NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
AUCTION MARKET PREFERRED SHARES
Neuberger Berman Intermediate Municipal Fund Inc. (the "Fund") is a
recently organized, diversified, closed-end management investment company.
This Statement of Additional Information relating to Series A auction
market preferred shares and Series B auction market preferred shares
(collectively, "AMPS") is not a prospectus, and should be read in conjunction
with the Fund's prospectus relating to AMPS dated December 12, 2002. This
Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing AMPS, and investors
should obtain and read the prospectus prior to purchasing such shares. You can
get a free copy of the prospectus from Neuberger Berman Management Inc. ("NB
Management"), 605 Third Avenue, 2nd Floor, New York, New York 10158-0180 or by
calling 877-461-1899. You may also obtain a copy of the prospectus (and other
information regarding the Fund) from the Securities and Exchange Commission's
("SEC") web site (http://www.sec.gov). Capitalized terms used but not defined in
this Statement of Additional Information have the meanings ascribed to them in
the prospectus.
No person has been authorized to give any information or to make any
representations not contained in the prospectus or in this Statement of
Additional Information in connection with the offering made by the prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Fund. The prospectus and this Statement of
Additional Information do not constitute an offering by the Fund in any
jurisdiction in which such offering may not lawfully be made.
The "Neuberger Berman" name and logo are service marks of Neuberger Berman,
LLC. "Neuberger Berman Management Inc." and the name of the Fund are either
service marks or registered trademarks of Neuberger Berman Management
Inc.(C)2002 Neuberger Berman Management Inc. All rights reserved.
This Statement of Additional Information is dated December 12, 2002.
TABLE OF CONTENTS
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Page
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USE OF PROCEEDS...............................................................1
INVESTMENT OBJECTIVE AND POLICIES.............................................1
INVESTMENT RESTRICTIONS.......................................................2
FURTHER INVESTMENT POLICIES AND
INVESTMENT TECHNIQUES.......................................................4
FURTHER INVESTMENT TECHNIQUES................................................12
PORTFOLIO TRADING AND TURNOVER RATE..........................................24
CERTAIN RISK CONSIDERATIONS..................................................24
MANAGEMENT OF THE FUND.......................................................25
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES............................35
PORTFOLIO TRANSACTIONS.......................................................40
NET ASSET VALUE..............................................................42
DESCRIPTION OF AMPS..........................................................42
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS......................44
CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION..........................46
REPURCHASE OF COMMON SHARES; TENDER OFFERS; CONVERSION
TO OPEN-END FUND...........................................................47
TAX MATTERS..................................................................49
CUSTODIAN, TRANSFER AGENT AND AUCTION AGENT..................................57
INDEPENDENT AUDITORS.........................................................57
COUNSEL......................................................................57
REGISTRATION STATEMENT.......................................................57
REPORT OF INDEPENDENT AUDITORS...............................................58
FINANCIAL STATEMENT..........................................................59
APPENDIX A -- ARTICLES SUPPLEMENTARY.........................................A-1
APPENDIX B -- DESCRIPTION OF SECURITIES RATINGS..............................B-1
APPENDIX C -- TAX-EQUIVALENT YIELD TABLE.....................................C-1
i
USE OF PROCEEDS
The net proceeds of the offering of AMPS of the Fund will be approximately
$177,261,000 after payment of offering costs. Pending investment in municipal
bonds (as described below) that meet the Fund's investment objective and
policies, it is anticipated that the net proceeds of the offering will be
invested in high quality, short-term, tax-exempt securities. If necessary to
invest fully the net proceeds of the offering immediately, the Fund may also
purchase high quality, short-term securities, including mortgage-backed and
corporate debt securities, the income on which is subject to federal income tax.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies of the Fund are
described in the prospectus. Additional information concerning the
characteristics of certain of the Fund's investments is set forth below.
The Fund's investment objective is to provide holders of common stock
("Common Stockholders") a high level of current income exempt from federal
income tax. This income, if any, will be distributed to Common Stockholders
after the satisfaction of the obligation to pay dividends on AMPS. The
investment objective and, unless otherwise specified, the investment policies
and limitations of the Fund are not fundamental. Any investment objective,
policy or limitation that is not fundamental may be changed by the Board of
Directors of the Fund (the "Board") without stockholder approval. The
fundamental investment policies and limitations of the Fund may not be changed
without the approval of the holders of a majority of the outstanding common
stock ("Common Shares") and AMPS voting as a single class, as well as by the
vote of a majority of the outstanding AMPS tabulated separately. A "majority of
the outstanding" shares means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever of (i) or
(ii) is less. These percentages are required by the Investment Company Act of
1940, as amended ("1940 Act").
All or a portion of the interest paid on the municipal obligations the Fund
holds may be an item of tax preference for purposes of the federal alternative
minimum tax ("AMT") ("Tax Preference Item"), with the result that all or a
portion of the dividends paid to Fund stockholders also would be such an item.
AMPS thus may not be a suitable investment for investors who are subject to the
AMT or would become subject thereto by investing in AMPS. The suitability of an
investment in AMPS will depend upon a comparison of the after-tax yield likely
to be provided from the Fund with that from comparable tax-exempt investments
not subject to the AMT, and from comparable fully taxable investments, in light
of each such investor's tax position. Special considerations apply to corporate
investors. See "Tax Matters."
Under normal market conditions, the Fund will invest at least 80% of its
total assets in municipal bonds (as described below) rated, at the time of
investment, within the four highest categories by a nationally recognized
statistical rating organization ("NRSRO") (or, if unrated, judged by NB
Management to be of comparable quality). The Fund's policies on the credit
quality of its investments apply only at the time of the purchase of a security,
and the Fund is not required to dispose of securities if Standard & Poor's
1
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's
Investors Service, Inc. ("Moody's") or any other NRSRO downgrades its assessment
of the credit characteristics of a particular issuer or if NB Management
reassesses its view with respect to the credit quality of the issuer thereof.
The Fund may invest up to 20% of its total assets in municipal bonds that,
at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch Ratings
("Fitch") or that are unrated but judged to be of comparable quality by NB
Management. Bonds of below-investment grade quality (Ba/BB or below) are
commonly referred to as "junk bonds." For a description of the risks associated
with lower-quality securities, see "High Yield Securities (`Junk Bonds')" below.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are fundamental and
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the 1940 Act. The Fund may
not:
1. DIVERSIFICATION. Purchase securities (other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities or
securities of other investment companies) of any issuer if as a result of the
purchase, more than 5% of the value of the Fund's total assets would be invested
in the securities of the issuer, except that up to 25% of the value of the
Fund's total assets may be invested without regard to this 5% limitation.
2. CONCENTRATION. Invest 25% or more of its total assets in issuers
having their principal business activities in the same industry.
3. SENIOR SECURITIES. Issue senior securities if such issuance is
specifically prohibited by the 1940 Act or the rules or regulations thereunder.
4. BORROWING. Borrow money in excess of 33 1/3% of its total assets
(including the amount of money borrowed) minus liabilities (other than the
amount borrowed), except that the Fund may borrow up to an additional 5% of its
total assets for temporary purposes.
5. LENDING. Make loans of money or property to any person, except to the
extent that the securities in which the Fund may invest are considered to be
loans and except that the Fund may lend money or property in connection with the
maintenance of the value of or the Fund's interest with respect to the municipal
securities it owns and may lend portfolio securities.
6. UNDERWRITING. Engage in the business of underwriting the securities of
other issuers, except to the extent that the Fund may be deemed an underwriter
in connection with the sale of securities in its portfolio.
7. REAL ESTATE. Purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments. This policy does not prevent
the Fund from investing in issuers that invest, deal, or otherwise engage in
transactions in or hold real estate or interests therein, investing in
2
instruments that are secured by real estate or interests therein, or exercising
rights under agreements relating to such securities, including the right to
enforce security interests.
8. COMMODITIES. Purchase or sell physical commodities unless acquired as
a result of ownership of securities or other instruments. This policy does not
prevent the Fund from engaging in transactions involving futures contracts and
options, forward contracts, swaps, caps, floors, collars, securities purchased
or sold on a forward-commitment or delayed-delivery basis or other financial
instruments, or investing in securities or other instruments that are secured by
physical commodities.
As a fundamental policy, the Fund will invest at least 80% of its total
assets in Municipal Bonds. If because of market action, the Fund falls out of
compliance with this policy, it will make future investments in such a manner as
to bring the Fund back into compliance with the policy.
The following investment policies and limitations of the Fund are
non-fundamental. The Fund may not:
1. MARGIN TRANSACTIONS. Buy any securities on "margin." Neither the
deposit of initial or variation margin in connection with hedging and risk
management transactions nor short-term credits as may be necessary for the
clearance of transactions is considered the purchase of a security on margin.
2. SHORT SALES, PUTS AND CALLS. Sell securities short (unless it owns or
has the right to obtain securities equivalent in kind and amount to the
securities sold short). This policy does not prevent the Fund from entering into
short positions in futures contracts, options, forward contracts, swaps, caps,
floors, collars, securities purchased or sold on a forward-commitment or delayed
delivery basis or other financial instruments.
Unless otherwise indicated, all limitations applicable to the Fund's
investments (as stated above and elsewhere in this Statement of Additional
Information) are applied only at the time a transaction is entered into. If
because of changes in the value of the Fund's portfolio, the asset coverage for
any borrowings were to fall below 300%, this would limit the Fund's ability to
pay dividends and therefore, the Fund intends to restore the 300% asset coverage
as soon as practical in light of the circumstances. Any subsequent change in a
rating assigned by any NRSRO to a security (or, if unrated, any change in the
judgment of NB Management as to comparable quality), or change in the percentage
of the Fund's total assets invested in certain securities or other instruments,
or change in the average duration of the Fund's investment portfolio, resulting
from market fluctuations or other changes in the Fund's total assets, will not
require the Fund to dispose of an investment unless and until NB Management
determines that it is appropriate and practicable to sell or close out the
investment without undue market or tax consequences to the Fund. If rating
agencies assign different ratings to the same security, NB Management will
determine which rating it believes best reflects the security's quality and risk
at that time, which may be the higher of the several assigned ratings.
3
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes if
it is repaid within sixty days and is not extended or renewed.
The Fund would be deemed to "concentrate" in a particular industry if it
invested 25% or more of its total assets in that industry. The Fund's industry
concentration policy does not preclude it from focusing investments in issuers
in a group of related industrial sectors (such as different types of utilities).
To the extent the Fund covers its commitment under a derivative instrument
by the segregation of assets determined by NB Management to be liquid in
accordance with procedures adopted by the Board, and/or by holding instruments
representing offsetting commitments, such instrument will not be considered a
"senior security" for purposes of the asset coverage requirements otherwise
applicable to borrowings by the Fund or the Fund's issuance of AMPS.
The Fund interprets its policies with respect to borrowing and lending to
permit such activities as may be lawful for the Fund, to the full extent
permitted by the 1940 Act or by exemption from the provisions therefrom pursuant
to exemptive order of the SEC.
It is a condition of closing the offering of AMPS that the AMPS be offered
with a rating of "AAA" from Fitch and of "Aaa" from Moody's. In order to obtain
and maintain the required ratings, the Fund is required to comply with
investment quality, diversification and other guidelines established by Moody's
and Fitch. Such guidelines will likely be more restrictive than the restrictions
set forth above. The Fund does not anticipate that such guidelines would have a
material adverse effect on the Fund's stockholders or its ability to achieve its
investment objective. Moody's and Fitch receive fees in connection with their
ratings issuances.
CASH MANAGEMENT AND TEMPORARY DEFENSIVE POSITIONS. For temporary defensive
purposes, or to manage cash pending investment or payout, the Fund may invest up
to 100% of its total assets in cash and cash equivalents, U.S. Government and
Agency Securities, commercial paper and certain other money market instruments,
as well as repurchase agreements collateralized by the foregoing.
Pursuant to an exemptive order received from the SEC, the Fund also may
invest up to 25% of its total assets in shares of a money market fund managed by
NB Management to manage uninvested cash and cash collateral received in
connection with securities lending.
FURTHER INVESTMENT POLICIES AND INVESTMENT TECHNIQUES
The following information supplements the discussion of the Fund's
investment objective, policies, and techniques that are described in the
prospectus.
The Fund's policy is to invest, under normal conditions, at least 80% of
its total assets in municipal bonds with remaining maturities of less than 15
years and to maintain a dollar-weighted average duration of the entire portfolio
between 3 and 8 years. For this purpose, any scheduled principal prepayments
4
will be reflected in the calculation of dollar-weighted average duration. The
Fund may invest up to 20% of its total assets in municipal bonds that, at the
time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch or unrated but
judged to be of comparable quality by NB Management.
Investment In Municipal Bonds
-----------------------------
Municipal bonds are issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest on which,
in the opinion of special bond counsel or other counsel to the issuer of such
securities is, at the time of issuance, not includable in gross income for
federal income tax purposes. Under normal market conditions, at least 80% of the
Fund's total assets will be invested in municipal bonds with remaining
maturities of less than 15 years.
The "issuer" of municipal bonds is generally deemed to be the governmental
agency, authority, instrumentality or other political subdivision, or the
non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal bonds.
Municipal bonds may have fixed or variable interest rates. The Fund may
purchase floating and variable rate demand notes, which are municipal
obligations normally having a stated maturity in excess of one year, but which
permit the holder to tender the notes for purchase at the principal amount
thereof at shorter intervals. The interest rate on a floating rate demand note
is based on a known lending rate, such as a bank's prime rate, and is adjusted
each time such rate is adjusted. The interest rate on a variable rate demand
note is adjusted at known intervals, on the basis of a specific benchmark. There
generally is no secondary market for these notes, although they may be tendered
for redemption or remarketing at face value and thus may be determined to be
liquid. Each such note purchased by the Fund will meet the criteria established
for the purchase of municipal bonds.
Municipal bonds that have fixed rates of interest are sensitive to changes
in market interest rates. Generally, when interest rates are rising, the value
of the Fund's municipal bond holdings can be expected to decrease. When interest
rates are declining, the value of the Fund's municipal bond holdings can be
expected to increase. The Fund's net asset value may fluctuate in response to
the increasing or decreasing value of its municipal bond holdings. Generally,
the longer the maturity of a fixed-rate instrument, the greater the change in
value in response to a given change in market interest rates.
The issuer of a municipal obligation might declare bankruptcy, which could
cause the Fund to experience delays collecting interest and principal. To
enforce its rights, the Fund might be required to take possession of and manage
the assets securing the issuer's obligation, which may increase the Fund's
expenses and reduce its net asset value. If the Fund took possession of a
bankrupt issuer's assets, income derived from the Fund's ownership and
management of the assets might not be tax exempt and more of the Fund's total
distributions to its stockholders thus would be taxable. The Fund might not be
able to take possession of the assets of a bankrupt issuer because of laws
protecting state and local institutions, limits on the investments the Fund is
5
permitted to make and limits on the nature of the income the Fund is permitted
to receive imposed on it by the Internal Revenue Code of 1986, as amended (the
"Code"). If the Fund cannot take possession of a bankrupt issuer's assets and
enforce its rights, the value of the issuer's security may be greatly
diminished. This could reduce the Fund's net asset value.
The U.S. Government has enacted laws that have restricted or diminished the
income tax exemption on some municipal bonds, and it may do so again in the
future. If this were to happen, more of the Fund's distributions to its
stockholders would be taxable. The issuer of a municipal bond may be obligated
to redeem the bond at face value, but if the Fund paid more than face value for
the bond, it may lose money when it sells the bond. Market rates of interest may
be lower for municipal bonds than for taxable securities, but this may be offset
by the federal income tax on income derived from taxable securities. There may
be less extensive information available about the financial condition of issuers
of municipal bonds than for corporate issuers with publicly traded securities.
The Fund's investments in municipal bonds are subject to certain risks. In
addition to those discussed in the prospectus, they include the following:
GENERAL OBLIGATION BONDS. A general obligation bond is backed by the
governmental issuer's pledge of its full faith and credit and power to raise
taxes for payment of principal and interest under the bond. The taxes or special
assessments that can be levied for the payment of debt service may be limited or
unlimited as to rate or amount. Many jurisdictions face political and economic
constraints on their ability to raise taxes. These limitations and constraints
may adversely affect the ability of the governmental issuer to meet its
obligations under the bonds in a timely manner.
REVENUE BONDS OR SPECIAL OBLIGATION BONDS. Revenue bonds are backed by the
income from a specific project, facility or tax. Revenue bonds are issued to
finance a wide variety of public projects, including (1) housing, (2) electric,
gas, water, and sewer systems, (3) highways, bridges, and tunnels, (4) port and
airport facilities, (5) colleges and universities, and (6) hospitals. In some
cases, repayment of these bonds depends upon annual legislative appropriations;
in other cases, if the issuer is unable to meet its legal obligation to repay
the bond, repayment becomes an unenforceable "moral commitment" of a related
governmental unit (subject, however, to appropriations). Revenue bonds issued by
housing finance authorities are backed by a wider range of security, including
partially or fully insured mortgages, rent subsidized and/or collateralized
mortgages, and net revenues from housing projects.
Most private activity bonds are revenue bonds, in that principal and
interest are payable only from the net revenues of the facility financed by the
bonds. These bonds generally do not constitute a pledge of the general credit of
the public or private operator or user of the facility. In some cases, however,
payment may be secured by a pledge of real and personal property constituting
the facility.
RESOURCE RECOVERY BONDS. Resource recovery bonds are a type of revenue bond
issued to build facilities such as solid waste incinerators or waste-to-energy
plants. Typically, a private corporation will be involved on a temporary basis
during the construction of the facility, and the revenue stream will be secured
by fees or rents paid by municipalities for use of the facilities. The credit
6
and quality of resource recovery bonds may be affected by the viability of the
project itself, tax incentives for the project, and changing environmental
regulations or interpretations thereof.
TENDER OPTION BONDS. Tender option bonds are created by coupling an
intermediate- or long-term fixed rate tax-exempt bond (generally held pursuant
to a custodial arrangement) with a tender agreement that gives the holder the
option to tender the bond at its face value. As consideration for providing the
tender option, the sponsor (usually a bank, broker-dealer, or other financial
institution) receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate (determined by a remarketing or similar agent)
that would cause the bond, coupled with the tender option, to trade at par on
the date of such determination. After payment of the tender option fee, the Fund
effectively holds a demand obligation that bears interest at the prevailing
short-term tax-exempt rate. NB Management considers the creditworthiness of the
issuer of the underlying bond, the custodian, and the third party provider of
the tender option. In certain instances, a sponsor may terminate a tender option
if, for example, the issuer of the underlying bond defaults on interest payments
or the bond's rating falls below investment grade. The tax treatment of tender
option bonds is unclear, and the Fund will not invest in them unless NB
Management has assurances that the interest thereon will be exempt from federal
income tax.
LEASE OBLIGATIONS. Also included within the general category of municipal
bonds are participations in lease obligations or installment purchase contract
obligations (collectively "lease obligations") of municipal authorities or
entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses, which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although "non
appropriation" lease obligations are often secured by the underlying property,
disposition of the property in the event of foreclosure might prove difficult.
The Fund may invest up to 100% of its assets in "non-appropriation" lease
obligations and in unrated "non-appropriation" lease obligations that, at the
time of investment, are judged by NB Management to have credit characteristics
equivalent to, and to be of comparable quality to, securities that are rated
investment grade.
The Fund will usually invest in municipal lease obligations through
certificates of participation ("COPs"), which give the Fund a specified,
undivided interest in the obligation. For example, a COP may be created when
long-term revenue bonds are issued by a governmental corporation to pay for the
acquisition of property. The payments made by the municipality under the lease
are used to repay interest and principal on the bonds. Once these lease payments
are completed, the municipality gains ownership of the property.
In evaluating such unrated lease obligations, NB Management will consider
such factors as it deems appropriate, including:
7
o whether the lease can be cancelled;
o the ability of the lease obligee to direct the sale of the underlying
assets;
o the general creditworthiness of the lease obligor;
o the likelihood that the municipality will discontinue appropriating
funding for the leased property if such property is no longer considered
essential by the municipality;
o the legal recourse of the lease obligee in the event of such a failure
to appropriate funding; and
o any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the
lease obligations.
High Yield Securities ("Junk Bonds")
------------------------------------
The Fund may invest up to 20% of its total assets in municipal bonds that,
at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch or are
unrated but judged to be of comparable quality by NB Management. Bonds of
below-investment grade quality (Ba/BB or below) are commonly referred to as
"high yield securities" or "junk bonds." Issuers of bonds rated Ba/BB or B are
regarded as having current capacity to make principal and interest payments but
are subject to business, financial or economic conditions that could adversely
affect such payment capacity. Municipal bonds rated Baa or BBB are considered
"investment grade" securities, although such bonds may be considered to possess
some speculative characteristics. Municipal bonds rated AAA may have been so
rated on the basis of the existence of insurance guaranteeing the timely
payment, when due, of all principal and interest.
High yield securities are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments and, therefore, carry greater price volatility and principal and income
risk, including the possibility of issuer default and bankruptcy and increased
market price volatility.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of an issuer to make principal and
interest payments on its debt securities. If an issuer of high yield securities
defaults, in addition to risking payment of all or a portion of interest and
principal, the Fund may incur additional expenses to seek recovery. In the case
of high yield securities structured as zero coupon securities (see "Zero Coupon
Bonds," below), their market prices are affected to a greater extent by interest
rate changes, and therefore tend to be more volatile, than securities that pay
interest periodically and in cash. NB Management seeks to reduce these risks
through diversification, credit analysis and attention to current developments
and trends in both the economy and financial markets.
8
The secondary market on which high yield securities are traded may be less
liquid than the market for higher-grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund
could sell a high yield security, and could adversely affect the net asset value
of the shares. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of high yield
securities, especially in a thinly-traded market. When secondary markets for
high yield securities are less liquid than the market for higher-grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
During periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly and the Fund may have greater
difficulty selling its portfolio securities. The Fund will be more dependent on
NB Management's research and analysis when investing in high yield securities.
NB Management seeks to minimize the risks of investing in all securities through
diversification, in-depth credit analysis and attention to current developments
in interest rates and market conditions.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix B hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations with the same
maturity and coupon with different ratings may have the same yield. For these
reasons, the use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. NB
Management does not rely solely on credit ratings when selecting securities for
the Fund, and develops its own independent analysis of issuer credit quality.
The Fund's credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security if a rating
agency or NB Management downgrades its assessment of the credit characteristics
of a particular issue. In determining whether to retain or sell such a security,
NB Management may consider such factors as NB Management's assessment of the
credit quality of the issuer of such security, the price at which such security
could be sold and the rating, if any, assigned to such security by any rating
agency. However, analysis of the creditworthiness of issuers of high yield
securities may be more complex than for issuers of higher-quality debt
securities.
Participation Certificates
--------------------------
Participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Some municipal leases and
participation certificates may not be readily marketable.
9
Zero Coupon Bonds
-----------------
The Fund may invest in zero coupon bonds. These securities 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 bonds are issued and traded at a significant
discount from their face amount or par value. This discount varies depending on
prevailing interest rates, the time remaining until cash payments begin, the
liquidity of the security, and the perceived credit quality of the issuer. Zero
coupon bonds are redeemed at face value when they mature. The Fund must take
discount on zero coupon bonds ("original issue discount" or "OID") into account
ratably for federal income tax purposes prior to the receipt of any actual
payments. Because the Fund must distribute substantially all of its net income
(including non-cash income attributable to zero coupon bonds and regardless of
whether the income is taxable or tax-exempt) to its stockholders each year for
federal income and excise tax purposes, it may have to dispose of portfolio
securities under disadvantageous circumstances to generate cash, or may be
required to borrow, to satisfy its distribution requirements. See "Tax Matters."
The market prices of zero coupon bonds generally are more volatile than the
prices of securities that pay interest periodically. Zero coupon bonds are
likely to respond to changes in interest rates to a greater degree than other
types of debt securities having a similar maturity and credit quality. Because
these securities usually trade at a deep discount, they will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities that make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate the
reinvestment risk and lock in a rate of return to maturity.
Illiquid Securities
-------------------
The Fund may invest up to 20% of its net assets in securities that are
illiquid at the time of investment. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the securities. Illiquid securities are considered to include, among
other things, written over-the-counter options, securities or other liquid
assets being used as cover for such options, repurchase agreements with
maturities in excess of seven days, certain loan participation interests, fixed
time deposits that are not subject to prepayment or provide for withdrawal
penalties upon prepayment (other than overnight deposits), and other securities
whose disposition is restricted under the federal securities laws.
Municipal Notes
---------------
Municipal notes in which the Fund may invest include the following:
PROJECT NOTES are issued by local issuing agencies created under the laws of a
state, territory, or possession of the United States to finance low-income
housing, urban redevelopment, and similar projects. These notes are backed by an
agreement between the local issuing agency and the Department of Housing and
Urban Development ("HUD"). Although the notes are the primary obligations of the
10
local issuing agency, the HUD agreement provides the full faith and credit of
the United States as additional security.
TAX ANTICIPATION NOTES are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of future seasonal
tax revenues, such as income, sales, use, and business taxes, and are payable
from these future revenues.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other types
of revenue, such as that available under federal revenue-sharing programs.
Because of proposed measures to reform the federal budget and alter the relative
obligations of federal, state, and local governments, many revenue-sharing
programs are in a state of uncertainty.
BOND ANTICIPATION NOTES are issued to provide interim financing until long-term
bond financing can be arranged. In most cases, the long-term bonds provide the
funds for the repayment of the notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing. After
completion of construction, many projects receive permanent financing from
Fannie Mae (also known as the Federal National Mortgage Association) or Ginnie
Mae (also known as the Government National Mortgage Association or GNMA).
TAX-EXEMPT COMMERCIAL PAPER is a short-term obligation issued by state or local
governments or their agencies to finance seasonal working capital needs or as
short-term financing in anticipation of longer-term financing.
PRE-REFUNDED AND "ESCROWED" MUNICIPAL BONDS are bonds with respect to which the
issuer has deposited, in an escrow account, an amount of securities and cash, if
any, that will be sufficient to pay the periodic interest on and principal
amount of the bonds, either at their stated maturity date or on the date the
issuer may call the bonds for payment. This arrangement gives the investment a
quality equal to the securities in the account, usually U.S. Government
Securities (as defined below). The Fund can also purchase bonds issued to refund
earlier issues. The proceeds of these refunding bonds are often used for escrow
to support refunding.
Taxable Investments
-------------------
From time to time, for temporary defensive purposes, or when suitable
municipal securities are not available, the Fund may invest in instruments the
income from which is taxable. These include:
U.S. GOVERNMENT AND AGENCY SECURITIES. U.S. Government Securities are
obligations of the U.S. Treasury backed by the full faith and credit of the
United States. U.S. Government Agency Securities are issued or guaranteed by
U.S. Government agencies, or instrumentalities of the U.S. Government, such as
GNMA, Fannie Mae, Freddie Mac (also known as the Federal Home Loan Mortgage
Corporation), Sallie Mae (formerly known as the Student Loan Marketing
Association), and the Tennessee Valley Authority. Some U.S. Government Agency
Securities are supported by the full faith and credit of the United States,
while others may be supported by the issuer's ability to borrow from the U.S.
Treasury, subject to the Treasury's discretion in certain cases, or only by the
credit of the issuer. U.S. Government Agency Securities include U.S. Government
11
Agency mortgage-backed securities. The market prices of U.S. Government Agency
Securities are not guaranteed by the Government and generally fluctuate
inversely with changing interest rates.
COMMERCIAL PAPER. Commercial paper is a short-term debt security issued by a
corporation, bank, municipality, or other issuer, usually for purposes such as
financing current operations. The Fund may invest in commercial paper that
cannot be resold to the public without an effective registration statement under
the Securities Act of 1933 ("1933 Act"). While restricted commercial paper
normally is deemed illiquid, NB Management may in certain cases determine that
such paper is liquid, pursuant to guidelines established by the Fund Directors.
BANKING AND SAVINGS INSTITUTION SECURITIES. These include certificates of
deposit ("CDs"), time deposits, bankers' acceptances, and other short-term and
long-term debt obligations issued by commercial banks and savings institutions.
CDs are receipts for funds deposited for a specified period of time at a
specified rate of return; time deposits generally are similar to CDs, but are
uncertificated. Bankers' acceptances are time drafts drawn on commercial banks
by borrowers, usually in connection with international commercial transactions.
The CDs, time deposits, and bankers' acceptances in which the Fund may invest
typically are not covered by deposit insurance.
FURTHER INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income.
In connection with the investment objective and policies described in this
Statement of Additional Information and in the prospectus, the Fund may:
purchase and sell options (including swaps, caps, floors and collars) on
municipal securities and on indices based on municipal securities; borrow funds
and issue senior securities to the extent permitted under the 1940 Act; engage
in interest rate and other hedging and risk management transactions; and
purchase and sell municipal securities on a "when-issued" or "delayed delivery"
basis. These investment practices entail risks. NB Management may use some or
all of the following hedging and risk management practices when their use
appears appropriate. Although NB Management believes that these investment
practices may further the Fund's investment objective, no assurance can be given
that these investment practices will achieve this result. NB Management may also
decide not to engage in any of these investment practices.
Options and Futures Generally
-----------------------------
The Fund may engage in futures and options transactions in accordance with
its investment objective and policies. The Fund may engage in such transactions
if it appears advantageous to NB Management to do so in order to pursue its
investment objective, to hedge (i.e., protect) against the effects of market
conditions and to stabilize the value of its assets. NB Management may also
decide not to engage in any of these investment practices. The use of futures
and options, and the possible benefits and attendant risks are discussed below,
along with information concerning certain other investment policies and
techniques.
12
There are risks associated with futures and options transactions. Because
it is not possible to perfectly correlate the price of the securities being
hedged with the price movement in a futures contract, it is not possible to
provide a perfect offset on losses on the futures contract or the option on the
contract.
Because there is imperfect correlation between the Fund's securities that
are hedged and the futures contract, the hedge may not be fully effective.
Losses on the Fund's security may be greater than gains on the futures contract,
or losses on the futures contract may be greater than gains on the securities
subject to the hedge. In an effort to compensate for imperfect correlation, the
Fund may over-hedge or under-hedge by entering into futures contracts or options
on futures contracts in dollar amounts greater or less than the dollar amounts
of the securities being hedged. If market movements are not as anticipated, the
Fund could lose money from these positions.
If the Fund hedges against an increase in interest rates, and rates decline
instead, the Fund will lose all or part of the benefit of the increase in value
of the securities it hedged because it will have offsetting losses in its
futures or options positions. Also, in order to meet margin requirements, the
Fund may have to sell securities at a time it would not normally choose.
Securities Options Transactions
-------------------------------
The Fund may invest in options on municipal securities, traded
over-the-counter and, if applicable, traded on a national securities exchange.
In general, the Fund may purchase and sell (or write) options on up to 20% of
its total assets. The SEC requires that obligations of investment companies such
as the Fund, in connection with options sold, must comply with certain
segregation or cover requirements that are more fully described below. There is
no limitation on the amount of the Fund's assets that can be used to comply with
such segregation or cover requirements.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed-upon exercise (or
"strike") price during the period specified in the terms of the option ("option
period"). A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying security at the strike price during the option
period. Purchasers of options pay an amount, known as a premium, to the option
writer in exchange for the right under the option contract. Option contracts may
be written with terms that would permit the holder of the option to purchase or
sell the underlying security only upon the expiration date of the option.
The Fund may purchase put and call options in hedging transactions to
protect against a decline in the market value of municipal securities in the
Fund's portfolio (E.G., by the purchase of a put option) and to protect against
an increase in the cost of fixed-income securities that the Fund may seek to
purchase in the future (E.G., by the purchase of a call option). If the Fund
purchases put and call options, paying premiums therefor, and price movements in
the underlying securities are such that exercise of the options would not be
profitable for the Fund, to the extent such underlying securities correlate in
value to the Fund's portfolio securities, losses of the premiums paid may be
offset by an increase in the value of the Fund's portfolio securities (in the
13
case of a purchase of put options) or by a decrease in the cost of acquisition
of securities by the Fund (in the case of a purchase of call options).
The Fund may also sell put and call options as a means of increasing the
yield on its portfolio and also as a means of providing limited protection
against decreases in market value of the portfolio. When the Fund sells an
option, if the underlying securities do not increase (in the case of a call
option) or decrease (in the case of a put option) to a price level that would
make the exercise of the option profitable to the holder of the option, the
option generally will expire without being exercised and the Fund will realize
as profit the premium received for such option. When a call option written by
the Fund is exercised, the option holder purchases the underlying security at
the strike price and the Fund does not participate in any increase in the price
of such securities above the strike price. When a put option written by the Fund
is exercised, the Fund will be required to purchase the underlying securities at
the strike price, which may be in excess of the market value of such securities.
OPTIONS ON SECURITIES. The Fund may write covered call options so long as
it owns securities that are acceptable for escrow purposes and may write secured
put options, which means that so long as the Fund is obligated as a writer of a
put option, it will invest an amount, not less than the exercise price of the
put option, in securities consistent with its investment objective and policies
and restrictions on investment. See "Investment Objective and Policies" and
"Investment Restrictions." The premium received for writing an option will
reflect, among other things, the relationship of the exercise price to the
market price, the price volatility of the underlying security, the option
period, supply and demand and interest rates. The Fund may write or purchase
spread options, which are options for which the exercise price may be a fixed
dollar spread or yield spread between the security underlying the option and
another security that is used as a benchmark. The exercise price of an option
may be below, equal to or above the current market value of the underlying
security at the time the option is written. The buyer of a put who also owns the
related security is protected by ownership of a put option against any decline
in that security's price below the exercise price, less the amount paid for the
option. At times the Fund may wish to establish a position in a security upon
which call options are available. By purchasing a call option on such security
the Fund would be able to fix the cost of acquiring the security, which is the
cost of the call plus the exercise price of the option. This procedure also
provides some protection from an unexpected downturn in the market, because the
Fund is only at risk for the amount of the premium paid for the call option that
it can, if it chooses, permit to expire.
OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call
and put options on securities indices. Through the writing or purchase of index
options, the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive upon exercise of the option, an amount of
cash, if the closing level of the securities index upon which the option is
based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on securities (which
14
require, upon exercise, delivery of the underlying security), settlements of or
loss of an option on an index depends on price movements in the market generally
(or in a particular industry or segment of the market on which the underlying
index is based) rather than price movements in individual securities, as is the
case with respect to options on securities.
When the Fund writes an option on a securities index, it will be required
to deposit with its custodian eligible securities equal in value to 100% of the
exercise price in the case of a put, or the contract's value in the case of a
call. In addition, where the Fund writes a call option on a securities index at
a time when the contract value exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess.
Options on securities and index options involve risks similar to those
risks relating to transactions in financial futures described below. Also, an
option purchased by the Fund may expire worthless, in which case the Fund would
lose the premium paid therefor.
OTC OPTIONS. Over-the-counter options ("OTC options") differ from
exchange-traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation, and there is a risk of
non-performance by the dealer. OTC options are available for a greater variety
of securities and for a wider range of expiration dates and exercise prices than
are exchange-traded options. Because OTC options are not traded on an exchange,
pricing is normally done by reference to information from a market maker, which
information is carefully monitored by NB Management and verified in appropriate
cases. The Fund may be required to treat certain of its OTC options transactions
as illiquid securities.
It will generally be the Fund's policy, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering into
a closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund's purchasing an option having the same terms as
the option it sold and has the effect of canceling its position as a seller. The
premium that the Fund will pay when executing a closing purchase transaction may
be higher than the premium it received when it sold the option, depending in
large part upon the relative price of the underlying security at the time of
each transaction. To the extent options sold by the Fund are exercised and it
either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to it, its portfolio turnover rate will increase, which would
cause it to incur additional brokerage expenses.
During the option period, the Fund, as a covered call writer, gives up the
potential appreciation above the exercise price should the underlying security
rise in value, or the Fund, as a secured put writer, retains the risk of loss
should the underlying security decline in value. For the covered call writer,
substantial appreciation in the value of the underlying security would result in
the security being "called away" at the strike price of the option that may be
substantially below the fair market value of such security. For the secured put
writer, substantial depreciation in the value of the underlying security would
result in the security being "put to" the writer at the strike price of the
15
option which may be substantially in excess of the fair market value of such
security. If a covered call option or a secured put option expires unexercised,
the writer realizes a gain, and the buyer a loss, in the amount of the premium.
To the extent that an active market exists or develops, whether on a
national securities exchange or over-the-counter, in options on indices based
upon municipal securities, the Fund may purchase and sell options on such
indices, subject to the limitation that the Fund may purchase and sell options
on up to 20% of its total assets. Through the writing or purchase of index
options, the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on securities except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
strike price of the option.
Price movements in securities, which the Fund owns or intends to purchase,
will not correlate perfectly with movements in the level of an index and,
therefore, the Fund bears the risk of a loss on an index option that is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.
The Fund and NB Management have found the dealers with which they engage in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Fund has adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse impact of such
transactions upon the liquidity of the Fund's portfolio.
As part of these procedures the Fund will only engage in OTC options
transactions with respect to U.S. Government securities with primary dealers
that have been specifically approved by the Board. The Fund will engage in OTC
options transactions with respect to municipal securities only with dealers that
have been specifically approved by the Board. The Fund and NB Management believe
that the approved dealers should be agreeable and able to enter into closing
transactions as necessary and, therefore, present minimal credit risk to the
Fund. The Fund anticipates entering into written agreements with those dealers
to whom the Fund may sell OTC options, pursuant to which the Fund would have the
absolute right to repurchase the OTC options from such dealers at any time at a
price with respect to U.S. Government securities set forth in such agreement.
The amount invested by the Fund in OTC options on securities other than U.S.
Government securities, including options on municipal securities, will be
treated as illiquid and subject to the Fund's 20% limitation on its net assets
that may be invested in illiquid securities.
Gains, if any, the Fund recognizes or is deemed to recognize from
transactions in securities options will be taxable income. See "Tax Matters" for
information relating to the allocation of taxable income, if any, between the
Common Shares and AMPS.
16
Borrowing and Leverage
----------------------
The Fund is authorized to borrow amounts up to 33 1/3% of its total assets
(including the amount borrowed) minus liabilities (other than the amount
borrowed). The use of borrowed funds involves the speculative factor known as
"leverage." The Fund intends to use financial leverage for investment purposes
by issuing AMPS. The issuance of AMPS would permit the Fund to assume leverage
in an amount up to 50% of its total assets. It is currently anticipated that,
taking into account the AMPS being offered in the Fund's current prospectus, the
amount of leverage will represent approximately 38% of the Fund's total assets
(after issuance). Preferred stock, including, when issued, the AMPS, would have
a priority on the income and assets of the Fund over the Common Shares and would
have certain other rights with respect to voting and the election of Directors.
In certain circumstances, the net asset value of and dividends payable on Common
Shares could be adversely affected by such preferences. The Fund's leveraged
capital structure creates special risks not associated with unleveraged funds
having similar investment objectives and policies. The Fund will utilize
leverage only when there is an expectation that it will benefit the Fund. To the
extent the income or other gain derived from securities purchased with the
proceeds of borrowings or preferred stock issuances exceeds the interest or
dividends the Fund would have to pay thereon, the Fund's net income or other
gain would be greater than if leverage had not been used. Conversely, if the
income or other gain from the securities purchased through leverage is not
sufficient to cover the cost of such leverage, the Fund's total return would be
less than if leverage had not been used. If leverage is used, in certain
circumstances, the Fund could be required to liquidate securities it would not
otherwise sell in order to satisfy dividend or interest obligations. The Fund
may also borrow up to an additional 5% of its total assets for temporary
purposes without regard to the foregoing limitations. See "Investment
Restrictions." This could include, for example, borrowing on a short-term basis
in order to facilitate the settlement of portfolio securities transactions.
Interest Rate and Other Hedging Transactions
--------------------------------------------
In order to seek to protect the value of its portfolio securities against
declines resulting from changes in interest rates or other market changes, the
Fund may enter into the following hedging transactions: financial futures
contracts and related options contracts. However, the use of such transactions
is limited by Moody's and Fitch in connection with their rating of the AMPS.
The Fund may enter into various interest rate hedging transactions using
financial instruments with a high degree of correlation to the municipal
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts (E.G., futures contracts on U.S. Treasury securities) and
futures contracts on interest rate related indices (E.G., municipal bond
indices). The Fund may also purchase and write put and call options on such
futures contracts and on the underlying instruments. The Fund may enter into
these transactions in an attempt to "lock in" a return or spread on a particular
investment or portion of its portfolio, to protect against any increase in the
price of securities it anticipates purchasing at a later date, or for other risk
management strategies such as managing the effective dollar-weighted average
duration of its portfolio. Financial futures and options contracts and the risk
attendant to the Fund's use thereof, are more completely described below. The
successful utilization of hedging and risk management transactions requires
17
skills different from those needed in the selection of the Fund's portfolio
securities.
The Fund will not engage in the foregoing transactions for speculative
purposes, but only in limited circumstances as a means to hedge risks associated
with management of its portfolio. Typically, investments in futures contracts
and sales of futures options contracts require the Fund to deposit in a
custodial account a good faith deposit, known as "initial margin," in connection
with its obligations in an amount of cash or specified debt securities which
generally is equal to 1%-15% of the face amount of the contract, which initial
margin requirement may be revised periodically by the applicable exchange as the
volatility of the contract fluctuates. Thereafter, the Fund must make additional
deposits with the applicable financial intermediary equal to any net losses due
to unfavorable price movements of the contract, and will be credited with an
amount equal to any net gains due to favorable price movements. These additional
deposits or credits are calculated and required daily and are known as
"variation margin."
The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such companies must either
segregate cash or liquid securities in the amount of their obligations under the
foregoing transactions or cover such obligations by maintaining positions in
portfolio securities, futures contracts or options that would serve to satisfy
or offset the risk of such obligations. When effecting transactions of the
foregoing nature, the Fund will comply with such segregation or cover
requirements. There is no limitation on the percentage of the Fund's assets that
may be segregated with respect to such transactions.
FINANCIAL FUTURES CONTRACTS. The Fund may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or the cash value of a securities index. This investment technique is designed
primarily to hedge against anticipated future changes in market conditions that
otherwise might adversely affect the value of securities the Fund holds or
intends to purchase. A "sale" of a futures contract means the undertaking of a
contractual obligation to deliver the securities, or the cash value of an index,
called for by the contract at a specified price during a specified delivery
period. At the time of delivery, in the case of fixed-income securities pursuant
to the contract, adjustments are made to recognize differences in value arising
from the delivery of securities with a different interest rate than that
specified in the contract. In some cases, securities called for by a futures
contract may not have been issued at the time the contract was written.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contract calls
for a payment of the net value of the securities. The offsetting of a
contractual obligation is accomplished by purchasing (or selling, as the case
may be) on a commodities exchange an identical futures contract calling for
delivery in the same period. Such a transaction cancels the obligation to make
or take delivery of the securities. All transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded. The Fund will incur brokerage fees when it
purchases or sells contracts, and will be required to maintain margin deposits.
Futures contracts entail risk. If NB Management's judgment about the general
18
direction of securities markets or interest rates is wrong, the Fund's overall
performance may be poorer than if it had not entered into such contracts.
There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the securities and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, because from the point of view of speculators, the margin
requirements in the futures market may be less onerous than margin requirements
in the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities and movements in the prices of
futures contracts, a correct forecast of market trends by NB Management may
still not result in a successful hedging transaction. If this should occur, the
Fund could lose money on the financial futures contracts and also on the value
of its portfolio securities.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. The Fund may purchase and write
call and put options on financial futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time during the period specified in the terms of the option. Upon exercise, the
writer of the option delivers the futures contract to the holder at the exercise
price. The Fund would be required to deposit with its custodian initial margin
and maintenance margin with respect to put and call options on futures contracts
written by it. Options on futures contracts involve risks similar to the risks
on options purchased by the Fund, I.E., that they may expire worthless, in which
case the Fund would lose the premium paid therefor.
REGULATORY RESTRICTIONS. The Fund will comply with SEC guidelines regarding
"cover" for hedging transactions and, if the guidelines so require, set aside in
a segregated account with its custodian the prescribed amount of cash or
appropriate liquid securities. Securities held in a segregated account cannot be
sold while the futures contract or option covered by those securities is
outstanding, unless they are replaced with other suitable assets. As a result,
segregation of a large percentage of the Fund's assets could impede portfolio
management or its ability to meet current obligations. The Fund may be unable to
promptly dispose of assets that cover, or are segregated with respect to, an
illiquid future contract or option position; this inability may result in a loss
to the Fund.
To the extent the Fund sells or purchases futures contracts or writes
options thereon that are traded on an exchange regulated by the Commodity
Futures Trading Commission ("CFTC") other than for BONA FIDE hedging purposes
(as defined by the CFTC), the aggregate initial margin and premiums required to
establish those positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the Fund's net assets.
19
ACCOUNTING AND TAX CONSIDERATIONS. When the Fund writes an option, an
amount equal to the premium it receives is included in its Statement of Assets
and Liabilities as a liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option written. When
the Fund purchases an option, the premium the Fund pays is recorded as an asset
in that statement and is subsequently adjusted to the current market value of
the option.
In the case of a regulated futures contract the Fund purchases or sells, an
amount equal to the initial margin deposit is recorded as an asset in its
Statement of Assets and Liabilities. The amount of the asset is subsequently
adjusted to reflect changes in the amount of the deposit as well as changes in
the value of the contract.
For a summary of the tax consequences of the Fund's investments in options
and futures contracts, see "Tax Matters - Hedging Transactions."
All of the foregoing transactions present certain risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the securities being hedged creates the possibility that
losses on the hedge may be greater than gains in the value of the Fund's
securities. In addition, these instruments may not be liquid in all
circumstances and generally are closed out by entering into offsetting
transactions rather than by delivery or cash settlement at maturity. As a
result, in volatile markets, the Fund may not be able to close out a transaction
on favorable terms or at all. Although the contemplated use of those contracts
should tend to reduce the risk of loss due to a decline in the value of the
hedged security, at the same time the use of these contracts could tend to limit
any potential gain that might result from an increase in the value of such
security. Finally, the daily deposit requirements for futures contracts and
sales of futures options contracts create an ongoing greater potential financial
risk than do option purchase transactions, where the exposure is limited to the
cost of the premium for the option.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of NB Management to predict correctly movements in the
direction of interest rates and other factors affecting securities markets. If
NB Management's expectations were not met, the Fund would be in a worse position
than if a hedging strategy had not been pursued. For example, if the Fund has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of securities in its portfolio and the price of such
securities increases instead, the Fund will lose part or all of the benefit of
the increased value of its securities because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash to meet daily variation margin requirements, it may have to
sell securities to meet such requirements. Such sales of securities may be, but
will not necessarily be, at increased prices, which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.
In addition to engaging in transactions utilizing options on futures
contracts, the Fund may purchase put and call options on securities and, as
developed from time to time, on interest indices and other instruments.
Purchasing options may increase investment flexibility and improve total return
but also risks loss of the option premium if an asset the Fund has the option to
buy declines in value or if an asset the Fund has the option to sell increases
in value.
20
New options and futures contracts and other financial products may be
developed from time to time. The Fund may invest in any such options, contracts
and products as may be developed to the extent consistent with its investment
objective and the regulatory requirements applicable to investment companies.
Gains, if any, the Fund recognizes or is deemed to recognize from
transactions in hedging activities will be taxable income. See "Tax Matters" for
information relating to the allocation of taxable income, if any, between the
Common Shares and AMPS.
When-Issued And Delayed Delivery Transactions
---------------------------------------------
The Fund may purchase municipal securities on a "when-issued" and "delayed
delivery" basis. No income accrues to the Fund on municipal securities in
connection with such transactions prior to the date it actually takes delivery
of such securities. These transactions are subject to market fluctuation; the
value of the municipal securities at delivery may be more or less than their
purchase price, and yields generally available on municipal securities when
delivery occurs may be higher than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund's missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account,
cash, or liquid securities, having a value equal to or greater than its purchase
commitments, provided such securities have been determined by NB Management to
be liquid and unencumbered, and are marked to market daily, pursuant to
guidelines established by the Board. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but it may sell such securities prior to the settlement date
if such sale is considered to be advisable.
To the extent that the Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for its
portfolio consistent with its investment objective and policies. However,
although the Fund does not intend to engage in such transactions for speculative
purposes, purchases of securities on such basis may involve more risk than other
types of purchases. For example, if the Fund determines it is necessary to sell
the "when-issued" or "delayed delivery" securities before delivery, it may
realize a gain or incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made. Subject to the requirement of
maintaining a segregated account, no specified limitation exists as to the
percentage of the Fund's assets that may be used to acquire securities on a
"when-issued" or "delayed delivery" basis. "When-issued" and "delayed delivery"
purchases have a leveraging effect on the Fund, because it is subject to
fluctuations in the value of securities for which it has not yet paid. A
significant percentage of the Fund's assets committed to the purchase of
securities on a "when-issued" or "delayed delivery" basis may increase the
volatility of its net asset value and may limit the flexibility to manage its
investments.
21
Repurchase Agreements
---------------------
The Fund may use repurchase agreements to manage its cash position. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. Government Securities or municipal obligations) agrees to repurchase the
same security at a specified price on a future date agreed upon by the parties.
The agreed-upon repurchase price determines the yield during the Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income, if
any, generated from transactions in repurchase agreements will be taxable. See
"Tax Matters" for information relating to the allocation of taxable income, if
any, between the Common Shares and AMPS. If the other party to a repurchase
agreement defaults, the Fund may not be able to sell the underlying securities.
If the Fund must assert its rights against the other party to recover the
securities, the Fund will incur unexpected expenses, risk losing the income on
the security and bear the risk of loss in the value of the security.
Investment in Other Investment Companies
----------------------------------------
The Fund does not currently invest in other investment companies and does
not currently intend to invest in them, but it may, consistent with the
provisions of the 1940 Act and the Fund's investment restrictions, determine to
do so in the future in appropriate circumstances. Currently, under the 1940 Act,
the Fund may hold securities of another registered investment company in amounts
that (i) do not exceed 3% of the total outstanding voting stock of such company,
(ii) do not exceed 5% of the value of the Fund's total assets, and (iii) when
added to all other investment company securities held by the Fund, do not exceed
10% of the value of the Fund's total assets.
In the event of such an investment, as a shareholder in an investment
company the Fund would bear its ratable share of the investment company's
expenses, including management fees, and would remain subject to payment of the
Fund's administration fees and other expenses with respect to assets so
invested.
Pursuant to an exemptive order issued by the SEC, the Fund may invest up to
25% of its total assets in shares of a money market fund managed by NB
Management for cash management purposes.
Residual Interest Municipal Bonds
---------------------------------
The Fund may also invest up to 5% of its total assets in residual interest
municipal bonds ("RIBS"); the interest rate on a RIB bears an inverse
relationship to the interest rate on another security or the value of an index.
RIBS are created by dividing the income stream provided by the underlying bonds
to create two securities, one short-term and one long-term. The interest rate on
the short-term component is reset by an index or auction process normally every
seven to 35 days. After income is paid on the short-term securities at current
rates, the residual income from the underlying bond(s) goes to the long-term
securities. Therefore, rising short-term interest rates result in lower income
22
for the longer-term portion, and vice versa. The longer-term bonds can be very
volatile and may be less liquid than other municipal bonds of comparable
maturity.
An investment in RIBS typically will involve greater risk than an
investment in a fixed rate bond. Because increases in the interest rate on the
other security or index reduce the residual interest paid on a RIB, the value of
a RIB is generally more volatile than that of a fixed-rate bond. RIBS have
interest rate adjustment formulas that generally reduce or, in the extreme,
eliminate the interest paid to the Fund when short-term interest rates rise, and
increase the interest paid to the Fund when short-term interest rates fall. RIBS
have varying degrees of liquidity that approximate the liquidity of the
underlying bond(s), and the market price for these securities is volatile. These
securities generally will underperform the market of fixed-rate bonds in a
rising interest rate environment, but tend to outperform the market of
fixed-rate bonds when interest rates decline or remain relatively stable.
Although volatile, RIBS typically offer the potential for yields exceeding
the yields available on fixed-rate bonds with comparable credit quality, coupon,
call provisions and maturity. The Fund may also invest in RIBS for the purpose
of increasing the Fund's leverage as a more flexible alternative to the issuance
of AMPS. Should short-term and long-term interest rates rise, the combination of
the Fund's investment in RIBS and its use of other forms of leverage (including
through the issuance of AMPS or the use of other derivative instruments) likely
will adversely affect the Fund's net asset value per share and income,
distributions and total return to Common Stockholders. Trusts in which RIBS may
be held could be terminated, in which case the residual bond holder would take
possession of the underlying bond(s) on an unleveraged basis.
Structured Notes and other Hybrid Instruments
---------------------------------------------
The Fund may invest in "structured" notes, which are privately negotiated
debt obligations where the principal and/or interest is determined by reference
to the performance of a benchmark asset, market or interest rate, such as
selected securities, an index of securities or specified interest rates, or the
differential performance of two assets or markets, such as indices reflecting
taxable and tax-exempt bonds. Depending on the terms of the note, the Fund may
forgo all or part of the interest and principal that would be payable on a
comparable conventional note. The rate of return on structured notes may be
determined by applying a multiplier to the performance or differential
performance of the referenced index(es) or other asset(s). Application of a
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss. The Fund currently intends that any use of structured
notes will be for the purpose of reducing the interest rate sensitivity of its
portfolio (and, thereby, decreasing its exposure to interest rate risk) and, in
any event, that the interest income on the notes will normally be exempt from
federal income tax. Like other sophisticated strategies, the Fund's use of
structured notes may not work as intended; for example, the change in the value
of the structured notes may not match very closely the change in the value of
bonds that the structured notes were purchased to hedge.
The Fund may invest in other types of "hybrid" instruments that combine the
characteristics of securities, futures, and options. For example, the principal
amount or interest rate of a hybrid could be tied (positively or negatively) to
23
the price of some securities index or another interest rate (each a
"benchmark"). The interest rate or (unlike most debt obligations) the principal
amount payable at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark. Hybrids can be used as an
efficient means of pursuing a variety of investment goals, including duration
management and increased total return. Hybrids may not bear interest or pay
dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more steeply
and rapidly than the benchmark. These benchmarks may be sensitive to economic
and political events that cannot be readily foreseen by the purchaser of a
hybrid. Under certain conditions, the redemption value of a hybrid could be
zero. Thus, an investment in a hybrid may entail significant market risks that
are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed rate
or floating rate of interest. The purchase of hybrids also exposes the Fund to
the credit risk of the issuer of the hybrids. These risks may cause significant
fluctuations in the net asset value of the Fund.
Certain issuers of structured products, such as hybrid instruments, may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Fund's investments in these products may be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act. See "Investments in Other Investment Companies."
PORTFOLIO TRADING AND TURNOVER RATE
The Fund cannot accurately predict its turnover rate but anticipates that
its annual turnover rate will not exceed 100%. The Fund's turnover rate is
calculated by dividing the lesser of its sales or purchases of securities during
a year (excluding any security the maturity of which at the time of acquisition
is one year or less) by the average monthly value of its securities for the
year. The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish its investment objective. For example, the Fund may sell portfolio
securities in anticipation of a movement in interest rates. Higher turnover
rates can result in corresponding increases in the Fund's transaction costs,
which must be borne by the Fund and its stockholders. High portfolio turnover
may also result in the realization of substantial net short-term capital gains,
and any distributions attributable to those gains will be taxable at ordinary
income rates for federal income tax purposes. Other than for consideration of
tax consequences, frequency of portfolio turnover will not be a limiting factor
if the Fund considers it advantageous to purchase or sell securities.
CERTAIN RISK CONSIDERATIONS
Although the Fund 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 Fund will achieve its investment objective. The
Fund's ability to achieve its investment objective is dependent on the
continuing ability of the issuers of municipal obligations in which the Fund
invests (and, in certain circumstances, of banks issuing letters of credit or
insurers issuing insurance backing those obligations) to pay interest and
principal when due.
24
MANAGEMENT OF THE FUND
Directors and Officers
----------------------
The Board is broadly responsible for overseeing the management of the
business and affairs of the Fund, including general supervision of the duties
performed by NB Management and Neuberger Berman. Subject to the provisions of
the Fund's Articles of Incorporation (the "Articles"), its Bylaws and Maryland
law, the Board has all powers necessary and convenient to carry out this
responsibility, including the election and removal of the Fund's officers. Among
other things, the Board generally oversees the portfolio management of the Fund
and reviews and approves the Fund's management and sub-advisory agreements and
other principal agreements.
The following tables set forth information concerning the Directors and
officers of the Fund. All persons named as Directors and officers also serve in
similar capacities for other funds administered or managed by NB Management and
Neuberger Berman.
The Board of Directors
----------------------
---------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, and Address (1) Overseen by Outside Fund Complex by
Principal Occupation(s)(2) Director Director
---------------------------------------------------------------------------------------------------------------------------
CLASS I
---------------------------------------------------------------------------------------------------------------------------
Independent Fund Directors
---------------------------------------------------------------------------------------------------------------------------
Faith Colish (67) Counsel to Carter, Ledyard & Millburn 31
since October 2002; prior thereto,
Attorney at Law and President, Faith
Colish, A Professional Corporation;
1980 to 2002.
---------------------------------------------------------------------------------------------------------------------------
C. Anne Harvey (65) Consultant, C. A. Harvey Associates, 31
June 2001 to present; Member,
Individual Investors Advisory
Committee to the New York Stock
Exchange Board of Directors, 1998 to
present; Secretary, Board of
Associates to The National
Rehabilitation Hospital's Board of
Directors; Director of American
Association of Retired Persons (AARP),
1978 to December 2000; Member,
American Savings Education Council's
Policy Board (ASEC), 1998-2000;
Member, Executive Committee, Crime
Prevention Coalition of America, 1997
- 2000.
---------------------------------------------------------------------------------------------------------------------------
25
---------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, and Address (1) Overseen by Outside Fund Complex by
Principal Occupation(s)(2) Director Director
---------------------------------------------------------------------------------------------------------------------------
Cornelius T. Ryan (71) General Partner of Oxford Partners and 31 Formerly, Director of Capital
Oxford Bioscience Partners (venture Cash Management Trust (money
capital partnerships) and President of market fund) and Prime Cash
Oxford Venture Corporation. Fund.
---------------------------------------------------------------------------------------------------------------------------
Peter P. Trapp (58) Regional Manager for Atlanta Region, 31
Ford Motor Credit Company since
August, 1997; prior thereto,
President, Ford Life Insurance
Company, April 1995 until August 1997.
---------------------------------------------------------------------------------------------------------------------------
Director who is an "Interested Person"
---------------------------------------------------------------------------------------------------------------------------
Peter E. Sundman* (43) Executive Vice President of Neuberger 31 Executive Vice President and
Berman since 1999; Principal of Director of Neuberger Berman
Neuberger Berman from 1997 until 1999; Inc. (holding company) since
Senior Vice President of NB Management 1999; President and Director
from 1996 until 1999; Director of of NB Management since 1999;
Institutional Services of NB Director and Vice President of
Management from 1988 until 1996. Neuberger & Berman Agency,
Inc. since 2000.
---------------------------------------------------------------------------------------------------------------------------
CLASS II
---------------------------------------------------------------------------------------------------------------------------
Independent Fund Directors
---------------------------------------------------------------------------------------------------------------------------
John Cannon (72) Retired. Formerly, Chairman and Chief 31 Independent Trustee or
Investment Officer of CDC Capital Director of three series of
Management (registered investment OppenheimerFunds: Limited Term
adviser) (1993-Jan. 1999). New York Municipal Fund,
Rochester Fund Municipals, and
Oppenheimer Convertible
Securities Fund, 1992 to
present.
---------------------------------------------------------------------------------------------------------------------------
Barry Hirsch (69) Senior Vice President and Senior 31
Counsel of Loews Corporation
(diversified financial corporation)
since May 2002; prior thereto, General
Counsel of Loews Corporation.
---------------------------------------------------------------------------------------------------------------------------
John P. Rosenthal (69) Senior Vice President of Burnham 31 Director, 92nd Street Y
Securities Inc. (a registered (non-profit), 1967 to present;
broker-dealer) since 1991. Formerly, Director, Cancer
Treatment Holdings, Inc.
---------------------------------------------------------------------------------------------------------------------------
26
---------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, and Address (1) Overseen by Outside Fund Complex by
Principal Occupation(s)(2) Director Director
---------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (52) General Partner of Seip Investments LP 31 Director, H&R Block, Inc.
(a private investment partnership); (financial services company)
President and CEO of Westaff, Inc. (the parent company of one of
(temporary staffing) May 2001 to the Fund's underwriters), May
January 2002; Senior Executive at the 2001 to present; Director,
Charles Schwab Corporation from 1983 General Magic (voice
to 1999, including Chief Executive recognition software),
Officer of Charles Schwab Investment November 2001 to present;
Management, Inc. and Trustee of Schwab Director, Forward Management,
Family of Funds and Schwab Investments Inc. (asset management), 2001
from 1997 to 1998 and Executive Vice to present; Member of the
President-Retail Brokerage for Charles Board of Directors of
Schwab Investment Management from 1994 E-Finance Corporation (credit
to 1997. decisioning services), 1999 to
present; Director,
Save-Daily.com (micro
investing services), 1999 to
present; Formerly, Director of
Offroad Capital Inc.
(pre-public internet commerce
company).
---------------------------------------------------------------------------------------------------------------------------
Director who is an "Interested Person"
---------------------------------------------------------------------------------------------------------------------------
Michael M. Kassen* (49) Executive Vice President and Chief 31 Executive Vice President,
Investment Officer of Neuberger Berman Chief Investment Officer and
since 1999; Executive Vice President Director of Neuberger Berman
and Chief Investment Officer of NB Inc. (holding company) since
Management from November 1999 to May 1999; Chairman since May 2000
2000; Vice President of NB Management and Director of NB Management
from 1990 until 1999; Partner or since April 1996.
Principal of Neuberger Berman from
1993.
---------------------------------------------------------------------------------------------------------------------------
CLASS III
---------------------------------------------------------------------------------------------------------------------------
Independent Fund Directors
---------------------------------------------------------------------------------------------------------------------------
Walter G. Ehlers (69) Consultant; Retired President and 31
Director of Teachers Insurance &
Annuity (TIAA) and College Retirement
Equities Fund (CREF).
---------------------------------------------------------------------------------------------------------------------------
Robert A. Kavesh (75) Professor of Finance and Economics at 31 Director, Delaware Labs
Stern School of Business, New York (cosmetics), 1978 to present.
University.
---------------------------------------------------------------------------------------------------------------------------
Howard A. Mileaf (65) Retired. Formerly, Vice President and 31 Director, State Theatre of New
Special Counsel to WHX Corporation Jersey (not-for-profit
(holding company); 1993 - 2001. theater), 2000 to present;
Formerly, Director of Kevlin
Corporation (manufacturer
of microwave and other
products).
---------------------------------------------------------------------------------------------------------------------------
27
---------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in
Fund Complex Other Directorships Held
Name, Age, and Address (1) Overseen by Outside Fund Complex by
Principal Occupation(s)(2) Director Director
---------------------------------------------------------------------------------------------------------------------------
William E. Rulon (70) Retired. Senior Vice President of 31 Director, Pro-Kids Golf and
Foodmaker, Inc. (operator and Learning Academy (teach golf
franchiser of restaurants) until and computer usage to "at
January 1997; Secretary of Foodmaker, risk" children), 1998 to
Inc. until July 1996. present; Director of Prandium,
Inc. (restaurants) since March
2001.
---------------------------------------------------------------------------------------------------------------------------
Candace L. Straight (55) Private investor and consultant 31 Director, Providence
specializing in the insurance Washington (property and
industry; Advisory Director of casualty insurance company),
Securities Capital LLC (a global December 1998 to present;
private equity investment firm Director, Summit Global
dedicated to making investments in the Partners (insurance brokerage
insurance sector). firm), October 2000 to present.
---------------------------------------------------------------------------------------------------------------------------
Director who is an "Interested Person"
---------------------------------------------------------------------------------------------------------------------------
Edward I. O'Brien* (74) Member, Investment Policy Committee, 31 Director of Legg Mason, Inc.
Edward Jones, 1993 - 2001; President (financial services holding
of the Securities Industry Association company) (the parent company
("SIA") (securities industry's of one of the Fund's
representative in government relations underwriters), 1993 to
and regulatory matters at the federal present; Director, Boston
and state levels) from 1974 - 1992; Financial Group (real estate
Adviser to SIA from November 1992 and tax shelters), 1993-1999.
-November 1993.
---------------------------------------------------------------------------------------------------------------------------
* Indicates a director who is an "interested person" within the meaning of the
1940 Act. Mr. Sundman and Mr. Kassen are interested persons of the Fund by
virtue of the fact that each is an officer and/or director of NB Management and
Executive Vice President of Neuberger Berman. Mr. O'Brien is an interested
person of the Fund by virtue of the fact that he is a director of Legg Mason,
Inc., a wholly owned subsidiary of which is one of the Fund's underwriters that
from time to time, serves as a broker or dealer to the Fund and other funds or
accounts for which NB Management serves as investment manager.
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each person has held the positions shown for
at least the last five years. The Board of Directors shall at all times be
divided as equally as possible into three classes of Directors designated Class
I, Class II, and Class III. The terms of office of Class I, Class II, and Class
III Directors shall expire at the annual meetings of stockholders held in 2003,
2004, and 2005 respectively, and at each third annual meeting of stockholders
thereafter.
28
Information about the Officers of the Fund
------------------------------------------
------------------------------------------------------------------------------------------------------------------
Position and Length of
Name, Age, and Address(1) Time Served Principal Occupation(s)(2)
------------------------- ---------------------- ---------------------------
------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (46) Secretary since 2002 Vice President-Mutual Fund Board Relations
of NB Management since 2000; Vice President
of Neuberger Berman since 2002 and employee
since 1999; Vice President of NB Management
from 1986 to 1999; Secretary of six other
registered investment companies for which NB
Management acts as investment manager and
administrator.
------------------------------------------------------------------------------------------------------------------
Robert Conti (46) Vice President since 2002 Vice President of Neuberger Berman since
1999; Senior Vice President of NB Management
since 2000; Controller of NB Management
until 1996; Treasurer of NB Management from
1996 until 1999; Vice President of three
other registered investment companies for
which NB Management acts as investment
manager and administrator since 2000 and of
three other registered investment companies
since 2002.
------------------------------------------------------------------------------------------------------------------
Stacy Cooper-Shugrue (39) Assistant Secretary since 2002 Vice President-Mutual Fund Board Relations
of NB Management since 2002; Employee of
Neuberger Berman since 1999; Assistant Vice
President of NB Management from 1993 to
1999; Assistant Secretary of six other
registered investment companies for which NB
Management acts as investment manager and
administrator.
------------------------------------------------------------------------------------------------------------------
Brian J. Gaffney (49) Vice President since 2002 Managing Director of Neuberger Berman since
1999; Senior Vice President of NB Management
since 2000; Vice President of NB Management
from 1997 until 1999; Vice President of
three other registered investment companies
for which NB Management acts as investment
manager and administrator since 2000 and of
three other registered investment companies
since 2002.
------------------------------------------------------------------------------------------------------------------
Sheila R. James (37) Assistant Secretary since 2002 Employee of Neuberger Berman since 1999;
Employee of NB Management from 1991 to 1999;
Assistant Secretary of six other registered
investment companies for which NB Management
acts as investment manager and administrator
since 2002.
------------------------------------------------------------------------------------------------------------------
John McGovern (32) Assistant Treasurer since 2002 Employee of NB Management since 1993;
Assistant Treasurer of six other registered
investment companies for which NB Management
acts as investment manager and administrator
since 2002.
------------------------------------------------------------------------------------------------------------------
29
------------------------------------------------------------------------------------------------------------------
Position and Length of
Name, Age, and Address(1) Time Served Principal Occupation(s)(2)
------------------------- ---------------------- ---------------------------
------------------------------------------------------------------------------------------------------------------
Barbara Muinos (43) Treasurer and Principal Financial Vice President of Neuberger Berman since
and Accounting Officer since 2002 1999; Assistant Vice President of NB
Management from 1993 to 1999; Treasurer
and Principal Financial and Accounting
Officer of six other registered investment
companies for which NB Management acts as
investment manager and administrator since
2002; Assistant Treasurer from 1996 to 2002
of three other mutual funds for which NB
Management acts as investment manager and
administrator.
------------------------------------------------------------------------------------------------------------------
Frederic B. Soule (56) Vice President since 2002 Vice President of Neuberger Berman since
1999; Vice President of NB Management from
1995 until 1999; Vice President of three
other registered investment companies for
which NB Management acts as investment
manager and administrator since 2000 and of
three other registered investment companies
since 2002.
------------------------------------------------------------------------------------------------------------------
Trani Wyman (33) Assistant Treasurer since 2002 Employee of NB Management since 1991.
Assistant Treasurer of six other registered
investment companies for which NB Management
acts as investment manager and administrator
since 2002.
------------------------------------------------------------------------------------------------------------------
--------------------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
Committees
----------
The Board has established several standing committees to oversee particular
aspects of the Fund's management. The standing committees of the Board are
described below.
AUDIT COMMITTEE. The Audit Committee's purposes are (a) to oversee generally the
Fund's accounting and financial reporting policies and practices, its internal
controls and, as appropriate, the internal controls of certain service
providers; (b) to oversee generally the quality and objectivity of the Fund's
financial statements and the independent audit thereof; and (c) to act as a
liaison between the Fund's independent auditors and the full Board. The Audit
Committee is composed entirely of Independent Fund Directors; its members are
John Cannon, Walter G. Ehlers, Cornelius T. Ryan (Chairman), and Peter P. Trapp.
CODE OF ETHICS COMMITTEE. The Code of Ethics Committee oversees the
administration of the Fund's Code of Ethics, which restricts the personal
securities transactions of employees, officers, and Directors. Its members are
John Cannon, Faith Colish, Robert A. Kavesh (Chairman), and Edward I. O'Brien.
All members except for Mr. O'Brien are Independent Fund Directors.
30
CONTRACT REVIEW COMMITTEE. The Contract Review Committee is responsible for
review and oversight of the Fund's principal contractual arrangements. Its
members are Faith Colish (Chairwoman), Barry Hirsch, Howard A. Mileaf, William
E. Rulon and Tom D. Seip. All members are Independent Fund Directors.
EXECUTIVE COMMITTEE. The Executive Committee has all the powers of the Directors
when the Directors are not in session. Its members are John Cannon, Faith
Colish, John P. Rosenthal, William E. Rulon, Cornelius T. Ryan and Peter E.
Sundman (Chairman). All members except for Mr. Sundman are Independent Fund
Directors.
NOMINATING COMMITTEE. The Nominating Committee is responsible for nominating
individuals to serve as Directors, including as Independent Fund Directors, as
members of committees, and as officers of the Fund. Its members are C. Anne
Harvey, Barry Hirsch, Howard A. Mileaf (Chairman), Cornelius T. Ryan and Tom D.
Seip. All members are Independent Fund Directors. The Committee will consider
nominees recommended by stockholders; stockholders may send resumes of
recommended persons to the attention of Claudia Brandon, Secretary, Neuberger
Berman Intermediate Municipal Fund Inc., 605 Third Avenue, 2nd Floor, New York,
New York, 10158-0180.
PORTFOLIO TRANSACTIONS COMMITTEE. The Portfolio Transactions Committee from time
to time reviews, among other things, quality of execution of portfolio trades,
actual and potential uses of portfolio brokerage commissions, agency
cross-transactions, information relating to the commissions charged by Neuberger
Berman to the Fund and to its other customers, and information concerning the
prevailing level of commissions charged by other brokers having comparable
execution capability. The Committee is composed entirely of Independent Fund
Directors; its members are Faith Colish, Walter G. Ehlers, C. Anne Harvey,
Candace L. Straight (Chairwoman) and Peter P. Trapp.
PRICING COMMITTEE. The Pricing Committee oversees the procedures for pricing the
Fund's portfolio securities, and from time to time may be called upon to
establish or ratify the fair value of portfolio securities for which market
prices are not readily available. Its members are Michael M. Kassen, Robert A.
Kavesh, Edward I. O'Brien, John P. Rosenthal (Chairman), Tom D. Seip and Peter
P. Trapp. All members except for Mr. Kassen and Mr. O'Brien are Independent Fund
Directors.
The Fund's Articles provide that the Fund will indemnify its Directors and
officers against liabilities and expenses to the extent permitted by Maryland
law and the 1940 Act. This means that the Fund will indemnify its officers and
Directors against liabilities and expenses reasonably incurred in connection
with litigation in which they may be involved because of their offices with the
Fund, unless it is adjudicated that they (a) engaged in bad faith, willful
misfeasance, gross negligence, or reckless disregard of the duties involved in
the conduct of their offices, or (b) did not act in good faith in the reasonable
belief that their action was in the best interest of the Fund. In the case of
settlement, such indemnification will not be provided unless it has been
determined (by a court or other body approving the settlement or other
disposition, by a majority of disinterested Directors based upon a review of
readily available facts, or in a written opinion of independent counsel) that
31
such officers or Directors 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 Directors of the Fund. The Fund does not have any retirement plan for its
Directors.
Compensation
------------
The Directors' compensation and other costs of their joint meetings are
allocated pro rata based on the assets of each investment company in the
Neuberger Berman Fund Complex. It is estimated that the Directors will receive
the amounts set forth in the following table from the Fund for the fiscal year
ending October 31, 2003. For the calendar year ended December 31, 2001, the
Directors received the compensation set forth in the following table for serving
as Trustees of other investment companies in the "Fund Complex." Each officer
and Director who is a Director, officer, partner or employee of NB Management,
Neuberger Berman or any entity controlling, controlled by or under common
control with NB Management or Neuberger Berman serves without any compensation
from the Fund.
TABLE OF COMPENSATION
---------------------
Total Compensation from 3
Registered Investment Companies in
Estimated Aggregate the Neuberger Berman Fund
Compensation Complex Paid to Directors For
Name and Position with the Fund from the Fund* Calendar Year Ended 12/31/01
-------------------------------- -------------- ----------------------------
Independent Fund Directors
John Cannon $2,060 $70,000
Director
Faith Colish $2,060 $70,000
Director
Walter G. Ehlers $2,060 $70,000
Director
C. Anne Harvey $2,060 $62,500
Director
Barry Hirsch $2,060 $70,000
Director
Robert A. Kavesh $2,060 $70,000
Director
Howard A. Mileaf $2,060 $70,000
Director
32
Total Compensation from 3
Registered Investment Companies in
Estimated Aggregate the Neuberger Berman Fund
Compensation Complex Paid to Directors For
Name and Position with the Fund from the Fund* Calendar Year Ended 12/31/01
-------------------------------- -------------- ----------------------------
John P. Rosenthal $2,060 $70,000
Director
William E. Rulon $2,060 $70,000
Director
Cornelius T. Ryan $2,060 $70,000
Director
Tom Decker Seip $2,060 $70,000
Director
Candace L. Straight $2,060 $62,500
Director
Peter P. Trapp $2,060 $62,500
Director
Directors who are "Interested Persons"
Michael M. Kassen $0 $0
Director
Edward I. O'Brien $2,060 $70,000
Director
Peter E. Sundman $0 $0
Director
*Since the Fund has not completed its first full fiscal year since its
organization, compensation is estimated based upon payments to be made by the
Fund during the current fiscal year and upon relative net assets of the NB
Management Fund Complex. The estimate is for the fiscal year ending October 31,
2003.
Ownership of Securities
-----------------------
At November 29, 2002, the Directors and officers of the Fund, as a group,
owned beneficially or of record less than 1% of the outstanding shares of the
Fund.
Set forth below is the dollar range of equity securities owned by each
Director as of December 31, 2001. Since the Fund has not yet commenced
operations, none of the Directors own Fund shares as of the date of this SAI.
33
--------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Name of Director Securities in all Registered Investment
Companies Overseen by Director in
Family of Investment Companies*
--------------------------------------------------------------------------------
Independent Fund Directors
--------------------------------------------------------------------------------
John Cannon $50,001 - $100,000
--------------------------------------------------------------------------------
Faith Colish Over $100,000
--------------------------------------------------------------------------------
Walter G. Ehlers Over $100,000
--------------------------------------------------------------------------------
C. Anne Harvey None
--------------------------------------------------------------------------------
Barry Hirsch Over $100,000
--------------------------------------------------------------------------------
Robert A. Kavesh $10,001 - $50,000
--------------------------------------------------------------------------------
Howard A. Mileaf Over $100,000
--------------------------------------------------------------------------------
John P. Rosenthal Over $100,000
--------------------------------------------------------------------------------
William E. Rulon Over $100,000
--------------------------------------------------------------------------------
Cornelius T. Ryan Over $100,000
--------------------------------------------------------------------------------
Tom Decker Seip None
--------------------------------------------------------------------------------
Candace L. Straight Over $100,000
--------------------------------------------------------------------------------
Peter P. Trapp $10,001 - $50,000
--------------------------------------------------------------------------------
Directors who are "Interested Persons"
--------------------------------------------------------------------------------
Michael M. Kassen Over $100,000
--------------------------------------------------------------------------------
Edward I. O'Brien Over $100,000
--------------------------------------------------------------------------------
Peter E. Sundman Over $100,000
--------------------------------------------------------------------------------
*Valuation as of December 31, 2001
Independent Fund Directors Ownership of Securities
--------------------------------------------------
As of December 31, 2001, no Independent Fund Director (or his/her immediate
family members) owned securities of Neuberger Berman or securities in an entity
controlling, controlled by or under common control with Neuberger Berman (not
including registered investment companies).
Codes of Ethics
---------------
The Fund, NB Management and Neuberger Berman have personal securities
trading policies that restrict the personal securities transactions of
employees, officers, and Directors. Their primary purpose is to ensure that
personal trading by these individuals does not disadvantage any fund managed by
NB Management. The Fund managers and other investment personnel who comply with
the policies' preclearance and disclosure procedures may be permitted to
purchase, sell or hold certain types of securities which also may be or are held
in the funds they advise, but are restricted from trading in close conjunction
with their Funds or taking personal advantage of investment opportunities that
may belong to the Fund. Text-only versions of the codes of ethics can be viewed
online or downloaded from the EDGAR Database on the SEC's internet web site at
www.sec.gov. You may also review and copy those documents by visiting the SEC's
Public Reference Room in Washington, DC. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 202-942-8090. In
addition, copies of the codes of ethics may be obtained, after mailing the
appropriate duplicating fee, by writing to the SEC's Public Reference Section,
34
450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES
Investment Manager and Administrator
------------------------------------
NB Management serves as the investment manager to the Fund pursuant to a
management agreement with the Fund, dated September 24, 2002 ("Management
Agreement"). NB Management provides investment management and advisory services
to private accounts of institutional and individual clients and to mutual funds.
As of September 30, 2002, NB Management and its affiliates had approximately
$53.6 billion in assets under management. NB Management is located at 605 Third
Avenue, New York, New York 10158-0180.
The Management Agreement provides, in substance, that NB Management will
make and implement investment decisions for the Fund in its discretion and will
continuously develop an investment program for the Fund's assets. The Management
Agreement permits NB Management to effect securities transactions on behalf of
the Fund through associated persons of NB Management. The Management Agreement
also specifically permits NB Management to compensate, through higher
commissions, brokers and dealers who provide investment research and analysis to
the Fund, although NB Management has no current plans to pay a material amount
of such compensation.
The Management Agreement provides that NB Management shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties. In the event that litigation against NB
Management, in connection with its obligations under the Management Agreement,
ends with a determination that NB Management acted without culpability, the Fund
will reimburse NB Management for reasonable attorney's fees and other expenses.
In the event a matter ends without a court ruling on NB Management's
culpability, NB Management's entitlement to reimbursement will be determined by
a committee of disinterested Directors who were not party to the suit or by an
opinion of independent legal counsel. The Fund may advance expenses to NB
Management if (1) a committee of non-party disinterested Directors or
independent legal counsel determine that NB Management is likely to prevail, and
(2) the Fund is adequately assured of repayment in the event of an adverse
result.
NB Management provides to the Fund, without separate cost, office space,
equipment, and facilities and the personnel necessary to perform executive,
administrative, and clerical functions. NB Management pays all salaries,
expenses, and fees of the officers, Directors, and employees of the Fund who are
officers, Directors, or employees of NB Management. Two Directors of NB
Management (who are also officers of Neuberger Berman), who also serve as
officers of NB Management, currently serve as Directors and/or officers of the
Fund. See "Directors and Officers." The Fund pays NB Management a management fee
as described below.
35
NB Management provides facilities, services, and personnel to the Fund
pursuant to an administration agreement with the Fund, dated September 24, 2002
("Administration Agreement"). For such administrative services, the Fund pays NB
Management a fee based on the Fund's average daily total assets minus
liabilities other than the aggregate indebtedness entered into for purposes of
leverage ("Managed Assets").
Under the Administration Agreement, NB Management also provides certain
stockholder, stockholder-related, and other services that are not furnished by
the Fund's stockholder servicing agent. NB Management provides the direct
stockholder services specified in the Administration Agreement and assists the
stockholder servicing agent in the development and implementation of specified
programs and systems to enhance overall stockholder servicing capabilities. NB
Management solicits and gathers stockholder proxies, performs services connected
with the qualification of the Fund's shares, and furnishes other services the
parties agree from time to time should be provided under the Administration
Agreement. The Administration Agreement contains provisions on liability and
indemnification substantially identical to those in the Management Agreement,
described above.
For administrative services, the Fund pays NB Management at the annual rate
of .30% of average daily Managed Assets. With the Fund's consent, NB Management
may subcontract to third parties some of its responsibilities to the Fund under
the administration agreement. In addition, the Fund may compensate such third
parties for accounting and other services.
Pursuant to the Management Agreement, the Fund has agreed to pay NB
Management an annual management fee, payable on a monthly basis, at the annual
rate of .25% of the Fund's average daily Managed Assets. The liquidation
preference of the AMPS is not a liability. All fees and expenses are accrued
daily and deducted before payment of dividends to investors.
From the commencement of the Fund's operations through October 31, 2011, NB
Management has contractually agreed to waive a portion of the management fees it
is entitled to receive from the Fund in the amounts, and for the time periods,
set forth below:
------------------------------------------------------------------------------------------------------------------
Percentage Waived (annual rate as a Percentage Waived (annual rate
percentage of net assets attributable as a percentage of net assets
Fiscal Period to Common Shares - assuming no attributable to Common Shares -
Ending October 31, AMPS are issued or outstanding) assuming the issuance AMPS(2)
------------------------------------------------------------------------------------------------------------------
2002 (1) .25% .40%
------------------------------------------------------------------------------------------------------------------
2003 .25% .40%
------------------------------------------------------------------------------------------------------------------
2004 .25% .40%
------------------------------------------------------------------------------------------------------------------
2005 .25% .40%
------------------------------------------------------------------------------------------------------------------
2006 .25% .40%
------------------------------------------------------------------------------------------------------------------
2007 .25% .40%
------------------------------------------------------------------------------------------------------------------
2008 .20% .32%
------------------------------------------------------------------------------------------------------------------
2009 .15% .24%
------------------------------------------------------------------------------------------------------------------
2010 .10% .16%
------------------------------------------------------------------------------------------------------------------
2011 .05% .08%
------------------------------------------------------------------------------------------------------------------
36
(1) From the commencement of the Fund's operations.
(2) Assumes the issuance of AMPS in an amount equal to 38% of the Fund's net
assets (after issuance).
NB Management has not agreed to waive any portion of its fees beyond October 31,
2011.
The Management Agreement continues until June 30, 2004. The Management
Agreement is renewable thereafter from year to year with respect to the Fund, so
long as its continuance is approved at least annually (1) by the vote of a
majority of the Fund Directors who are not "interested persons" of NB Management
or the Fund ("Independent Fund Directors"), cast in person at a meeting called
for the purpose of voting on such approval, and (2) by the vote of a majority of
the Fund Directors or by a 1940 Act majority vote of the outstanding stock in
the Fund. The Administration Agreement continues for a period of two years after
the date the Fund became subject thereto. The Administration Agreement is
renewable from year to year, so long as its continuance is approved at least
annually (1) by the vote of a majority of the Independent Fund Directors, cast
in person at a meeting called for the purpose of voting on such approval and (2)
by the vote of a majority of the Fund Directors or by a 1940 Act majority vote
of the outstanding stock in the Fund.
The Management Agreement is terminable, without penalty, on 60 days'
written notice either by the Fund or by NB Management. The Administration
Agreement is terminable, without penalty, on 60 days' written notice either by
NB Management or by the Fund. Each Agreement terminates automatically if it is
assigned.
Except as otherwise described in the prospectus, the Fund pays, in addition
to the investment management fee described above, all expenses not assumed by NB
Management, including, without limitation, fees and expenses of Directors who
are not "interested persons" of NB Management or the Fund, interest charges,
taxes, brokerage commissions, expenses of issue of shares, fees and expenses of
registering and qualifying the Fund and its classes of shares for distribution
under federal and state laws and regulations, charges of custodians, auditing
and legal expenses, expenses of determining net asset value of the Fund, reports
to stockholders, expenses of meetings of stockholders, expenses of printing and
mailing prospectuses, proxy statements and proxies to existing stockholders, and
its proportionate share of insurance premiums and professional association dues
or assessments. The Fund is also responsible for such nonrecurring expenses as
may arise, including litigation in which the Fund may be a party, and other
expenses as determined by the Board. The Fund may have an obligation to
indemnify its officers and Directors with respect to such litigation.
Sub-Adviser
-----------
NB Management retains Neuberger Berman, 605 Third Avenue, New York, New
York 10158-3698, as sub-adviser with respect to the Fund pursuant to a
sub-advisory agreement dated September 24, 2002 ("Sub-Advisory Agreement").
The Sub-Advisory Agreement provides in substance that Neuberger Berman will
furnish to NB Management, upon reasonable request, the same type of investment
recommendations and research that Neuberger Berman, from time to time, provides
37
to its officers and employees for use in managing client accounts. In this
manner, NB Management expects to have available to it, in addition to research
from other professional sources, the capability of the research staff of
Neuberger Berman. This staff consists of numerous investment analysts, each of
whom specializes in studying one or more industries, under the supervision of
the Director of Research, who is also available for consultation with NB
Management. The Sub-Advisory Agreement provides that NB Management will pay for
the services rendered by Neuberger Berman based on the direct and indirect costs
to Neuberger Berman in connection with those services. Neuberger Berman also
serves as sub-adviser for all of the other investment companies managed by NB
Management.
The Sub-Advisory Agreement continues until June 30, 2004 and is renewable
from year to year, subject to approval of its continuance in the same manner as
the Management Agreement. The Sub-Advisory Agreement is subject to termination,
without penalty, with respect to the Fund by the Directors or a 1940 Act
majority vote of the outstanding stock in the Fund, by NB Management, or by
Neuberger Berman on not less than 30 nor more than 60 days' prior written
notice. The Sub-Advisory Agreement also terminates automatically with respect to
the Fund if it is assigned or if the Management Agreement terminates with
respect to the Fund. Neuberger Berman and NB Management employ experienced
professionals that work in a competitive environment.
The Management Agreement and the Sub-Advisory Agreement each provide that
NB Management or Neuberger Berman, as applicable, shall not be subject to any
liability in connection with the performance of its services thereunder in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Board Consideration of the Management and Sub-Advisory Agreements
-----------------------------------------------------------------
In approving the Management and Sub-Advisory Agreements for the Fund, the
Board primarily considered the nature and quality of the services to be provided
under the Agreements and the overall fairness of the Agreements to the Fund.
With respect to the nature and quality of the services provided, the Board
considered, among other things, the resources that NB Management plans to devote
to managing the Fund and the firm's fixed-income research and trading
capabilities. They discussed the recent and long-term performance of the other
fixed-income funds managed by NB Management and Neuberger Berman. They also
considered NB Management's and Neuberger Berman's positive compliance history,
as the firms have been free of significant compliance problems. With respect to
the overall fairness of the Management and Sub-Advisory Agreements, the Board
primarily considered the fee structure of the Agreements and the proposed
indemnity provision in the Management Agreement. The Board reviewed information
from an independent data service about the rates of compensation paid to
investment advisers, and the overall expense ratios, for funds pursuing a
comparable investment strategy to the Fund. The Board also considered the
contractual limits on the Fund's expenses undertaken by NB Management.
38
The Board concluded that the fees and other benefits likely to accrue to NB
Management and its affiliates by virtue of their relationship to the Fund are
reasonable in comparison with the benefits likely to accrue to the Fund. In
considering the fees, the Board took note of the likelihood that the Fund would
issue preferred stock and considered the effect of such issuance on the Fund's
net assets and, therefore, the fees. The Board also took note of the Additional
Compensation Agreement between NB Management and Merrill Lynch concerning the
aftermarket for Fund shares and whether there are steps the Fund should consider
taking to alleviate any discount. The Board also concluded that approval of the
Management and Sub-Advisory Agreements was in the best interests of the Fund's
stockholders. These matters also were considered separately by the Independent
Fund Directors working with experienced 1940 Act counsel that is independent of
Neuberger Berman and NB Management.
Management and Control of NB Management and Neuberger Berman
-------------------------------------------------------------
The Directors and officers of NB Management who are deemed "control
persons," all of whom have offices at the same address as NB Management, are:
Jeffrey B. Lane, Director; Robert Matza, Director; Michael M. Kassen, Director
and Chairman; Barbara R. Katersky, Senior Vice President; Robert Conti, Senior
Vice President; Brian Gaffney, Senior Vice-President; Thomas J. Gengler, Jr.,
Senior Vice President; Joseph K. Herlihy, Treasurer; Matthew S. Stadler, Senior
Vice President and Chief Financial Officer; Peter E. Sundman, Director and
President; and Heidi S. Steiger, Director.
The officers and employees of Neuberger Berman, who are deemed "control
persons," all of whom have offices at the same address as Neuberger Berman, are:
Jeffrey B. Lane, President and Chief Executive Officer; Robert Matza, Executive
Vice President and Chief Operating Officer; Michael M. Kassen, Executive Vice
President and Chief Investment Officer; Jack L. Rivkin, Executive Vice
President; Heidi S. Steiger, Executive Vice President; Peter E. Sundman,
Executive Vice President; Matthew S. Stadler, Senior Vice President and Chief
Financial Officer; Kevin Handwerker, Senior Vice President, General Counsel and
Secretary; Joseph K. Herlihy, Senior Vice President and Treasurer; Robert
Akeson, Senior Vice President; Steven April, Senior Vice President; Irene
Ashkenazy, Senior Vice President; Philip Callahan, Senior Vice President;
Lawrence J. Cohn, Senior Vice President; Joseph F. Collins III, Senior Vice
President; Thomas E. Gengler Jr., Senior Vice President; Amy Gilfenbaum, Senior
Vice President; Brian E. Hahn, Senior Vice President; Barbara R. Katersky,
Senior Vice President; Judith Ann Kenney, Senior Vice President; Diane E.
Lederman, Senior Vice President; Domenick Migliorato, Senior Vice President;
Jane Ringel, Senior Vice President; David Root, Senior Vice President; Mark
Shone, Senior Vice President; Robert H. Splan, Senior Vice President; Thomas
Tapen, Senior Vice President; Andrea Trachtenberg, Senior Vice President; Robert
Traversa, Senior Vice President; Frank J. Tripodi, Senior Vice President; and
Marvin C. Schwartz, Managing Director.
Mr. Sundman and Mr. Kassen are Directors and officers of the Fund. Mr.
Gaffney and Mr. Conti are officers of the Fund.
Neuberger Berman and NB Management are wholly owned subsidiaries of
Neuberger Berman Inc., a publicly owned holding company owned primarily by the
employees of Neuberger Berman. The inside Directors and officers of Neuberger
39
Berman Inc. are: Jeffrey B. Lane, Director, Chief Executive Officer and
President; Peter E. Sundman, Director and Executive Vice President; Heidi S.
Steiger, Director and Executive Vice President; Michael M. Kassen, Director,
Chief Investment Officer and Executive Vice President; Robert Matza, Director,
Chief Operating Officer and Executive Vice President; Marvin C. Schwartz,
Director and Vice Chairman; Jack L. Rivkin, Executive Vice President; Kevin
Handwerker, Senior Vice President, General Counsel and Secretary; Matthew S.
Stadler, Senior Vice President and Chief Financial Officer; Richard Cantor, Vice
Chairman and Director; Lawrence Zicklin, Vice Chairman and Director; Joseph K.
Herlihy, Treasurer; Maxine L. Gerson, Assistant Secretary; and Ellen Metzger,
Assistant Secretary.
PORTFOLIO TRANSACTIONS
Investment Decisions and Portfolio Transactions
-----------------------------------------------
Investment decisions for the Fund and for the other investment advisory
clients of NB Management are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved (including the
Fund). Some securities considered for investments by the Fund may also be
appropriate for other clients served by NB Management. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. If a purchase or sale of
securities consistent with the investment policies of the Fund and one or more
of these clients served by NB Management is considered at or about the same
time, transactions in such securities will be allocated among the Fund and
clients in a manner deemed fair and reasonable by NB Management. NB Management
may aggregate orders for the Fund with simultaneous transactions entered into on
behalf of its other clients so long as price and transaction expenses are
averaged either for that transaction or for the day. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which NB Management believes is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio securities
for one or more clients will have an adverse effect on other clients.
The Fund has applied with the SEC for an order to permit the Fund to pay
Neuberger Berman, and Neuberger Berman to receive, compensation for services as
a securities lending intermediary, subject to certain conditions. These services
would be provided by a separate operating unit of Neuberger Berman under the
supervision of NB Management who are not involved in the securities lending
intermediary's lending agency operations. Neuberger Berman would receive as
compensation a reasonable fee based on revenues earned by the Fund through the
securities lending program. The order requested by the Fund would also permit
Neuberger Berman and other affiliated broker-dealers of the Fund to borrow
portfolio securities from the Fund, subject to certain conditions. There is no
guarantee that the Fund will receive the requested order.
40
Brokerage and Research Services
-------------------------------
Purchases and sales of portfolio securities generally are transacted with
issuers, underwriters, or dealers that serve as primary market-makers, who act
as principals for the securities on a net basis. The Fund typically does not pay
brokerage commissions for such purchases and sales. Instead, the price paid for
newly issued securities usually includes a concession or discount paid by the
issuer to the underwriter, and the prices quoted by market-makers reflect a
spread between the bid and the asked prices from which the dealer derives a
profit.
In purchasing and selling portfolio securities other than as described
above (for example, in the secondary market), the Fund seeks to obtain best
execution at the most favorable prices through responsible broker-dealers and,
in the case of agency transactions, at competitive commission rates. In
selecting broker-dealers to execute transactions, NB Management considers such
factors as the price of the security, the rate of commission, the size and
difficulty of the order, and the reliability, integrity, financial condition,
and general execution and operational capabilities of competing broker-dealers.
NB Management also may consider the brokerage and research services that
broker-dealers provide to the Fund or NB Management. Under certain conditions,
the Fund may pay higher brokerage commissions in return for brokerage and
research services. In any case, the Fund may effect principal transactions with
a dealer who furnishes research services, may designate any dealer to receive
selling concessions, discounts, or other allowances, or otherwise may deal with
any dealer in connection with the acquisition of securities in underwritings.
In certain instances NB Management specifically allocates brokerage for
research services (including research reports on issuers and industries as well
as economic and financial data). Such research may sometimes be available for
cash purchase. While the receipt of such services has not reduced NB
Management's normal internal research activities, NB Management's expenses could
be materially increased if it were to generate such additional information
internally. To the extent such research services are provided by others, NB
Management is relieved of expenses it may otherwise incur. In some cases
research services are generated by third parties but provided to NB Management
by or through broker dealers. Research obtained in return for brokerage may be
used in servicing any or all clients of NB Management and may be used in
connection with clients other than those client's whose brokerage commissions
are used to acquire the research services described herein. With regard to
allocation of brokerage to acquire research services, NB Management always
considers its best execution obligation.
The commissions paid to a broker other than Neuberger Berman may be higher
than the amount another firm might charge if NB Management determines in good
faith that the amount of those commissions is reasonable in relation to the
value of the brokerage and research services provided by the broker. NB
Management believes that those research services benefit the Fund by
supplementing the information otherwise available to NB Management. That
research may be used by NB Management in servicing other funds managed by it
and, in some cases, by Neuberger Berman in servicing managed accounts. On the
other hand, research received by NB Management from brokers effecting portfolio
transactions on behalf of the other funds it manages and by Neuberger Berman
from brokers effecting portfolio transactions on behalf of managed accounts may
be used for the Fund's benefit.
41
No affiliate of the Fund receives give-ups or reciprocal business in
connection with its portfolio transactions. The Fund does not effect
transactions with or through broker-dealers in accordance with any formula or
for selling shares of the Fund. However, broker-dealers who execute portfolio
transactions may from time to time effect purchases of Fund shares for their
customers. The 1940 Act generally prohibits NB Management and Neuberger Berman
from acting as principal in the purchase of portfolio securities from, or the
sale of portfolio securities to, the Fund unless an appropriate exemption is
available.
NET ASSET VALUE
The net asset value attributable to the Common Shares is calculated by
subtracting the Fund's total liabilities and the liquidation preference of any
outstanding AMPS from total assets (the market value of the securities the Fund
holds plus cash and other assets). The net asset value per Common Share is
calculated by dividing its net asset value by the number of Common Shares
outstanding and rounding the result to the nearest full cent. The Fund
calculates its net asset value as of the close of regular trading on the New
York Stock Exchange, usually 4 p.m. Eastern time, every day on which the New
York Stock Exchange is open. Information that becomes known to the Fund or its
agent after the Fund's net asset value has been calculated on a particular day
will not be used to retroactively adjust the price of a security or the Fund's
net asset value determined earlier that day.
The Fund values its portfolio securities on the basis of bid quotations
from independent pricing services or principal market makers, or, if quotations
are not available, by a method that the Board of Directors believes accurately
reflects fair value. The Fund periodically verifies valuations provided by the
pricing services. Short-term securities with remaining maturities of less than
60 days may be valued at cost which, when combined with interest earned,
approximates market value.
If NB Management believes that the price of a security obtained under the
Fund's valuation procedures (as described above) does not represent the amount
that the Fund reasonably expects to receive on a current sale of the security,
the Fund will value the security based on a method that the Directors of the
Fund believe accurately reflects fair value. Common stock of closed-end
investment companies frequently trade at a discount from net asset value, but in
some cases trade at a premium. Since the market price of the Fund's Common
Shares is determined by such factors as trading volume of the shares, general
market and economic conditions and other factors beyond the control of the Fund,
the Fund cannot predict whether its Common Shares will trade at, below or above
its computed net asset value.
DESCRIPTION OF AMPS
Under the Articles, the Fund is authorized to issue up to 1,000,000,000
shares of capital stock, all of it originally designated Common Shares. Pursuant
to the Articles, the Board may classify or reclassify any unissued shares of
capital stock without a stockholder vote into one or more classes of preferred
or other stock. Pursuant to that authority, the Board has classified 4,000
shares as Series A AMPS and 4,000 shares as Series B AMPS. All AMPS will have
42
a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared).
AMPS will rank on parity with shares of any other class or series of
preferred stock of the Fund as to the payment of dividends and the distribution
of assets upon liquidation. All AMPS carry one vote per share on all matters on
which such shares are entitled to be voted. AMPS will, when issued, be fully
paid and non-assessable and have no preemptive, exchange, conversion or
cumulative voting rights.
As used in this Statement of Additional Information, unless otherwise
noted, the Fund's "net assets" include assets of the Fund attributable to any
outstanding Common and AMPS, with no deduction for the liquidation preference of
the AMPS. Solely for financial reporting purposes, however, the Fund is required
to exclude the liquidation preference of AMPS from "net assets," so long as the
AMPS have redemption features that are not solely within the control of the
Fund. For all regulatory and tax purposes, the Fund's AMPS will be treated as
stock (rather than indebtedness).
LIMITED ISSUANCE OF AMPS. Under the 1940 Act, the Fund could issue AMPS
with an aggregate liquidation value of up to one-half of the value of the Fund's
net assets, measured immediately after issuance of the AMPS. "Liquidation value"
means the original purchase price of the shares being liquidated plus any
accrued and unpaid dividends. In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Shares unless the
liquidation value of the AMPS is less than one-half of the value of the Fund's
net assets (determined after deducting the amount of such dividend or
distribution). To the extent that the Fund has outstanding any senior securities
representing indebtedness (such as through the use of derivative instruments
that constitute senior securities), the aggregate amount of such senior
securities will be added to the total liquidation value of any outstanding AMPS
for purposes of these asset coverage requirements. The liquidation value of the
AMPS is expected to be approximately 38% of the value of the Fund's net assets.
The Fund intends to purchase or redeem AMPS, if necessary, to keep the
liquidation value of the AMPS plus the aggregate amount of other senior
securities representing indebtedness at or below one-half of the value of the
Fund's net assets.
DISTRIBUTION PREFERENCE. The AMPS will have complete priority over the
Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
AMPS ("Preferred Stockholders") will be entitled to receive a preferential
liquidating distribution (expected to equal the original purchase price per
share plus accumulated and unpaid dividends thereon, whether or not earned or
declared) before any distribution of assets is made to holders of Common Shares.
After payment of the full amount of the liquidating distribution to which they
are entitled, Preferred Stockholders will not be entitled to any further
participation in any distribution of assets by the Fund. A consolidation or
merger of the Fund with or into any business trust or corporation or a sale of
all or substantially all of the assets of the Fund shall not be deemed to be a
liquidation, dissolution or winding up of the Fund.
43
VOTING RIGHTS. In connection with any issuance of AMPS, the Fund must
comply with Section 18(i) of the 1940 Act, which requires, among other things,
that AMPS be voting shares. Except as otherwise provided in the Articles or the
Fund's Bylaws or otherwise required by applicable law, Preferred Stockholders
will vote together with Common Stockholders as a single class.
In connection with the election of the Fund's Directors, Preferred
Stockholders, voting as a separate class, will also be entitled to elect two of
the Fund's Directors, and the remaining Directors shall be elected by Common
Stockholders and Preferred Stockholders, voting together as a single class. In
addition, if at any time dividends on the Fund's outstanding AMPS shall be
unpaid in an amount equal to two full years' dividends thereon, the holders of
all outstanding AMPS, voting as a separate class, will be entitled to elect a
majority of the Fund's Directors until all dividends in arrears have been paid
or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding AMPS,
voting as a separate class, shall be required to approve any action requiring a
vote of security holders under Section 13(a) of the 1940 Act including, among
other things, conversion of the Fund from a closed-end to an open-end company,
or changes in the investment restrictions described as fundamental policies
under "Investment Restrictions." The class or series vote of Preferred
Stockholders described above shall in each case be in addition to any separate
vote of the requisite percentage of Common Shares and AMPS, voting together,
necessary to authorize the action in question.
The Fund's AMPS would not be entitled to vote on matters placed before
stockholders if, at or prior to the time when a vote is required, such shares
shall have been (1) redeemed or (2) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
REDEMPTION, PURCHASE AND SALE OF AMPS BY THE FUND. The terms of the AMPS
provide that they are redeemable at certain times, in whole or in part, at the
original purchase price per share plus accumulated dividends, that the Fund may
tender for or purchase AMPS and that the Fund may subsequently resell any shares
so tendered for or purchased. Any redemption or purchase of AMPS by the Fund
will reduce the leverage applicable to Common Shares, while any resale of shares
by the Fund will increase such leverage.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS
GENERAL. DTC will act as the Securities Depository with respect to the
AMPS. One certificate for all of the shares of each series will be registered in
the name of Cede & Co., as nominee of the Securities Depository. Such
certificate will bear a legend to the effect that such certificate is issued
subject to the provisions restricting transfers of shares of the AMPS contained
in the Fund's Articles Supplementary. The Fund will also issue stop-transfer
instructions to the transfer agent for the AMPS. Prior to the commencement of
the right of holders of the AMPS to elect a majority of the Directors, as
described under "Description of AMPS -- Voting Rights" in the prospectus, Cede &
Co. will be the holder of record of the AMPS and owners of such shares will not
44
be entitled to receive certificates representing their ownership interest in
such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in the AMPS, whether for its own
account or as a nominee for another person.
CONCERNING THE AUCTION AGENT. The Auction Agent will act as agent for the
Fund in connection with the auctions of the AMPS (the "Auctions"). In the
absence of willful misconduct or gross negligence on its part, the Auction Agent
will not be liable for any action taken, suffered, or omitted or for any error
of judgment made by it in the performance of its duties under the auction agency
agreement between the Fund and the Auction Agent and will not be liable for any
error of judgment made in good faith unless the Auction Agent was grossly
negligent in ascertaining the facts pertinent to making such a decision. The
Fund shall indemnify the Auction Agent and its officers, directors, employees
and agents for, and hold it harmless against, any loss, liability or expense
incurred without gross negligence or willful misconduct on the part of the
Auction Agent arising out of or in connection with its agency under the auction
agency agreement and under the Broker-Dealer Agreements entered by the Auction
Agent pursuant to the auction agency agreement, including the costs and expenses
of defending itself against any claim of liability in connection with its
exercise or performance of any of its duties thereunder, except such as may
result from its gross negligence or willful misconduct.
The Auction Agent may conclusively rely upon, as evidence of the identities
of the holders of the AMPS, the Auction Agent's registry of holders, and the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under "The Auction --
Secondary Market Trading and Transfers of AMPS" in the prospectus and notices
from the Fund. The Auction Agent is not required to accept any such notice for
an auction unless it is received by the Auction Agent by 3:00 p.m., Eastern
time, on the business day preceding such Auction.
The Auction Agent may terminate its auction agency agreement with the Fund
upon at least 60 days notice to the Fund (30 days if such termination is due to
nonpayment of amounts due to it). If the Auction Agent should resign, the Fund
will use its best efforts to enter into an agreement with a successor auction
agent containing substantially the same terms and conditions as the auction
agency agreement. The Fund may remove the Auction Agent provided that prior to
such removal the Fund shall have entered into such an agreement with a successor
auction agent.
BROKER-DEALERS. The Auction Agent after each Auction for AMPS will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
dividend period of less than one year, or a percentage agreed to by the Fund and
the Broker-Dealer in the case of any auction immediately preceding a dividend
period of one year or longer, of the purchase price of the AMPS placed by such
Broker-Dealer at such auction. For the purposes of the preceding sentence, the
AMPS will be placed by a Broker-Dealer if such shares were (a) the subject of
hold orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its customers who are
45
beneficial owners or (b) the subject of an order submitted by such Broker-Dealer
that is (i) a submitted bid of an existing holder that resulted in the existing
holder continuing to hold such shares as a result of the Auction or (ii) a
submitted bid of a potential bidder that resulted in the potential holder
purchasing such shares as a result of the Auction or (iii) a valid hold order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in Auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any Auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction, if there
are other Broker-Dealers.
CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION
The Articles include provisions that could limit the ability of other
entities or persons to acquire control of the Fund, to cause it to engage in
certain transactions or to modify its structure.
The Articles require a vote by holders of at least 75% of the Directors and
75% of the shares of capital stock of the Fund outstanding and entitled to vote,
except as described below, to authorize (1) the Fund's conversion from a
closed-end to an open-end investment company; (2) any merger or consolidation or
share exchange of the Fund with or into any other company; (3) the dissolution
or liquidation of the Fund; (4) any sale, lease, or exchange of all or
substantially all of the Fund's assets to any Principal Stockholder (as defined
below); (5) a change in the nature of the business of the Fund so that it would
cease to be an investment company registered under the 1940 Act; (6) with
certain exceptions, the issuance of any securities of the Fund to any Principal
Stockholder for cash; or (7) any transfer by the Fund of any securities of the
Fund to any Principal Stockholder in exchange for cash, securities or other
property having an aggregate fair market value of $1,000,000 or more; provided,
with respect to (1) through (5), if such action has been authorized by the
affirmative vote of a majority of the entire Board, including a majority of the
Directors who are not "interested persons," of the Fund, as defined in the 1940
Act ("Independent Directors"), then the affirmative vote of the holders of only
a majority of the Fund's shares of capital stock outstanding and entitled to
vote at the time is required; and provided, further, with respect to (6) and
(7), if such transaction has been authorized by the affirmative vote of a
majority of the entire Board, including a majority of the Independent Directors,
no stockholder vote is required to authorize such action. The term "Principal
Stockholder" means any person, entity or group that holds, directly or
indirectly, more than 5% of the outstanding shares of the Fund, and includes any
46
associates or affiliates of such person or entity or of any member of the group.
None of the foregoing provisions may be amended except by the vote of at least
75% of the outstanding shares of capital stock of the Fund outstanding and
entitled to vote thereon. As discussed in the prospectus, certain of the actions
described above also require approval by the holders of the AMPS, tallied
separately. Certain of the transactions described above, even if approved by
stockholders, may be prohibited by the 1940 Act.
The percentage votes required under these provisions, which are greater
than the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Fund's business or management and may have the effect
of depriving Common Stockholders of an opportunity to sell shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The Board
believes that the provisions of the Articles relating to such higher votes are
in the best interest of the Fund and its stockholders.
Reference should be made to the Articles on file with the SEC for the full
text of these provisions.
REPURCHASE OF COMMON SHARES; TENDER OFFERS;
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its stockholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Fund's Common Shares will trade in the open market at a price that will be a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Shares of a closed-end
investment company may frequently trade at prices lower than net asset value.
The Board regularly monitors the relationship between the market price and net
asset value of the Common Shares. If the Common Shares were to trade at a
substantial discount to net asset value for an extended period of time, the
Board may consider the repurchase of its Common Shares on the open market or in
private transactions, or the making of a tender offer for such shares, or the
conversion of the Fund to an open-end investment company. There can be no
assurance, however, that the Board will decide to take or propose any of these
actions, or that share repurchases or tender offers, if undertaken, will
actually reduce market discount. The Fund has no present intention to repurchase
its Common Shares and would do so only in the circumstances described in this
section.
Notwithstanding the foregoing, at any time when the Fund's AMPS are
outstanding, the Fund may not purchase, redeem or otherwise acquire any of its
Common Shares unless (1) all accrued dividends on AMPS have been paid and (2) at
the time of such purchase, redemption or acquisition, the net asset value of the
Fund's portfolio (determined after deducting the acquisition price of the Common
Shares) is at least 200% of the liquidation value of the outstanding AMPS
(expected to equal the original purchase price per share plus any accrued and
unpaid dividends thereon).
47
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board would have to comply with the Securities Exchange Act of 1934, as amended,
and the 1940 Act and the rules and regulations thereunder.
The Board may also from time to time consider submitting to the holders of
the shares of stock of the Fund a proposal to convert the Fund to an open-end
investment company. In determining whether to exercise its sole discretion to
submit this issue to stockholders, the Board would consider all factors then
relevant, including the relationship of the market price of the Common Shares to
net asset value, the extent to which the Fund's capital structure is leveraged
and the possibility of re-leveraging, the spread, if any, between the yields on
securities in the Fund's portfolio and interest and dividend charges on AMPS
issued by the Fund and general market and economic conditions.
See "Anti-Takeover and Other Provisions in the Articles of Incorporation"
in the prospectus and "Certain Provisions in the Articles of Incorporation" in
this Statement of Additional Information for a discussion of voting requirements
applicable to conversion of the Fund to an open-end company. If the Fund
converted to an open-end company, it would be required to redeem all AMPS then
outstanding, and the Fund's Common Shares would no longer be listed on the
American Stock Exchange. Holders of common stock of an open-end investment
company may require the company to redeem their shares on any business day
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet redemptions, open-end
companies typically engage in a continuous offering of their common stock.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management.
The repurchase by the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets. This would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when AMPS
are outstanding will increase the leverage applicable to the outstanding Common
Shares then remaining. See the Fund's prospectus under "The Fund's Investments -
Risk Considerations - Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board would consider all relevant factors,
including the extent and duration of the discount, the liquidity of the Fund's
48
portfolio, the impact of any action that might be taken on the Fund or its
stockholders and market considerations. Based on these considerations, even if
the Fund's shares should trade at a discount, the Board may determine that, in
the interest of the Fund and its stockholders, no action should be taken.
TAX MATTERS
TAXATION OF THE FUND
The Fund intends to qualify each year for treatment as a regulated
investment company under Subchapter M of the Code ("RIC"). To qualify for that
treatment, the Fund must, among other things:
(a) derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of securities, or other income
(including gains from options or futures contracts) derived with respect to
its business of investing in securities;
(b) distribute with respect to each taxable year at least 90% of the
sum of its net tax-exempt income, taxable ordinary income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for that year ("Distribution Requirement"); and
(c) diversify its holdings so that, at the end of each quarter of its
taxable year, (1) at least 50% of the value of its total assets is
represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities limited in respect of any one issuer to
a value not greater than 5% of the value of the Fund's total assets and not
more than 10% of the issuer's outstanding voting securities, and (2) not
more than 25% of the value of the Fund's total assets is invested in the
securities (other than those of the U.S. Government or other RICs) of any
one issuer or of two or more issuers the Fund controls and that are engaged
in the same, similar, or related trades or businesses.
If the Fund qualifies for treatment as a RIC, it will not be subject to
federal income tax on income and gains it timely distributes to its stockholders
(including Capital Gain Dividends, as defined below). If the Fund failed to
qualify for treatment as a RIC for any taxable year, it would be subject to tax
on its taxable income at corporate rates, and all distributions from its
earnings and profits, including any distributions of its net tax-exempt income
and net capital gains, would be taxable to its stockholders as ordinary
(taxable) income. Those distributions would be eligible for the
dividends-received deduction in the case of corporate stockholders under certain
circumstances. In addition, the Fund could be required to recognize unrealized
gains, pay substantial taxes and interest, and make substantial distributions
before requalifying for treatment as a RIC.
The Fund intends to distribute at least annually to its stockholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income (consisting generally of taxable net investment income and net
short-term capital gain, determined without regard to any deduction for
dividends paid). The Fund also may annually distribute its net capital gain
49
(i.e., the excess of net long-term capital gain over net short-term capital
loss) or may retain all or a portion of its net capital gain for investment. If
the Fund retains any investment company taxable income or any net capital gain,
it will be subject to tax at regular corporate rates on the retained amount. If
the Fund retains any net capital gain, the Fund may designate all or a portion
of the retained amount as undistributed capital gains in a notice to its
stockholders who (1) would be required to include in income for federal income
tax purposes, as long-term capital gain, their shares of the undistributed
amount and (2) would be entitled to credit their proportionate shares of the tax
the Fund paid on the undistributed amount against their federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds those
liabilities. For federal income tax purposes, the tax basis in shares owned by a
Fund stockholder would be increased by an amount equal to the difference between
the undistributed capital gains included in the stockholder's gross income and
the tax deemed paid by the stockholder under clause (2) of the preceding
sentence.
To the extent the Fund fails to distribute in a calendar year at least an
amount equal to 98% of the sum of (1) its ordinary (taxable) income for that
year plus (2) its capital gain net income for the one-year period ending October
31 of that year, plus any retained amount from the prior year, the Fund will be
subject to a nondeductible 4% excise tax ("Excise Tax"). For these purposes, the
Fund will be treated as having distributed any amount with respect to which it
pays income tax. A dividend the Fund pays to stockholders in January of any year
generally will be deemed to have been paid on December 31 of the preceding year
if the dividend is declared and payable to stockholders of record on a date in
October, November, or December of that preceding year. The Fund intends
generally to make distributions sufficient to avoid imposition of the Excise
Tax.
TAXATION OF THE STOCKHOLDERS
EXEMPT-INTEREST DIVIDENDS. The Fund will qualify to pay exempt-interest
dividends to its stockholders only if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
obligations the interest on which is exempt from federal income tax under Code
section 103(a). Distributions that the Fund properly designates as
exempt-interest dividends will be treated as interest excludable from
stockholders' gross income for federal income tax purposes but may be a Tax
Preference Item and may be taxable for state and local purposes. Because the
Fund intends to qualify to pay exempt-interest dividends, it may be limited in
its ability to enter into taxable transactions involving forward commitments,
repurchase agreements, financial futures and options contracts on financial
futures, tax-exempt bond indices, and other assets.
The receipt of exempt-interest dividends may affect the portion, if any, of
a person's Social Security and Railroad Retirement benefits (collectively
"Benefits") that will be includable in gross income subject to federal income
tax. Up to 85% of Benefits may be included in gross income where the recipient's
combined income, consisting of adjusted gross income (with certain adjustments),
tax-exempt interest income, and one-half of any Benefits, exceeds an adjusted
base amount. Stockholders receiving Benefits should consult their tax advisers.
The Code imposes the AMT with respect to individuals, corporations (except
certain small corporations), trusts, and estates. The interest on certain
"private activity bonds" (E.G., municipal bonds issued to make loans for housing
50
purposes or to private entities, but not certain tax-exempt organizations such
as universities and non-profit hospitals) is treated as a Tax Preference Item
and, after reduction by applicable expenses, is included in federal alternative
minimum taxable income. The Fund will furnish to stockholders annually a report
indicating the percentage of Fund income treated as a Tax Preference Item. In
addition, interest on all tax-exempt obligations is included in "adjusted
current earnings" of corporations for purposes of the AMT. Accordingly, a
portion of the Fund's dividends that would otherwise be tax-exempt to its
stockholders may cause certain stockholders to become subject to the AMT or may
increase the tax liability of stockholders who already are subject to that tax.
The Fund will inform investors within 60 days after each taxable year-end
of the percentage of its income dividends that qualify as exempt-interest
dividends. The percentage will be applied uniformly to all dividends paid during
the year. Thus, the percentage of any particular dividend designated as an
exempt-interest dividend may be substantially different from the percentage of
the Fund's income that was tax-exempt during the period covered by the dividend.
The Internal Revenue Service (the "Service") requires that a RIC that has
two or more classes of shares must designate to each such class proportionate
amounts of each type of its income and gain for each taxable year based upon the
percentage of total dividends distributed to each class for such year. The Fund
intends each year to designate, to the fullest extent practicable, (1) net
interest that is exempt from federal income tax and is not a Tax Preference
Item, (2) net interest that is exempt from income tax but is a Tax Preference
Item, (3) net capital gain, and (4) other taxable income, if any, between its
Common Shares and AMPS in proportion to the total dividends paid to such class
with respect to such year. To the extent permitted under applicable law, the
Fund reserves the right to make special allocations of income within a class,
consistent with its objective. The Fund will, in the case of a Minimum Rate
Period or a Special Rate Period of 28 Rate Period Days or fewer, and may, in the
case of any other Special Rate Period, notify the Auction Agent of the amount of
any net capital gain or other taxable income to be included in any dividend on
AMPS prior to the Auction establishing the Applicable Rate for such dividend
period. If (a) in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, the Fund allocates any net capital gain or
other taxable income to a dividend paid on AMPS without having given advance
notice thereof to the Auction Agent as required by the Articles Supplementary
solely by reason of the fact that such allocation is made retroactively as a
result of the redemption of all or a portion of the outstanding AMPS or the
liquidation of the Fund or (b) in the case of any Special Rate Period of more
than 28 Rate Period Days, the Fund allocates any net capital gain or other
taxable income to AMPS without having given advance notice thereof as described
above, the Fund will make certain payments to owners of AMPS to which such
allocation was made to offset the federal income tax effect thereof as described
under "Description of AMPS - Dividends and Rate Periods - Gross-up Payments" in
the prospectus. In order for any distributions on AMPS to be eligible to be
treated as exempt-interest dividends, AMPS must be treated as stock for federal
income tax purposes. NB Management believes the AMPS should be treated as stock
for federal income tax purposes.
If at any time when AMPS are outstanding, the Fund fails to meet the
Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred Shares Asset
Coverage, it will be required to suspend distributions to holders of the Common
Shares until such maintenance amount or asset coverage, as the case may be, is
51
restored. See "Description of AMPS - Dividends and Rate Periods - Restriction on
Dividends and Other Distributions" in the prospectus. Such a suspension may
prevent the Fund from satisfying the Distribution Requirement and may therefore
jeopardize the Fund's qualification for treatment as a RIC or cause the Fund to
incur an income tax or Excise Tax liability, or both. If the Fund fails to meet
the Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred Shares
Asset Coverage when AMPS are outstanding, it will be required to redeem AMPS to
maintain or restore such maintenance amount or asset coverage and avoid the
adverse consequences to the Fund and its stockholders of failing to qualify for
treatment as a RIC. There can be no assurance, however, that any such redemption
would achieve such objective. The capitalized terms used herein and not
otherwise defined have the same meaning as in the Fund's Articles Supplementary,
attached hereto as Appendix A.
OTHER FUND DISTRIBUTIONS. As long as the Fund qualifies for treatment as a
RIC, distributions from it (other than exempt-interest dividends) will be
taxable to its stockholders as ordinary income to the extent the distributions
are derived from taxable net investment income and net short-term capital gains,
and generally will not be eligible for the dividends received deduction
available to corporations. Distributions of net capital gain (after applying any
available capital loss carryovers) that are properly designated as capital gain
dividends ("Capital Gain Dividends") will be taxable to each stockholder as
long-term gain, regardless of how long the stockholder has held the shares in
the Fund.
The Fund's expenses attributable to earning tax-exempt income do not reduce
its current earnings and profits; therefore, distributions in excess of the sum
of its net tax-exempt and taxable income may be treated as taxable dividends to
the extent of its remaining earnings and profits. Distributions in excess of the
sum of the Fund's net tax-exempt and taxable income could occur, for example, if
its book income exceeded that sum, which could arise as a result of certain of
its hedging and investment activities. See "--Tax Consequences of Certain
Investments" below.
For federal income tax purposes, the Fund is required to allocate its
tax-exempt income, net capital gain, and other taxable income, if any, between
the Common Shares and preferred stock, including the AMPS, it issues on a PRO
RATA basis in proportion to the total distributions paid to each such class of
stock for the taxable year.
Dividends (including Capital Gain Dividends) will be taxable as described
above whether received in cash or reinvested in additional Common Shares through
the Dividend Reinvestment Plan. A Common Stockholder whose distributions are so
reinvested will be treated as having received a dividend equal to either (1) the
fair market value of the newly issued shares or (2) if the Common Shares are
trading below their net asset value, the amount of cash allocated to the
stockholder for the purchase of shares on its behalf in the open market.
Dividends on the Fund's shares (other than exempt-interest dividends) are
generally subject to federal income tax as described herein to the extent they
do not exceed its realized income and gains, even though those dividends may
economically represent a return of a particular stockholder's investment. Those
distributions are likely to occur in respect of shares purchased when the Fund's
net asset value reflects gains that are either unrealized or realized but not
distributed, or income that is not distributed. Those realized gains may be
required to be distributed even when the Fund's net asset value also reflects
52
unrealized losses. Distributions are taxable to a stockholder even if they are
paid from income or gains the Fund earned before the stockholder's investment
(and thus included in the price paid by the stockholder).
If the Fund makes a distribution to a stockholder in excess of its current
and accumulated earnings and profits, the excess distribution will be treated as
a return of capital to the extent of the stockholder's tax basis in its shares
and thereafter as capital gain. A return of capital is not taxable, but it
reduces a stockholder's tax basis in its shares, thus reducing any loss or
increasing any gain on a subsequent taxable disposition by the stockholder of
its shares. If one or more such distributions occur in any taxable year, the
available earnings and profits first will be allocated to the distributions made
to the Preferred Stockholders and only thereafter to distributions made to
Common Stockholders. As a result, the Preferred Stockholders will receive a
disproportionate share of the distributions treated as dividends, and the Common
Stockholders will receive a disproportionate share of the distributions treated
as a return of capital.
OTHER. Part or all of the interest on indebtedness, if any, incurred or
continued by a stockholder to purchase or carry Fund shares is not deductible
for federal income tax purposes. The non-deductible part is equal to the total
interest paid or accrued on the indebtedness, multiplied by the percentage of
the Fund's total distributions (not including Capital Gain Dividends) paid to
the stockholder that are exempt-interest dividends. Under rules the Service uses
to determine when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of Fund shares may be
considered to have been made with borrowed funds even though those funds are not
directly traceable to the purchase of the shares. Under a published position of
the Service, a stockholder's interest deduction generally will not be disallowed
to the extent the average adjusted basis of the stockholder's tax-exempt
obligations (including shares of preferred stock) does not exceed two percent of
the average adjusted basis of the stockholder's trade or business assets (in the
case of most corporations) or portfolio investments (in the case of
individuals). Legislation has been introduced in recent years that would limit
or repeal this two percent DE MINIMIS exception, which if enacted would reduce
the total after-tax yield of a stockholder.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity bonds will not be tax-exempt to any
stockholders who are "substantial users" (or persons related to "substantial
users") of facilities financed by those bonds. For these purposes, "substantial
user" is defined to include a "non-exempt person" who regularly uses in a trade
or business a part of a facility financed from the proceeds of those bonds.
SALE OR REDEMPTION OF SHARES. The sale, exchange, or redemption of Fund
shares may give rise to a taxable gain or loss. In general, any gain or loss
realized on a taxable disposition of shares will be treated as long-term capital
gain or loss if the shares have been held for more than 12 months; otherwise,
any such gain or loss will be treated as short-term capital gain or loss.
However, if a stockholder sells shares at a loss within six months of their
purchase, (1) any loss will be disallowed for federal income tax purposes to the
extent of any exempt-interest dividends received on the shares and (2) any such
loss not so disallowed will be treated as long-term, rather than short-term, to
the extent of any Capital Gain Dividends the stockholder received with respect
to the shares. All or a portion of any loss realized on a taxable disposition of
Fund shares will be disallowed if other Fund shares are purchased within 30 days
53
before or after the disposition. In that case, the basis of the newly purchased
shares will be adjusted to reflect the disallowed loss.
From time to time the Fund may make a tender offer for its Common Shares.
It is expected that the terms of any such offer will require a tendering
stockholder to tender all Common Shares and dispose of all AMPS held, or
considered under certain attribution rules of the Code to be held, by the
stockholder. Stockholders who tender all Common Shares and dispose of all AMPS
held, or considered to be held, by them will be treated as having sold their
shares and generally will realize a capital gain or loss. If a stockholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its AMPS, the stockholder may be treated as having received a taxable dividend
(instead of capital gain or loss) on the tender of its Common Shares. In that
case, there is a remote risk that non-tendering stockholders will be treated as
having received taxable distributions from the Fund. Likewise, if the Fund
redeems some but not all of a Preferred Stockholder's AMPS and the stockholder
is treated as having received a taxable dividend on the redemption, there is a
remote risk that Common Stockholders and non-redeeming Preferred Stockholders
will be treated as having received taxable distributions from the Fund. To the
extent the Fund recognizes net gains on the liquidation of portfolio securities
to meet tenders of Common Shares, it will be required to make taxable
distributions to its stockholders, which may in turn require it to make
additional distributions to the Preferred Stockholders, if any.
The Fund may, at its option, redeem AMPS in whole or in part, and is
required to redeem AMPS to the extent required to maintain the Preferred Shares
Basic Maintenance Amount and the 1940 Act Preferred Shares Asset Coverage. Gain
or loss, if any, resulting from such a redemption of AMPS will be taxed as gain
or loss from the sale or exchange of AMPS rather than as a dividend, but only if
the redemption distribution (a) is deemed not to be essentially equivalent to a
dividend, (b) is in complete redemption of an owner's interest in the Fund, (c)
is substantially disproportionate with respect to the owner's interest in the
Fund, or (d) with respect to non-corporate owners, is in partial liquidation of
the Fund. For purposes of (a), (b) and (c) above, an owner's ownership of Common
Shares will be taken into account.
WITHHOLDING. The Fund generally is required to withhold and remit to the
U.S. Treasury a percentage of the taxable dividends (including Capital Gain
Dividends) paid to any individual or certain other non-corporate stockholder who
fails to properly furnish the Fund with a correct taxpayer identification
number, who has under-reported dividend or interest income, or who fails to
certify to the Fund that he or she is not otherwise subject to that withholding
("backup withholding"). The backup withholding rates are (1) 30% for amounts
paid during 2002 and 2003, (2) 29% for amounts paid during 2004 and 2005, and
(3) 28% for amounts paid during 2006 through 2010. The backup withholding rate
will increase to 31% for amounts paid after December 31, 2010, unless Congress
enacts tax legislation providing otherwise.
For a foreign investor to qualify for exemption from withholding under an
income tax treaty, the investor must comply with special certification and
filing requirements. Foreign investors in the Fund should consult their tax
advisers in this regard.
54
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
HEDGING TRANSACTIONS. If the Fund engages in hedging transactions,
including hedging transactions in options, futures contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to increase its taxable income, accelerate income,
defer losses, cause adjustments in the holding periods of its securities,
convert long-term capital gains to short-term capital gains, and/or convert
short-term capital losses to long-term capital losses. These rules could
therefore affect the amount, timing, and character of distributions to
stockholders. Distributions to stockholders of income earned from the Fund's
hedging activities will not be eligible to be treated as exempt-interest
dividends. The Fund will endeavor to make any available elections pertaining to
such transactions in a manner believed to be in the stockholders' best
interests.
Certain of the Fund's hedging activities are likely to produce a difference
between its book income and the sum of its net tax-exempt and taxable income. If
the Fund's book income exceeds that sum, the distribution of the excess would be
treated as (1) a taxable dividend to the extent of the Fund's remaining earnings
and profits (including earnings and profits arising from tax-exempt income), (2)
thereafter as a return of capital to the extent of the recipient's basis in the
shares, and (3) thereafter as gain from the sale or exchange of a capital asset.
If the Fund's book income is less than the sum of its net tax-exempt and taxable
income, it could be required to make distributions exceeding book income to
continue to qualify for treatment as a RIC.
Certain listed options and futures contracts are considered "Section 1256
contracts" for federal income tax purposes. In general, gain or loss the Fund
realizes on Section 1256 contracts will be considered 60% long-term and 40%
short-term capital gain or loss. Also, Section 1256 contracts the Fund holds at
the end of each taxable year (and at October 31 for purposes of calculating the
excise tax) will be "marked to market," that is, treated for federal income tax
purposes as though sold for fair market value on the last business day of the
taxable year (or on October 31 for purposes of the excise tax). The Fund can
elect to exempt its Section 1256 contracts that are part of a "mixed straddle"
(as described below) from the application of section 1256.
Gain or loss the Fund realizes on the expiration or sale of certain OTC
options it holds will be either long-term or short-term capital gain or loss
depending on its holding period for the options. However, gain or loss realized
on the expiration or closing out of options the Fund wrote will be treated as
short-term capital gain or loss. In general, if the Fund exercises an option, or
an option the Fund wrote is exercised, gain or loss on the option will not be
separately recognized, but the premium received or paid will be included in the
calculation of gain or loss on disposition of the property underlying the
option.
Any security, option, or futures contract, delayed delivery transaction, or
other position the Fund enters into or holds in conjunction with any other
position it holds may constitute a "straddle" for federal income tax purposes. A
straddle of which at least one, but not all, the positions are Section 1256
contracts will constitute a "mixed straddle." In general, straddles are subject
to certain rules that may affect the character and timing of the Fund's gains
and losses with respect to straddle positions by requiring, among other things,
that loss realized on disposition of one position of a straddle be deferred to
55
the extent of any unrealized gain in an offsetting position until that position
is disposed of; that the Fund's holding period in certain straddle positions be
suspended until the straddle is terminated (possibly resulting in gain being
treated as short-term capital gain rather than long-term capital gain); and that
losses recognized with respect to certain straddle positions, that otherwise
constitute short-term capital losses, be treated as long-term capital losses.
Different elections are available to the Fund that may mitigate the effects of
the straddle rules, particularly with respect to mixed straddles.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. The Fund may acquire zero
coupon or other municipal securities issued with OID. As a holder of those
securities, the Fund must take into account the OID that accrues on them during
the taxable year, even if it receives no corresponding payment on them during
the year. Because the Fund annually must distribute substantially all of its
investment company taxable income and net tax-exempt income, including any
tax-exempt OID, to satisfy the distribution requirement applicable to RICs, it
may be required in a particular year to distribute as a dividend an amount that
is greater than the total amount of cash it actually receives. Those
distributions will be made from the Fund's cash assets or from the proceeds of
sales of its portfolio securities, if necessary. The Fund may realize capital
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
The Fund may invest in municipal bonds that are purchased, generally not on
their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with OID,
a price less than the amount of the issue price plus accrued OID ("municipal
market discount bonds"). If a bond's market discount is less that the product of
(1) .25% of the redemption price at maturity times (2) the number of complete
years to maturity after the Fund acquired the bond, then no market discount is
considered to exist. Gain on the disposition of a municipal market discount bond
(other than a bond with a fixed maturity date within one year from its issuance)
generally is treated as ordinary (taxable) income, rather than capital gain, to
the extent of the bond's accrued market discount at the time of disposition.
Market discount on such a bond generally is accrued ratably, on a daily basis,
over the period from the acquisition date to the date of maturity. In lieu of
treating the disposition gain as above, the Fund may elect to include market
discount in its gross income currently, for each taxable year to which it is
attributable.
* * *
The foregoing is a general summary of the provisions of the Code and
regulations thereunder currently in effect as they directly govern the taxation
of the Fund and its stockholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Moreover, the foregoing does not address many of the factors that may be
determinative of whether an investor will be liable for the AMT. Stockholders
are advised to consult their own tax advisers for more detailed information
concerning the federal income tax consequences of purchasing, holding, and
disposing of Fund shares.
56
CUSTODIAN, TRANSFER AGENT AND AUCTION AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110,
serves as custodian for assets of the Fund. The custodian performs custodial and
fund accounting services. The Bank of New York, 100 Church Street, 8th Floor,
New York, New York 10286, serves as the transfer agent, registrar and Auction
Agent for the AMPS.
INDEPENDENT AUDITORS
Ernst & Young, LLP, 200 Clarendon Street, Boston, MA 02116 serves as
independent auditors for the Fund. Ernst & Young, LLP provides audit services,
tax return preparation and assistance and consultation in connection with review
of the Fund's filings with the SEC.
COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington
D.C. 20036, passes upon certain legal matters in connection with shares offered
by the Fund, and also acts as counsel to the Fund.
REGISTRATION STATEMENT
A Registration Statement on Form N-2, including any amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Fund's prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered or to be
offered hereby, reference is made to the Fund's Registration Statement.
Statements contained in the Fund's prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement may be inspected without charge
at the SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC.
57
REPORT OF INDEPENDENT AUDITORS
To the Shareholder and
Board of Directors of
Neuberger Berman Intermediate Municipal Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Neuberger Berman Intermediate Municipal Fund Inc., (the "Fund") as of September
19, 2002. This financial statement is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Neuberger Berman Intermediate
Municipal Fund Inc., at September 19, 2002, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Boston, Massachusetts
September 20, 2002
58
FINANCIAL STATEMENT
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 19, 2002
ASSETS
Cash $ 100,005
Deferred offering costs 300,000
-----------------
Total assets 400,005
-----------------
LIABILITIES
Payable for offering costs 300,000
-----------------
NET ASSETS AT VALUE $ 100,005
=================
NET ASSETS CONSIST OF:
Paid-in capital $ 100,005
=================
SHARES OUTSTANDING ($.0001 PAR VALUE;
1,000,000,000 SHARES AUTHORIZED) 6,981
=================
NET ASSET VALUE, PER SHARE $14.325
=================
MAXIMUM OFFERING PRICE PER SHARE ($14.325/95.5%) $15.00
=================
See Notes to Financial Statement.
59
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC.
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 19, 2002
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. ORGANIZATION:
Neuberger Berman Intermediate Municipal Fund Inc. (the "Fund") was organized as
a Maryland corporation on July 29, 2002. The Fund is registered under the
Investment Company Act of 1940, as amended, as a non-diversified, closed-end
management investment company. The Fund has had no operations to date, other
than the sale to Neuberger Berman LLC ("Neuberger"), the Fund's sub-adviser, on
September 19, 2002 of 6,981 shares of common stock for $100,005 ($14.325 per
share).
2. ACCOUNTING POLICIES
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities. Actual results may differ from those estimates.
3. CONCENTRATION OF RISK
The ability of the issuers of the debt securities held by the Fund to meet their
obligations may be affected by economic developments, including those particular
to a specific industry or region.
NOTE B -- INVESTMENT MANAGEMENT AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS WITH AFFILIATES
Under the terms of an Investment Management Agreement, the Fund pays Neuberger
Berman Management Inc. ("Management") a monthly fee at an annualized rate of
0.25% of the Fund's average daily Managed Assets. Managed Assets means the total
assets of the Fund less liabilities other than the aggregate indebtedness
entered into for purposes of leverage. For purposes of calculating Managed
Assets, the liquidation preference of any preferred shares outstanding is not
considered a liability.
Management has contractually agreed to waive a portion of the management fees it
is entitled to receive from the Fund at the following annual rates:
Fiscal Period or Year Ended % of Average
October 31, Daily Managed Assets
--------------------------------------------------------------
2002 0.25%
2003 - 2007 0.25
2008 0.20
2009 0.15
2010 0.10
2011 0.05
Management has not agreed to waive any portion of its fees and expenses beyond
October 31, 2011.
60
Pursuant to an administration agreement between Management and the Fund, the
Fund has agreed to pay Management an administration fee payable on a monthly
basis at the annual rate of 0.30% of the Fund's average daily Managed Assets.
Additionally, Management retains State Street Corporation ("State Street") as
its sub-administrator under a Sub Administration Agreement. Management pays
State Street a fee for all services received under the agreement.
Management and Neuberger, a member firm of The New York Stock Exchange and
sub-adviser to the Fund, are wholly owned subsidiaries of Neuberger Berman Inc.,
a publicly held company. Neuberger is retained by Management to furnish it with
investment recommendations and research information without added cost to each
Fund. Several individuals who are officers and/or trustees of the Fund are also
employees of Neuberger and/or Management.
NOTE C -- ORGANIZATION EXPENSES AND OFFERING COSTS:
Based on an estimated Fund offering of 10,000,000 shares, organization and
offering costs are estimated to be $35,000 and $811,100, respectively.
Management has agreed to pay all organizational expenses and the amount by which
the aggregate of all of the Fund's offering costs (other than sales load) exceed
$0.03 per share. Such amount to be paid by Management is estimated to be
$511,100. The Fund will pay offering costs estimated at $300,000 from the
proceeds of the offering. Offering costs paid by the Fund will be charged as a
reduction of paid-in capital at the completion of the Fund offering.
NOTE D - FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and to comply
with the applicable provisions of the Internal Revenue Code of 1986, as amended,
such that it will not be subject to Federal income tax.
61
FINANCIAL STATEMENTS (UNAUDITED)
NEUBERGER BERMAN OCTOBER 31, 2002
SCHEDULE OF INVESTMENTS INTERMEDIATE MUNICIPAL FUND INC.
PRINCIPAL AMOUNT SECURITY @ RATING * VALUE+
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
TAX-EXEMPT SECURITIES--BACKED BY INSURANCE (32.6%)
AMERICAN MUNICIPAL BOND ASSURANCE CORP.
$ 5,000 Chicago (IL) G.O., Ser. 1996 A-2, 6.25%, due 1/1/13 Aaa AAA $ 5,950
4,100 Fargo (ND) Hlth. Sys. Rev. (Meritcare Obligated Group),
Ser. 2002 A, 5.63%, due 6/1/17 AAA 4,452
FINANCIAL GUARANTY INSURANCE CO.
2,150 Cass Lake (MN) Independent Sch. Dist. No. 115 G.O.,
5.00%, due 2/1/18 AAA 2,246
4,000 Denver (CO) City & Co. Arpt. Sys. Ref. Rev., Ser. 2002 E,
5.25%, due 11/15/14 Aaa AAA 4,214
3,075 Detroit (MI) City Sch. Dist. Sch. Bldg. & Site Imp. G.O.,
Ser. 2002 A, 5.50%, due 5/1/15 AAA 3,442
4,935 Massachusetts St. Hlth. & Ed. Fac. Au. Rev.
(New England Med. Ctr. Hosp.), Ser. 2002 H, 5.38%,
due 5/15/16 AAA 5,251
2,140 Mt. Pleasant (SC) Wtr. & Swr. Ref. Rev., 5.25%, due 12/1/17 AAA 2,301
8,140 Orange Co. (FL) Sales Tax Ref. Rev., Ser. 2002 A, 5.13%,
due 1/1/18 Aaa AAA 8,605
5,500 Prince Georges Co. (MD) Cons. Pub. Imp. G.O., Ser. 2001,
5.25%, due 12/1/16 Aaa AAA 6,005
1,000 Sarasota Co. (FL) Util. Sys. Ref. Rev., Ser. 2002 C, 5.25%,
due 10/1/20 Aaa AAA 1,055
FINANCIAL SECURITY ASSURANCE INC.
7,000 Harris Co. (TX) Senior Lien Toll Road Rev., 5.38%, due 8/1/16 AAA 7,619
4,260 King Co. (WA) Pub. Trans. Sales Tax Ref. G.O., Ser. 2002,
5.38%, due 12/1/14 Aaa AAA 4,738
1,725 Maine Muni. Bond Bank Rev., Ser. 1998 C, 5.35%,
due 11/1/18 AAA 1,836
5,395 Truckee Meadows (NV) Wtr. Au. Wtr. Rev., Ser. 2001 A, 5.50%,
due 7/1/15 AAA 5,937
1,370 Wisconsin St. Hlth. & Ed. Fac. Au. Rev. (Aurora Med. Group,
Inc. Proj.), Ser. 1996, 6.00%, due 11/15/11 Aaa AAA 1,581
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
1,465 Arizona St. Energy Mgt. Svcs. Energy Conservation Rev.
(Arizona St. Univ. Proj.), Ser. 2002, 5.25%, due 7/1/17 AAA 1,574
5,335 Clark Co. (NV) Passenger Fac. Charge Ref. Rev. (Las Vegas
McCarran Arpt. Proj.), Ser. 2002, 5.25%, due 7/1/10 AAA 5,768
5,000 Illinois G.O., First Ser. 2002, 5.25%, due 10/1/14 Aaa 5,507
3,000 Illinois Hlth. Fac. Au. Rev. (Loyola Univ.), Ser. 1997 A, 6.00%,
due 7/1/14 Aaa AAA 3,482
4,555 Washington St. G.O., Ser. 1998 C, 6.00%, due 7/1/12 AAA 5,359
1,000 Western (MI) Townships Util. Au. Sewage Disp. Sys. Ref. G.O.,
Ser. 2001 A, 5.25%, due 1/1/13 Aaa AAA 1,091
7,205 Wisconsin St. G.O., Ser. 2002 C, 5.25%, due 5/1/17 Aaa AAA 7,717
--------
95,730
--------
TAX-EXEMPT SECURITIES--OTHER (39.0%)
1,000 Austin (TX) Convention Enterprises, Inc. Convention Ctr. Hotel
First Tier Rev., Ser. 2001 A, 6.38%, due 1/1/16 Baa3 BBB- 1,035
2,000 Badger (WI) Tobacco Asset Securitization Corp. Asset-Backed
Rev., Ser. 2002, 5.50%, due 6/1/10 A1 A 2,004
2,635 Beaufort Co. (SC) Sch. Dist. G.O., Ser. 2001 A, 5.00%,
due 3/1/18 Aa1 2,739
62
PRINCIPAL AMOUNT SECURITY @ RATING * VALUE+
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 6,000 Brazos River (TX) Harbor Navigation Dist. Rev. (Dow Chemical
Co. Proj.), Ser. 2002 B-2, 4.75%, due 5/15/33 A3 A $ 5,824
5,000 Burke Co. (GA) Dev. Au. PCR (Georgia Pwr. Co. Plant Vogtle Proj.),
Ser. 2001, 4.45%, due 1/1/32 A2 A 5,217
1,000 Clark Co. (WA) Sch. Dist. No. 037 G.O., Ser. 1998, 5.13%,
due 12/1/12 A3 1,108
1,765 Cumberland Co. (PA) West Shore Area Au. Hosp. Rev.,
(Holy Spirit Hosp. of the Sisters of Christian Charity Proj.),
6.05%, due 1/1/19 BBB+ 1,828
4,210 DCH Hlth. Care Au. (AL) Hlth. Care Fac. Rev., Ser. 2002, 5.25%,
due 6/1/14 A1 A+ 4,362
4,495 Dist. of Columbia Ref. G.O., Ser. 2002 C, 5.25%, due 6/1/13 AAA 4,897
825 Fort Bend Co. (TX) Ind. Dev. Corp. Ref. PCR (Frito-Lay Inc. Proj.),
Ser. 1987, 3.00%, due 10/1/11 A1 819
5,130 Illinois Ed. Fac. Au. Rev. (Field Museum of Natural History),
Ser. 2002, 4.30%, due 11/1/36 A2 A 5,094
3,500 Indiana St. Dev. Fin. Au. Solid Waste Disp. Rev. (Waste
Management, Inc. Proj.), Ser. 2001, 3.45%, due 10/1/31 BBB 3,492
2,000 Jasper (IN) Hosp. Au. Hosp. Fac. Ref. Rev. (Mem. Hosp. Ctr. Proj.),
5.50%, due 11/1/17 AA 2,072
2,000 Lubbock (TX) Hlth. Fac. Dev. Corp. Rev. (St. Joseph Hlth. Sys.),
Ser. 1998, 5.25%, due 7/1/16 Aa3 AA- 2,053
1,500 Maricopa Co. (AZ) IDA Multi-Family Hsg. Rev. (Sun King Arpts.
Proj.), Ser. 2000 A, 6.75%, due 11/1/18 A3 A 1,628
1,000 Martin Co. (NC) Ind. Fac. & Poll. Ctrl. Fin. Au. Solid Waste
Disp. Rev. (Weyerhaeuser Co. Proj.), Ser. 1994, 6.80%,
due 5/1/24 Baa2 BBB 1,042
1,000 Maryland St. Hlth. & Higher Ed. Fac. Au. Rev. (Union Hosp. of
Cecil Co.), Ser. 2002, 5.50%, due 7/1/14 A3 1,083
2,400 Mashnatucket Western Pequot Tribe (CT) Spec. Rev.,
Sub. Ser. 1997 B, 5.70%, due 9/1/12 Baa3 2,532
2,450 Massachusetts St. Hlth. & Ed. Fac. Au. Rev. (Caritas Christi
Oblig. Group.), Ser. 1999 A, 5.70%, due 7/1/15 A+ 2,467
2,810 Massachusetts St. Hlth. & Ed. Fac. Au. Rev. (Milford-Whitinsville
Reg. Hosp.), Ser. 1998 C, 5.75%, due 7/15/13 Baa2 BBB 2,966
3,085 Memphis-Shelby Co. (TN) Arpt. Au. Spec. Fac. Ref. Rev.
(Federal Express Corp.), Ser. 2002, 5.05%, due 9/1/12 Baa2 BBB 3,186
1,085 Mesa (AZ) IDA Std. Hsg. Rev. (Mesa Std. Hsg.), Ser. 2001,
5.70%, due 7/1/11 A 1,189
1,500 Michigan St. Bldg. Au. Rev. (Fac. Prog.), Ser. 2001 II, 5.50%,
due 10/15/18 Aa1 AA+ 1,621
3,235 Minneapolis (MN) G.O., 5.00%, due 12/1/18 AAA 3,381
2,000 Missouri St. Env. Imp. & Energy Res. Au. Wtr. Poll. Ctrl. Rev.,
Ser. 2002 B, 5.50%, due 7/1/16 AAA 2,225
1,500 Missouri St. Hsg. Dev. Comm. Multi-Family Hsg. Rev.,
Ser. 2001 II, 5.25%, due 12/1/16 AA 1,568
5,000 Montgomery Co. (PA) Higher Ed. & Hlth. Au. Hosp. Rev.
(Abington Mem. Hosp.), Ser. 2002 A, 5.00%, due 6/1/19 A 4,933
3,000 Moraine (OH) Solid Waste Disp. Rev. (General Motors Corp. Proj.),
Ser. 1994, 6.75%, due 7/1/14 A3 BBB 3,293
4,780 North Central (TX) Hlth. Fac. Dev. Corp. Ref. Hosp. Rev.
(Baylor Hlth. Care Sys. Proj.), Ser. 1998, 5.10%, due 5/15/13 Aa3 AA- 4,974
2,085 Palm Beach Co. (FL) Hlth. Fac. Au. Ref. Rev. (Boca Raton Comm.
Hosp. Corp.), Ser. 2001, 5.00%, due 12/1/12 A+ 2,170
See Notes to Schedule of Investments
63
PRINCIPAL AMOUNT SECURITY @ RATING * VALUE+
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 8,000 Puerto Rico Children's Trust Tobacco Settlement Asset-Backed
Rev., Ser. 2002, 5.38%, due 5/15/33 A1 A $ 7,693
2,000 Sayre (PA) Hlth. Care Fac. Au. Rev. (Guthrie Hlth.), Ser. 2002 A,
5.75%, due 12/1/21 A- 2,049
1,000 Spokane Co. (WA) G.O., Ser. 1998, 5.10%, due 12/1/17 Aa3 1,042
2,500 St. Louis (MO) IDA Rev. (St. Louis Convention Center
Headquarters Hotel Proj.), Ser. 2000 A, 7.00%, due 12/15/15 Baa3 2,524
2,540 St. Paul (MN) Port Au. Lease Rev. (Office Bldg.), Ser. 2002,
5.00%, due 12/1/17 Aa1 2,623
500 Texas Std. Hsg. Corp. Std. Hsg. Rev. (Midwestern St. Univ. Proj.),
Ser. 2002, 5.50%, due 9/1/12 Baa3 495
3,000 Tobacco Settlement Au. (IA) Tobacco Settlement Rev.,
Ser. 2001 B, 5.30%, due 6/1/25 A1 A 2,651
3,500 Union Co. (SC) IDR (Federal Paper Board Co., Inc. Proj.),
Ser. 1989, 4.55%, due 11/1/09 Baa2 BBB 3,510
1,900 Univ. (WI) Hosp. & Clinics Au. Rev., Ser. 2002 B, 5.50%,
due 4/1/12 A1 2,012
3,155 Washington St. Hlth. Care Fac. Au. Rev. (Yakima Valley Mem.
Hosp. Assoc.), Ser. 2002, 5.00%, due 12/1/17 A 3,096
1,000 Washington St. Var. Purp. G.O., Ser. 1998 A, 4.75%, due 7/1/17 Aa1 AA+ 1,013
2,780 Wisconsin St. Hlth. & Ed. Fac. Au. Rev. (Kenosha Hosp. & Med.
Ctr., Inc. Proj.), Ser. 1999, 5.50%, due 5/15/15 A 2,861
--------
114,371
--------
TAX-EXEMPT CASH EQUIVALENT SECURITIES (16.0%)
700 Harris Co. (TX) IDC Solid Waste Disp. Rev. (Exxon Proj.),
Ser. 1997, 2.00%, VRDN due 4/1/32 VMIG1 A-1+ 700++
14,400 Jackson Co. (MS) Port Fac. Ref. Rev. (Chevron U.S.A., Inc. Proj.),
Ser. 1993, 2.00%, VRDN due 6/1/23 P-1 14,400++
3,500 Joliet (IL) Reg. Port Dist. Ref. Rev. (Exxon Proj.), Ser. 1989,
1.89%, VRDN due 10/1/24 VMIG1 A-1+ 3,500
10,000 Kentucky Econ. Dev. Fin. Au. Hosp. Fac. Rev. (Baptist Hlth.
Care Sys.), Ser. 1999 C, 2.00%, VRDN due 8/15/31 VMIG1 A-1 10,000
3,100 Lincoln Co. (WY) PCR (Exxon Proj.), Ser. 1984 C, 1.89%,
VRDN due 11/1/14 A-1+ 3,100++
2,900 Lincoln Co. (WY) PCR (Exxon Proj.), Ser. 1984 D, 1.89%,
VRDN due 11/1/14 P-1 A-1+ 2,900++
6,000 Lincoln Co. (WY) PCR (Exxon Proj.), Ser. 1987 C, 2.00%,
VRDN due 7/1/17 A-1+ 6,000++
6,200 Massachusetts St. Dev. Fin. Agcy. Rev. (Boston Univ.),
Ser. 2002 R-4, 1.69%, VRDN due 10/1/42 VMIG1 6,200
--------
46,800
--------
TAX-EXEMPT CASH EQUIVALENT SECURITIES-BACKED BY LETTERS OF CREDIT (19.1%)
BANK OF AMERICA
5,000 Missouri St. Hlth. & Ed. Fac. Au. Ed. Fac. Rev. (Rockhurst Univ.),
Ser. 2002, 1.95%, VRDN due 11/1/32 A-1+ 5,000
BANK OF NEW YORK
5,900 California Hsg. Fin. Agcy. Home Mtge. Rev., Ser. 2001 U, 1.98%,
VRDN due 8/1/32 VMIG1 A-1+ 5,900
BARCLAYS BANK INT'L., LTD.
4,800 Farmington City (NM) Ref. PCR (Arizona Pub. Svc. Co. Four
Corners Proj.), Ser. 1994 C, 2.00%, VRDN due 9/1/24 VMIG1 A-1+ 4,800
BAYERISCHE LANDESBANK GIROZENTRALE
6,500 Nashville (TN) Metro. Arpt. Au. Spec. Fac. Ref. Rev. (Amer. Airlines,
Inc. Proj.), Ser. 1995 B, 2.00%, VRDN due 10/1/12 A-1+ 6,500
64
PRINCIPAL AMOUNT SECURITY @ RATING * VALUE+
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
BNP PARIBAS
$ 5,000 Alachua Co. (FL) Hlth. Fac. Continuing Care Rev. (Oak Hammock
Univ. Proj.), Ser. 2002 A, 1.95%, VRDN due 10/1/32 VMIG1 $ 5,000
LANDESBANK HESSEN-THUERINGEN GIROZENTRALE
6,400 California Hsg. Fin. Agcy. Multi-Family Hsg. Rev., Ser. 2000 A,
2.01%, VRDN due 2/1/26 VMIG1 A-1+ 6,400
2,900 Univ. of North Carolina Board of Governors Univ. Hosp. at Chapel
Hill Rev., Ser. 2001 A, 1.99%, VRDN due 2/15/31 VMIG1 A-1+ 2,900
MORGAN GUARANTY TRUST CO.
6,900 New York City (NY) G.O., Sub. Ser. 1993 A-10, 1.95%,
VRDN due 8/1/16 VMIG1 A-1+ 6,900
6,900 New York City (NY) G.O., Sub. Ser. 1993 A-10, 1.95%,
VRDN due 8/1/17 VMIG1 A-1+ 6,900
5,700 New York City (NY) G.O., Sub. Ser. 1993 B-2, 1.95%,
VRDN due 8/15/20 VMIG1 A-1+ 5,700
--------
56,000
--------
TAX-EXEMPT CASH EQUIVALENT SECURITIES--BACKED BY INSURANCE (12.4%)
FINANCIAL GUARANTY INSURANCE CO.
170 Clark Co. (NV) Arpt. Rev., Ser. 2001 A, 2.09%,
VRDN due 7/1/36 VMIG1 A-1+ 170
FINANCIAL SECURITY ASSURANCE INC.
4,300 Clark Co. (NV) Sch. Dist. G.O., Ser. 2001 A, 1.95%,
VRDN due 6/15/21 VMIG1 4,300
2,200 Clark Co. (NV) Sch. Dist. Rev., Ser. 2001 B, 1.89%,
VRDN due 6/15/21 VMIG1 A-1+ 2,200
13,000 Illinois Hlth. Fac. Au. Rev. (Resurrection Hlth. Care),
Ser. 1999 A, 2.00%, VRDN due 5/15/29 VMIG1 A-1+ 13,000
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
6,370 California Hsg. Fin. Agcy. Home Mtge. Rev., Ser. 2002 J,
1.98%, VRDN due 2/1/33 VMIG1 A-1+ 6,370
10,340 Massachusetts St. Hlth. & Ed. Fac. Au. Rev. (Cap. Asset Prog.),
Ser. 1985 D, 1.95%, VRDN due 1/1/35 VMIG1 10,340
--------
36,380
--------
TOTAL INVESTMENTS (119.1%) (COST $349,557) 349,281##
Liabilities, less cash, receivables and other assets [(19.1%)] (55,968)
--------
TOTAL NET ASSETS (100.0%) $293,313
--------
See Notes to Schedule of Investments
65
Only notes related to Neuberger Berman Intermediate Municipal Fund Inc. are
applicable to this filing.
NOTES TO SCHEDULE OF INVESTMENTS
+ Investment securities of the Fund are valued daily by obtaining bid price
quotations from independent pricing services on all securities available in
each service's data base. For all other securities requiring daily
quotations, bid prices are obtained from principal market makers in those
securities or, if quotations are not available, by a method the directors
of Neuberger Berman California Intermediate Municipal Fund Inc.
("California"), Neuberger Berman Intermediate Municipal Fund Inc.
("Intermediate"), and Neuberger Berman New York Intermediate Municipal Fund
Inc. ("New York") (individually a "Fund", collectively, the "Funds"),
believe accurately reflects fair value. Short-term debt securities with
less than 60 days until maturity may be valued at cost which, when combined
with interest earned, approximates market value.
## At October 31, 2002, selected Fund information on a U.S. Federal income tax
basis was as follows:
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
NEUBERGER BERMAN COST APPRECIATION DEPRECIATION APPRECIATION
CALIFORNIA INTERMEDIATE MUNICIPAL FUND INC. $106,714,000 $511,000 $514,000 $(3,000)
INTERMEDIATE MUNICIPAL FUND INC. 349,557,000 1,983,000 2,259,000 (276,000)
NEW YORK INTERMEDIATE MUNICIPAL FUND INC. 83,747,000 547,000 506,000 41,000
@ Municipal securities held by the Funds are within the four highest ratings
categories (with respect to at least 80% of total assets) assigned by a
nationally recognized statistical rating organization ("NRSRO") such as
Moody's Investors Service, Inc., Standard & Poor's, or Fitch Investors
Services, Inc. or, where not rated, are determined by the Funds' investment
manager to be of comparable quality. Approximately 72%, 63%, and 49% of the
municipal securities held by California, Intermediate, and New York,
respectively, have credit enhancement features backing them, which the
Funds may rely on, such as letters of credit, insurance, or guarantees.
Without these credit enhancement features the securities may or may not
meet the quality standards of the Funds. Pre-refunded bonds are supported
by securities in escrow issued or guaranteed by the U.S. Government, its
agencies, or instrumentalities. The amount escrowed is sufficient to pay
the periodic interest due and the principal of these bonds. Putable bonds
give the Funds the right to sell back the issue on the date specified.
* Credit ratings are unaudited.
++ Security is guaranteed by the corporate obligor.
See Notes to Financial Statements
66
NEUBERGER BERMAN OCTOBER 31, 2002
STATEMENT OF ASSETS AND LIABILITIES
INTERMEDIATE
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL CLOSED-END FUNDS MUNICIPAL
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE* (NOTE A)-SEE
SCHEDULE OF INVESTMENTS $349,281
Cash 4,688
----------------------------------------------------------------------------------------------------
Interest receivable 2,592
Receivable for securities sold 200
====================================================================================================
TOTAL ASSETS 356,761
====================================================================================================
LIABILITIES
Payable for securities purchased 63,326
Payable to administrator (Note B) 70
----------------------------------------------------------------------------------------------------
Accrued expenses and other payables 52
====================================================================================================
TOTAL LIABILITIES 63,448
====================================================================================================
NET ASSETS AT VALUE $293,313
====================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital $293,147
Undistributed (dividends in excess of) net investment income 442
----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) in value of investments (276)
====================================================================================================
NET ASSETS AT VALUE $293,313
====================================================================================================
SHARES OUTSTANDING ($.0001 PAR VALUE; 1,000,000,000 SHARES AUTHORIZED) 20,507
====================================================================================================
NET ASSET VALUE PER SHARE OUTSTANDING $ 14.30
====================================================================================================
*COST OF INVESTMENTS $349,557
====================================================================================================
See Notes to Financial Statements
67
STATEMENT OF OPERATIONS
INTERMEDIATE
MUNICIPAL FUND
--------------------
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL CLOSED-END FUNDS For the
Period from
September 27,
2002
(Commencement
of Operations) to
October 31,
(000'S OMITTED) 2002
INVESTMENT INCOME
Interest income $ 579
==============================================================================================
EXPENSES:
Investment management fee (Note B) 68
Administration fee (Note B) 82
----------------------------------------------------------------------------------------------
Stock transfer agent fees 3
Auditing fees 22
Custodian fees (Note B) 17
----------------------------------------------------------------------------------------------
Shareholder reports 8
----------------------------------------------------------------------------------------------
Stock exchange listing fees 2
Directors' fees and expenses 3
Miscellaneous 1
==============================================================================================
Total expenses 206
Investment management fee waived and expenses reduced by custodian
fee expense offset arrangement (Note B) (69)
==============================================================================================
Total net expenses 137
==============================================================================================
Net investment income 442
==============================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Change in net unrealized appreciation (depreciation) in value of:
Investment securities (Note A) (276)
=======================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 166
==============================================================================================
See Notes to Financial Statements
68
NEUBERGER BERMAN OCTOBER 31, 2002
STATEMENT OF CHANGES IN NET ASSETS
INTERMEDIATE
MUNICIPAL FUND
------------------
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL CLOSED-END FUNDS Period from
September 27,
2002
(Commencement
of Operations) to
October 31,
(000'S OMITTED) 2002
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 442
Change in net unrealized appreciation (depreciation) of investments (276)
============================================================================================
Net increase (decrease) in net assets resulting from operations 166
============================================================================================
FROM FUND SHARE TRANSACTIONS:
Proceeds from issuance of common shares 278,852
Proceeds from underwriters' over-allotment option exercised 14,295
--------------------------------------------------------------------------------------------
Total proceeds from Fund share transactions 293,147
============================================================================================
NET INCREASE (DECREASE) IN NET ASSETS 293,313
NET ASSETS:
Beginning of period --
============================================================================================
End of period $293,313
============================================================================================
Accumulated undistributed net investment income at end of period $ 442
============================================================================================
See Notes to Financial Statements
69
Only notes related to Neuberger Berman Intermediate Municipal Fund Inc. are
applicable to this filing.
NOTES TO FINANCIAL STATEMENTS INTERMEDIATE MUNICIPAL CLOSED-END FUNDS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman California Intermediate Municipal Fund Inc.
("California"), Neuberger Berman Intermediate Municipal Fund Inc.
("Intermediate"), and Neuberger Berman New York Intermediate Municipal
Fund Inc. ("New York") (individually a "Fund", collectively, the
"Funds") were organized as Maryland corporations on July 29, 2002.
California and New York are registered as non-diversified, closed-end
management investment companies and Intermediate is registered as a
diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund
had no operations until September 27, 2002, other than matters
relating to their organization and the sale on September 19, 2002 of
6,981 shares of common stock for $100,005 ($14.325 per share) from
each Fund to Neuberger Berman LLC ("Neuberger"), the Funds'
sub-adviser.
The assets of each Fund belong only to that Fund, and the liabilities
of each Fund are borne solely by that Fund and no other.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires Neuberger
Berman Management Inc. ("Management") to make estimates and
assumptions at the date of the financial statements. Actual results
could differ from those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in
the notes following the Funds' Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions
are recorded on a trade date basis. Interest income, including
accretion of discount (adjusted for original issue discount, where
applicable) and amortization of premium, where applicable, is recorded
on the accrual basis. Realized gains and losses from securities
transactions are recorded on the basis of identified cost.
4 FEDERAL INCOME TAXES: It is the intention of each Fund to qualify as a
regulated investment company by complying with the provisions
available to certain investment companies, as defined in applicable
sections of the Internal Revenue Code, and to make distributions of
investment company taxable income and net capital gains (after
reduction for any amounts available for U.S. Federal income tax
purposes as capital loss carryforwards) sufficient to relieve them
from all, or substantially all, U.S. Federal income taxes.
Accordingly, each Fund paid no U.S. Federal income taxes and no
provision for U.S. Federal income taxes was required.
5 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Each Fund earns income,
net of expenses, daily on its investments. It is the policy of each
Fund to declare and pay dividends from net investment income on a
monthly basis. Distributions from net realized capital gains, if any,
are normally distributed in December. Income dividends and capital
gain distributions to shareholders are recorded on the ex-dividend
date. To the extent each Fund's net realized capital gains, if any,
can be offset by capital loss carryforwards, it is the policy of each
Fund not to distribute such gains.
70
NEUBERGER BERMAN OCTOBER 31, 2002
Each Fund distinguishes between dividends on a tax basis and a
financial reporting basis and only distributions in excess of tax
basis earnings and profits are reported in the financial statements as
a return of capital. Differences in the recognition or classification
of income between the financial statements and tax earnings and
profits which result in temporary over-distributions for financial
statement purposes are classified as distributions in excess of net
investment income or accumulated net realized gains in the components
of net assets on the Statements of Assets and Liabilities.
The Funds declared dividends from their net investment income which
were paid December 16, 2002, to shareholders of record on November 18,
2002, with an ex-dividend date of November 14, 2002, as follows:
DIVIDEND PER SHARE
CALIFORNIA $0.06250
INTERMEDIATE 0.06625
NEW YORK 0.06500
As of October 31, 2002, the components of distributable earnings
(accumulated losses) on a federal income tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED LOSS
TAX-EXEMPT LONG-TERM APPRECIATION CARRYFORWARDS
INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
CALIFORNIA $ 96,547 $0 $ (2,566) $0 $ 93,981
INTERMEDIATE 441,543 0 (276,028) 0 165,515
NEW YORK 87,508 0 40,553 0 128,061
There were no significant differences between book basis and tax
basis.
6 EXPENSE ALLOCATION: Expenses directly attributable to a Fund are
charged to that Fund. Expenses not directly attributed to a Fund are
allocated, on the basis of relative net assets, except where a more
appropriate allocation of expenses to each of the Funds can otherwise
be made fairly.
7 ORGANIZATION EXPENSES AND OFFERING COSTS: Management has agreed to pay
all organizational expenses and the amount by which each Fund's
offering costs for common stock (other than sales load) exceed $0.03
per share. Offering costs for common stock paid by each Fund were
charged as a reduction of paid-in-capital at the completion of each
Fund's offering and amounted to $198,209, $615,209, and $160,709 for
California, Intermediate, and New York, respectively.
8 CONCENTRATION OF RISK: The ability of the issuers of the debt
securities held by the Funds to meet their obligations may be affected
by economic developments, including those particular to a specific
industry or region. The investment policies of California and New York
involve investing substantially all of their assets in California and
New York municipal bonds, respectively. This policy makes those funds
more susceptible to adverse economic, political, regulatory or other
factors affecting the issuers of such municipal bonds than a fund that
does not limit its investments to such issuers.
71
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, DISTRIBUTION
ARRANGEMENTS, AND OTHER TRANSACTIONS WITH AFFILIATES:
Each Fund retains Management as its investment manager under a
Management Agreement. For such investment management services, each
Fund pays Management a fee at the annual rate of 0.25% of its average
daily Managed Assets. Managed Assets equals the total assets of the
Fund less liabilities, other than the aggregate indebtedness entered
into for purposes of leverage. For purposes of calculating Managed
Assets, the liquidation preference of any preferred shares outstanding
is not considered a liability.
Management has contractually agreed to waive a portion of the
management fees it is entitled to receive from each Fund at the
following annual rates:
FISCAL PERIOD OR YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
--------------------------------------------------------------------------------------
2002 - 2007 0.25%
2008 0.20
2009 0.15
2010 0.10
2011 0.05
Management has not agreed to waive any portion of its fees beyond
October 31, 2011.
For the period ended October 31, 2002, such waived fees amounted to
$21,955, $67,982, and $17,878 for California, Intermediate, and New
York, respectively.
Each Fund retains Management as its administrator under an
Administration Agreement ("Agreement"). Pursuant to this Agreement
each Fund pays Management an administration fee at the annual rate of
0.30% of its average daily Managed Assets.
Additionally, Management retains State Street Bank and Trust Company
("State Street") as its sub-administrator under a Sub-Administration
Agreement. Management pays State Street a fee for all services
received under the agreement.
Management and Neuberger, a member firm of The New York Stock Exchange
and sub-adviser to each Fund, are wholly owned subsidiaries of
Neuberger Berman Inc., a publicly held company. Neuberger is retained
by Management to furnish it with investment recommendations and
research information without added cost to each Fund. Several
individuals who are officers and/or directors of each Fund are also
employees of Neuberger and/or Management.
Each Fund has an expense offset arrangement in connection with its
custodian contract. The impact of this arrangement, reflected in the
Statements of Operations under the caption Custodian fees, was a
reduction of $1,289, $993, and $696 for California, Intermediate, and
New York, respectively.
72
Neuberger Berman october 31, 2002
NOTE C--SECURITIES TRANSACTIONS:
During the period ended October 31, 2002, there were purchase and sale
transactions (excluding short-term securities) as follows:
PURCHASES SALES
California $ 52,677,000 0
Intermediate 208,096,000 0
New York 60,056,000 0
NOTE D--CAPITAL:
At October 31, 2002, the shares outstanding and the shares owned by
Neuberger for each Fund were as follows:
COMMON SHARES COMMON SHARES OWNED
OUTSTANDING BY NEUBERGER
CALIFORNIA 6,606,981 6,981
INTERMEDIATE 20,506,981 6,981
NEW YORK 5,356,981 6,981
Transactions in common shares of capital stock for the period ended
October 31, 2002, were as follows:
SHARES ISSUED IN CONNECTION WITH:
UNDERWRITERS' REINVESTMENT OF NET INCREASE
INITIAL PUBLIC EXERCISE OF OVER- DIVIDENDS AND IN SHARES
OFFERING ALLOTMENT OPTION DISTRIBUTIONS OUTSTANDING
CALIFORNIA 6,306,981 300,000 - 6,606,981
INTERMEDIATE 19,506,981 1,000,000 - 20,506,981
NEW YORK 5,156,981 200,000 - 5,356,981
NOTE E--USE OF LEVERAGE:
Subject to market conditions, each Fund intends to offer Preferred
Shares representing approximately 38% of each Fund's capital after
issuance. The Funds also may add leverage to the portfolio through the
utilization of derivative instruments. The Funds may issue Preferred
Shares so long as after their issuance the liquidation value of the
Preferred Shares, plus the aggregate amount of senior securities
representing indebtedness, does not exceed 50% of each Fund's capital.
Once Preferred Shares are issued and/or other forms of leverage are
used, the net asset value and market price of the common shares and
the yield to common stockholders will be more volatile.
73
APPENDIX A
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC.
FORM OF ARTICLES SUPPLEMENTARY CREATING AND FIXING THE RIGHTS OF
AUCTION MARKET PREFERRED SHARES, SERIES A AND B
("PREFERRED SHARES")
TABLE OF CONTENTS
PAGE
----
DESIGNATION......................................................................1
DEFINITIONS......................................................................2
PART I..........................................................................20
1. NUMBER OF AUTHORIZED SHARES..............................................20
2. DIVIDENDS................................................................20
(a) RANKING............................................................20
(b) CUMULATIVE CASH DIVIDENDS..........................................20
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE...................20
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF......................20
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS........................21
(f) CURING A FAILURE TO DEPOSIT........................................23
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT.........................23
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND..............23
(i) DIVIDENDS PAID TO HOLDERS..........................................23
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID
DIVIDENDS..........................................................23
(k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS..................23
3. GROSS-UP PAYMENTS........................................................24
(a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD
DAYS OR FEWER......................................................24
(b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS..............24
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION................24
4. DESIGNATION OF SPECIAL RATE PERIODS.....................................24
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD................24
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD........................25
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD.............................25
(d) NOTICE OF SPECIAL RATE PERIOD......................................25
A-i
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD...................26
5. VOTING RIGHTS............................................................26
(a) ONE VOTE PER SHARE OF PREFERRED SHARES.............................26
(b) VOTING FOR ADDITIONAL DIRECTORS....................................27
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS.......28
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT STOCKHOLDER APPROVAL........29
(e) RELATIVE RIGHTS AND PREFERENCES....................................30
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING..........................30
(g) VOTING FOR DIRECTORS SOLE REMEDY FOR FUND'S FAILURE TO PAY
DIVIDENDS..........................................................30
(h) HOLDERS ENTITLED TO VOTE...........................................30
6. 1940 ACT PREFERRED SHARES ASSET COVERAGE.................................30
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT................................30
8. RESERVED..................................................................32
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS........................32
(a) DIVIDENDS ON SHARES OTHER THAN PREFERRED SHARES....................32
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES
UNDER THE 1940 ACT..................................................33
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS............33
10. RESERVED.................................................................34
11. REDEMPTION...............................................................34
(a) OPTIONAL REDEMPTION................................................34
(b) MANDATORY REDEMPTION...............................................35
(c) NOTICE OF REDEMPTION...............................................36
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES..........................36
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION..........................37
(f) AUCTION AGENT AS DIRECTOR OF REDEMPTION PAYMENTS BY FUND...........37
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING........................................................37
(h) COMPLIANCE WITH APPLICABLE LAW.....................................37
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED........................38
A-ii
12. LIQUIDATION RIGHTS.......................................................38
(a) RANKING............................................................38
(b) DISTRIBUTIONS UPON LIQUIDATION.....................................38
(c) PRO RATA DISTRIBUTIONS.............................................38
(d) RIGHTS OF JUNIOR SHARES............................................38
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION........................39
13. FUTURES AND OPTIONS TRANSACTINOS: FORWARD COMMITMENTS....................39
14. MISCELLANEOUS............................................................44
(a) RESERVED...........................................................44
(b) NO FRACTIONAL SHARES...............................................44
(c) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE
ACQUIRED BY THE FUND...............................................44
(d) BOARD MAY RESOLVE AMBIGUITIES......................................44
(e) HEADINGS NOT DETERMINATIVE.........................................44
(f) NOTICES............................................................44
PART II.........................................................................44
1. ORDERS....................................................................44
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT......................46
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE.........................................................................48
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES.........................................................50
5. NOTIFICATION OF ALLOCATIONS..................................................52
6. AUCTION AGENT................................................................52
7. TRANSFER OF PREFERRED SHARES.................................................53
8. GLOBAL CERTIFICATE...........................................................53
A-iii
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC., a Maryland corporation
(the "Fund"), certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: Pursuant to the authority expressly vested in the Board of
Directors of the Fund by Article Sixth of the Fund's Articles of Incorporation
(which, as restated, amended or supplemented from time to time are, together
with these Articles Supplementary, herein called the "Charter"), the Board of
Directors has, by resolution, reclassified from the unissued common stock of the
Fund and authorized the issuance of 4,000 shares of auction market preferred
shares, Series A and 4,000 shares of auction market preferred shares, Series B,
par value $.0001 per share, liquidation preference $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared).
SECOND: The preferences, rights, voting powers, restrictions, limitations
as to dividends, qualifications, and terms and conditions of redemption, and
other rights and limitation of the shares of the auction rate preferred shares,
Series A, Series B and each other series of auction rate preferred shares now or
hereafter described in this Articles Supplementary are as set forth in this
Articles Supplementary.
THIRD: That to the extent permitted by Maryland law, any provisions of the
Articles of Incorporation that conflict with or are inconsistent with the
provisions of the Articles Supplementary are hereby amended to conform to the
terms of these Articles Supplementary.
DESIGNATION
Series A: 4,000 shares of preferred stock, par value $.0001 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared), are hereby
designated auction market preferred shares, Series A ("Series A Shares"). Each
Series A Share shall have an Applicable Rate for its Initial Rate Period equal
to 1.20% per annum and an initial Dividend Payment Date of January 17, 2003.
Series B: 4,000 shares of preferred stock, par value $.0001 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared), are hereby
designated auction market preferred shares, Series B ("Series B Shares" and,
together with Series A Shares, "Preferred Shares"). Each Series B Share shall
have an Applicable Rate for its Initial Rate Period equal to 1.20% per annum and
an initial Dividend Payment Date of January 21, 2003.
Preferred Shares may be marketed under the name "auction market preferred
shares" or "AMPS" or such other name as the Board of Directors may approve from
time to time.
Each Preferred Share shall have such other preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law, as
are set forth in Part I and Part II of these Articles Supplementary. Subject to
the provisions of Section 5(c) of Part I hereof, the Board of Directors of the
Fund may, in the future, reclassify additional shares of the Fund's capital
stock as Preferred Shares, with the same preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
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conditions of redemption and other terms herein described, except that the
Applicable Rate for the Initial Rate Period, its initial Payment Date and any
other changes in the terms herein set forth shall be as set forth in the
Articles Supplementary reclassifying such shares as Preferred Shares.
Capitalized terms used in Part I and Part II of these Articles
Supplementary shall have the meanings (with the terms defined in the singular
having comparable meanings when used in the plural and vice versa) provided in
the "Definitions" section immediately following, unless the context otherwise
requires.
DEFINITIONS
As used in Parts I and II of these Articles Supplementary, the following
terms shall have the following meanings (with terms defined in the singular
having comparable meanings when used in the plural and vice versa), unless the
context otherwise requires:
(a) ""AA" COMPOSITE COMMERCIAL PAPER RATE" on any date for any Rate Period
of shares of a series of Preferred Shares, shall mean (i) (A) in the case of any
Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Financial
Commercial Paper Rate is being used to determine the Applicable Rate for shares
of such series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the interest
equivalent of the 120-day and 180-day rates; and (7) 162 or more but fewer than
183 Rate Period Days, the interest equivalent of the 180-day rate, in each case
on commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by S&P or the equivalent of such rating by S&P or another rating agency, as
made available on a discount basis or otherwise by the Federal Reserve Bank of
New York for the Business Day next preceding such date; and (8) in the case of a
Special Rate Period of 183 or more Rate Period Days, the Treasury Rate which
most closely matches the Special Rate Period; or (ii) in the event that the
Federal Reserve Bank of New York does not make available any such rate, then the
arithmetic average of such rates, as quoted on a discount basis or otherwise, by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day next preceding such date. If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Fund to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Fund does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining
Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this
definition, the "interest equivalent" of a rate stated on a discount basis (a
"discount rate") for commercial paper of a given days' maturity shall be equal
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to the quotient (rounded upwards to the next higher one-thousandth (.001) of 1%)
of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y)
a fraction, the numerator of which shall be the product of the discount rate
times the number of days in which such commercial paper matures and the
denominator of which shall be 360.
(b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of these Articles Supplementary.
(c) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided, however, that for
purposes of these Articles Supplementary no Broker-Dealer controlled by, in
control of or under common control with the Fund shall be deemed to be an
Affiliate nor shall any corporation or any Person controlled by, in control of
or under common control with such corporation, one of the trustees, directors,
or executive officers of which is a Director of the Fund be deemed to be an
Affiliate solely because such trustee, director or executive officer is also a
Director of the Fund.
(d) "AGENT MEMBER" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
(e) Intentionally left blank.
(f) "ANNUAL VALUATION DATE" shall mean the last Business Day of December
of each year.
(g) "APPLICABLE RATE" shall have the meaning specified in subparagraph
(e)(i) of Section 2 of Part I of these Articles Supplementary.
(h) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(i) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the Fund
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of Preferred Shares so long as the Applicable Rate
for shares of such series is to be based on the results of an Auction.
(j) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Directors in accordance with Section 6 of Part II of
these Articles Supplementary.
(k) "AUCTION DATE" with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(l) "AUCTION PROCEDURES" shall mean the procedures for conducting Auctions
set forth in Part II of these Articles Supplementary.
(m) "AVAILABLE PREFERRED SHARES" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles Supplementary.
(n) "BENCHMARK RATE" shall have the meaning specified in paragraph
(b)(iii) of Section 3 of Part II of these Articles Supplementary.
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(o) "BENEFICIAL OWNER" with respect to shares of a series of Preferred
Shares, means a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares of
such series.
(p) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of these Articles Supplementary.
(q) "BIDDER" and "BIDDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of these Articles Supplementary; provided,
however, that neither the Fund nor any affiliate thereof shall be permitted to
be a Bidder in an Auction, except that any Broker-Dealer that is an affiliate of
the Fund may be a Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.
(r) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Fund or
any duly authorized committee thereof.
(s) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of these Articles Supplementary, that is a member of, or a participant
in, the Securities Depository or is an affiliate of such member or participant,
has been selected by the Fund and has entered into a Broker-Dealer Agreement
that remains effective.
(t) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Fund, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of these Articles Supplementary.
(u) "BUSINESS DAY" shall mean a day on which the New York Stock Exchange
is open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized by law to close.
(v) "CHARTER" shall have the meaning specified on the first page of these
Articles Supplementary.
(w) "CLOSING TRANSACTION" shall have the meaning specified in paragraph
(a)(i)(A) of Section 13 of Part I of these Articles Supplementary.
(x) "CODE" means the Internal Revenue Code of 1986, as amended.
(y) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and any other commercial paper dealer selected by the Fund as to
which Moody's, Fitch or any substitute rating agency then rating the Preferred
Shares shall not have objected or, in lieu of any thereof, their respective
affiliates or successors, if such entity is a commercial paper dealer.
(z) "COMMON SHARES" shall mean the outstanding shares of common stock, par
value $.0001 per share, of the Fund.
(aa) "CURE DATE" shall mean the Preferred Shares Basic Maintenance Cure
Date or 1940 Act Cure Date, as the case may be.
(bb) "DATE OF ORIGINAL ISSUE" with respect to shares of a series of the
Preferred Shares, shall mean the date on which the Fund initially issued such
shares.
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(cc) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations rated
at least P-1, MIG-1 or VMIG-1 by Moody's or F1 by Fitch.
(dd) "DISCOUNTED VALUE" as of any Valuation Date, shall mean, (i) with
respect to a Fitch Eligible Asset or Moody's Eligible Asset that is not
currently callable as of such Valuation Date at the option of the issuer
thereof, the lesser of the Market Value or par value thereof divided by the
Fitch Discount Factor for a Fitch Eligible Asset or Moody's Discount Factor for
a Moody's Eligible Asset, or (ii) with respect to a Fitch Eligible Asset or
Moody's Eligible Asset that is currently callable as of such Valuation Date at
the option of the issuer thereof, the quotient of (1) the lesser of the Market
Value or next call price thereof, including any call premium, divided by (2) the
Fitch Discount Factor for Fitch Eligible Assets or the Moody's Discount Factor
for Moody's Eligible Assets.
(ee) "DIVIDEND PAYMENT DATE" with respect to shares of a series of
Preferred Shares, shall mean any date on which dividends are payable on shares
of such series pursuant to the provisions of paragraph (d) of Section 2 of Part
I of these Articles Supplementary.
(ff) "DIVIDEND PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the period from and including the Date of Original Issue of
shares of a series of Preferred Shares to but excluding the initial Dividend
Payment Date for shares of such series then any period thereafter from and
including one Dividend Payment Date for shares of such series to but excluding
the next succeeding Dividend Payment Date for shares of such series.
(gg) "EXISTING HOLDER," with respect to shares of a series of Preferred
Shares, shall mean a Broker-Dealer (or any such other Person as may be permitted
by the Fund) that is listed on the records of the Auction Agent as a holder of
shares of such series.
(hh) "EXPOSURE PERIOD" shall mean the period commencing on a given
Valuation Date and ending 56 days thereafter.
(ii) "FAILURE TO DEPOSIT," with respect to shares of a series of Preferred
Shares, shall mean a failure by the Fund to pay to the Auction Agent, not later
than 12:00 noon, Eastern time, (A) on the Business Day next preceding any
Dividend Payment Date for shares of such series, in funds available on such
Dividend Payment Date in The City of New York, New York, the full amount of any
dividend (whether or not earned or declared) to be paid on such Dividend Payment
Date on any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in The City of New York, New York, the Redemption Price to be paid on
such redemption date for any share of such series after notice of redemption is
mailed pursuant to paragraph (c) of Section 11 of Part I of these Articles
Supplementary; provided, however, that the foregoing clause (B) shall not apply
to the Fund's failure to pay the Redemption Price in respect of Preferred Shares
when the related Notice of Redemption provides that redemption of such shares is
subject to one or more conditions precedent and any such condition precedent
shall not have been satisfied at the time or times and in the manner specified
in such Notice of Redemption.
(jj) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in the
definition of "Fitch Volatility Factor" and "Moody's Volatility Factor."
(kk) "FITCH" shall mean Fitch Ratings and its successors.
(ll) "FITCH DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any Fitch Eligible Asset, the percentage determined by
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reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Exposure
Period, in accordance with the table set forth below.
RATING CATEGORY
EXPOSURE PERIOD AAA* AA* A* BBB* F1** UNRATED***
7 weeks................ 151% 159% 166% 173% 136% 225%
8 weeks or less but
greater than 7 weeks... 154% 161% 168% 176% 137% 231%
9 weeks or less but
greater than 8 weeks... 158% 163% 170% 177% 138% 240%
* Fitch rating (or, if not rated by Fitch, see (mm) below).
** Municipal Obligations rated F1 by Fitch (or, if not rated by Fitch, see
(mm) below), which do not mature or have a demand feature at par exercisable in
30 days and which do not have a long-term rating.
*** Municipal Obligations rated less than BBB by Fitch (or, if not rated
by Fitch, see (mm) below) or unrated, not to exceed 10% of Fitch Eligible
Assets.
Notwithstanding the foregoing, (i) the Fitch Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least F1 by Fitch (or, if not rated by Fitch, rated
MIG-1, VMIG-1 or P-1 by Moody's or at least A-1+ or SP-1+ by S&P) and mature or
have a demand feature at par exercisable in 30 days or less, and (ii) no Fitch
Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold.
Notwithstanding the foregoing, inverse floating rate structured
securities, including primary market and secondary market residual interest
bonds, may constitute no more than 10% of the Discounted Value of Fitch Eligible
Assets. The Fitch Discount Factor for such securities shall be the product of
(x) the percentage determined by reference to the rating on the security
underlying such inverse floating rate structured securities multiplied by (y)
1.25.
(mm) "FITCH ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Fitch rating, as applicable, suspended by Fitch, and (iii) is
part of an issue of Municipal Obligations of at least $10,000,000. Municipal
Obligations issued by any one issuer and rated BB or B (for the purposes of this
definition only, "Other Securities") may comprise no more than 4% of total Fitch
Eligible Assets; such Other Securities, if any, together with any Municipal
Obligations issued by the same issuer and rated BBB by Fitch may comprise no
more than 6% of total Fitch Eligible Assets; such Other Securities and BBB-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
the same issuer and rated A by Fitch, may comprise no more than 10% of total
Fitch Eligible Assets; and such Other Securities, and BBB and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated AA by Fitch, may comprise no more than 20% of total Fitch
Eligible Assets. For purposes of the foregoing sentence any Municipal Obligation
backed by the guaranty, letter of credit or insurance issued by a third party
shall be deemed to be issued by such third party if the issuance of such third
party credit is the sole determinant of the rating on such Municipal Obligation.
Other Securities issued by issuers located within a single state or territory
may comprise no more than 12% of total Fitch Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations issued by issuers
located within the same state or territory and rated BBB by Fitch, may comprise
no more than 20% of total Fitch Eligible Assets; such Other Securities,
BBB-rated Municipal Obligations, if any, together with any Municipal Obligations
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issued by issuers located within the same state or territory and rated A by
Fitch, may comprise no more than 40% of total Fitch Eligible Assets; and such
Other Securities and BBB and A-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by issuers located within the same state
or territory and rated AA by Fitch, may comprise no more than 60% of total Fitch
Eligible Assets. For purposes of applying the foregoing requirements and
applying the applicable Fitch Discount Factor, if a Municipal Obligation is not
rated by Fitch but is rated by Moody's and S&P, such Municipal Obligation
(excluding short-term Municipal Obligations) will be deemed to have the Fitch
rating which is the lower of the Moody's and S&P rating. If a Municipal
Obligation is not rated by Fitch but is rated by Moody's or S&P, such Municipal
Obligation (excluding short-term Municipal Obligations) will be deemed to have
such rating. Eligible Assets shall be calculated including cash. When the Fund
sells a Municipal Obligation and agrees to repurchase such Municipal Obligation
at a future date, such Municipal Obligation shall be valued at its Discounted
Value for purposes of determining Fitch Eligible Assets, and the amount of the
repurchase price of such Municipal Obligation shall be included as a liability
for purposes of calculating the Preferred Shares Basic Maintenance Amount. When
the Fund purchases a Fitch Eligible Asset and agrees to sell it at a future
date, such Fitch Eligible Asset shall be valued at the amount of cash to be
received by the Fund upon such future date, provided that the counterparty to
the transaction has a long-term debt rating of at least A by Fitch and the
transaction has a term of no more than 30 days, otherwise, such Fitch Eligible
Asset shall be valued at the Discounted Value of such Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset for purposes of determining the Preferred Shares Basic
Maintenance Amount to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Fitch (if Fitch is then rating the
Preferred Shares) has indicated to the Fund will not affect the status of such
asset as a Fitch Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens to secure
payment for services rendered or cash advanced to the Fund by the Fund's
investment adviser, custodian or the Auction Agent, (d) Liens by virtue of any
repurchase agreement, and (e) Liens in connection with any futures margin
account; or (ii) deposited irrevocably for the payment of any liabilities.
(nn) "FITCH HEDGING TRANSACTION" shall have the meaning specified in
paragraph 13(b)(1) of Part I of these Articles Supplementary.
(oo) "FITCH VOLATILITY FACTOR" shall mean, as of any Valuation Date, (i)
in the case of any Minimum Rate Period, any Special Rate Period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; and (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
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applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Fitch Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:
FEDERAL TAX RATE INCREASE FITCH VOLATILITY FACTOR
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
(pp) "FORWARD COMMITMENTS" shall have the meaning specified in paragraph
(a)(iv) of Section 13 of Part I of these Articles Supplementary.
(qq) "FUND" shall mean the entity named on the first page of these
Articles Supplementary, which is the issuer of the Preferred Shares.
(rr) "GROSS-UP PAYMENT" means payment to a Holder of shares of a series of
Preferred Shares of an amount which, when taken together with the aggregate
amount of Taxable Allocations made to such Holder to which such Gross-up Payment
relates, would cause such Holder's dividends in dollars (after Federal income
tax consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been retained by such Holder if the amount of such aggregate Taxable
Allocations would have been excludable from the gross income of such Holder.
Such Gross-up Payment shall be calculated (i) without consideration being given
to the time value of money; (ii) assuming that no Holder of shares of a series
of Preferred Shares is subject to the AMT with respect to dividends received
from the Fund; and (iii) assuming that each Taxable Allocation and each Gross-up
Payment (except to the extent such Gross-up Payment is designated as an
exempt-interest dividend under Section 852(b)(5) of the Code or successor
provisions) would be taxable in the hands of each Holder of shares of a series
of Preferred Shares at the maximum marginal regular Federal personal income tax
rate applicable to ordinary income or net capital gains, as applicable, or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income or net capital gains, as applicable, whichever is greater, in
effect at the time such Gross-up Payment is made.
(ss) "HOLDER" with respect to shares of a series of Preferred Shares,
shall mean the registered holder of such shares as the same appears on the
record books of the Fund.
(tt) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these Articles
Supplementary.
(uu) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Fund an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.
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(vv) "INITIAL RATE PERIOD" shall be the period from and including the Date
of Original Issue to but excluding January 16, 2003, with respect to Series A
Shares and January 20, 2003, with respect to Series B Shares.
(ww) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a discount
basis security, which is equal to the yield on an equivalent interest-bearing
security.
(xx) "KENNY INDEX" shall have the meaning specified in the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."
(yy) "LATE CHARGE" shall have the meaning specified in subparagraph
(e)(1)(B) of Section 2 of Part I of these Articles Supplementary.
(zz) "LIQUIDATION PREFERENCE" with respect to a given number of Preferred
Shares, means $25,000 times that number.
(aaa) "MARKET VALUE" of any asset of the Fund shall mean the market value
thereof determined in accordance with the Pricing Procedures of the Neuberger
Berman Funds.
(bbb) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY" as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be due if
the Fund were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized net
capital gains and other taxable income earned by the Fund, as of the end of the
calendar month immediately preceding such Valuation Date, and assuming such
Gross-up Payments are fully taxable.
(ccc) "MAXIMUM RATE" for shares of a series of Preferred Shares on any
Auction Date for shares of such series, shall mean:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Fund pursuant to Section 4 of Part I of these Articles
Supplementary, the product of (A) the Reference Rate on such Auction Date for
the next Rate Period of shares of such series and (B) the Rate Multiple on such
Auction Date, unless shares of such series have or had a Special Rate Period
(other than a Special Rate Period of 28 Rate Period Days or fewer) and an
Auction at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period of shares of such series after such Special Rate Period, in
which case the higher of:
(A) the dividend rate on shares of such series for the then-ending Rate
Period; and
(B) the product of (1) the higher of (x) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was 364 Rate Period Days
or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal
in length to the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in length to such
Special Rate Period of shares of such series, if such Special Rate Period was
364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to such Special Rate Period, if such Special
Rate Period was more than 364 Rate Period Days and (2) the Rate Multiple on such
Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
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designated by the Fund pursuant to Section 4 of Part I of these Articles
Supplementary, the product of (A) the higher of (1) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was 364 Rate Period Days
or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal
in length to the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was more than 364 Rate Period Days and (2) the Reference
Rate on such Auction Date for the Special Rate Period for which the Auction is
being held if such Special Rate Period is 364 Rate Period Days or fewer or the
Treasury Note Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is more than 364 Rate
Period Days and (B) the Rate Multiple on such Auction Date.
(ddd) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days for Series A Shares and 28 Rate Period Days for Series B
Shares.
(eee) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(fff) "MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining
the Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
--------------------------------------------------------------------------------
EXPOSURE Aaa* Aa* A* Baa* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
PERIOD
--------------------------------------------------------------------------------
7 weeks..... 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or
less but
greater than
7 weeks..... 154 161 168 176 190 137 149 231
9 weeks or
less but
greater than
8 weeks..... 158 163 17 177 192 138 150 240
--------------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated at least BBB by
S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or
have a demand feature at par exercisable in 30 days and which do not have a
long-term rating, including taxable short-term obligations rated P-1.
**** Municipal Obligations not rated by Moody's but rated A-1+ or SP-1+ by
S&P, which do not mature or have a demand feature at par exercisable in 30 days
and which do not have a long-term rating.
A-10
***** Municipal Obligations rated less than Baa3 by Moody's or less than
BBB by S&P or not rated by Moody's or S&P not to exceed 10% of Moody's Eligible
Assets.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% as long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold.
Notwithstanding the foregoing, inverse floating rate structured
securities, including primary market and secondary market residual interest
bonds, may constitute no more than 10% of the Discounted Value of Moody's
Eligible Assets. The Moody's Discount Factor for such securities shall be the
product of (x) the percentage determined by reference to the rating on the
security underlying such inverse floating rate structured securities multiplied
by (y) 1.25.
(ggg) "MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Moody's rating, as applicable, suspended by Moody's, and (iii)
is part of an issue of Municipal Obligations of at least $10,000,000. Municipal
Obligations issued by any one issuer and rated BBB or lower by S&P, Ba or B by
Moody's or not rated by S&P and Moody's (for the purposes of this definition
only, "Other Securities") may comprise no more than 4% of total Moody's Eligible
Assets; such Other Securities, if any, together with any Municipal Obligations
issued by the same issuer and rated Baa by Moody's or A by S&P, may comprise no
more than 6% of total Moody's Eligible Assets; such Other Securities, Baa and
A-rated Municipal Obligations, if any, together with any Municipal Obligations
issued by the same issuer and rated A by Moody's or AA by S&P, may comprise no
more than 10% of total Moody's Eligible Assets; and such Other Securities, Baa,
A and AA-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by the same issuer and rated Aa by Moody's or AAA by S&P, may
comprise no more than 20% of total Moody's Eligible Assets. For purposes of the
foregoing sentence, any Municipal Obligation backed by the guaranty, letter of
credit or insurance issued by a third party shall be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Municipal Obligation. Other Securities issued by issuers
located within a single state or territory may comprise no more than 12% of
total Moody's Eligible Assets; such Other Securities, if any, together with any
Municipal Obligations issued by issuers located within a single state or
territory and rated Baa by Moody's or A by S&P, may comprise no more than 20% of
total Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within a single state or territory and rated A by Moody's or AA by S&P,
may comprise no more than 40% of total Moody's Eligible Assets; and such Other
Securities, Baa, A and AA-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by issuers located within a single state or
territory and rated Aa by Moody's or AAA by S&P, may comprise no more than 60%
of total Moody's Eligible Assets. For purposes of applying the foregoing
requirements and applying the applicable Moody's Discount Factor, if a Municipal
Obligation is not rated by Moody's but is rated by S&P, such Municipal
Obligation (excluding short-term Municipal Obligations) will be deemed to have
the Moody's rating which is one full rating category lower than its S&P rating;
a Municipal Obligation shall be deemed to be rated BBB by S&P if rated BBB-, BBB
or BBB+ by S&P; Moody's Eligible Assets should be calculated including cash.
When the Fund sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets and
A-11
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the Preferred Shares Basic
Maintenance Amount. When the Fund purchases a Moody's Eligible Asset and agrees
to sell it at a future date, such Moody's Eligible Asset shall be valued at the
amount of cash to be received by the Fund upon such future date, provided that
the counterparty to the transaction has a long-term debt rating of at least A2
from Moody's and the transaction has a term of no more than 30 days; otherwise,
such Moody's Eligible Asset shall be valued at the Discounted Value of such
Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset for purposes of determining the Preferred Shares Basic
Maintenance Amount to the extent it is (i) subject to any Liens, except for (a)
Liens which are being contested in good faith by appropriate proceedings and
which Moody's (if Moody's is then rating the Preferred Shares) has indicated to
the Fund will not affect the status of such asset as a Moody's Eligible Asset,
(b) Liens for taxes that are not then due and payable or that can be paid
thereafter without penalty, (c) Liens to secure payment for services rendered or
cash advanced to the Fund by the Fund's investment adviser, custodian or the
Auction Agent, (d) Liens by virtue of any repurchase agreement, and (e) Liens in
connection with any futures margin account; or (ii) deposited irrevocably for
the payment of any liabilities.
(hhh) "MOODY'S HEDGING TRANSACTION" shall have the meaning specified in
paragraph (a)(i) of Section 13 of Part I of these Articles Supplementary.
(iii) "MOODY'S VOLATILITY FACTOR" shall mean, as of any Valuation Date,
(i) in the case of any Minimum Rate Period, any Special Rate Period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:
FEDERAL TAX RATE INCREASE VOLATILITY FACTOR
------------------------- -----------------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
A-12
35% 477%
40% 525%
(jjj) "MUNICIPAL INDEX" shall have the meaning specified in paragraph
(a)(i) of Section 13 of Part I of these Articles Supplementary.
(kkk) "MUNICIPAL OBLIGATIONS" shall mean any and all instruments that pay
interest or make other distributions that are exempt from regular Federal income
tax and in which the Fund may invest consistent with the investment policies and
restrictions contained in its registration statement on Form N-2 (333-100914)
("Registration Statement"), as the same may be amended from time to time.
(lll) "1940 ACT" shall mean the Investment Company Act of 1940, as amended
from time to time.
(mmm) "1940 ACT CURE DATE," with respect to the failure by the Fund to
maintain the 1940 Act Preferred Shares Asset Coverage (as required by Section 6
of Part I of these Articles Supplementary) as of the last Business Day of each
month, shall mean the last Business Day of the following month.
(nnn) "1940 ACT PREFERRED SHARES ASSET COVERAGE" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Fund which are shares of
stock, including all outstanding Preferred Shares (or such other asset coverage
as may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are shares or stock of a closed-end
investment company as a condition of declaring dividends on its common shares or
stock).
(ooo) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of Preferred Shares pursuant to paragraph (c) of Section 11 of Part I
of these Articles Supplementary.
(ppp) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with respect
to a Special Rate Period of shares of a series of Preferred Shares pursuant to
subparagraph (d)(i) of Section 4 of Part I of these Articles Supplementary.
(qqq) "ORDER" and "ORDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of these Articles Supplementary.
(rrr) "OTHER SECURITIES" shall have the meaning specified, as applicable,
in the definitions of "Fitch Eligible Assets" and "Moody's Eligible Assets"
above.
(sss) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of Preferred Shares, the number of shares theretofore issued
by the Fund except, without duplication, (i) any shares of such series
theretofore cancelled or delivered to the Auction Agent for cancellation or
redeemed by the Fund, (ii) any shares of such series as to which the Fund or any
Affiliate thereof shall be an Existing Holder and (iii) any shares of such
series represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Fund.
(ttt) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
A-13
(uuu) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series of
Preferred Shares, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
(vvv) "POTENTIAL HOLDER," with respect to Preferred Shares, shall mean a
Broker-Dealer (or any such other person as may be permitted by the Fund) that is
not an Existing Holder of Preferred Shares or that is an Existing Holder of
Preferred Shares that wishes to become the Existing Holder of additional
Preferred Shares.
(www) "PREFERRED SHARES" shall have the meaning set forth on the first
page of these Articles Supplementary.
(xxx) "PREFERRED SHARES BASIC MAINTENANCE AMOUNT" as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i)(A) the product of the
number of Preferred Shares outstanding on such date multiplied by $25,000 (plus
the product of the number of shares of any other series of preferred stock
outstanding on such date multiplied by the liquidation preference of such
shares) plus any redemption premium applicable to Preferred Shares (or other
preferred stock) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or not
earned or declared) to (but not including) the first Dividend Payment Date for
Preferred Shares outstanding that follows such Valuation Date; (C) the aggregate
amount of dividends that would accumulate on shares of each series Preferred
Shares outstanding from such first respective Dividend Payment Date therefor
through the 56th day after such Valuation Date, at the Maximum Rate (calculated
as if such Valuation Date were the Auction Date for the Rate Period commencing
on such Dividend Payment Date) for a Minimum Rate Period of shares of such
series to commence on such Dividend Payment Date, assuming, solely for purposes
of the foregoing, that if on such Valuation Date the Fund shall have delivered a
Notice of Special Rate Period to the Auction Agent pursuant to Section 4(d)(i)
of this Part I with respect to shares of such series, such Maximum Rate shall be
the higher of (a) the Maximum Rate for the Special Rate Period of shares of such
series to commence on such Dividend Payment Date and (b) the Maximum Rate for a
Minimum Rate Period of shares of such series to commence on such Dividend
Payment Date, multiplied by the greater of Moody's Volatility Factor (if Moody's
is then rating the Preferred Shares) and the Fitch Volatility Factor (if Fitch
is then rating the Preferred Shares) applicable to a Minimum Rate Period, or, in
the event the Fund shall have delivered a Notice of Special Rate Period to the
Auction Agent pursuant to Section 4(d)(i) of this Part I with respect to such
shares of such series designating a Special Rate Period consisting of 56 Rate
Period Days or more, the greater of the Moody's Volatility Factor and Fitch
Volatility Factor applicable to a Special Rate Period of that length (plus the
aggregate amount of dividends that would accumulate at the maximum dividend rate
or rates on any other preferred stock outstanding from such respective dividend
payment dates through the 56th day after such Valuation Date, as established by
or pursuant to the respective articles supplementary establishing and fixing the
rights and preferences of such other preferred stock) (except that (1) if such
Valuation Date occurs at a time when a Failure to Deposit (or, in the case of
preferred stock other than Preferred Shares, a failure similar to a Failure to
Deposit) has occurred that has not been cured, the dividend for purposes of
calculation would accumulate at the current dividend rate then applicable to the
shares in respect of which such failure has occurred and (2) for those days
during the period described in this subparagraph (C) in respect of which the
Applicable Rate in effect immediately prior to such Dividend Payment Date will
remain in effect (or, in the case of preferred stock other than Preferred
Shares, in respect of which the dividend rate or rates in effect immediately
prior to such respective dividend payment dates will remain in effect), the
dividend for purposes of calculation would accumulate at such Applicable Rate
(or other rate or rates, as the case may be) in respect of those days); (D) the
amount of anticipated expenses of the Fund for the 90 days subsequent to such
A-14
Valuation Date; (E) the amount of the Fund's Maximum Potential Gross-up Payment
Liability in respect of Preferred Shares (and similar amounts payable in respect
of other preferred stock pursuant to provisions similar to those contained in
Section 3 of Part I of this Charter) as of such Valuation Date; (F) the amount
of any indebtedness or obligations of the Fund senior in right of payment to the
Preferred Shares; and (G) any current liabilities as of such Valuation Date to
the extent not reflected in any of (i)(A) through (i)(F) (including, without
limitation, any payables for Municipal Obligations purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less (ii) the value (i.e., for purposes of current
Moody's guidelines, the face value of cash, short-term Municipal Obligations
rated MIG-1, VMIG-1 or P-1, and short-term securities that are the direct
obligation of the U.S. government, provided in each case that such securities
mature on or prior to the date upon which any of (i)(A) through (i)(G) become
payable, otherwise the Moody's Discounted Value) of any of the Fund's assets
irrevocably deposited by the Fund for the payment of any of (i)(A) through
(i)(G).
(yyy) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to the
failure by the Fund to satisfy the Preferred Shares Basic Maintenance Amount (as
required by paragraph (a) of Section 7 of Part I of these Articles
Supplementary) as of a given Valuation Date, shall mean the seventh Business Day
following such Valuation Date.
(zzz) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer, Assistant Treasurer, Controller, Assistant
Controller or any Senior Vice President or Vice President of the Fund which sets
forth, as of the related Valuation Date, the assets of the Fund, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the
Preferred Shares Basic Maintenance Amount.
(aaaa) "PRICING SERVICE" shall mean any pricing service designated from
time to time in accordance with the Fund's pricing procedures.
(bbbb) "QUARTERLY VALUATION DATE" shall mean the last Business Day of each
March, June, September and December of each year, commencing on December 31,
2002.
(cccc) "RATE MULTIPLE," for Preferred Shares on any Auction Date, shall
mean the percentage, determined as set forth in the columns below (depending on
whether the Fund has notified the Auction Agent of its intent to allocate income
taxable for Federal income tax purposes to such shares prior to the Auction
establishing the Applicable Rate for such shares as provided in these Articles
Supplementary) and based on the lower of the credit rating or ratings assigned,
at the close of business on the Business Day next preceding such Auction Date,
to shares of such Preferred Shares by Moody's or Fitch (or if Moody's and Fitch
shall not make such rating available, the equivalent of either or both of such
ratings by S&P or a nationally recognized statistical rating organization (as
that term is used in the rules and regulations of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended from time to
time) that acts as a substitute rating agency in respect of Preferred Shares)
(the Fund taking all reasonable action to enable such rating agency to provide a
rating for such shares):
CREDIT RATING APPLICABLE PERCENTAGE APPLICABLE PERCENTAGE-
A-15
NO NOTIFICATION NOTIFICATION
MOODY'S FITCH
Aa3 or higher AA- or higher 110% 150%
---------------- ---------------- ---- ----
A3 to A1 A- to A+ 125% 160%
---------------- ---------------- ---- ----
Baa3 to Baa1 BBB- to BBB+ 150% 250%
---------------- ---------------- ---- ----
Ba3 to Ba1 BB- to BB+ 200% 275%
---------------- ---------------- ---- ----
Below Ba3 Below BB- 250% 300%
---------------- ---------------- ---- ----
(dddd) "RATE PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the Initial Rate Period of such shares that have a Moody's
rating of Aaa (if Moody's is then rating the Preferred Shares) and a Fitch
long-term debt rating of AAA (if Fitch is then rating the Preferred Shares) and
any Subsequent Rate Period, including any Special Rate Period, of Preferred
Shares.
(eeee) "RATE PERIOD DAYS," for any Rate Period or Dividend Period, means
the number of days that would constitute such Rate Period or Dividend Period but
for the application of paragraph (d) of Section 2 of Part I of these Articles
Supplementary or paragraph (b) of Section 4 of Part I of these Articles
Supplementary.
(ffff) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean for
purposes of calculation of Moody's Eligible Assets and Fitch Eligible Assets as
of any Valuation Date, no more than the aggregate of the book value of
receivables for Municipal Obligations sold as of or prior to such Valuation Date
if such receivables are due within five business days of such Valuation Date.
(gggg) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in Section 11 of Part I of these Articles Supplementary.
(hhhh) "REFERENCE RATE" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer, (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
(iiii) "REGISTRATION STATEMENT" has the meaning specified in the
definition of "Municipal Obligations."
(jjjj) "S&P" shall mean Standard & Poor's Ratings Services and its
successors.
(kkkk) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by the
Fund which agrees to follow the procedures required to be followed by such
securities depository in connection with the Preferred Shares.
A-16
(llll) "SELL ORDER" and "SELL ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these Articles
Supplementary.
(mmmm) "SPECIAL RATE PERIOD," with respect to Preferred Shares, shall have
the meaning specified in paragraph (a) of Section 4 of Part I of these Articles
Supplementary.
(nnnn) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified in
subparagraph (a)(i) of Section 11 of Part I of these Articles Supplementary.
(oooo) "SUBMISSION DEADLINE" shall mean 1:30 P.M., Eastern time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
(pppp) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of these Articles
Supplementary.
(qqqq) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of these
Articles Supplementary.
(rrrr) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of these Articles
Supplementary.
(ssss) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of these
Articles Supplementary.
(tttt) "SUBSEQUENT RATE PERIOD," with respect to Preferred Shares, shall
mean the period from and including the first day following the Initial Rate
Period of Preferred Shares to but excluding the next Dividend Payment Date for
Preferred Shares and any period thereafter from and including one Dividend
Payment Date for Preferred Shares to but excluding the next succeeding Dividend
Payment Date for Preferred Shares; provided, however, that if any Subsequent
Rate Period is also a Special Rate Period, such term shall mean the period
commencing on the first day of such Special Rate Period and ending on the last
day of the last Dividend Period thereof.
(uuuu) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean Credit Suisse First
Boston or Morgan Stanley & Co., Incorporated or their respective affiliates or
successors, if such entity is a commercial paper dealer; provided, however, that
none of such entities shall be a Commercial Paper Dealer.
(vvvv) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean Credit
Suisse First Boston or Merrill Lynch, Pierce, Fenner & Smith Incorporated or
their respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.
(wwww) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles Supplementary.
(xxxx) "TAXABLE ALLOCATION" shall have the meaning specified in Section 3
of Part I of these Articles Supplementary.
(yyyy) "TAXABLE INCOME" shall have the meaning specified in paragraph
(b)(iii) of Section 3 of Part II of these Articles Supplementary.
A-17
(zzzz) "TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND RATE," on any
date for any Rate Period of 28 Rate Period Days or fewer, shall mean 90% of the
quotient of (A) the per annum rate expressed on an interest equivalent basis
equal to the Kenny S&P 30 day High Grade Index or any successor index (the
"Kenny Index") (provided, however, that any such successor index must be
approved by Moody's (if Moody's is then rating the Preferred Shares) and Fitch
(if Fitch is then rating the Preferred Shares)), made available for the Business
Day immediately preceding such date but in any event not later than 8:30 A.M.,
Eastern time, on such date by Kenny S&P Evaluation Services or any successor
thereto, based upon 30-day yield evaluations at par of short-term bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny S&P Evaluation
Services or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds, but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57 (a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the maximum marginal regular Federal individual income tax rate applicable
to ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., Eastern time, on such date by Kenny S&P Evaluation
Services or any successor, the Taxable Equivalent of the Short-Term Municipal
Bond Rate shall mean the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the most recent Kenny Index so made available
for any preceding Business Day, divided by (B) 1.00 minus the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income (in each case expressed as a decimal), whichever is greater.
(aaaaa) "TREASURY BILL" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or less.
(bbbbb) "TREASURY BILL RATE," on any date for any Rate Period, shall mean
(i) the bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent. If any U.S. Government Securities Dealer does not
quote a rate required to determine the Treasury Bill Rate or the Treasury Note
Rate, the Treasury Bill Rate or the Treasury Note Rate shall be determined on
the basis of the quotation or quotations furnished by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers and any
substitute U.S. Government Securities Dealers selected by the Fund to provide
such rate or rates not being supplied by any U.S. Government Securities Dealer
of U.S. Government Securities Dealers, as the case may be, or, if the Fund does
not select any such Substitute U.S. Government Securities Dealer or Substitute
A-18
U.S. Government Securities Dealers, by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers.
(ccccc) "TREASURY FUTURES" shall have the meaning specified in paragraph
(a)(i) of Section 13 of Part I of these Articles Supplementary.
(ddddd) "TREASURY NOTE" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less but
more than 364 days.
(eeeee) "TREASURY NOTE RATE," on any date for any Rate Period, shall mean
(i) the yield on the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the Business Day next preceding such date; or (ii) in
the event that any such rate is not published in The Wall Street Journal, then
the yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from the U.S. Government Securities Dealers to the Auction
Agent. If any U.S. Government Securities Dealer does not quote a rate required
to determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any Substitute U.S. Government Securities
Dealers selected by the Fund to provide such rate or rates not being supplied by
any U.S. Government Securities Dealer or U.S. Government Securities Dealers, as
the case may be, or, if the Fund does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
(fffff) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc., Morgan
Guaranty Trust Company of New York and any other U.S. Government Securities
Dealer selected by the Fund as to which Moody's (if Moody's is then rating the
Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares) shall
not have objected or their respective affiliates or successors, if such entity
is a U.S. Government Securities Dealer.
(ggggg) "VALUATION DATE" shall mean, for purposes of determining whether
the Fund is maintaining the Preferred Shares Basic Maintenance Amount, the last
Business Day of each month.
(hhhhh) "VOTING PERIOD" shall have the meaning specified in paragraph (b)
of Section 5 of Part I of these Articles Supplementary.
(iiiii) "WINNING BID RATE" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of these Articles Supplementary.
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PART I
1. NUMBER OF AUTHORIZED SHARES. The number of authorized shares
constituting the Series A Shares is 4,000, of which 3,588 shares will be issued
on December 13, 2002. The number of authorized shares constituting the Series B
Shares is 4,000, of which 3,588 shares will be issued on December 13, 2002.
2. DIVIDENDS.
(a) RANKING. The shares of a series of Preferred Shares shall rank on a
parity with each other, with shares of any other series of Preferred Shares and
with any other series of preferred stock as to the payment of dividends by the
Fund.
(b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of a series of
Preferred Shares shall be entitled to receive, when, as and if declared by the
Board of Directors, out of funds legally available therefor in accordance with
the Charter and applicable law, cumulative cash dividends at the Applicable Rate
for shares of such series, determined as set forth in paragraph (e) of this
Section 2, and no more (except to the extent set forth in Section 3 of this Part
I), payable on the Dividend Payment Dates with respect to shares of such series
determined pursuant to paragraph (d) of this Section 2. Holders of Preferred
Shares shall not be entitled to any dividend, whether payable in cash, property
or shares, in excess of full cumulative dividends, as herein provided, on
Preferred Shares. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on Preferred Shares which
may be in arrears, and, except to the extent set forth in subparagraph (e)(i) of
this Section 2, no additional sum of money shall be payable in respect of any
such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on
Preferred Shares of any series shall accumulate at the Applicable Rate for
shares of such series from the Date of Original Issue thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. Dividends shall be
payable for the Initial Rate Period on January 17, 2003, with respect to Series
A Shares, and January 21, 2003, with respect to Series B Shares, and, if
declared by the Board of Directors (which declaration may be by a single
resolution for multiple such dates), on each seventh day thereafter (or after
the Dividend Payment Date with respect to an intervening Special Rate Period),
with respect to Series A Shares, and each twenty-eighth day thereafter (or after
the Dividend Payment Date with respect to an intervening Special Rate Period),
with respect to Series B Shares (each date being a "Dividend Payment Date");
provided, however, that:
(i) if the day on which dividends would otherwise be payable on Preferred
Shares is not a Business Day, then such dividends shall be payable on such
shares on the first Business Day that falls after such day, and
(ii) notwithstanding this paragraph (d) of Section 2, the Fund in its
discretion may establish the Dividend Payment Dates in respect of any Special
Rate Period of shares of a series of Preferred Shares consisting of more than 7
Rate Period Days, with respect to Series A Shares, and 28 Rate Period Days, with
respect to Series B Shares; provided, however, that such dates shall be set
forth in the Notice of Special Rate Period relating to such Special Rate Period,
as delivered to the Auction Agent, which Notice of Special Rate Period shall be
filed with the Secretary of the Fund; and further provided that (1) any such
Dividend Payment Date shall be a Business Day and (2) the last Dividend Payment
Date in respect of such Special Rate Period shall be the Business Day
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immediately following the last day thereof, as such last day is determined in
accordance with paragraph (b) of Section 4 of this Part I.
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.
(i) DIVIDEND RATES. The dividend rate on shares of a series of Preferred
Shares during the period from and after the Date of Original Issue of shares of
such series to and including the last day of the Initial Rate Period of shares
of such series shall be equal to the rate per annum set forth with respect to
shares of such series under "Designation." The initial dividend rate on any
series of preferred stock subsequently established by the Fund shall be the rate
set forth in or determined in accordance with the resolutions of the Board of
Directors establishing such series. For each Subsequent Rate Period of shares of
such series thereafter, the dividend rate on shares of such series shall be
equal to the rate per annum that results from an Auction for shares of such
series on the Auction Date next preceding such Subsequent Rate Period; provided,
however, that if:
(A) an Auction for any such Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on shares of such series
for such Subsequent Rate Period will be the Maximum Rate of such series on the
Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
consisting of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), but, prior to 12:00 Noon,
Eastern time, on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall have been cured in
accordance with paragraph (f) of this Section 2 and the Fund shall have paid to
the Auction Agent a late charge ("Late Charge") equal to the sum of (1) if such
Failure to Deposit consisted of the failure timely to pay to the Auction Agent
the full amount of dividends with respect to any Dividend Period of shares of
such series, an amount computed by multiplying (x) 200% of the Reference Rate
for the Rate Period during which such Failure to Deposit occurs on the Dividend
Payment Date for such Dividend Period by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit has not been cured
in accordance with paragraph (f) of this Section 2 (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate obtained
against the aggregate Liquidation Preference of the outstanding shares of such
series and (2) if such Failure to Deposit consisted of the failure timely to pay
to the Auction Agent the Redemption Price of the shares, if any, of such series
for which Notice of Redemption has been mailed by the Fund pursuant to paragraph
(c) of Section 11 of this Part I, an amount computed by multiplying (x) 200% of
the Reference Rate for the Rate Period during which such Failure to Deposit
occurs on the redemption date by (y) a fraction, the numerator of which shall be
the number of days for which such Failure to Deposit is not cured in accordance
with paragraph (f) of this Section 2 (including the day such Failure to Deposit
occurs and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against the
aggregate Liquidation Preference of the outstanding shares of such series to be
redeemed, no Auction will be held, in respect of shares of such series for the
Subsequent Rate Period thereof and the dividend rate for shares of such series
for such Subsequent Rate Period will be the Maximum Rate on the Auction Date for
such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
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consisting of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), and, prior to 12:00 Noon,
Eastern time, on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall not have been cured
in accordance with paragraph (f) of this Section 2 or the Fund shall not have
paid the applicable Late Charge to the Auction Agent, no Auction will be held in
respect of shares of such series for the first Subsequent Rate Period thereof
thereafter (or for any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Fund pays the applicable Late Charge
to the Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Fund cures such
Failure to Deposit), in each case no later than 12:00 Noon, Eastern time, on the
fourth Business Day prior to the end of such Rate Period), and the dividend rate
for shares of such series for each such Subsequent Rate Period for shares of
such series shall be a rate per annum equal to the Maximum Rate on the Auction
Date for such Subsequent Rate Period (but with the prevailing rating for shares
of such series, for purposes of determining such Maximum Rate, being deemed to
be "Below "Ba3"/BB"); or
(D) any Failure to Deposit shall have occurred with respect to shares of
such series during a Special Rate Period thereof consisting of more than 364
Rate Period Days, or during any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which a Failure to
Deposit occurred that has not been cured, and, prior to 12:00 Noon, Eastern
time, on the fourth Business Day preceding the Auction Date for the Rate Period
subsequent to such Rate Period, such Failure to Deposit shall not have been
cured in accordance with paragraph (f) of this Section 2 or, in the event
Moody's is then rating such shares, the Fund shall not have paid the applicable
Late Charge to the Auction Agent (such Late Charge, for purposes of this
subparagraph (D), to be calculated by using, as the Reference Rate, the
Reference Rate applicable to a Rate Period (x) consisting of more than 182 Rate
Period Days but fewer than 365 Rate Period Days and (y) commencing on the date
on which the Rate Period during which Failure to Deposit occurs commenced), no
Auction will be held with respect to shares of such series for such Subsequent
Rate Period (or for any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Fund pays the applicable Late Charge
to the Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Fund cures such
Failure to Deposit), in each case no later than 12:00 Noon, Eastern time, on the
fourth Business Day prior to the end of such Rate Period), and the dividend rate
for shares of such series for each such Subsequent Rate Period shall be a rate
per annum equal to the Maximum Rate for shares of such series on the Auction
Date for such Subsequent Rate Period (but with the prevailing rating for shares
of such series, for purposes of determining such Maximum Rate, being deemed to
be "Below "Ba3"/BB") (the rate per annum at which dividends are payable on
shares of a series of Preferred Shares for any Rate Period thereof being herein
referred to as the "Applicable Rate" for shares of such series).
(ii) CALCULATION OF DIVIDENDS. The amount of dividends per share payable
on shares of a series of Preferred Shares on any date on which dividends on
shares of such series shall be payable shall be computed by multiplying the
Applicable Rate for shares of such series in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall be
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365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to
shares of a series of Preferred Shares shall have been cured (if such Failure to
Deposit is not solely due to the willful failure of the Fund to make the
required payment to the Auction Agent) with respect to any Rate Period of shares
of such series if, within the respective time periods described in subparagraph
(e)(i) of this Section 2, the Fund shall have paid to the Auction Agent (A) all
accumulated and unpaid dividends on shares of such series and (B) without
duplication, the Redemption Price for shares, if any, of such series for which
Notice of Redemption has been mailed by the Fund pursuant to paragraph (c) of
Section 11 of Part I of these Articles Supplementary; provided, however, that
the foregoing clause (B) shall not apply to the Fund's failure to pay the
Redemption Price in respect of Preferred Shares when the related Redemption
Notice provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT. The Fund shall pay to the
Auction Agent, not later than 12:00 Noon, Eastern time, on the Business Day next
preceding each Dividend Payment Date for shares of a series of Preferred Shares,
an aggregate amount of funds available on the next Business Day in The City of
New York, New York, equal to the dividends to be paid to all Holders of shares
of such series on such Dividend Payment Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND. All moneys paid
to the Auction Agent for the payment of dividends (or for the payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
in paragraph (i) of this Section 2. Any moneys paid to the Auction Agent in
accordance with the foregoing but not applied by the Auction Agent to the
payment of dividends (and any such Late Charge) will, to the extent permitted by
law, be repaid to the Fund at the end of 90 days from the date on which such
moneys were so to have been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on Preferred Shares shall be
paid on the Dividend Payment Date therefor to the Holders thereof as their names
appear on the record books of the Fund on the Business Day next preceding such
Dividend Payment Date.
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID DIVIDENDS.
Any dividend payment made on Preferred Shares shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such shares.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the Holders
as their names appear on the record books of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as may be fixed by the
Board of Directors.
(k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS. Dividends on
Preferred Shares shall be designated as exempt-interest dividends up to the
amount of tax-exempt income of the Fund, to the extent permitted by, and for
purposes of, Section 852 of the Code.
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3. GROSS-UP PAYMENTS. Holders of Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends in an amount equal to the aggregate
Gross-up Payments as follows:
(a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD DAYS
OR FEWER. If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, the Fund allocates any net capital gains or
other income taxable for Federal income tax purposes to a dividend paid on
Preferred Shares without having given advance notice thereof to the Auction
Agent as provided in Section 5 of Part II of these Articles Supplementary (such
allocation being referred to herein as a "Taxable Allocation") solely by reason
of the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding Preferred Shares or the
liquidation of the Fund, the Fund shall, prior to the end of the calendar year
in which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Fund's dividend disbursing agent to send such notice with a Gross-up
Payment to each Holder of such shares that was entitled to such dividend payment
during such calendar year at such Holder's address as the same appears or last
appeared on the record books of the Fund.
(b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS. If, in the case
of any Special Rate Period of more than 28 Rate Period Days, the Fund makes a
Taxable Allocation to a dividend paid on Preferred Shares, the Fund shall, prior
to the end of the calendar year in which such dividend was paid, provide notice
thereof to the Auction Agent and direct the Fund's dividend disbursing agent to
send such notice with a Gross-up Payment to each Holder of shares that was
entitled to such dividend payment during such calendar year at such Holder's
address as the same appears or last appeared on the record books of the Fund.
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The Fund shall
not be required to make Gross-up Payments with respect to any net capital gains
or other taxable income determined by the Internal Revenue Service to be
allocable in a manner different from that allocated by the Fund.
4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Fund, at its
option, may designate any succeeding Subsequent Rate Period of shares of a
series of Preferred Shares as a Special Rate Period consisting of a specified
number of Rate Period Days evenly divisible by seven subject to adjustment as
provided in paragraph (b) of this Section 4. A designation of a Special Rate
Period shall be effective only if (A) notice thereof shall have been given in
accordance with paragraph (c) and subparagraph (d)(i) of this Section 4, (B) an
Auction for shares of such series shall have been held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period and
Sufficient Clearing Bids for shares of such series shall have existed in such
Auction, and (C) if any Notice of Redemption shall have been mailed by the Fund
pursuant to paragraph (c) of Section 11 of this Part I with respect to any
shares of such series, the Redemption Price with respect to such shares shall
have been deposited with the Auction Agent. In the event the Fund wishes to
designate any succeeding Subsequent Rate Period for shares of a series of
Preferred Shares as a Special Rate Period consisting of more than 28 Rate Period
Days, the Fund shall notify Fitch (if Fitch is then rating the series of
Preferred Shares) and Moody's (if Moody's is then rating the series of Preferred
Shares) in advance of the commencement of such Subsequent Rate Period that the
Fund wishes to designate such Subsequent Rate Period as a Special Rate Period
and shall provide Fitch (if Fitch is then rating the series of Preferred Shares)
and Moody's (if Moody's is then rating the series of Preferred Shares) with such
documents as either may request. In addition, full cumulative dividends, any
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amounts due with respect to mandatory redemptions and any additional dividends
payable prior to such date must be paid in full or deposited with the Auction
Agent. The Fund also must have portfolio securities with a discounted value at
least equal to the Preferred Share Maintenance Amount.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the Fund
wishes to designate a Subsequent Rate Period as a Special Rate Period, but the
day following what would otherwise be the last day of such Special Rate Period
is not (a) a Friday that is a Business Day in case of Series A Shares or (b) a
Monday that is a Business Day in case of Series B Shares, then the Fund shall
designate such Subsequent Rate Period as a Special Rate Period consisting of the
period commencing on the first day following the end of the immediately
preceding Rate Period and ending (a) on the first Thursday that is followed by a
Friday that is a Business Day preceding what would otherwise be such last day in
the case of Series A Shares, or (b) on the first Friday that is followed by a
Monday that is a Business Day preceding what would otherwise be such last day in
the case of Series B Shares.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Preferred Shares as a Special Rate Period pursuant to paragraph (a) of this
Section 4, not less than 20 (or such lesser number of days as may be agreed to
from time to time by the Auction Agent) nor more than 30 days prior to the date
the Fund proposes to designate as the first day of such Special Rate Period
(which shall be such day that would otherwise be the first day of a Minimum Rate
Period), notice shall be (i) published or caused to be published by the Fund in
a newspaper of general circulation to the financial community in The City of New
York, New York, which carries financial news, and (ii) mailed by the Fund by
first-class mail, postage prepaid, to the Holders of shares of such series. Each
such notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Rate Period of shares of such series as a Special Rate
Period, specifying the first day thereof and (B) that the Fund will, by 11:00
A.M., Eastern time, on the second Business Day next preceding such date (or by
such later time or date, or both, as may be agreed to by the Auction Agent)
notify the Auction Agent of either (x) its determination, subject to certain
conditions, to exercise such option, in which case the Fund shall specify the
Special Rate Period designated, or (y) its determination not to exercise such
option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M., Eastern time,
on the second Business Day next preceding the first day of any proposed Special
Rate Period of shares of a series of Preferred Shares as to which notice has
been given as set forth in paragraph (c) of this Section 4 (or such later time
or date, or both, as may be agreed to by the Auction Agent), the Fund shall
deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the Fund
has determined to designate the next succeeding Rate Period of shares of such
series as a Special Rate Period, specifying the same and the first day thereof,
(B) the Auction Date immediately prior to the first day of such Special Rate
Period, (C) that such Special Rate Period shall not commence if (1) an Auction
for shares of such series shall not be held on such Auction Date for any reason
or (2) an Auction for shares of such series shall be held on such Auction Date
but Sufficient Clearing Bids for shares of such series shall not exist in such
Auction (other than because all Outstanding shares of such series are subject to
Submitted Hold Orders), (D) the scheduled Dividend Payment Dates for shares of
such series during such Special Rate Period, (E) the Special Redemption
Provisions, if any, applicable to shares of such series in respect of such
Special Rate Period, such notice to be accompanied by a Preferred Shares Basic
Maintenance Report showing that, as of the third Business Day next preceding
such proposed Special Rate Period, Moody's Eligible Assets (if Moody's is then
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rating the series in question) and Fitch Eligible Assets (if Fitch is then
rating the series in question) each have an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount as of such Business Day
(assuming for purposes of the foregoing calculation that (a) the Maximum Rate is
the Maximum Rate on such Business Day as if such Business Day were the Auction
Date for the proposed Special Rate Period, and (b) the Moody's Discount Factors
applicable to Moody's Eligible Assets and the Fitch Discount Factors applicable
to Fitch Eligible Assets are determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Fund, as described
in the definitions of Moody's Discount Factor and Fitch Discount Factor herein)
and (F) that if all applicable Outstanding Preferred Shares are subject to
Submitted Hold Orders, then the Rate Period following the Auction will
automatically be the same length as the preceding Rate Period; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period of shares of such series and that the
next succeeding Rate Period of shares of such series shall be a Minimum Rate
Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Fund fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Preferred Shares Basic Maintenance Report to the effect set
forth in such subparagraph (if either Moody's or Fitch is then rating the series
in question)) with respect to any designation of any proposed Special Rate
Period to the Auction Agent by 11:00 A.M., Eastern time, on the second Business
Day next preceding the first day of such proposed Special Rate Period (or by
such later time or date, or both, as may be agreed to by the Auction Agent), the
Fund shall be deemed to have delivered a notice to the Auction Agent with
respect to such Special Rate Period to the effect set forth in subparagraph
(d)(ii) of this Section 4. In the event the Fund delivers to the Auction Agent a
notice described in subparagraph (d)(i) of this Section 4, it shall file a copy
of such notice with the Secretary of the Fund, and the contents of such notice
shall be binding on the Fund. In the event the Fund delivers to the Auction
Agent a notice described in subparagraph (d)(ii) of this Section 4, the Fund
will provide Moody's (if Moody's is then rating the series in question) and
Fitch (if Fitch is then rating the series in question ) a copy of such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER SHARE OF PREFERRED SHARES. Except as otherwise provided
in the Charter or as otherwise required by law, (i) each Holder of Preferred
Shares shall be entitled to one vote for each Preferred Share held by such
Holder on each matter submitted to a vote of Stockholders of the Fund, and (ii)
the holders of outstanding shares of preferred stock, including Preferred
Shares, and of Common Shares shall vote together as a single class; provided,
however, that, at any meeting of the Stockholders of the Fund held for the
election of Directors, the holders of outstanding shares of preferred stock,
including Preferred Shares, represented in person or by proxy at said meeting,
shall be entitled, as a class, to the exclusion of the holders of all other
securities and classes of shares of stock of the Fund, to elect two Directors of
the Fund (regardless of the total number of Directors serving on the Fund's
Board of Directors), each share of preferred stock, including each Preferred
Share, entitling the holder thereof to one vote; provided, further, that if the
Board of Directors shall be divided into one or more classes, the Board of
Directors shall determine to which class or classes the Directors elected by the
holders of preferred stock shall be assigned and the holders of the preferred
stock shall only be entitled to elect the Directors so designated as being
A-26
elected by the holders of the preferred stock when their term shall have
expired; provided, finally, that such Directors appointed by the holders of
preferred shares shall be allocated as evenly as possible among the classes of
Directors. Subject to paragraph (b) of this Section 5, the holders of
outstanding Common Shares and shares of preferred stock, including Preferred
Shares, voting together as a single class, shall elect the balance of the
Directors.
(b) VOTING FOR ADDITIONAL DIRECTORS.
(i) VOTING PERIOD. Except as otherwise provided in the Charter or as
otherwise required by law, during any period in which any one or more of the
conditions described in subparagraphs (A) or (B) of this subparagraph (b)(i)
shall exist (such period being referred to herein as a "Voting Period"), the
number of Directors constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two Directors elected
exclusively by the holders of preferred stock, including Preferred Shares, would
constitute a majority of the Board of Directors as so increased by such smallest
number; and the holders of shares of preferred stock, including Preferred
Shares, shall be entitled, voting as a class on a one-vote-per-share basis (to
the exclusion of the holders of all other securities and classes of shares of
stock of the Fund), to elect such smallest number of additional Directors,
together with the two Directors that such holders are in any event entitled to
elect. A Voting Period shall commence:
(A) if at the close of business on any dividend payment date accumulated
dividends (whether or not earned or declared) on any outstanding shares of
preferred stock, including Preferred Shares, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or specified securities
shall not have been deposited with the Auction Agent for the payment of such
accumulated dividends; or
(B) if at any time holders of Preferred Shares are entitled under the 1940
Act to elect a majority of the Directors of the Fund.
Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) NOTICE OF SPECIAL MEETING. As soon as practicable after the accrual
of any right of the holders of preferred stock, including Preferred Shares, to
elect additional Directors as described in subparagraph (b)(i) of this Section
5, the Fund shall notify the Auction Agent and the Auction Agent shall call a
special meeting of such holders, by mailing a notice of such special meeting to
such holders, such meeting to be held not less than 10 nor more than 20 days
after the date of mailing of such notice. If the Fund fails to send such notice
to the Auction Agent or if the Auction Agent does not call such a special
meeting, it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting of holders of preferred stock, including Preferred Shares, held during a
Voting Period at which Directors are to be elected, such holders, voting
together as a class (to the exclusion of the holders of all other securities and
classes of shares of stock of the Fund), shall be entitled to elect the number
of Directors prescribed in subparagraph (b)(i) of this Section 5 on a
one-vote-per-share basis.
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(iii) TERMS OF OFFICE OF EXISTING DIRECTORS. The terms of office of all
persons who are Directors of the Fund at the time of a special meeting of
Holders and holders of other shares of preferred stock of the Fund to elect
Directors shall continue, notwithstanding the election at such meeting by the
Holders and such other holders of the number of Directors that they are entitled
to elect, and the persons so elected by the Holders and such other holders,
together with the two incumbent Directors elected by the Holders and such other
holders of shares of preferred stock of the Fund and the remaining incumbent
Directors elected by the holders of the Common Shares and preferred stock,
including Preferred Shares, shall constitute the duly elected Directors of the
Fund.
(iv) TERMS OF OFFICE OF CERTAIN DIRECTORS TO TERMINATE UPON TERMINATION OF
VOTING PERIOD. Simultaneously with the termination of a Voting Period, the terms
of office of the additional Directors elected by the Holders and holders of
other shares of preferred stock of the Fund pursuant to subparagraph (b)(i) of
this Section 5 shall terminate, the remaining Directors shall constitute the
Directors of the Fund and the voting rights of the Holders and such other
holders to elect additional Directors pursuant to subparagraph (b)(i) of this
Section 5 shall cease, subject to the provisions of the last sentence of
subparagraph (b)(i) of this Section 5.
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS.
(i) INCREASES IN CAPITALIZATION. So long as any Preferred Shares are
outstanding, the Fund shall not, without the affirmative vote or consent of the
Holders of at least a majority of the Preferred Shares outstanding at the time,
in person or by proxy, either in writing or at a meeting, voting as a separate
class: (a) authorize, create or issue any class or series of shares ranking
prior to or on a parity with Preferred Shares with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund, or authorize, create or issue additional shares
of any series of Preferred Shares (except that, notwithstanding the foregoing,
but subject to the provisions of paragraph (c) of Section 13 of this Part I, the
Board of Directors, without the vote or consent of the Holders of Preferred
Shares, may from time to time authorize and create, and the Fund may from time
to time issue additional shares of, any series of Preferred Shares, or classes
or series of preferred shares ranking on a parity with Preferred Shares with
respect to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund; provided,
however, that if Moody's or Fitch is not then rating the Preferred Shares, the
aggregate liquidation preference of all Preferred Shares of the Fund outstanding
after any such issuance, exclusive of accumulated and unpaid dividends, may not
exceed $245,000,000) or (b) amend, alter or repeal the provisions of the
Charter, or these Articles Supplementary, whether by merger, consolidation or
otherwise, so as to affect any preference, right or power of such Preferred
Shares or the Holders thereof; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division or split of a share of Preferred
Shares will be deemed to affect such preferences, rights or powers only if the
terms of such division adversely affect the Holders of Preferred Shares and
(iii) the authorization, creation and issuance of classes or series of shares
ranking junior to Preferred Shares with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, will be deemed to affect such preferences, rights or powers
only if Moody's or Fitch is then rating Preferred Shares and such issuance
would, at the time thereof, cause the Fund not to satisfy the 1940 Act Preferred
Shares Asset Coverage or the Preferred Shares Basic Maintenance Amount. So long
as any Preferred Shares are outstanding, the Fund shall not, without the
affirmative vote or consent of the Holders of at least a majority of the
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Preferred Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee becoming
insolvent. If any action set forth above would adversely affect the rights of
one or more series (the "Affected Series") of Preferred Shares in a manner
different from any other series of Preferred Shares, the Fund will not approve
any such action without the affirmative vote or consent of the holders of at
least a majority of the shares of each such Affected Series outstanding at the
time, in person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class).
(ii) 1940 ACT MATTERS. Unless a higher percentage is provided for in the
Charter, (A) the affirmative vote of the Holders a "majority of the outstanding"
(as such term is defined in the 1940 Act) preferred stock of the Fund, including
Preferred Shares, voting as a separate class, shall be required to approve (A)
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares and (B) any action requiring a vote of security holders of
the Fund under Section 13(a) of the 1940 Act. In the event a vote of Holders of
Preferred Shares is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Fund shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) that
such vote is to be taken and the nature of the action with respect to which such
vote is to be taken. The Fund shall, not later than ten Business Days after the
date on which such vote is taken, notify Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) of
the results of such vote.
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT STOCKHOLDER APPROVAL. The Board
of Directors may, without the vote or consent of the Holders of the Preferred
Shares, or any other stockholder of the Fund, from time to time amend, alter or
repeal any or all of the definitions of the terms listed below, or any provision
of the Articles Supplementary viewed by Moody's or Fitch as a predicate for any
such definition, and any such amendment, alteration or repeal will not be deemed
to affect the preferences, rights or powers of the Preferred Shares or the
Holders thereof, provided the Board of Directors receives confirmation from
Moody's (if Moody's is then rating the Preferred Shares) and Fitch (if Fitch is
then rating the Preferred Shares), that any such amendment, alteration or repeal
would not impair the ratings then assigned to the Preferred Shares by Moody's
(if Moody's is then rating the Preferred Shares) or Fitch (if Fitch is then
rating the Preferred Shares):
Annual Valuation Date Market Value
Accountant's Confirmation Maximum Potential Additional Dividend
Liability
Annual Valuation Date Moody's Discount Factor
Closing Transaction Moody's Eligible Assets
Deposit Securities Moody's Hedging Transactions
Discounted Value Exposure Period Moody's Volatility Factor Municipal
Bonds
Fitch Discount Factor Municipal Index
Fitch Eligible Assets Quarterly Valuation Date
A-29
Fitch Hedging Transactions Receivables for Municipal Obligations
Sold
Fitch Volatility Factor Preferred Shares Basic Maintenance
Amount
Forward Commitments Preferred Shares Basic Maintenance
Cure Date
Hedging Transactions Preferred Shares Basic Maintenance
Report
Independent Accountant Treasury Futures
1940 Act Preferred Shares Asset Coverage Valuation Date
1940 Act Cure Date
(e) RELATIVE RIGHTS AND PREFERENCES. Unless otherwise required by law or
provided elsewhere in the Charter, the Holders of Preferred Shares shall not
have any relative rights or preferences or other special rights other than those
specifically set forth herein.
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of Preferred
Shares shall have no preemptive rights or rights to cumulative voting.
(g) VOTING FOR DIRECTORS SOLE REMEDY FOR FUND'S FAILURE TO PAY DIVIDENDS.
In the event that the Fund fails to pay any dividends on the Preferred Shares,
the exclusive remedy of the Holders shall be the right to vote for Directors
pursuant to the provisions of this Section 5.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by these
Articles Supplementary, by the other provisions of the Charter, by statute or
otherwise, no Holder shall be entitled to vote any share of Preferred Shares and
no share of Preferred Shares shall be deemed to be "outstanding" for the purpose
of voting or determining the number of shares required to constitute a quorum
if, prior to or concurrently with the time of determination of shares entitled
to vote or shares deemed outstanding for quorum purposes, as the case may be,
the requisite Notice of Redemption with respect to such shares shall have been
mailed as provided in paragraph (c) of Section 11 of this Part I and the
Redemption Price for the redemption of such shares shall have been deposited in
trust with the Auction Agent for that purpose. No share of Preferred Shares held
by the Fund or any affiliate of the Fund (except for shares held by a
Broker-Dealer that is an affiliate of the Fund for the account of its customers)
shall have any voting rights or be deemed to be outstanding for voting or other
purposes.
6. 1940 ACT PREFERRED SHARES ASSET COVERAGE. The Fund shall maintain, as
of the last Business Day of each month in which any share of Preferred Shares is
outstanding, the 1940 Act Preferred Shares Asset Coverage.
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
(a) So long as Preferred Shares are outstanding, the Fund shall maintain,
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date, (i) Fitch Eligible Assets having an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount (if Fitch is then rating the Preferred Shares) and (ii)
Moody's Eligible Assets having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount (if Moody's is then rating
the Preferred Shares).
(b) On or before 5:00 P.M., Eastern time, on the third Business Day after
a Valuation Date on which the Fund fails to satisfy the Preferred Shares Basic
Maintenance Amount, and on the third Business Day after the Preferred Shares
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Basic Maintenance Cure Date with respect to such Valuation Date, the Fund shall
complete and deliver to Fitch (if Fitch is then rating the Preferred Shares),
Moody's (if Moody's is then rating the Preferred Shares) and the Auction Agent
(if either Fitch or Moody's is then rating the Preferred Shares) a Preferred
Shares Basic Maintenance Report as of the date of such failure or such Preferred
Shares Basic Maintenance Cure Date, as the case may be, which will be deemed to
have been delivered to the Auction Agent if the Auction Agent receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day
the Fund mails to the Auction Agent for delivery on the next Business Day the
full Preferred Shares Basic Maintenance Report. The Fund shall also deliver a
Preferred Shares Basic Maintenance Report to (i) the Auction Agent (if either
Moody's or Fitch is then rating the Preferred Shares) as of the last Business
Day of each month, and (ii) Moody's (if Moody's is then rating the Preferred
Shares) and Fitch (if Fitch is then rating the Preferred Shares), in each case
on or before the seventh Business Day after such day. A failure by the Fund to
deliver a Preferred Shares Basic Maintenance Report pursuant to the preceding
sentence shall be deemed to be delivery of a Preferred Shares Basic Maintenance
Report indicating the Discounted Value for all assets of the Fund is less than
the Preferred Shares Basic Maintenance Amount, as of the relevant Valuation
Date.
(c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to a Quarterly Valuation Date that is also an Annual Valuation Date,
the Fund shall cause the Independent Accountant to confirm in writing to Fitch
(if Fitch is then rating the Preferred Shares), Moody's (if Moody's is then
rating the Preferred Shares) and the Auction Agent (if either Fitch or Moody's
is then rating the Preferred Shares) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Preferred Shares Basic
Maintenance Report, randomly selected by the Independent Accountant, that was
delivered by the Fund during the quarter ending on such Annual Valuation Date),
(ii) that, in such Report (and in such randomly selected Report), the Fund
correctly determined in accordance with these Articles Supplementary whether the
Fund had, at such Annual Valuation Date (and at the Valuation Date addressed in
such randomly-selected Report), Fitch Eligible Assets (if Fitch is then rating
the Preferred Shares) of an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares) of an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount, (iii) that, in
such Report (and in such randomly selected Report), the Fund determined whether
the Fund had, at such Annual Valuation Date (and at the Valuation Date addressed
in such randomly selected Report) in accordance with these Articles
Supplementary, with respect to the Fitch ratings on Municipal Obligations, the
issuer name, issue size and coupon rate listed in such Report, verified by the
Independent Accountant by reference to Bloomberg Financial Services or another
independent source approved in writing by Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) and
the Independent Accountant shall provide a listing in its letter of any
differences, (iv) with respect to the Moody's ratings on Municipal Obligations,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by the Independent Accountant by reference to
Bloomberg Financial Services or another independent source approved in writing
by Moody's (if Moody's is then rating the Preferred Shares) and Fitch (if Fitch
is then rating the Preferred Shares) and the Independent Accountant shall
provide a listing in its letter of any differences, (v) with respect to the bid
or mean price (or such alternative permissible factor used in calculating the
Market Value) provided by the custodian of the Fund's assets to the Fund for
purposes of valuing securities in the Fund's portfolio, that the Independent
Accountant has traced the price used in such Report to the bid or mean price
listed in such Report as provided to the Fund and verified that such information
agrees (in the event such information does not agree, the Independent Accountant
A-31
will provide a listing in its letter of such differences) and (vi) with respect
to such confirmation to Moody's (if Moody's is then rating the Preferred Shares)
and Fitch (if Fitch is then rating the Preferred Shares), that the Fund has
satisfied the requirements of Section 13 of this Part I of these Articles
Supplementary (such confirmation is herein called the "Accountant's
Confirmation").
(d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to any Valuation Date on which the Fund failed to satisfy the
Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Fund shall cause the Independent
Accountant to provide to Fitch (if Fitch is then rating the shares of series in
question), Moody's (if Moody's is then rating the series in question) and the
Auction Agent (if either Fitch or Moody's is then rating the series in question)
an Accountant's Confirmation as to such Preferred Shares Basic Maintenance
Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph (c)
or (d) of this Section 7 shows that an error was made in the Preferred Shares
Basic Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation was required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all Fitch Eligible Assets (if
Fitch is then rating the Preferred Shares) or Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares), as the case may be, of the Fund
was determined by the Independent Accountant, then in the absence of manifest
error the calculation or determination made by such Independent Accountant shall
be final and conclusive and shall be binding on the Fund, and the Fund shall
accordingly amend and deliver the Preferred Shares Basic Maintenance Report to
Fitch (if Fitch is then rating the Preferred Shares), Moody's (if Moody's is
then rating the Preferred Shares) and the Auction Agent (if either Fitch or
Moody's is then rating the Preferred Shares) promptly following receipt by the
Fund of such Accountant's Confirmation.
(f) On or before 5:00 p.m., Eastern time, on the first Business Day after
the Date of Original Issue of any Preferred Shares, the Fund shall complete and
deliver to Fitch (if Fitch is then rating the Preferred Shares) and Moody's (if
Moody's is then rating the Preferred Shares) a Preferred Shares Basic
Maintenance Report as of the close of business on such Date of Original Issue.
(g) On or before 5:00 p.m., Eastern time, on the seventh Business Day
after either (i) the Fund shall have redeemed Common Shares or (ii) the ratio of
the Discounted Value of Fitch Eligible Assets or the Discounted Value of Moody's
Eligible Assets to the Preferred Shares Basic Maintenance Amount on any
valuation date is less than or equal to 105% or (iii) whenever requested by
Moody's or Fitch, the Fund shall complete and deliver to Fitch (if Fitch is then
rating the Preferred Shares) or Moody's (if Moody's is then rating the Preferred
Shares), as the case may be, a Preferred Shares Basic Maintenance Report as of
the date of either such event.
8. RESERVED.
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON SHARES OTHER THAN PREFERRED SHARES. Except as set forth
in the next sentence, no dividends shall be declared or paid or set apart for
payment on the shares of any class or series of shares of stock of the Fund
A-32
ranking, as to the payment of dividends, on a parity with Preferred Shares for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid on the shares of each series of Preferred Shares through its
most recent Dividend Payment Date. When dividends are not paid in full upon the
shares of each series of Preferred Shares through its most recent Dividend
Payment Date or upon the shares of any other class or series of shares of stock
of the Fund ranking on a parity as to the payment of dividends with Preferred
Shares through their most recent respective dividend payment dates, all
dividends declared upon Preferred Shares and any other such class or series of
shares of stock ranking on a parity as to the payment of dividends with
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on Preferred Shares and such other class or series of shares
of stock shall in all cases bear to each other the same ratio that accumulated
dividends per share on the Preferred Shares and such other class or series of
shares of stock bear to each other (for purposes of this sentence, the amount of
dividends declared per share of Preferred Shares shall be based on the
Applicable Rate for such share for the Dividend Periods during which dividends
were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES UNDER
THE 1940 ACT. The Board of Directors shall not declare any dividend (except a
dividend payable in Common Shares), or declare any other distribution, upon the
Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long
as any Preferred Shares are outstanding, and except as set forth in paragraph
(a) of this Section 9 and paragraph (c) of Section 12 of this Part I, (A) the
Fund shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the Preferred Shares as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of the Common Shares or any other shares of the Fund
ranking junior to or on a parity with the Preferred Shares as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the
Preferred Shares as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up), or any such parity shares (except
by conversion into or exchange for shares of the Fund ranking junior to or on a
parity with Preferred Shares as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up), unless (i) full
cumulative dividends on shares of each series of Preferred Shares through its
most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent and (ii) the Fund has redeemed the full number of Preferred Shares
required to be redeemed by any provision for mandatory redemption pertaining
thereto, and (B) the Fund shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to Preferred Shares as to
the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of Common Shares or any other shares of
the Fund ranking junior to Preferred Shares as to the payment of dividends or
A-33
the distribution of assets upon dissolution, liquidation or winding up, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares (except by conversion into or
exchange for shares of the Fund ranking junior to Preferred Shares as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares) would each at least equal the Preferred Shares Basic
Maintenance Amount.
10. RESERVED.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of this paragraph (a),
Preferred Shares of any series may be redeemed, at the option of the Fund, as a
whole or from time to time in part, on the second Business Day preceding any
Dividend Payment Date for shares of such series, out of funds legally available
therefor, at a redemption price per share equal to the sum of $25,000 plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to (but not including) the date fixed for redemption; provided,
however, that (1) shares of a series of Preferred Shares may not be redeemed in
part if after such partial redemption fewer than 250 shares of such series of
Preferred Shares remain outstanding; (2) shares of a series of Preferred Shares
are redeemable by the Fund during the Initial Rate Period only on the second
Business Day next preceding the last Dividend Payment Date for such Initial Rate
Period; and (3) subject to subparagraph (ii) of this paragraph (a), the Notice
of Special Rate Period relating to a Special Rate Period of shares of a series
of Preferred Shares, as delivered to the Auction Agent and filed with the
Secretary of the Fund, may provide that shares of such series shall not be
redeemable during the whole or any part of such Special Rate Period (except as
provided in subparagraph (iv) of this paragraph (a)) or shall be redeemable
during the whole or any part of such Special Rate Period only upon payment of
such redemption premium or premiums as shall be specified therein ("Special
Redemption Provisions").
(ii) A Notice of Special Rate Period relating to shares of a series of
Preferred Shares for a Special Rate Period thereof may contain Special
Redemption Provisions only if the Fund's Board of Directors, after consultation
with the Broker-Dealer or Broker-Dealers for such Special Rate Period of shares
of such series, determines that such Special Redemption Provisions are in the
best interest of the Fund.
(iii) If fewer than all of the outstanding shares of a series of Preferred
Shares are to be redeemed pursuant to subparagraph (i) of this paragraph (a),
the number of shares of such series to be redeemed shall be determined by the
Board of Directors, and such shares shall be redeemed pro rata from the Holders
of shares of such series in proportion to the number of shares of such series
held by such Holders or by such other method that the Board of Directors deems
fair and equitable.
(iv) Subject to the provisions of subparagraph (v) of this paragraph (a),
shares of any series of Preferred Shares may be redeemed, at the option of the
Fund, as a whole but not in part, out of funds legally available therefor, on
A-34
the first day following any Dividend Period thereof included in a Rate Period
consisting of more than 364 Rate Period Days if, on the date of determination of
the Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the Treasury
Note Rate for such Rate Period, at a redemption price per share equal to the sum
of $25,000 plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed for
redemption.
(v) The Fund may not on any date mail a Notice of Redemption pursuant to
paragraph (c) of this Section 11 in respect of a redemption contemplated to be
effected pursuant to this paragraph (a) unless on such date (a) the Fund has
available Deposit Securities with maturity or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to Holders of Preferred Shares
by reason of the redemption of such shares on such redemption date and (b) the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and the Discounted Value of Fitch Eligible Assets (if Fitch is
then rating the Preferred Shares) each at least equal the Preferred Shares Basic
Maintenance Amount, and would at least equal the Preferred Shares Basic
Maintenance Amount immediately subsequent to such redemption if such redemption
were to occur on such date. The Fund shall not be required to have available
Deposit Securities as described in clause (a) of this subparagraph (v) in
respect of a redemption of any Preferred Shares, as a whole or in part,
contemplated to be effected pursuant to paragraph 11(a) where such redemption is
subject to the issuance of shares of any other series of preferred stock of the
Fund. For purposes of determining in clause (b) of the preceding sentence
whether the Discounted Value of Moody's Eligible Assets and Fitch Eligible
Assets at least equals the Preferred Shares Basic Maintenance Amount, the
Moody's Discount Factors applicable to Moody's Eligible Assets and the Fitch
Discount Factor applicable to Fitch Discount Assets shall be determined by
reference to the first Exposure Period longer than the Exposure Period then
applicable to the Fund, as described in the definition of Moody's Discount
Factor and Fitch Discount Factor herein.
(b) MANDATORY REDEMPTION. The Fund shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Directors for redemption, certain of the Preferred Shares, if the Fund
fails to have either Moody's Eligible Assets with a Discounted Value or Fitch
Eligible Assets with a Discounted Value greater than or equal to the Preferred
Shares Basic Maintenance Amount or fails to maintain the 1940 Act Preferred
Shares Asset Coverage, in accordance with the requirements of the rating agency
or agencies then rating the Preferred Shares, and such failure is not cured on
or before the Preferred Shares Basic Maintenance Cure Date or the 1940 Act Cure
Date, as the case may be. The number of Preferred Shares to be redeemed shall be
equal to the lesser of (i) the minimum number of Preferred Shares, together with
all other preferred stock subject to redemption or retirement, the redemption of
which, if deemed to have occurred immediately prior to the opening of business
on the Cure Date, would have resulted in the Fund's having both Moody's Eligible
Assets with a Discounted Value and Fitch Eligible Assets with a Discounted Value
greater than or equal to the Preferred Shares Basic Maintenance Amount or
maintaining the 1940 Act Preferred Shares Asset Coverage, as the case may be, on
such Cure Date (provided, however, that if there is no such minimum number of
Preferred Shares and other preferred stock the redemption or retirement of which
would have had such result, all Preferred Shares and other preferred stock then
outstanding shall be redeemed), and (ii) the maximum number of Preferred Shares,
together with all other shares of preferred stock subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
A-35
therefor in accordance with the Charter and applicable law. In determining the
Preferred Shares required to be redeemed in accordance with the foregoing, the
Fund shall allocate the number required to be redeemed to satisfy the Preferred
Shares Basic Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage,
as the case may be, pro rata among Preferred Shares and other preferred stock
(and, then, pro rata among each series of Preferred Shares) subject to
redemption or retirement. The Fund shall effect such redemption on the date
fixed by the Fund therefor, which date shall not be earlier than 20 days nor
later than 40 days after such Cure Date, except that if the Fund does not have
funds legally available for the redemption of all of the required number of
Preferred Shares and other preferred stock which are subject to redemption or
retirement or the Fund otherwise is unable to effect such redemption on or prior
to 40 days after such Cure Date, the Fund shall redeem those Preferred Shares
and other preferred stock which it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption. If fewer than
all of the outstanding shares of a series of Preferred Shares are to be redeemed
pursuant to this paragraph (b), the number of shares of such series to be
redeemed shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders or by
such other method that the Board of Directors deems fair and equitable.
(c) NOTICE OF REDEMPTION. If the Fund shall determine or be required to
redeem shares of a series of Preferred Shares pursuant to paragraph (a) or (b)
of this Section 11, it shall mail a Notice of Redemption with respect to such
redemption by first class mail, postage prepaid, to each Holder of the shares of
such series to be redeemed, at such Holder's address as the same appears on the
record books of the Fund on the record date established by the Board of
Directors. Such Notice of Redemption shall be so mailed not less than 20 nor
more than 45 days prior to the date fixed for redemption. Each such Notice of
Redemption shall state: (i) the redemption date; (ii) the number of Preferred
Shares to be redeemed and the series thereof; (iii) the CUSIP number for the
shares of such series; (iv) the Redemption Price; (v) the place or places where
the certificate(s) for such shares (properly endorsed or assigned for transfer,
if the Board of Directors shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of Preferred Shares
held by any Holder are to be redeemed, the Notice of Redemption mailed to such
Holder shall also specify the number of shares of such series to be redeemed
from such Holder. The Fund may provide in any Notice of Redemption relating to a
redemption contemplated to be effected pursuant to paragraph (a) of this Section
11 that such redemption is subject to one or more conditions precedent and that
the Fund shall not be required to effect such redemption unless each such
condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of Preferred Shares (whether or not earned or declared) are
in arrears, no Preferred Shares shall be redeemed unless all outstanding shares
of such series are simultaneously redeemed, and the Fund shall not purchase or
otherwise acquire any shares of such series; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
Holders of all outstanding shares of such series.
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(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Charter and applicable law, such redemption shall be made as soon as practicable
to the extent such funds become available. Failure to redeem Preferred Shares
shall be deemed to exist at any time after the date specified for redemption in
a Notice of Redemption when the Fund shall have failed, for any reason
whatsoever, to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been mailed;
provided, however, that the foregoing shall not apply in the case of the Fund's
failure to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed Preferred Shares
for which a Notice of Redemption has been mailed, dividends may be declared and
paid on Preferred Shares and shall include those Preferred Shares for which a
Notice of Redemption has been mailed.
(f) AUCTION AGENT AS DIRECTOR OF REDEMPTION PAYMENTS BY FUND. All moneys
paid to the Auction Agent for payment of the Redemption Price of Preferred
Shares called for redemption shall be held in trust by the Auction Agent for the
benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the Preferred Shares that are the subject of such notice,
dividends on such shares shall cease to accumulate and such shares shall no
longer be deemed to be outstanding for any purpose, and all rights of the
Holders of the shares so called for redemption shall cease and terminate, except
the right of such Holders to receive the Redemption Price, but without any
interest or other additional amount, except as provided in subparagraph (e)(i)
of Section 2 of this Part I and in Section 3 of this Part I. Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Directors
shall so require and the Notice of Redemption shall so state), the Redemption
Price shall be paid by the Auction Agent to the Holders of Preferred Shares
subject to redemption. In the case that fewer than all of the shares represented
by any such certificate are redeemed, a new certificate shall be issued,
representing the unredeemed shares, without cost to the Holder thereof. The Fund
shall be entitled to receive from the Auction Agent, promptly after the date
fixed for redemption, any cash deposited with the Auction Agent in excess of (i)
the aggregate Redemption Price of the Preferred Shares called for redemption on
such date and (ii) all other amounts to which Holders of Preferred Shares called
for redemption may be entitled. Any funds so deposited that are unclaimed at the
end of 90 days from such redemption date shall, to the extent permitted by law,
be repaid to the Fund, after which time the Holders of Preferred Shares so
called for redemption may look only to the Fund for payment of the Redemption
Price and all other amounts to which they may be entitled.
(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption pursuant
to this Section 11, the Fund shall use its best efforts to comply with all
A-37
applicable conditions precedent to effecting such redemption under the 1940 Act
and any applicable Maryland law, but shall effect no redemption except in
accordance with the 1940 Act and any applicable Maryland law.
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED. In the case of any
redemption pursuant to this Section 11, only whole Preferred Shares shall be
redeemed, and in the event that any provision of the Charter would require
redemption of a fractional share, the Auction Agent shall be authorized to round
up so that only whole shares are redeemed.
(j) MODIFICATION OF REDEMPTION PROCEDURES. Notwithstanding any of the
foregoing provisions of this Section 11, the Fund may modify any or all of the
requirements relating to the Notice of Redemption provided that (i) any such
modification does not materially and adversely affect any holder of the relevant
series of Preferred Shares, and (ii) the Fund receives notice from Moody's (if
Moody's is then rating the Preferred Shares) and Fitch (if Fitch is then rating
the Preferred Shares) that such modification would not impair the ratings
assigned by Moody's and Fitch to the Preferred Shares.
12. LIQUIDATION RIGHTS.
(a) RANKING. The shares of a series of Preferred Shares shall rank on a
parity with each other, with shares of any other series of Preferred Shares and
with shares of any other series of preferred stock as to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of Preferred Shares then outstanding shall be entitled to receive and to
be paid out of the assets of the Fund available for distribution to its
Stockholders, before any payment or distribution shall be made on the Common
Shares or on any other class of shares of the Fund ranking junior to the
Preferred Shares upon dissolution, liquidation or winding up, an amount equal to
the Liquidation Preference with respect to such shares plus an amount equal to
all dividends thereon (whether or not earned or declared) accumulated but unpaid
to (but not including) the date of final distribution in same day funds,
together with any payments required to be made pursuant to Section 3 of this
Part I in connection with the liquidation of the Fund. After the payment to the
Holders of the Preferred Shares of the full preferential amounts provided for in
this paragraph (b), the Holders of Preferred Shares as such shall have no right
or claim to any of the remaining assets of the Fund.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the Fund available
for distribution to the Holders of Preferred Shares upon any dissolution,
liquidation, or winding up of the affairs of the Fund, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
Holders are entitled pursuant to paragraph (b) of this Section 12, no such
distribution shall be made on account of any shares of any other class or series
of preferred stock ranking on a parity with the Preferred Shares with respect to
the distribution of assets upon such dissolution, liquidation or winding up
unless proportionate distributive amounts shall be paid on account of the
Preferred Shares, ratably, in proportion to the full distributable amounts for
which holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with the
A-38
Preferred Shares with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, after payment shall have
been made in full to the Holders of the Preferred Shares as provided in
paragraph (b) of this Section 12, but not prior thereto, any other series or
class or classes of shares ranking junior to the Preferred Shares with respect
to the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund shall, subject to the respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the sale of all
or substantially all the property or business of the Fund, nor the merger or
consolidation of the Fund into or with any corporation nor the merger or
consolidation of any corporation into or with the Fund shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary, for the purposes of
this Section 12.
13. FUTURES AND OPTIONS TRANSACTIONS: FORWARD COMMITMENTS.
(a) If Moody's is rating any Preferred Shares, then:
(i) For so long as any Preferred Shares are rated by Moody's, the Fund
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
confirmation from Moody's that engaging in such transactions would not impair
the ratings then assigned to such Preferred Shares by Moody's, except that the
Fund may purchase or sell exchange-traded futures contracts based on the Bond
Buyer Municipal Bond Index (the "Municipal Index") or United States Treasury
Bonds, Bills or Notes ("Treasury Futures"), and purchase, write or sell
exchange-traded put options on such futures contracts and purchase, write or
sell exchange-traded call options on such futures contracts (collectively,
"Moody's Hedging Transactions"), subject to the following limitations: (A) the
Fund will not engage in any Moody's Hedging Transaction based on the Municipal
Index (other than transactions which terminate a futures contract or option held
by the Fund by the Fund's taking an opposite position thereto ("Closing
Transactions")) which would cause the Fund at the time of such transaction to
own or have sold outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(B) the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Futures (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold
(I) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated by
Moody's, rated AAA by S&P), or
(II) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 40% of the aggregate Market Value of all
Municipal Bonds constituting Moody's Eligible Assets owned by the Fund (other
than Moody's Eligible Assets already subject to a Moody's Hedging Transaction)
and rated Baa or A by Moody's (or, if not rated by Moody's, rated A or AA by
S&P) (for purpose of the foregoing clauses (I) and (II), the Fund shall be
deemed to own futures contracts that underlie any outstanding options written by
the Fund);
A-39
(C) the Fund will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the amount of open
interest in the Municipal Index as reported by The Wall Street Journal is less
than 100; and
(D) the Fund will not enter into an option on futures transaction unless,
after giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.
(ii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Fund is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows:
(A) assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:
(I) Discounted Value and
(II) the exercise price of the call option written by the Fund;
(B) assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;
(C) assets subject to put options written by the Fund shall be valued at
the lesser of:
(I) the exercise price and
(II) the Discounted Value of the subject security.
(iii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) where the Fund is the seller under a futures contract, 10% of the
settlement price of the futures contract;
(D) where the Fund is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract;
(E) the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract; and
(F) 105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.
(iv) For so long as any Preferred Shares are rated by Moody's, the Fund
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions that are permitted under Section
A-40
13(a)(ii) of this Part I), except that the Fund may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitation:
(A) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated P-1, MTG-1
or MIG-1 by Moody's and maturing prior to the date of the Forward Commitment
with a Market Value that equals or exceeds the amount of the Fund's obligations
under any Forward Commitments to which it is from time to time a party or
long-term fixed income securities with a Discounted Value that equals or exceeds
the amount of the Fund's obligations under any Forward Commitment to which it is
from time to time a party; and
(B) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the Preferred Shares
Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund pursuant
to such Forward Commitments shall be zero.
(b) If Fitch is rating any Preferred Shares, then:
(i) For so long as any Preferred Shares are rated by Fitch, the Fund
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
confirmation from Fitch that engaging in such transactions would not impair the
ratings then assigned to such Preferred Shares by Fitch, except that the Fund
may purchase or sell exchange-traded futures contracts based on the Municipal
Index or Treasury Futures, and purchase, write or sell exchange-traded put
options on such futures contracts and purchase, write or sell exchange-traded
call options on such futures contracts (collectively, "Fitch Hedging
Transactions"), subject to the following limitations:
(A) the Fund will not engage in any Fitch Hedging Transaction based on
the Municipal Index (other than Closing Transactions) which would cause the Fund
at the time of such transactions to own or have sold outstanding futures
contracts based on the Municipal Index exceeding in number 10% of the average
number of daily traded futures contracts based on the Municipal Index in the 30
days preceding the time of effecting such transaction (as reported by The Wall
Street Journal);
(B) the Fund will not engage in any Fitch Hedging Transaction based on
Treasury Futures (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold
(I) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 20% of the aggregate Market Value of Fitch
Eligible Assets owned by the Fund and rated AA by Fitch (or, if not rated by
Fitch, rated Aa by Moody's; or, if not rated by Moody's, rated AA by S&P), or
(II) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 40% of the aggregate Market Value of all
Municipal Bonds constituting Fitch Eligible Assets owned by the Fund (other than
Fitch Eligible Assets already subject to a Fitch Hedging Transaction) and rated
A or BBB by Fitch (or, if not rated by Fitch, rated Baa by Moody's, or, if not
rated by Moody's rated A or AA by S&P) (for purposes of the foregoing clauses
A-41
(I) and (II), the Fund shall be deemed to own futures contracts that underlie
any outstanding options written by the Fund);
(C) the Fund will engage in Closing Transactions to close any
outstanding futures contract based on the Municipal Index if the amount of open
interest in the Municipal Index as reported by The Wall Street Journal is less
than 100; and
(D) the Fund will not enter into an option on future transaction unless,
after giving effect thereto, the Fund would continue to have Fitch Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.
(ii) For purposes of determining whether the Fund has Fitch Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of Fitch Eligible Assets
which the Fund is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows:
(A) assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:
(I) Discounted Value and
(II) the exercise price of the call option written by the Fund;
(B) assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;
(C) assets subject to put options written by the Fund shall be valued at
the lesser of:
(I) the exercise price and
(II) the Discounted Value of the subject security.
(iii) For purposes of determining whether the Fund has Fitch Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Fitch Eligible Assets held by the Fund:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) where the Fund is the seller under a futures contract, 10% of the
settlement price of the futures contract;
(D) where the Fund is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract;
(E) the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract and does now own the underlying
contract; and
(F) 105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.
(iv) For so long as any Preferred Shares are rated by Fitch, the Fund
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Fitch Hedging Transactions that are permitted under Section 13(b)(ii)
A-42
of this Part I), except that the Fund may enter into Forward Commitments,
subject to the following limitation:
(A) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated F-1 by Fitch
(or, if not rated by Fitch, rated P-1, MTG-1 or MIG-1 by Moody's) and maturing
prior to the date of the Forward Commitment with a Market Value that equals or
exceeds the amount of the Fund's obligations under any Forward Commitments to
which it is from time to time a party or long-term fixed income securities with
a Discounted Value that equals or exceeds the amount of the Fund's obligations
under any Forward Commitment to which it is from time to time a party; and
(B) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Fitch Eligible Assets
with an aggregate Discounted Value equal to or greater than the Preferred Shares
Maintenance Amount.
For purposes of determining whether the Fund has Fitch Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund pursuant
to such Forward Commitments shall be zero.
(c) For so long as any Preferred Shares are outstanding and Moody's or
Fitch or both is rating such shares, the Fund will not, unless it has received
confirmation from Moody's or Fitch or both, as applicable, that any such action
would not impair the rating then assigned by such rating agency to such shares,
engage in any one or more of the following transactions:
(i) borrow money, except that the Fund may, without obtaining the
confirmation described above, borrow money for the purpose of clearing
securities transactions if
(A) the Preferred Shares Basic Maintenance Amount would continue to be
satisfied after giving effect to such borrowing and
(B) such borrowing
(I) is privately arranged with a bank or other person and is evidenced
by a promissory note or other evidence of indebtedness that is not intended to
be publicly distributed or
(II) is for "temporary purposes," is evidenced by a promissory note or
other evidence of indebtedness and is in an amount not exceeding 5% of the value
of the total assets of the Fund at the time of the borrowing (for purposes of
the foregoing, "temporary purposes" means that the borrowing is to be repaid
within sixty days and is not to be extended or renewed);
(ii) except as provided in Section 5 of this Part I, issue additional
shares of any series of Preferred Shares or any class or series of shares
ranking prior to or on a parity with Preferred Shares with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Fund, or reissue any Preferred Shares previously purchased
or redeemed by the Fund;
(iii) engage in any short sales of securities;
(iv) lend securities;
(v) merge or consolidate into or with any other corporation or entity;
A-43
(vi) change a pricing service (which has been designated by management or
the Board of Directors); and
(vii) enter into reverse repurchase agreements.
In the event any Preferred Shares are outstanding and another
nationally-recognized statistical rating organization is rating such shares in
addition to or in lieu of Moody's or Fitch, the Fund shall comply with any
restrictions imposed by such rating agency, which restrictions may be more
restrictive than those imposed by Moody's or Fitch.
14. MISCELLANEOUS.
(a) AMENDMENT OF ANNEX A TO ADD ADDITIONAL SERIES. Subject to the
provisions of paragraph (c) of Section 10 of this Part I, the Board of Directors
may, by resolution duly adopted, without stockholder approval (except as
otherwise provided by these Articles Supplementary or required by applicable
law), approving an annex hereto, (1) reflect any amendments hereto which the
Board of Directors is entitled to adopt pursuant to the terms of these Articles
Supplementary without shareholder approval or (2) add additional series of
Preferred Shares or additional shares of a series of Preferred Shares (and terms
relating thereto) to the series and Preferred Shares described herein. Each such
additional series and all such additional shares shall be governed by the terms
of these Articles Supplementary.
(b) NO FRACTIONAL SHARES. No fractional Preferred Shares shall be
issued.
(c) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE ACQUIRED
BY THE FUND. Preferred Shares that are redeemed, exchanged or otherwise acquired
by the Fund shall return to the status of authorized and unissued Preferred
Shares.
(d) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by applicable
law, the Board of Directors may interpret or adjust the provisions of these
Articles Supplementary to resolve any inconsistency or ambiguity or to remedy
any formal defect, and may amend these Articles Supplementary with respect to
any series of Preferred Shares prior to the issuance of shares of such series.
(e) HEADINGS NOT DETERMINATIVE. The headings contained in these Articles
Supplementary are for convenience of reference only and shall not affect the
meaning or interpretation of these Articles Supplementary.
(f) NOTICES. All notices or communications, unless otherwise specified in
the Bylaws of the Fund or these Articles Supplementary, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid.
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of
a series of Preferred Shares:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
A-44
(A) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for shares of such series for the next
succeeding Rate Period of such series;
(B) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell if the Applicable
Rate shares of such series for the next succeeding Rate Period of shares of such
series shall be less than the rate per annum specified by such Beneficial Owner;
and/or
(C) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard to
the Applicable Rate for shares of such series for the next succeeding Rate
Period of shares of such series; and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive Auction
in a commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, of such series which each
such Potential Beneficial Owner offers to purchase if the Applicable Rate for
shares of such series for the next succeeding Rate Period of shares of such
series shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such shares specified in such Bid
if the Applicable Rate for shares of such series determined on such Auction Date
shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such series to
be determined as set forth in clause (iv) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in such Bid
if the rate specified therein shall be higher than the Maximum Rate for shares
of such series, or such number or a lesser number of Outstanding shares of such
series to be determined as set forth in clause (iii) of paragraph (b) of Section
4 of this Part II if the rate specified therein shall be higher than the Maximum
Rate for shares of such series and Sufficient Clearing Bids for shares of such
series do not exist.
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(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares
of a series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Sell Order; or
(B) such number or a lesser number of Outstanding shares of such series
as set forth in clause (iii) of paragraph (b) of Section 4 of this Part II if
Sufficient Clearing Bids for shares of such series do not exist; provided,
however, that a Broker-Dealer that is an Existing Holder with respect to shares
of a series of Preferred Shares shall not be liable to any Person for failing to
sell such shares pursuant to a Sell Order described in the proviso to paragraph
(c) of Section 2 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Fund)
with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker-Dealer's records, such Broker-Dealer believes it
is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of Preferred Shares subject to an Auction on any Auction Date
shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such Auction
Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding shares of such series
as set forth in clause (v) of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such Auction Date shall
be equal to the rate specified therein.
(C) No Order for any number of Preferred Shares other than whole shares
shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for Preferred
Shares of a series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series that are the subject
of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of
such series:
(A) the number of shares, if any, of Preferred Shares subject to any
Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid of
such Existing Holder and the rate specified in such Bid; and
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(C) the number of shares, if any, of such series subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series, the rate and number of shares of such series specified in such Potential
Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding Preferred
Shares of a series held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding shares of such series held by such Existing Holder and
not subject to Orders submitted to the Auction Agent; provided, however, that if
an Order or Orders covering all of the Outstanding shares of such series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Rate Period consisting
of more than 28 Rate Period Days, the Auction Agent shall deem a Sell Order to
have been submitted by or on behalf of such Existing Holder covering the number
of outstanding shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
Preferred Shares of a series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be considered valid,
but only up to and including in the aggregate the number of Outstanding shares
of such series held by such Existing Holder, and if the number of shares of such
series subject to such Hold Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares subject to each
such Hold Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii)(A) any Bid for shares of such series shall be considered valid up to
and including the excess of the number of Outstanding shares of such series held
by such Existing Holder over the number of shares of such series subject to any
Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing Holder
for shares of such series is submitted to the Auction Agent with the same rate
and the number of Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids shall be considered valid up to and
including the amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to cover the
number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding shares of
such series subject to any portion of Bids considered not valid in whole or in
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part under this clause (ii) shall be treated as the subject of a Bid for shares
of such series by or on behalf of a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for shares of such series shall be considered valid
up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the sum of shares of such series
subject to valid Hold Orders referred to in clause (i) above and valid Bids
referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of Preferred
Shares is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Preferred Shares, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding Preferred Shares of such
series over the number of Outstanding shares of such series subject to Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
Preferred Shares" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to Submitted
Bids of Potential Holders specifying one or more rates equal to or lower than
the Maximum Rate for shares of such series exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to Submitted
Bids of Existing Holders specifying one or more rates higher than the Maximum
Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to Submitted
Sell Orders (in the event such excess or such equality exists (other than
because the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing Bids" for shares of
such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for shares
of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such lowest
rate and (II) all other such Submitted Bids of Existing Holders specifying lower
rates were rejected, thus entitling such Existing Holders to continue to hold
the shares of such series that are subject to such Submitted Bids; and
A-48
(B) (I) each such Submitted Bid of Potential Holders specifying such
lowest rate and (II) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted; would result in such Existing Holders
described in subclause (A) above continuing to hold an aggregate number of
Outstanding shares of such series which, when added to the number of Outstanding
shares of such series to be purchased by such Potential Holders described in
subclause (B) above, would equal not less than the Available Preferred Shares of
such series.
(b) Promptly after the Auction Agent has made the determinations pursuant
to paragraph (a) of this Section 3, the Auction Agent shall advise the Fund of
the Maximum Rate for shares of the series of Preferred Shares for which an
Auction is being held on the Auction Date and, based on such determination, the
Applicable Rate for shares of such series for the next succeeding Rate Period
thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist, the
Applicable Rate for all shares of such series for the next succeeding Rate
Period thereof shall be equal to the Winning Bid Rate for shares of such series
so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not exist
(other than because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), the Applicable Rate for all shares of such series for
the next succeeding Rate Period thereof shall be equal to the Maximum Rate for
shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, the Applicable Rate for all shares of such series for the
next succeeding Rate Period thereof shall be equal to the lesser of the Kenny
Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the
product of (A)(I) the "AA" Composite Commercial Paper Rate on such Auction Date
for such Rate Period, if such Rate Period consists of fewer than 183 Rate Period
Days; (II) the Treasury Bill Rate on such Auction Date for such Rate Period, if
such Rate Period consists of more than 182 but fewer than 365 Rate Period Days;
or (III) the Treasury Note Rate on such Auction Date for such Rate Period, if
such Rate Period is more than 364 Rate Period Days (the rate described in the
foregoing clause (A)(I), (II) or (III), as applicable, being referred to herein
as the "Benchmark Rate") and (B) 1 minus the maximum marginal regular Federal
personal income tax rate applicable to ordinary income (taking into account the
Federal income tax deductibility of state and local taxes paid or incurred) or
the maximum marginal regular Federal corporate income tax rate applicable to
ordinary income, whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to such series in such Rate
Period any net capital gains or other income taxable for Federal income tax
purposes ("Taxable Income"), the Applicable Rate for shares of such series for
such Rate Period will be (i) if the Taxable Yield Rate (as defined below) is
greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the Taxable
Yield Rate is less than or equal to the Benchmark Rate, then the rate equal to
the sum of (x) the lesser of the Kenny Index (if such Rate Period consists of
fewer than 183 Rate Period Days) or the product of the Benchmark Rate multiplied
by the factor set forth in the preceding clause (B) and (y) the product of the
maximum marginal regular Federal personal income tax rate applicable to ordinary
income (taking into account the Federal income tax deductibility of state and
local taxes paid or incurred) or the maximum marginal regular Federal corporate
income tax applicable to ordinary income, whichever is greater, multiplied by
the Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate means
the rate determined by (a) dividing the amount of Taxable Income available for
distribution per such share of such series by the number of days in the Dividend
Period in respect of which such Taxable Income is contemplated to be
distributed, (b) multiplying the amount determined in (a) above by 365 (in the
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case of a Dividend Period of 7 Rate Period Days for Series A Shares or 28 Rate
Period Days for Series B Shares) or 360 (in the case of any other Dividend
Period), and (c) dividing the amount determined in (b) above by $25,000.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES.
Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of Preferred Shares
have been made, all Submitted Sell Orders with respect to shares of such series
shall be accepted and, subject to the provisions of paragraphs (d) and (e) of
this Section 4, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series specifying
any rate that is higher than the Winning Bid Rate for shares of such series
shall be accepted, thus requiring each such Existing Holder to sell the
Preferred Shares subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series specifying
any rate that is lower than the Winning Bid Rate for shares of such series shall
be rejected, thus entitling each such Existing Holder to continue to hold the
Preferred Shares subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be rejected, thus entitling such Existing Holder to continue to
hold the Preferred Shares subject to such Submitted Bid, unless the number of
Outstanding Preferred Shares subject to all such Submitted Bids shall be greater
than the number of Preferred Shares ("remaining shares") in the excess of the
Available Preferred Shares of such series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) and (iii) of this paragraph
(a), in which event such Submitted Bid of such Existing Holder shall be rejected
in part, and such Existing Holder shall be entitled to continue to hold
Preferred Shares subject to such Submitted Bid, but only in an amount equal to
the number of Preferred Shares of such series obtained by multiplying the number
of remaining shares by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate number of
Outstanding Preferred Shares subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate for shares
of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of shares of
such series obtained by multiplying the number of shares in the excess of the
Available Preferred Shares of such series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) through (iv) of this
paragraph (a) by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares subject to such Submitted Bid and the denominator
of which shall be the aggregate number of Outstanding Preferred Shares subject
A-50
to such Submitted Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Preferred Shares
have not been made (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for Preferred Shares shall be rejected:
(i) Existing Holders' Submitted Bids for Preferred Shares specifying any
rate that is equal to or lower than the Maximum Rate for shares of such series
shall be rejected, thus entitling such Existing Holders to continue to hold the
Preferred Shares subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for shares
of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of such
series and the Submitted Sell Orders for shares of such series of each Existing
Holder shall be accepted, thus entitling each Existing Holder that submitted or
on whose behalf was submitted any such Submitted Bid or Submitted Sell Order to
sell the shares of such series subject to such Submitted Bid or Submitted Sell
Order, but in both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series subject to
Submitted Bids described in clause (ii) of this paragraph (b) by a fraction, the
numerator of which shall be the number of shares of Outstanding shares of such
series held by such Existing Holder subject to such Submitted Bid or Submitted
Sell Order and the denominator of which shall be the aggregate number of
Outstanding shares of such series subject to all such Submitted Bids and
Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Preferred Shares are
subject to Submitted Hold Orders, all Submitted Bids for shares of such series
shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of a series of Preferred
Shares on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, round up or down the number of Preferred
Shares of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole Preferred Shares.
(e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this Section 4, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of Preferred Shares on any Auction
Date, the Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate Preferred Shares of such series for purchase among
Potential Holders so that only whole Preferred Shares of such series are
purchased on such Auction Date as a result of such procedures by any Potential
Holder, even if such allocation results in one or more Potential Holders not
purchasing Preferred Shares of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Preferred Shares, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of such
A-51
series to be sold by Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, Preferred Shares of such series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a series of Preferred Shares with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for such shares that was accepted in whole
or in part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial deliveries of Preferred
Shares that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of such series that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders and Potential Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver Preferred Shares of any series
or to pay for Preferred Shares of any series sold or purchased pursuant to the
Auction Procedures or otherwise.
5. NOTIFICATION OF ALLOCATIONS.
Whenever the Fund intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on Preferred Shares, the
Fund shall, in the case of a Minimum Rate Period or a Special Rate Period of 28
Rate Period Days or fewer, and may, in the case of any other Special Rate
Period, notify the Auction Agent of the amount to be so included not later than
the Dividend Payment Date next preceding the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, it will be required in turn to notify
each Broker-Dealer, who, on or prior to such Auction Date, in accordance with
its Broker-Dealer Agreement, will be required to notify its Beneficial Owners
and Potential Beneficial Owners of Preferred Shares believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date.
6. AUCTION AGENT.
For so long as any Preferred Shares are outstanding, the Auction Agent,
duly appointed by the Fund to so act, shall be in each case a commercial bank,
trust company or other financial institution independent of the Fund and its
affiliates (which however, may engage or have engaged in business transactions
with the Fund or its affiliates) and at no time shall the Fund or any of its
affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any Preferred Shares are outstanding, the Board of
Directors shall use its best efforts promptly thereafter to appoint another
qualified commercial bank, trust company or financial institution to act as the
Auction Agent. The Auction Agent's registry of Existing Holders of shares of a
series of Preferred Shares shall be conclusive and binding on the Broker-
Dealers. A Broker-Dealer may inquire of the Auction Agent between 3:00 p.m.
Eastern time on the Business Day preceding an Auction for shares of a series of
Preferred Shares and 9:30 a.m. Eastern time on the Auction Date for such Auction
to ascertain the number of shares in respect of which the Auction Agent has
determined such Broker-Dealer to be an Existing Holder. If such Broker-Dealer
believes it is the Existing Holder of fewer shares of such series than specified
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by the Auction Agent in response to such Broker-Dealer's inquiry, such
Broker-Dealer may so inform the Auction Agent of that belief. Such Broker-Dealer
shall not, in its capacity as Existing Holder of shares of such series, submit
Orders in such Auction in respect of shares of such series covering in the
aggregate more than the number of shares of such series specified by the Auction
Agent in response to such Broker-Dealer's inquiry.
7. TRANSFER OF PREFERRED SHARES.
Unless otherwise permitted by the Fund, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of Preferred Shares only in whole
shares and only pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in this Part II or to a Broker-Dealer,
provided, however, that (a) a sale, transfer or other disposition of Preferred
Shares from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this Section 7 if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other Person,
if permitted by the Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
8. GLOBAL CERTIFICATE.
Prior to the commencement of a Voting Period, (i) all of the shares of a
series of Preferred Shares outstanding from time to time shall be represented by
one global certificate registered in the name of the Securities Depository or
its nominee and (ii) no registration of transfer of shares of a series of
Preferred Shares shall be made on the books of the Fund to any Person other than
the Securities Depository or its nominee.
9. FORCE MAJEURE.
(a) Notwithstanding anything else set forth herein, if an Auction Date is
not a Business Day because the New York Stock Exchange is closed for business
for more than three consecutive business days due to an act of God, natural
disaster, act of war, civil or military disturbance, act of terrorism, sabotage,
riots or a loss or malfunction of utilities or communications services or the
Auction Agent is not able to conduct an Auction in accordance with the Auction
Procedures for any such reason, then the Auction Rate for the next Dividend
Period shall be the Auction Rate determined on the previous Auction Date.
(b) Notwithstanding anything else set forth herein, if a Dividend Payment
Date is not a Business Day because the New York Stock Exchange is closed for
business for more than three consecutive business days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications services
or the dividend payable on such date cannot be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend Period shall
be the next Business Day on which the Trust and its paying agent, if any, are
able to cause the dividend to be paid using their reasonable best efforts;
(ii) the affected Dividend Period shall end on the day it would have
ended had such event not occurred and the Dividend Payment Date had remained the
scheduled date; and
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(iii) the next Dividend Period will begin and end on the dates on
which it would have begun and ended had such event not occurred and the Dividend
Payment Date remained the scheduled date.
A-54
IN WITNESS WHEREOF, NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC. has
caused these presents to be signed on December 11, 2002 in its name and on its
behalf by its President or a Vice President and witnessed by its Secretary or
Assistant Secretary and the said officers of the Fund acknowledge said
instrument to be the corporate act of the Fund, and state under penalties of
perjury that to the best of their knowledge, information and belief the matters
and facts therein set forth with respect to authorization and approval are true
in all material respects.
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC.
/s/ Robert Conti
------------------------------------
Name: Robert Conti
Title: Vice President
WITNESS:
/s/ Claudia A. Brandon
------------------------
Name: Claudia A. Brandon
Title: Secretary
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS+
MOODY'S INVESTORS SERVICE, INC.
-------------------------------
MUNICIPAL BONDS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds 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. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are 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 which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
B-1
C: Bonds which are 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.
----------
+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this SAI for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which would be given to these securities on the date of the Fund's
fiscal year end.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its municipal bond rating system. 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 issue ranks in the lower end of its generic rating
category.
MUNICIPAL SHORT-TERM OBLIGATIONS
MIG/VMIG RATINGS U.S. SHORT-TERM RATINGS: In municipal debt issuance, there are
three rating categories for short-term obligations that are considered
investment grade. These ratings are designated as Moody's Investment Grade (MIG)
and are divided into three levels -- MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade.
In the case of variable rate demand obligations (VRDOs), a two-component rating
is assigned. The first element represents Moody's evaluation of the degree of
risk associated with scheduled principal and interest payments. The second
element represents Moody's evaluation of the degree of risk associated with the
demand feature, using the MIG rating scale.
B-2
The short-term rating assigned to the demand feature of VRDOs is designated as
VMIG. When either the long- or short- term aspect of a VRDO is not rated, that
piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings expire at note maturity. By contrast, VMIG rating expirations will
be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1: This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
MIG 3/VMIG 3: This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG: This designation denotes speculative-grade credit quality. Debt instruments
in this category in this category may lack sufficient margins of protection.
STANDARD & POOR'S RATINGS SERVICES
----------------------------------
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
B-3
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
p: The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
B-4
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is insured by
the Federal Deposit Insurance Corp. and interest is adequately collateralized.
In the case of certificates of deposit, the letter "L" indicates that the
deposit, combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the federal
insurance limits within 30 days after closing of the insured institution or, in
the event that the deposit is assumed by a successor insured institution, upon
maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
MUNICIPAL NOTES
S&P note ratings reflect the liquidity concerns and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating. The
following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
-- Sources of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. Those issues
determined to possess very strong characteristics will be given a plus(+)
designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH RATINGS
-------------
INVESTMENT GRADE BOND RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated `AAA'. Because bonds rated in the `AAA' and
B-5
`AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated `F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
HIGH YIELD BOND RATINGS
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified that could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. `DDD'
represents the highest potential for recovery on these bonds, and `D' represents
the lowest potential for recovery.
Plus (+) or Minus (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
B-6
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
`F-1+'.
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as the
`F-1+' and `F-1' categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
* * * * * * * *
NOTES: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. The Fund is dependent on the Investment Adviser's
judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
B-7
APPENDIX C
TAX-EQUIVALENT YIELD TABLE
The table below gives the approximate yield a taxable security must earn at
various combined federal/state tax brackets to produce after-tax yields
equivalent to those of tax-exempt bonds yielding from 5% to 6% under the regular
2002 federal income tax rates applicable to individuals.
COMPARE TAX-FREE YIELDS TO THE TAXABLE ALTERNATIVES:
IF YOUR COMBINED TO EQUAL A TAX-
FEDERAL/STATE FREE YIELD OF:
TAX BRACKET IS:
5.0% 5.5% 6.0%
A TAXABLE INVESTMENT WOULD HAVE TO PAY:
27.0% 6.85% 7.53% 8.22%
30.0% 7.14% 7.86% 8.57%
35.0% 7.69% 8.46% 9.23%
38.6% 8.14% 8.96% 9.77%
THIS EXAMPLE IS FOR ILLUSTRATIVE PURPOSES AND DOES NOT REFLECT THE PERFORMANCE
OF ANY SPECIFIC INVESTMENT. ACTUAL YIELDS WILL VARY WITH MARKET CONDITIONS. THE
EQUIVALENT TAXABLE YIELDS ARE BASED UPON 2002 FEDERAL INCOME TAX RATES. INCOME
FROM MUNICIPAL INVESTMENTS MAY BE SUBJECT TO STATE, LOCAL AND/OR THE ALTERNATIVE
MINIMUM TAX.
Yields shown are for illustration purposes only and are not meant to
represent the Fund's actual yield. No assurance can be given that the Fund will
achieve any specific tax-exempt yield. While it is expected that the Fund will
invest principally in obligations the interest from which is exempt from federal
income tax, other income received by the Fund may be taxable. It should also be
noted that the interest earned on certain "private activity bonds," while exempt
from the regular federal income tax, is treated as a tax preference item which
could subject the recipient to the AMT. The illustrations assume that the AMT is
not applicable and do not take into account any tax credits that may be
available.
The information set forth above is as of the date of this SAI. Subsequent
tax law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax-equivalent yields set forth above. Investors should
consult their tax advisers for additional information.
C-1