management acts as
investment manager or
administrator.
- 19 -
<PAGE>
Name, Age, and Positions Held
Address(1) With the Trusts Principal Occupation(s)(2)
---------- --------------- --------------------------
Barbara DiGiorgio (39) Assistant Assistant Vice President of N&B
Treasurer of each Management since 1993; prior
Trust thereto, employee of N&B
Management; Assistant
Treasurer since 1996 of
nine other mutual funds for
which N&B Management acts
as investment manager or
administrator.
Celeste Wischerth (37) Assistant Assistant Vice President of N&B
Treasurer of each Management since 1994; prior
Trust thereto, employee of N&B
Management; Assistant
Treasurer since 1996 of
nine 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, New York 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 Zicklin are interested persons by
virtue of the fact that they are officers and/or directors of N&B Management and
principals of Neuberger & Berman. Mr. O'Brien is an interested person by virtue
of the fact that he is a director of Legg Mason, Inc., a wholly owned subsidiary
of which, from time to time, serves as a broker or dealer to the Portfolio and
other funds for which N&B Management serves as investment manager.
The Trust's Trust Instrument and Managers Trust's Declaration of
Trust 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.
The following table sets forth information concerning the
compensation of the trustees of the Trust. None of the Neuberger & Berman
Funds(R) has any retirement plan for its trustees.
- 20 -
<PAGE>
TABLE OF COMPENSATION
FOR FISCAL YEAR ENDED 8/31/98
Total Compensation
from Investment
Aggregate Companies in the
Compensation Neuberger & Berman
Name and Position from the Fund Complex Paid to
With the Trust Trust Trustees
- -------------- ----- --------
Faith Colish $ 5,923.68 $ 84,500.00
Trustee (5 other investment
companies)
Stanley Egener $ 0 $ 0
Chairman of the Board, (9 other investment
Chief Executive companies)
Officer, and Trustee
Howard A. Mileaf $ 5,980.00 $ 52,000.00
Trustee (4 other investment
companies)
Edward I. O'Brien $ 6,399.60 $ 51,750.00
Trustee (3 other investment
companies)
John T. Patterson, Jr. $ 6,456.01 $ 55,750.00
Trustee (4 other investment
companies)
John P. Rosenthal $ 5,527.50 $ 47,750.00
Trustee (4 other investment
companies)
Cornelius T. Ryan $ 6,036.51 $ 48,750.00
Trustee (3 other investment
companies)
Gustave H. Shubert $ 5,980.10 $ 48,250.00
Trustee (3 other investment
companies)
Lawrence Zicklin $ 0 $ 0
President and Trustee (5 other investment
companies)
At October 1, 1998, the trustees and officers of the Trusts, as a
group, owned beneficially or of record less than 1% of the outstanding shares of
the Fund.
- 21 -
<PAGE>
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES
INVESTMENT MANAGER AND ADMINISTRATOR
Because all of the Fund's net investable assets are invested in the
Portfolio, the Fund does not need an investment manager. N&B Management serves
as the Portfolio's investment manager pursuant to a management agreement with
Managers Trust, dated as of August 2, 1993 ("Management Agreement"). The
Management Agreement was approved by the holders of the interests in the
Portfolio on October 19, 1998.
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
directors of N&B Management (who also are principals of Neuberger & Berman), one
of whom also serves as an officer of N&B Management, presently serve as trustees
and officers of the Trusts. See "Trustees and Officers." The Portfolio pays N&B
Management a management fee based on the Portfolio's average daily net assets,
as described in the Prospectus.
N&B Management provides facilities, services and personnel, as well
as accounting, recordkeeping, and other services, to the Fund pursuant to an
administration agreement with the Trust, dated August 3, 1993, as amended on
August 2, 1996 ("Administration Agreement"). The Fund was authorized to become
subject to the Administration Agreement by vote of the Fund Trustees on July 29,
1998, and became subject to it on October 19, 1998. 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 Institutions for accounting, recordkeeping and other services that
they provide in connection with investments in the Fund.
Institutions may be subject to federal or state laws that limit
their ability to provide certain administrative or distribution-related
services. For example, the Glass-Steagall Act is generally interpreted to
prohibit most banks from underwriting mutual fund shares. N&B Management intends
to contract with Institutions for only those services they may legally provide.
If, due to a change in the laws governing Institutions or in the interpretation
of any such law, an Institution is prohibited from performing some or all of the
above-described services, N&B Management may be required to find alternative
means of providing those services. Any such change is not expected to impact the
Fund or its shareholders adversely.
N&B Management has voluntarily undertaken to reimburse the Fund for
its Total Operating Expenses (as defined in the Prospectus) which exceed 1.75%
of the Fund's average daily net assets. The Fund has in turn agreed to repay N&B
Management through December 31, 2000, for the excess Total Operating Expenses
- 22 -
<PAGE>
that N&B Management reimbursed to the Fund through December 31, 1999, so long as
the Fund's Total Operating Expenses do not exceed the above expense limitation.
This undertaking can be terminated by N&B Management by giving the Fund at least
60 days' prior written notice.
The Management Agreement continues with respect to the Portfolio
until August 2, 2000. 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 until
August 2, 2000. The Administration Agreement is renewable thereafter from year
to year with respect to the Fund, so long as its continuance is approved at
least annually (1) by the vote of a majority of the Fund 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.
SUB-ADVISER
N&B Management retains Neuberger & Berman, 605 Third Avenue, New
York, NY 10158-3698, as sub-adviser with respect to the Portfolio pursuant to a
sub-advisory agreement dated August 2, 1993 ("Sub-Advisory Agreement"). The
Sub-Advisory Agreement was approved by the holders of the interests in the
Portfolio on October 19, 1998.
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 sub-adviser for all of the other mutual funds
managed by N&B Management.
The Sub-Advisory Agreement continues with respect to the Portfolio
until August 2, 2000 and is renewable from year to year, subject to approval of
its continuance in the same manner as the Management Agreement. The Sub-Advisory
Agreement is subject to termination, without penalty, with respect to the
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. The
- 23 -
<PAGE>
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 September 30, 1998, the investment companies managed by N&B
Management had aggregate net assets of approximately $18 billion. N&B Management
currently serves as investment manager of the following investment companies:
Approximate Net Assets
Name At September 30, 1998
---- ---------------------
Neuberger & Berman Cash Reserves $ 961,277,114.73
Portfolio
(investment portfolio for
Neuberger & Berman Cash Reserves)
Neuberger & Berman Government Money $ 356,413,872.98
Portfolio
(investment portfolio for
Neuberger & Berman Government
Money Fund)
Neuberger & Berman High Yield Bond $ 22,692,273.25
Portfolio
(investment portfolio for
Neuberger & Berman High Yield
Bond Fund)
Neuberger & Berman Limited Maturity $ 357,429,916.55
Bond Portfolio
(investment portfolio for
Neuberger & Berman Limited
Maturity Bond Fund and Neuberger
& Berman Limited Maturity Bond
Trust)
Neuberger & Berman Municipal Money $ 215,897,411.23
Portfolio
(investment portfolio for
Neuberger & Berman Municipal
Money Fund)
Neuberger & Berman Municipal $ 38,147,016.95
Securities Portfolio
(investment portfolio for
Neuberger & Berman Municipal
Securities Trust)
- 24 -
<PAGE>
Approximate Net Assets
Name At September 30, 1998
---- ---------------------
Neuberger & Berman Focus Portfolio $ 1,296,356,136.15
(investment portfolio for Neuberger &
Berman Focus Fund, Neuberger & Berman
Focus Trust, and Neuberger & Berman
Focus Assets)
Neuberger & Berman Genesis Portfolio $ 1,931,169,592.69
(investment portfolio for
Neuberger & Berman Genesis Fund,
Neuberger & Berman Genesis Trust
and Neuberger & Berman Genesis
Assets)
Neuberger & Berman Guardian Portfolio $ 5,672,663,013.15
(investment portfolio for
Neuberger & Berman Guardian
Fund, Neuberger & Berman
Guardian Trust and Neuberger &
Berman Guardian Assets)
Neuberger & Berman International $ 114,793,905.79
Portfolio
(investment portfolio for
Neuberger & Berman International
Fund and Neuberger & Berman
International Trust)
Neuberger & Berman Manhattan Portfolio $ 555,345,009.17
(investment portfolio for
Neuberger & Berman Manhattan
Fund, Neuberger & Berman
Manhattan Trust and Neuberger &
Berman Manhattan Assets)
Neuberger & Berman Partners Portfolio $ 3,712,575,595.41
(investment portfolio for
Neuberger & Berman Partners
Fund,
Neuberger & Berman Partners
Trust and Neuberger & Berman
Partners Assets)
- 25 -
<PAGE>
Approximate Net Assets
Name At September 30, 1998
---- ---------------------
Neuberger & Berman Socially Responsive $ 300,343,680.73
Portfolio
(investment portfolio for
Neuberger & Berman Socially
Responsive Fund, Neuberger &
Berman Socially Responsive Trust
and Neuberger & Berman NYCDC
Socially Responsive Trust)
Advisers Managers Trust $2,504,652,561.08
(seven series)
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 mutual
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 its advisory arrangements with N&B Management outweighs any
disadvantages that may result from contemporaneous transactions.
The Portfolio is subject to certain limitations imposed on all
advisory clients of Neuberger & Berman (including the Portfolio, the Other N&B
Funds, and other managed accounts) and personnel of Neuberger & Berman and its
affiliates. These include, for example, limits that may be imposed in certain
industries or by certain companies, and policies of Neuberger & Berman that
limit the aggregate purchases, by all accounts under management, of the
outstanding shares of public companies.
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
- 26 -
<PAGE>
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 G. Galli,
Vice President; Robert I. Gendelman, Vice President; Josephine P. Mahaney,
Vice President; Michael F. Malouf, Vice President; Ellen Metzger, Vice
President and Secretary; Paul Metzger, S. Basu Mullick, Vice President; Vice
President; Janet W. Prindle, Vice President; Kevin L. Risen, Vice President;
Richard Russell, Vice 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; Allan R. White, III, Vice
President; Thomas G. 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; 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, Risen, Simons, Sundman and Zicklin and Mmes.
Prindle, Silver and Vale are principals of Neuberger & Berman.
Messrs. Egener and Zicklin are trustees and officers, and Messrs.
Russell, Sullivan and Weiner 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.
The Trust, on behalf of the Fund, and the Distributor are parties to
a Distribution Agreement that continues until August 2, 1999. 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
- 27 -
<PAGE>
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
"Exchanging Shares," an Institution may exchange shares of the Fund for shares
of one or more of the Neuberger & Berman Funds or the Neuberger & Berman Income
Fund that are briefly described below, if made available through that
Institution.
EQUITY FUNDS
Neuberger & Berman Focus Trust Invests principally in common stocks
selected from 13 multi-industry
sectors of the economy. To maximize
potential return, the Portfolio
normally makes at least 90% of its
investments in not more than six
sectors of the economy believed by the
portfolio managers to be undervalued.
Neuberger & Berman Genesis Trust Invests primarily in stocks of
(Closed to most new investors. companies with small market
For more information, see Genesis capitalizations (up to 1.5 billion at
Trust's Prospectus) the time of the Portfolio's
investment). Portfolio managers seek
to buy the stocks of strong companies
with a history of solid performance
and a proven management team, which
are selling at attractive prices.
Neuberger & Berman Guardian Trust A growth and income fund that invests
primarily in stocks of established,
high-quality companies that are not
well followed on Wall Street or are
temporarily out of favor.
Neuberger & Berman Manhattan Trust Invests in securities believed to have
the maximum potential for long-term
capital appreciation. Portfolio
managers seek stocks of companies that
are projected to grow at above-average
rates and that appear to the managers
poised for a period of accelerated
earnings.
Neuberger & Berman Partners Trust Seeks capital growth through an
approach that is intended to increase
capital with reasonable risk.
Portfolio managers look at
fundamentals, focusing particularly on
cash flow, return on capital, and
asset values.
Neuberger & Berman Seeks long-term capital appreciation
Socially Responsive Trust by investing in Berman common stocks
of companies that meet both financial
and social criteria.
INCOME FUND
Neuberger & Berman Seeks the highest current income
Limited Maturity Bond Trust consistent with low risk to principal
and liquidity and, secondarily, total
return. The corresponding portfolio
invests in debt securities, primarily
investment grade; maximum 10% below
- 28 -
<PAGE>
investment grade, but no lower than
B.*/ Maximum average duration of four
years.
Any Neuberger & Berman Fund described herein, and the Neuberger &
Berman Income Fund, may terminate or modify its exchange privilege in the
future.
Fund shareholders who are considering exchanging shares into the
Neuberger & Berman Income Fund described herein should note that it (1) is a
series of a Delaware business trust (named "Neuberger & Berman Income 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.
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. An exchange is treated as a sale for federal income tax
purposes and, depending on the circumstances, a 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 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 transaction 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 Trustees determined that it was in the best interests of the Fund's
shareholders as a whole.
- -----------------
* As rated by Moody's or S&P or, if unrated by either of those entities,
determined by N&B Management to be of comparable quality.
- 29 -
<PAGE>
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, 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 realized 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 NAV per
share as of the close of regular trading on the NYSE on each Business Day
(usually 4:00 p.m. Eastern time).
The Fund generally distributes substantially all of its share of the
Portfolio's net investment income, (after deducting expenses incurred directly
by the Fund), if any, near the end of each other calendar quarter. 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 with respect to the Fund 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 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 the value
of the Fund's total assets and that 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
have received rulings from the Internal Revenue Service ("Service") that each
such fund, as an investor in its corresponding portfolio, will be deemed to own
a proportionate share of the portfolio's assets and income for purposes of
determining whether the fund satisfies all the requirements described above to
- 30 -
<PAGE>
qualify as a RIC. Although these rulings may not be relied on as precedent by
the Fund, N&B Management believes that the reasoning thereof and, hence, their
conclusion apply to the Fund as well.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ended on October 31 of that year, plus certain
other amounts.
See the next section for a discussion of the tax consequences to the
Fund of distributions to it from the Portfolio, investments by the Portfolio in
certain securities, and hedging transactions engaged in by the Portfolio.
TAXATION OF THE PORTFOLIO
Certain portfolios managed by N&B Management have received rulings
from the Service to the effect that, among other things, each such portfolio
will be treated as a separate partnership for federal income tax purposes and
will not be a "publicly traded partnership." As a result, the portfolio is not
subject to federal income tax; instead, each investor in the portfolio (such as
its corresponding fund) is required to take into account in determining its
federal income tax liability its share of the portfolio's income, gains, losses,
deductions, and credits, without regard to whether it has received any cash
distributions from the portfolio. The portfolios also are not subject to
Delaware or New York income or franchise tax. Although these rulings may not be
relied on as precedent by the Portfolio and the Fund, N&B Management believes
the reasoning thereof and, hence, their conclusion apply to the Portfolio and
the Fund as well.
Because the Fund is deemed to own a proportionate share of the
Portfolio's assets and income for purposes of determining whether the Fund
satisfies the requirements to qualify as a RIC, the Portfolio intends to
continue to conduct its operations so that the Fund will be able to continue to
satisfy all those requirements.
Distributions to the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) will not result in the Fund's
recognition of any gain or loss for federal income tax purposes, except that (1)
gain will be recognized to the extent any cash that is distributed exceeds the
Fund's basis for its interest in the Portfolio before the distribution, (2)
income or gain will be recognized if the distribution is in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by the Portfolio, and (3) loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables. The Fund's basis for its interest in the Portfolio
generally equals the amount of cash the Fund invests in the Portfolio, increased
by the Fund's share of the Portfolio's net income and capital gains and
decreased by (1) the amount of cash and the basis of any property the Portfolio
distributes to the Fund and (2) 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 return on its securities. Tax treaties between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors.
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The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (I.E., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which the Portfolio is a U.S. shareholder (effective
for the taxable year beginning September 1, 1998) -- that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, if the Portfolio
holds stock of a PFIC, the Fund (indirectly through its interest in the
Portfolio) will be subject to federal income tax on its share of a portion of
any "excess distribution" received by the Portfolio on the stock or of any gain
on the Portfolio's disposition of the stock (collectively, "PFIC income"), plus
interest thereon, even if the Fund distributes its share of the PFIC income as a
taxable dividend to its shareholders. The balance of the Fund's share of the
PFIC income will be included in its investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the Fund's incurring the
foregoing tax and interest obligation, the Fund would be required to include in
income each year its share of the Portfolio's pro rata share of the QEF's annual
ordinary earnings and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) -- which most likely would have to be
distributed by the Fund to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax -- even if those earnings and gain were not
received by the Portfolio from the QEF. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
Effective for taxable years beginning after 1997, a holder of stock
in any PFIC may elect to include in ordinary income each taxable year the
excess, if any, of the fair market value of the stock over the adjusted basis
therein as of the end of that year. Pursuant to the election, a deduction (as an
ordinary, not capital, loss) also would be allowed for the excess, if any, of
the holder's adjusted basis in PFIC stock over the fair market value thereof as
of the taxable year-end, but only to the extent of any net mark-to-market gains
with respect to that stock included in income for prior taxable years. The
adjusted basis in each PFIC's stock subject to the election would be adjusted to
reflect the amounts of income included and deductions taken thereunder. Proposed
regulations would provide a similar election with respect to the stock of
certain PFICs.
The Portfolio's use of hedging strategies, such as writing (selling)
and purchasing 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
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, certain forward contracts and
listed options thereon ("Section 1256 contracts") are required to be marked to
market (that is, treated as having been sold at market value) for federal income
tax purposes at the end of the Portfolio's taxable year. Sixty percent of any
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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; 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
net capital gain enacted by the Tax Act -- 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, proposed technical corrections legislation
would clarify that the 20% rate applies.
The Portfolio may acquire zero coupon securities or other securities
issued with original issue discount ("OID"). As a holder of those securities,
the Portfolio (and, through it, the Fund) must take into 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 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 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.
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
Neuberger & Berman acts as principal broker for the Portfolio in the
purchase and sale of its portfolio securities and in connection with the writing
of covered call options on its securities.
Portfolio securities may, from time to time, be loaned by the
Portfolio to Neuberger & Berman in accordance with the terms and conditions of
an order issued by the SEC. The order exempts such transactions from provisions
of the 1940 Act that would otherwise prohibit such transactions, subject to
certain conditions. In accordance with the order, securities loans made by the
Portfolio to Neuberger & Berman are fully secured by cash collateral. The
portion of the income on the cash collateral which may be shared with Neuberger
& Berman is to be determined by reference to concurrent arrangements between
Neuberger & Berman and non-affiliated lenders with which it engages in similar
transactions. In addition, where Neuberger & Berman borrows securities from the
Portfolio in order to re-lend them to others, Neuberger & Berman may be required
to pay the Portfolio, on a quarterly basis, certain of the earnings that
Neuberger & Berman otherwise has derived from the re-lending of the borrowed
securities. When Neuberger & Berman desires to borrow a security that the
Portfolio has indicated a willingness to lend, Neuberger & Berman must borrow
such security from the Portfolio, rather than from an unaffiliated lender,
unless the unaffiliated lender is willing to lend such security on more
favorable terms (as specified in the order) than the Portfolio. If, in any
month, the Portfolio's expenses exceed its income in any securities loan
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transaction with Neuberger & Berman, Neuberger & Berman must reimburse the
Portfolio for such loss. The Portfolio has no current intention of loaning
securities to Neuberger & Berman.
The Portfolio may also lend securities to unaffiliated entities,
including banks, brokerage firms, and other institutional investors judged
creditworthy by N&B Management, provided that cash or equivalent collateral,
equal to at least 100% of the market value of the loaned securities, is
continuously maintained by the borrower with the Portfolio. The Portfolio may
invest the cash collateral and earn income, or it may receive an agreed upon
amount of interest income from a borrower who has delivered equivalent
collateral. During the time securities are on loan, the borrower will pay the
Portfolio an amount equivalent to any dividends or interest paid on such
securities. These loans are subject to termination at the option of the
Portfolio or the borrower. The Portfolio may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Portfolio does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
A committee of Independent Portfolio Trustees from time to time
reviews, among other things, information relating to securities loans by the
Portfolio.
In effecting securities transactions, the Portfolio generally seeks
to obtain the best price and execution of orders. Commission rates, being a
component of price, are considered along with other relevant factors. The
Portfolio plans to continue to use Neuberger & Berman as its principal broker
where, in the judgment of N&B Management, that firm is able to obtain a price
and execution at least as favorable as other qualified brokers. To the
Portfolio's knowledge, no affiliate of the Portfolio receives give-ups or
reciprocal business in connection with its securities transactions.
The use of Neuberger & Berman as a broker for the Portfolio is
subject to the requirements of Section 11(a) of the Securities Exchange Act of
1934. Section 11(a) prohibits members of national securities exchanges from
retaining compensation for executing exchange transactions for accounts which
they or their affiliates manage, except where they have the authorization of the
persons authorized to transact business for the account and comply with certain
annual reporting requirements. Managers Trust and N&B Management have expressly
authorized Neuberger & Berman to retain such compensation, and Neuberger &
Berman has agreed to comply with the reporting requirements of Section 11(a).
Under the 1940 Act, commissions paid by the Portfolio to Neuberger &
Berman in connection with a purchase or sale of securities on a securities
exchange may not exceed the usual and customary broker's commission.
Accordingly, it is the Portfolio's policy that the commissions paid to Neuberger
& Berman must, in N&B Management's judgment, be (1) at least as favorable as
those charged by other brokers having comparable execution capability and (2) at
least as favorable as commissions contemporaneously charged by Neuberger &
Berman on comparable transactions for its most favored unaffiliated customers,
except for accounts for which Neuberger & Berman acts as a clearing broker for
another brokerage firm and customers of Neuberger & Berman considered by a
majority of the Independent Portfolio Trustees not to be comparable to the
Portfolio. The Portfolio does not deem it practicable and in its best interests
to solicit competitive bids for commissions on each transaction effected by
Neuberger & Berman. However, consideration regularly is given to information
concerning the prevailing level of commissions charged by other brokers on
comparable transactions during comparable periods of time. The 1940 Act
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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.
A committee of Independent Portfolio Trustees from time to time
reviews, among other things, information relating to the commissions charged by
Neuberger & Berman to the Portfolio and to its other customers and information
concerning the prevailing level of commissions charged by other brokers having
comparable execution capability. In addition, the procedures pursuant to which
Neuberger & Berman effects brokerage transactions for the Portfolio must be
reviewed and approved no less often than annually by a majority of the
Independent Portfolio Trustees.
To ensure that accounts of all investment clients, including the
Portfolio, are treated fairly in the event that Neuberger & Berman receives
transaction instructions regarding a security for more than one investment
account at or about the same time, Neuberger & Berman may combine orders placed
on behalf of clients, including advisory accounts in which affiliated persons
have an investment interest, for the purpose of negotiating brokerage
commissions or obtaining a more favorable price. Where appropriate, securities
purchased or sold may be allocated, in terms of amount, to a client according to
the proportion that the size of the order placed by that account bears to the
aggregate size of orders contemporaneously placed by the other accounts, subject
to de minimis exceptions. All participating accounts will pay or receive the
same price.
The Portfolio expects that it will execute a portion of its
transactions through brokers other than Neuberger & Berman. In selecting those
brokers, N&B Management considers the quality and reliability of brokerage
services, including execution capability, performance, and financial
responsibility, and may consider research and other investment information
provided by, and sale of Fund shares effected through, those brokers.
A committee comprised of officers of N&B Management and principals
of Neuberger & Berman who are portfolio managers of the Portfolio and Other N&B
Funds (collectively, "N&B Funds") and some of Neuberger & Berman's managed
accounts ("Managed Accounts") evaluates semi-annually the nature and quality of
the brokerage and research services provided by other brokers. Based on this
evaluation, the committee establishes a list and projected rankings of preferred
brokers for use in determining the relative amounts of commissions to be
allocated to those brokers. Ordinarily, the brokers on the list effect a large
portion of the brokerage transactions for the N&B Funds and the Managed Accounts
that are not effected by Neuberger & Berman. However, in any semi-annual period,
brokers not on the list may be used, and the relative amounts of brokerage
commissions paid to the brokers on the list may vary substantially from the
projected rankings. These variations reflect the following factors, among
others: (1) brokers not on the list or ranking below other brokers on the list
may be selected for particular transactions because they provide better price
and/or execution, which is the primary consideration in allocating brokerage;
(2) adjustments may be required because of periodic changes in the execution
capabilities of or research provided by particular brokers or in the execution
or research needs of the N&B Funds and/or the Managed Accounts; and (3) the
aggregate amount of brokerage commissions generated by transactions for the N&B
Funds and the Managed Accounts may change substantially from one semi-annual
period to the next.
The commissions paid to a broker other than Neuberger & Berman may
be higher than the amount another firm might charge if N&B Management determines
in good faith that the amount of those commissions is reasonable in relation to
the value of the brokerage and research services provided by the broker. N&B
Management believes that those research services benefit the Portfolio by
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supplementing the information otherwise available to N&B Management. That
research may be used by N&B Management in servicing Other N&B Funds and, in some
cases, by Neuberger & Berman in servicing the Managed Accounts. On the other
hand, research received by N&B Management from brokers effecting portfolio
transactions on behalf of the Other N&B Funds and by Neuberger & Berman from
brokers effecting portfolio transactions on behalf of the Managed Accounts may
be used for the Portfolio's benefit.
Jennifer K. Silver and Michael F. Malouf are primarily responsible for
making decisions as to specific action to be taken with respect to the
investment portfolio of the Portfolio. Each of them has full authority to take
action with respect to portfolio transactions and may or may not consult with
other personnel of N&B Management prior to taking such action.
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 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 their respective 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. In addition, State Street serves as transfer agent for the
Portfolio.
INDEPENDENT ACCOUNTANTS
The Fund and Portfolio have selected PricewaterhouseCoopers, One
Post Office Square, Boston, MA 02109, as the independent accountants who will
audit their financial statements.
LEGAL COUNSEL
The Fund and Portfolio have selected Kirkpatrick & Lockhart LLP,
1800 Massachusetts Avenue, N.W., 2nd Floor, Washington, D.C. 20036-1800, as
their legal counsel.
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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. In each instance where reference is made to the copy of any contract
or other document filed as an exhibit to the registration statement, each such
statement is qualified in all respects by such reference.
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Appendix A
RATINGS OF CORPORATE BONDS AND COMMERCIAL PAPER
S&P CORPORATE BOND RATINGS:
AAA - Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, and C are regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI - The rating CI is reserved for income bonds on which no interest
is being paid.
D - Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
PLUS (+) OR MINUS (-) - The ratings above may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating 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 edge." 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, the changes that can be visualized are most unlikely to
impair the fundamentally strong position of the issuer.
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
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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 to be considered as 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 rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
MODIFIERS--Moody's may apply numerical modifiers 1, 2, and 3 in each generic
rating classification described above. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issuer
ranks in the lower end of its generic rating.
S&P COMMERCIAL PAPER RATINGS:
A-1 - This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+).
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:
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- 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.
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