1933 Act File No. 333-100905
1940 Act File No. 811-21169
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ X ] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No.
and
[ X ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ X ] Amendment No. 5
Neuberger Berman New York Intermediate Municipal Fund Inc.
(Exact Name of Registrant as Specified in Articles of Incorporation)
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
(Address of Principal Executive Offices)
(212) 476-8800
(Registrant's Telephone Number, including Area Code)
Peter E. Sundman
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
(Name and Address of Agent for Service)
Copies of Communications to:
Arthur C. Delibert, Esq. Ellen Metzger, Esq.
Kirkpatrick & Lockhart LLP Neuberger Berman, LLC
1800 Massachusetts Avenue, N.W. 605 Third Avenue
2nd Floor New York, New York 10158-3698
Washington, DC 20036-1800
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
---------------------------
If any of the securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [_]
It is proposed that this filing will become effective (check appropriate box)
[ ] when declared effective pursuant to section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
-------------------------------------------------------------------------------------------------
Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price Aggregate Offering Registration Fee(1)
Per Unit Price
-------------------------------------------------------------------------------------------------
Preferred Stock 1,930 $25,000 $48,250,000 $4,439
-------------------------------------------------------------------------------------------------
(1) Of which $184 was previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
dates as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 6, 2002
PROSPECTUS [LOGO]
$48,250,000
NEUBERGER BERMAN NEW YORK
INTERMEDIATE MUNICIPAL FUND INC.
AUCTION MARKET PREFERRED SHARES ("AMPS")
965 SHARES, SERIES A
965 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------
THE OFFERING. Neuberger Berman New York Intermediate Municipal Fund Inc.
(the "Fund") is simultaneously offering 965 Series A auction market preferred
shares and 965 Series B auction market preferred shares. The shares are referred
to in this prospectus as "AMPS."
INVESTMENT OBJECTIVE. The Fund is a recently organized, non-diversified,
closed-end management investment company. The Fund's investment objective is to
provide common stockholders a high level of current income exempt from federal
income tax and New York State and New York City personal income taxes.
PORTFOLIO CONTENTS. The Fund normally invests substantially all (at least
90%) of its total assets in municipal bonds with remaining maturities of less
than 15 years that pay interest that, in the opinion of bond counsel to the
issuer (or on the basis of other authority believed by the Fund's investment
manager, Neuberger Berman Management Inc. ("NB Management"), to be reliable), is
exempt from federal income tax and New York State and New York City personal
income taxes. The Fund's policy is to invest, under normal market conditions, at
least 80% of its total assets in municipal bonds with remaining maturities of
less than 15 years. The Fund seeks to maintain a dollar-weighted average
duration between three and eight years. Under normal market conditions, the Fund
will invest at least 80% of its total assets in municipal bonds that, at the
time of investment, are rated in the four highest categories by a nationally
recognized statistical rating organization ("NRSRO") or are unrated, but judged
to be of comparable quality by NB Management. 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 Investors Service, Inc. ("Moody's"), Standard & Poor's
Rating Services ("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 are regarded as having predominately speculative characteristics
with respect to the issuer's capacity to pay interest and repay principal, and
are commonly referred to as "junk bonds." There is no assurance that the Fund
will achieve its investment objective.
INVESTING IN THE FUND'S AMPS INVOLVES CERTAIN RISKS. SEE "RISKS" BEGINNING
ON PAGE 23 OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF THE AMPS IS
$25,000.
-------------
PER SHARE TOTAL
--------- --------
Public offering price....................................... $25,000 $
Sales load.................................................. $ $
Estimated offering expenses................................. $ $
Proceeds, before expenses, to the Fund...................... $ $
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the AMPS are first
issued.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the AMPS subject to various conditions. The
underwriters expect to deliver the AMPS in book-entry form, through the
facilities of The Depository Trust Company, on or about December , 2002.
--------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
--------------
The date of this prospectus is December , 2002.
Investors in AMPS will be entitled to receive cash dividends at an annual
rate that may vary for the successive dividend periods for the AMPS. AMPS have a
liquidation preference of $25,000 per share, plus any accumulated, unpaid
dividends. AMPS also have priority over the Fund's common stock as to
distribution of assets as described in this prospectus. See "Description of
AMPS." The dividend rate for the initial dividend period will be % for
Series A AMPS and % for Series B AMPS. The initial dividend period is from
the date of issuance through January , 2003 for Series A AMPS and from the
date of issuance through January , 2003 for Series B AMPS. For subsequent
dividend periods, the AMPS will pay dividends based on a rate set at auction.
These auctions will usually be held every seven days in the case of the
Series A AMPS and every 28 days in the case of the Series B AMPS.
After the initial rate period described in this prospectus, investors may
buy or sell AMPS through an order placed at an auction with or through a
broker-dealer in accordance with the procedures specified in this prospectus.
Each prospective purchaser should review carefully the detailed information
regarding the auction procedures which appears in this prospectus and the Fund's
Statement of Additional Information and should note that (i) an order placed at
an auction constitutes an irrevocable commitment to hold, purchase or sell AMPS
based upon the results of the related auction, (ii) settlement for purchases and
sales will be on the business day following the auction and (iii) ownership of
AMPS will be maintained in book-entry form by or through The Depository Trust
Company (or any successor securities depository). The AMPS are redeemable in
whole or in part, at the option of the Fund on the second business day prior to
any date dividends are paid on the AMPS, and will be subject to mandatory
redemption in certain circumstances at a redemption price of $25,000 per share,
plus accumulated unpaid dividends to the date of redemption, plus a premium in
certain circumstances. See "Description of AMPS--Redemption."
The AMPS will be senior to the Fund's outstanding common stock ("Common
Shares"). The AMPS are not listed on an exchange. The Common Shares are traded
on the American Stock Exchange (the "AMEX") under the symbol "NBO." It is a
condition of closing this offering that the AMPS at the time of closing carry
ratings of "AAA" from Fitch and of "Aaa" from Moody's.
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in the AMPS and retain it for future
reference. A Statement of Additional Information, dated , 2002,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus, which means that it is part of the prospectus for
legal purposes. You may request a free copy of the Statement of Additional
Information, the table of contents of which is on page 55 of this prospectus, by
calling 877-461-1899 or by writing to the Fund, or obtain a copy (and other
information regarding the Fund) from the Securities and Exchange Commission's
web site (HTTP://WWW.SEC.GOV).
The Fund's AMPS do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
2
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................................ 4
Financial Highlights.............................. 15
The Fund.......................................... 16
Use of Proceeds................................... 16
Capitalization.................................... 17
Portfolio Composition............................. 18
The Fund's Investments............................ 18
Risks............................................. 23
How the Fund Manages Risk......................... 31
Management of the Fund............................ 33
Description of AMPS............................... 35
The Auction....................................... 44
Description of Common Shares...................... 48
Anti-Takeover and Other Provisions in the Articles
of Incorporation................................ 48
Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund..................... 49
Tax Matters....................................... 50
Underwriting...................................... 53
Custodian, Auction Agent, Transfer Agent and
Registrar....................................... 54
Legal Matters..................................... 54
Table of Contents for Statement of Additional
Information..................................... 55
-------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. THE FUND IS NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE
DATE OF THIS PROSPECTUS. THE FUND'S BUSINESS, FINANCIAL CONDITION AND PROSPECTS
MAY HAVE CHANGED SINCE THAT DATE.
3
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE AMPS. YOU SHOULD REVIEW THE
MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS, IN THE STATEMENT OF
ADDITIONAL INFORMATION AND IN THE FUND'S ARTICLES SUPPLEMENTARY.
THE FUND.......................................... Neuberger Berman New York Intermediate Municipal
Fund Inc. is a recently organized, non-diversified
closed-end management investment company. The Fund
is designed to provide tax benefits to individual
investors who are residents of New York State for
tax purposes. See "The Fund."
The Fund commenced operations on September 27,
2002 upon the closing of an initial public
offering of shares of its common stock, par value
$.0001 per share ("Common Shares"). The Common
Shares of the Fund are traded on the American
Stock Exchange ("AMEX") under the symbol "NBO."
See The Fund.
THE OFFERING...................................... The Fund is offering shares of preferred stock,
par value $.0001 per share, which have been
designated auction market preferred shares,
Series A and Series B, each with a purchase price
of $25,000 per share plus dividends, if any, that
have accumulated from the date the Fund first
issues the preferred stock. The shares of
preferred stock are called "AMPS" in the rest of
this prospectus. The AMPS are offered through a
group of underwriters (the "underwriters") led by
Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). See "Underwriting."
Issuance of the AMPS represents leverage financing
of the Fund.
The AMPS entitle their holders to receive cash
dividends at an annual rate that may vary for the
successive dividend periods for the AMPS.
In general, except as described under "--Dividends
and Rate Periods" below and "Description of
AMPS--Dividends and Rate Periods," the dividend
period for the Series A AMPS will be seven days
and the dividend period for the Series B AMPS will
be 28 days. The auction agent ("Auction Agent")
will determine the dividend rate for a particular
period by an auction conducted on the business day
immediately prior to the start of that rate
period. See "The Auction."
The AMPS are not listed on an exchange. Instead,
investors may buy or sell AMPS in an auction by
submitting orders to broker-dealers that have
entered into an agreement with the Auction Agent
and the Fund.
Generally, investors in AMPS will not receive
certificates representing ownership of their
shares. The Depository Trust Company or any
successor securities depository ("DTC") or its
nominee for the account of the investor's
broker-dealer will maintain record ownership of
AMPS in book-entry form. An investor's
broker-dealer, in turn, will maintain records of
that investor's beneficial ownership of AMPS.
4
An investor may consider whether to invest in a
particular series based on the series' rate of
return, the investor's time horizon for
investment, and the investor's liquidity
preference. Investors can choose between two
tranches. The Series A AMPS normally have a
seven-day dividend period. The Series B AMPS
normally have a 28-day dividend period. The
Series B Shares may be suited for investors with a
longer investment time horizon.
INVESTMENT OBJECTIVE AND POLICIES................. The Fund's investment objective is to provide
holders of Common Shares ("Common Stockholders") a
high level of current income exempt from federal
income tax and New York State and New York City
personal income taxes. The Fund must satisfy its
obligation to pay dividends on AMPS before it
distributes any income to Common Stockholders.
Under normal market conditions, the Fund will
invest substantially all (at least 90%) of its
total assets in municipal bonds that pay interest
that, in the opinion of bond counsel to the issuer
(or on the basis of other authority believed by
the Fund's investment manager to be reliable), is
exempt from federal income tax and New York State
and New York City personal income taxes ("New York
Municipal Bonds") with remaining maturities of
less than 15 years. The Fund's policy is to
invest, under normal market conditions, at least
80% of its total assets in municipal bonds with
remaining maturities of less than 15 years. As a
fundamental policy, the Fund will invest at least
80% of its total assets in New York Municipal
Bonds.
The Fund seeks to maintain a dollar-weighted
average duration between three and eight years.
Under normal market conditions, the Fund will
invest at least 80% of its total assets in
municipal bonds that, at the time of investment,
are rated in the four highest rating categories by
an NRSRO or are unrated but considered to be of
comparable quality by NB Management. 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 that are
unrated but judged to be of comparable quality by
NB Management. There is no assurance that the Fund
will achieve its investment objective. See "The
Fund's Investments."
The Fund's investments are subject to
diversification, liquidity and related guidelines
that may be established in connection with the
Fund's efforts to receive from Moody's and Fitch
ratings of "Aaa" and "AAA," respectively, for
AMPS. Ratings issued by NRSROs, including Moody's
and Fitch, do not eliminate or mitigate the risk
of investing in Fund shares.
RATINGS........................................... The Fund will issue AMPS only if the shares
receive a credit quality rating of "Aaa" from
Moody's and "AAA" from Fitch. These ratings are an
assessment of the capacity and willingness of an
issuer to pay preferred stock obligations. The
ratings are not a recommendation to purchase, hold
or sell those shares inasmuch as the rating does
not comment as to market price or suitability for
a particular investor. The ratings described above
also do not
5
address the likelihood that an owner of AMPS will
be able to sell such shares in an auction or
otherwise. The ratings are based on current
information furnished to Moody's and Fitch by the
Fund and NB Management and information obtained
from other sources. The ratings may be changed,
suspended or withdrawn in the rating agencies'
discretion as a result of changes in, or the
unavailability of, such information. See
"Description of AMPS--Rating Agency Guidelines and
Asset Coverage."
INVESTMENT MANAGER................................ NB Management serves as the investment manager of
the Fund. Subject to the general supervision of
the Board of Directors, NB Management is
responsible for managing, either directly or
through others selected by it, the investment
activities of the Fund and the Fund's business
affairs and other administrative matters.
NB Management receives a fee, payable monthly, in
a maximum annual amount equal to .55% of the
Fund's average daily total assets minus
liabilities other than any aggregate indebtedness
that may be entered into for purposes of leverage
("Managed Assets"). NB Management has
contractually agreed to waive a portion of the
management fees it is entitled to receive from the
Fund at the annual rate of .25% of the Fund's
average daily Managed Assets from the commencement
of operations through October 31, 2007 (i.e.,
roughly the first five years of operations), and
at a declining amount for an additional four years
of operations (through October 31, 2011).
NB Management has retained Neuberger Berman, LLC
("Neuberger Berman") to serve as the Fund's
sub-adviser. See "Sub-Adviser" below. Together,
the firms and their affiliates manage
$53.6 billion in total assets (as of
September 30, 2002) and continue an asset
management history that began in 1939.
Theodore P. Giuliano, Thomas J. Brophy and Lori
Canell are the portfolio managers of the Fund. See
"Management of the Fund--Investment Manager" for a
description of their backgrounds and experience.
SUB-ADVISER....................................... NB Management has retained Neuberger Berman to
serve as the Fund's sub-adviser responsible for
providing investment recommendations and research.
NB Management (and not the Fund) will pay a
portion of the fees it receives to Neuberger
Berman in return for its services.
RISK FACTORS SUMMARY.............................. RISK IS INHERENT IN ALL INVESTING. Therefore,
before investing in the AMPS of the Fund you
should consider certain risks carefully. The
primary risks of investing in AMPS are:
- The Fund will not be permitted to declare
dividends or other distributions with respect
to your AMPS or redeem your AMPS unless the
Fund meets certain asset coverage require-
ments;
- If you try to sell your AMPS between auctions
you may not be able to sell any or all of your
shares or you may not be able to sell them for
$25,000 per share or $25,000 per share plus
accumulated dividends. If the Fund has
designated a special rate
6
period, changes in interest rates are more
likely to affect the price you would receive if
you sold your shares in the secondary market.
You may transfer your shares outside of
auctions only to or through a broker-dealer
that has entered into an agreement with the
Auction Agent and the Fund or another person as
the Fund permits;
- If an auction fails you may not be able to sell
some or all of your AMPS;
- A rating agency could downgrade the AMPS, which
could affect liquidity and their value in a
secondary market;
- The Fund may be forced to redeem your AMPS to
meet regulatory or rating agency requirements
or may voluntarily redeem your shares in
certain circumstances;
- In certain circumstances the Fund may not earn
sufficient income from its investments to pay
dividends;
- The value of the Fund's investment portfolio
may decline, reducing the asset coverage for
its AMPS;
- If an issuer of a municipal bond in which the
Fund invests is downgraded or defaults, there
may be a negative impact on the income and/or
asset value of the Fund's portfolio;
- Because the Fund is classified as
"non-diversified" under the Investment Company
Act of 1940, as amended ("1940 Act"), and the
rules and regulations thereunder, it can invest
a greater portion of its assets in obligations
of a single issuer. As a result, the Fund will
be more susceptible than a more
widely-diversified fund to any single
corporate, economic, political or regulatory
occurrence.
- The Fund's policies of investing primarily in
municipal obligations of issuers located in New
York the Fund more susceptible to adverse
economic, political or regulatory occurrences
affecting those issuers. To the extent that a
particular industry sector represents a larger
portion of the state's total economy, the
greater the impact that a downturn in such
sector is likely to have on the state's
economy.
In addition to the risks described above, certain
general risks of investing in the Fund may under
certain circumstances limit the Fund's ability to
pay dividends and meet its asset coverage
requirements on the AMPS. These risks include:
LIMITED OPERATING HISTORY. The Fund is a recently
organized, non-diversified, closed-end management
investment company that has been operational only
since September 27, 2002.
INTEREST RATE RISK. Generally, when market
interest rates fall, bond prices rise, and vice
versa. Interest rate risk is the risk that the
municipal bonds in the Fund's portfolio will
decline in value because of increases in market
interest rates. The prices of longer-term bonds
generally fluctuate more than prices of shorter-
term bonds as interest rates change. Because the
Fund will invest primarily in intermediate-term
bonds, the Common Share net
7
asset value and market price per share will
fluctuate more in response to changes in market
interest rates than if the Fund invested primarily
in short-term bonds. See "Risks--Interest Rate
Risk" for additional information.
CREDIT RISK. Credit risk is the risk that an
issuer of a municipal bond will become unable to
meet its obligation to make interest and principal
payments. In general, lower-rated municipal bonds
carry a greater degree of credit risk. If rating
agencies lower their ratings of municipal bonds in
the Fund's portfolio, the value of those
obligations could decline, which could jeopardize
the rating agencies' ratings of AMPS. In addition,
the underlying revenue source for a municipal
obligation other than a general obligation bond
may be insufficient to pay principal or interest
in a timely manner. Because the primary source of
income for the Fund is the interest and principal
payments on the municipal bonds in which it
invests, any default by an issuer of a municipal
obligation could have a negative impact on the
Fund's ability to pay dividends on AMPS and could
result in the redemption of some or all AMPS. This
risk of default may be greater for private
activity bonds or other municipal bonds whose
payments are dependent upon a specific source of
revenue. Even if the issuer does not actually
default, adverse changes in the issuer's financial
condition may negatively affect its credit rating
or presumed creditworthiness. These developments
would adversely affect the market value of the
issuer's obligations.
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
that are unrated but judged to be of comparable
quality by NB Management. Bonds of
below-investment grade quality are regarded as
having predominantly speculative characteristics
with respect to capacity to pay interest and repay
principal, and these bonds are commonly referred
to as "junk bonds." The prices of these
lower-grade bonds are more sensitive to negative
developments, such as a decline in the issuer's
revenues or a general economic downturn, than are
the prices of higher-grade securities. Municipal
bonds in the lowest investment grade category may
also be considered to possess some speculative
characteristics by certain rating agencies.
STATE-SPECIFIC RISK. The Fund's policy of
investing substantially all of its assets in New
York Municipal Bonds makes the Fund more
susceptible to adverse economic, political or
regulatory occurrences affecting the issuers of
such bonds. The New York State economy has a
comparatively large share of the nation's finance,
insurance, transportation, communications and
services employment. The larger the portion that a
particular industry sector represents of the
state's total economy, the greater the impact that
a downturn in such sector is likely to have on the
state's economy. The combined state and local
taxes of residents of New York State, and
particularly of residents of New York City, are
among the highest in the country, which may limit
the ability of New
8
York State and its localities to raise additional
revenue. In addition, the combined state and local
debt per capita is above the national average, and
debt-service expenditures have represented an
increasing claim on state and local budgets.
Recent events have created significant risk
factors that could result in a reduction in
economic activity in New York State and New York
City.
MUNICIPAL BOND MARKET RISK. The amount of public
information available about the municipal bonds in
the Fund's portfolio is generally less than that
for corporate equities or bonds, and the
investment performance of the Fund may therefore
be more dependent on the analytical abilities of
NB Management than would be a stock fund or
taxable bond fund. The secondary market for
municipal bonds, particularly below-investment
grade bonds in which the Fund may invest, also
tends to be less well-developed and less liquid
than many other securities markets, which may
adversely affect the Fund's ability to sell bonds
from its portfolio at attractive prices. Some
municipal bonds are supported only by the revenue
of a particular project or privately operated
facility, and are not supported by the taxing
power of any governmental entity.
TERRORISM RISKS. Municipal securities are subject
to a risk that terror attacks could result in
substantial loss of life, damage the local economy
and damage or destroy significant portions of the
municipal infrastructure. The impact of these
events may extend beyond the immediately-affected
area and beyond the time of the attack. Businesses
that leave an affected area in the wake of such an
attack may not return, and economic activity may
slow if tourists and local consumers avoid the
affected city. These events could severely affect
the tax base of a particular issuer of municipal
securities and could damage or destroy a facility
whose revenues support the payment of particular
municipal securities. These attacks, and measures
taken to prevent them, may also impose substantial
overtime costs on municipal budgets. See "Recent
Developments."
HIGH YIELD RISK. Investing in high yield bonds
involves additional risks, including credit risk.
The value of high yield, lower-quality bonds is
affected by the creditworthiness of the issuers of
the securities and by general economic and
specific industry conditions. Issuers of high
yield bonds are not as strong financially as those
with higher credit ratings, so their bonds are
usually considered speculative investments. These
issuers are more vulnerable to financial setbacks
and recession than more creditworthy issuers,
which may impair their ability to make interest
and principal payments. Investments in lower-grade
securities will expose the Fund to greater risks
than if the Fund owned only higher-grade securi-
ties.
REINVESTMENT RISK. Income from the Fund's
municipal bond portfolio will decline if and when
the Fund invests the proceeds from matured, traded
or called bonds at market interest rates that are
below the portfolio's current earnings rate.
9
INFLATION RISK. Inflation risk is the risk that
the value of assets or income from the Fund's
investments will be worth less in the future as
inflation decreases the present value of payments
at future dates.
LIQUIDITY RISK. The Fund may invest up to 20% of
its net assets in securities that are illiquid at
the time of investment, which means a security
that cannot be sold within seven days at a price
that approximates the price at which the Fund is
carrying it. Illiquid securities may trade at a
discount from comparable, more liquid investments,
and may be subject to wide fluctuations in market
value. Also, the Fund may not be able to dispose
of illiquid securities when that would be
beneficial at a favorable time or price.
DERIVATIVES RISK. The Fund may utilize a variety
of derivative instruments for investment or risk
management purposes, such as engaging in interest
rate and other hedging and risk management
transactions, and purchasing and selling options
(including swaps, caps, floors and collars) on
municipal bonds and on indices based on municipal
bonds. In general, the Fund may purchase and sell
(or write) options on up to 20% of its total
assets. Derivatives are subject to a number of
risks described elsewhere in this prospectus, such
as liquidity risk, interest rate risk, credit risk
and management risk. In addition, investment by
the Fund in derivative instruments may increase
the Fund's leverage and, during periods of rising
interest rates, may adversely affect the Fund's
income, distributions and total returns to holders
of AMPS ("Preferred Stockholders"). Derivatives
also involve the risk of mispricing or improper
valuation, and the risk that changes in the value
of a derivative may not correlate perfectly with
an underlying asset, interest rate or index.
Suitable derivative transactions may not be
available in all circumstances and there can be no
assurance that the Fund will engage in these
transactions to reduce exposure to other risks
when that would be beneficial.
MANAGEMENT RISK. The Fund is subject to management
risk because it is an actively-managed investment
portfolio. NB Management and the portfolio
managers will apply investment techniques and risk
analyses in making investment decisions for the
Fund, but there can be no guarantee that these
will produce the desired results.
ECONOMIC SECTOR AND GEOGRAPHIC RISK. The Fund will
normally invest substantially all of its assets in
municipal obligations of issuers in New York State
and may invest 25% or more of its total assets in
municipal obligations in the same economic sector,
including the following: lease rental obligations
of state and local authorities; obligations
dependent on annual appropriations by the state's
legislature for payment; obligations of state and
local housing finance authorities; municipal
utilities systems or public housing authorities;
obligations of hospitals or life-care facilities;
and industrial development or pollution control
bonds issued for electrical utility systems, steel
companies, paper companies or other purposes. This
may make the Fund more susceptible to adverse
10
economic, political or regulatory occurrences
affecting New York State or a particular economic
sector. For example, health care-related issuers
are susceptible to Medicare, Medicaid and other
third-party payor reimbursement policies, and
national and state health care legislation.
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of
Incorporation (which, as hereafter amended,
restated or supplemented from time to time is,
together with the Articles Supplementary, referred
to as the "Articles") contain provisions limiting
(1) the ability of other entities or persons to
acquire control of the Fund, (2) the Fund's
freedom to engage in certain transactions and
(3) the ability of the Fund's Directors or
stockholders to amend the Articles. These
provisions of the Articles may be regarded as
"anti-takeover" provisions. See "Anti-Takeover and
Other Provisions in the Articles of
Incorporation."
RECENT DEVELOPMENTS. As a result of the terrorist
attacks on the World Trade Center and the Pentagon
on September 11, 2001, some of the U.S. securities
markets were closed for a four-day period. These
terrorist attacks and related events have led to
increased short-term market volatility and may
have long-term effects on U.S. and world economies
and markets. A similar disruption of the financial
markets could impact interest rates, auctions,
secondary trading, ratings, credit risk, inflation
and other factors relating to the securities. See
"Risks."
DIVIDENDS AND RATE PERIODS........................ The table below shows the dividend rates, the
dividend payment dates and the number of days for
the initial rate periods on AMPS offered in this
prospectus. For subsequent rate periods, AMPS will
pay dividends based on a rate set at auctions
normally held every seven days in the case of the
Series A AMPS and 28 days in the case of the
Series B AMPS. In most instances, dividends are
payable on the first business day following the
end of the rate period. The rate set at an auction
will not exceed a maximum rate (which is
determined in accordance with procedures described
in the Articles Supplementary).
Dividends on AMPS will be cumulative from the date
the shares are first issued and will be paid only
out of legally available funds.
DIVIDEND NUMBER
INITIAL PAYMENT DATE OF DAYS OF
DIVIDEND FOR INITIAL INITIAL
RATE RATE PERIOD RATE PERIOD
-------- -------------- -----------
Series A........................... % , 2003
Series B........................... % , 2003
The Fund may, subject to certain conditions,
designate special rate periods of more than seven
days in the case of the Series A AMPS, and more
than 28 days in the case of Series B AMPS. The
dividend payment date for special rate periods
will be set out in the notice designating a
special rate period.
11
The Fund may not designate a special rate period
unless sufficient clearing bids were made in the
most recent auction. In addition, full cumulative
dividends, any amounts due with respect to
mandatory redemptions and any additional dividends
payable prior to such date must be paid in full.
Pursuant to the broker-dealer agreement between
The Bank of New York, as Auction Agent, and
Merrill Lynch ("the Broker-Dealer Agreement"), the
lead broker-dealer designated by the Fund,
initially Merrill Lynch, must not have objected to
the declaration of a special rate period.
See "Description of AMPS--Dividends and Rate
Periods" and "Description of AMPS--Dividends and
Rate Periods--Designation of Special Rate Periods"
and "The Auction."
TRADING MARKET.................................... The AMPS are not listed on an exchange. Instead,
you may buy or sell AMPS at an auction that
normally is held periodically at the end of the
preceding rate period by submitting orders to a
broker-dealer that has entered into an agreement
with the Auction Agent and the Fund (a
"Broker-Dealer"), or to a broker-dealer that has
entered into a separate agreement with a Broker-
Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in AMPS
outside of auctions, but may discontinue this
activity at any time. There is no assurance that a
secondary market will exist or, if one does exist,
that it will provide Preferred Stockholders with
liquidity. You may transfer AMPS outside of
auctions only to or through a Broker-Dealer, or a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer.
The table below shows the first auction date for
each series of the Fund's AMPS and the day on
which each subsequent auction will normally be
held for each such series. The first auction date
for each series of AMPS will be the business day
before the dividend payment date for the initial
rate period for each such series. The start date
for subsequent rate periods normally will be the
business day following the auction date unless the
then-current rate period is a special rate period,
or the day that normally would be the auction date
or the first day of the subsequent dividend period
is not a business day.
FIRST AUCTION DATE SUBSEQUENT AUCTION
------------------ ------------------
Series A................................ Tuesday
Series B................................ Monday
TAXATION.......................................... Because under normal circumstances the Fund will
invest substantially all of its assets in
municipal bonds that pay interest that is exempt
from federal income tax and New York State and
12
New York City personal income taxes, the dividends
paid on AMPS and Common Shares attributable to
that interest will be similarly exempt for New
York resident individuals. However, dividends paid
on AMPS and Common Shares may be subject to state
and local taxes. All or a portion of the interest
paid on the municipal bonds 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 if you are subject to the AMT
or would become subject thereto by investing in
AMPS. The Fund also may realize net long- or
short-term capital gain on the sale or exchange of
its securities, which would be taxable to its
stockholders when distributed to them. Taxable
income or gain earned or realized by the Fund will
be allocated proportionately to Preferred
Stockholders and Common Stockholders, based on the
percentage of total dividends and capital gain
distributions, respectively, paid to each class
for that year. Accordingly, certain distributions
on AMPS may be subject to federal income tax. The
Fund intends to notify Preferred Stockholders,
before any applicable auction for a rate period of
28 days or less, of the amount of any taxable
income and gain for federal income tax purposes to
be paid as dividends on AMPS for the period
relating to that auction. For longer periods, the
Fund may notify Preferred Stockholders of such
amount. In certain circumstances, the Fund will
make Preferred Stockholders whole for taxes owing
on dividends paid to Preferred Stockholders that
include taxable income and gain. See "Tax
Matters."
SPECIAL TAX CONSIDERATIONS........................ While the Fund expects most of its income to be
exempt from federal income tax and New York State
and New York City personal income taxes, the
Fund's distributions of any taxable net investment
income and any net short-term capital gain (i.e.,
dividends) will be taxable to stockholders as
ordinary income, and distributions of any net
capital gain (the excess of net long-term capital
gain over net short-term capital loss) will be
subject to tax as long-term capital gain. See "Tax
Matters."
ASSET MAINTENANCE................................. Under the Fund's Articles Supplementary for the
AMPS, which establishes and fixes the rights and
preferences of the shares of each series of AMPS,
the Fund must maintain:
- asset coverage of the AMPS as required by the
rating agency or agencies rating the AMPS, and
- asset coverage of at least 200% with respect to
senior securities that are stock, including the
AMPS.
In the event that the Fund does not maintain these
coverage tests or cure any deficiencies in the
time allowed, some or all of the AMPS will be
subject to mandatory redemption. See "Description
of AMPS--Redemption--Mandatory Redemption."
13
Based on the composition of the Fund's portfolio
as of November 30, 2002, the asset coverage of the
AMPS as measured pursuant to the 1940 Act would be
approximately 262% if the Fund were to issue all
of the AMPS offered in this prospectus, repre-
senting approximately 38% of the Fund's Managed
Assets.
VOTING RIGHTS..................................... The 1940 Act requires that the holders of the AMPS
and any other preferred stock of the Fund, voting
as a separate class, have the right to elect at
least two Directors of the Fund at all times and
to elect a majority of the Directors at any time
when two years' dividends on the AMPS or any other
preferred stock are unpaid.
As required under the Fund's Articles and the 1940
Act, certain other matters must be approved by a
vote of all stockholders of all classes voting
together and by a vote of the AMPS and any other
preferred stock of the Fund tallied separately.
Each Common Share, each AMPS, and each share of
any other series of preferred stock of the Fund is
entitled to one vote per share. See "Description
of AMPS--Voting Rights" and "Anti-Takeover and
Other Provisions in the Articles of
Incorporation."
REDEMPTION........................................ Although the Fund will not ordinarily redeem AMPS,
it may be required to redeem AMPS if, for example,
the Fund does not meet an asset coverage ratio
required by law or required by the
Articles Supplementary or in order to correct a
failure to meet a rating agency guideline in a
timely manner. See "Description of
AMPS--Redemption--Mandatory Redemption." The Fund
voluntarily may redeem AMPS in certain
circumstances. See "Description of
AMPS--Redemption--Optional Redemption."
LIQUIDATION....................................... The liquidation preference of the AMPS of each
series is $25,000 per share, plus an amount equal
to accumulated but unpaid dividends (whether or
not earned or declared by the Fund, but excluding
interest thereon). See "Description of
AMPS--Liquidation."
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT AND State Street Bank and Trust Company serves as
REGISTRAR......................................... custodian of the Fund's assets. The Bank of New
York serves as Auction Agent, transfer agent and
registrar. See "Custodian, Auction Agent, Transfer
Agent and Registrar."
14
FINANCIAL HIGHLIGHTS (UNAUDITED)
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on September 27, 2002 through October 31, 2002. Because the Fund was
recently organized and commenced investment operations on September 27, 2002,
the table covers less than five weeks of operations, during which a substantial
portion of the Fund's portfolio was held in temporary investments pending
investment in municipal securities that meet the Fund's investment objective and
policies. Accordingly, the information presented may not provide a meaningful
picture of the Fund's operating performance.
FOR THE PERIOD
SEPTEMBER 27, 2002*
THROUGH
OCTOBER 31, 2002
----------------------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period............ $14.32**
------
Net Investment Income......................... 0.03
Net Gains on Securities (both realized and
unrealized).................................
------
Total from Investment Operations................ --
------
Offering Costs.................................. (0.03)
------
Net Asset Value, End of Period.................. $14.32
======
Per Share Market Value, End of Period........... $15.00
======
Total Investment Return on Net Asset Value...... (0.03)%***
======
Total Investment Return on Market Value......... 0%***
======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in millions)......... $ 76.7
Ratio of expenses to average net assets before
reimbursement................................. 1.18%****
Ratio of expenses to average net assets after
reimbursement................................. 0.93%****
Ratio of net investment income to average net
assets for reimbursement...................... 1.22%****
Portfolio turnover rate......................... 0%
-------------------
* Commencement of operations
** Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the Common Stockholder from the $15.00
offering price.
*** Total investment return on net asset value is calculated assuming a
purchase at the offering price of $15.00 less the sales load of $0.675 per
share paid by the Common Stockholder on the first day and a sale at the net
asset value on the last day of the period reported. Total investment return
on market value is calculated assuming a purchase at the offering price of
$15.00 less the sales load of $0.675 per share paid by the Common
Stockholder on the first day and a sale at the current market price on the
last day of the period reported. Total investment return on net asset value
and total investment return on market value are not computed on an
annualized basis.
**** Annualized. There were no AMPS outstanding during the period shown, and
these ratios do not reflect the effect of dividend payments to Preferred
Stockholders.
15
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Maryland corporation on July 29, 2002. The Fund issued an aggregate of 5,150,000
Common Shares, par value $.0001 per share, pursuant to the initial public
offering thereof and commenced operations on September 27, 2002. On October 17,
2002 and November 13, 2002, the Fund issued 200,000 and 215,000 additional
Common Shares, respectively, in connection with a partial exercise by the
underwriters of the over-allotment option. The Fund's Common Shares are traded
on the AMEX under the symbol "NBO." The Fund's principal office is located at
605 Third Avenue, New York, New York 10158-0180, and its telephone number is
877-461-1899. The Fund is designed to provide tax benefits to individual
investors who are residents of New York for tax purposes.
The following provides information about the Fund's outstanding shares as of
November 30, 2002:
AMOUNT HELD BY
AMOUNT THE FUND OR FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------- ------------ --------------- -----------
Common............................. 999,997,000* 0 5,571,981
Preferred
Series A......................... 1,500 0 0
Series B......................... 1,500 0 0
-------------------
* A total of 1,000,000,000 shares of capital stock of the Fund are authorized
under the Articles, all originally designated Common Stock pursuant to the
Articles. The Board of Directors of the Fund (the "Board") may classify or
reclassify any unissued shares of capital stock from time to time without a
stockholder vote into one or more classes of preferred or other stock by
setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms
or conditions of redemption of such shares of stock. The Board has
reclassified 1,500 shares of common stock as Series A AMPS and reclassified
1,500 shares of common stock as Series B AMPS, and has authorized the
issuance of those AMPS.
USE OF PROCEEDS
The net proceeds of the offering of AMPS will be approximately $ after
payment of the sales load and estimated offering costs. The Fund will invest the
net proceeds of the offering in accordance with the Fund's investment objective
and policies as stated below. It is currently anticipated that the Fund will be
able to invest substantially all of the net proceeds in municipal bonds that
meet its investment objective and policies within three months after the
completion of the offering. Pending such investment, it is anticipated that the
proceeds will be invested in high quality, short-term, tax-exempt securities,
although the Fund may, if necessary, also invest in other high quality,
short-term securities, including mortgage-backed and corporate debt securities,
that may be either tax-exempt or taxable.
16
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of November 30, 2002, and as adjusted to give effect to the issuance of the AMPS
offered in this prospectus.
AS OF NOVEMBER 30, 2002
-------------------------
ACTUAL AS ADJUSTED
------ -----------
Stockholders' equity:
AMPS, par value $.0001 per share
(no shares issued; 1,930, as
adjusted, at $25,000 per share
liquidation preference)......... -- $ 48,250,000
Common Shares, par value, $.0001
per share (5,571,981 shares
issued and outstanding)......... $ 557 557
Capital in excess of par value
attributable to Common Shares....... 79,650,914 78,923,414
Undistributed investment
income--net................... (46,282) (46,282)
Accumulated realized gain
(loss)--net................... -- --
Unrealized appreciation on
investments--net.............. (733,664) (733,664)
Net Assets...................... $78,871,525 $126,394,025
As used in this prospectus, unless otherwise noted, the Fund's "net assets"
include assets of the Fund attributable to any outstanding AMPS, with no
deduction for the liquidation preference of such shares. For financial reporting
purposes, however, the Fund is required to deduct the liquidation preference of
its outstanding AMPS from net assets so long as the AMPS have redemption
features that are not solely within the control of the Fund. In connection with
the rating of the AMPS, the Fund has established various portfolio covenants to
meet third-party rating agency guidelines in its Articles. These covenants
include, among other things, investment diversification requirements and
requirements that investments included in the Fund's portfolio meet specific
industry and credit quality criteria. Market factors outside the Fund's control
may affect its ability to meet the criteria of third-party rating agencies set
forth in the Fund's portfolio covenants. If the Fund violates these covenants,
it may be required to cure the violation by redeeming all or a portion of the
AMPS. For all regulatory purposes, the Fund's AMPS will be treated as stock
(rather than indebtedness).
17
PORTFOLIO COMPOSITION
As of November 30, 2002, 91.8% of the market value of the Fund's portfolio
was invested in long-term municipal obligations and 8.2% in short-term municipal
obligations. The following table sets forth certain information with respect to
the composition of the Fund's investment portfolio as of November 30, 2002. This
information reflects the composition of the Fund's assets as of November 30,
2002 and is not representative of the Fund as of the current fiscal year or at
any time in the future.
NUMBER OF VALUE
S&P* MOODY'S* FITCH* ISSUES (IN THOUSANDS) PERCENT
---- -------- ------ --------- -------------- -----------
AAA Aaa AAA 9 $19,393 24.6
AA Aa AA 13 22,982 29.1
A A A 11 19,399 24.6
BBB Baa1 BBB 7 11,100 14.1
BB Ba1 BB -- -- --
B B B -- -- --
NR+ NR+ NR+ -- -- --
VMIG1 A+ 6 6,500 8.2
Cash -- (502) (0.6)
------- ------- ------
Total 46 $78,872 100%
------- ------- ------
-------------------
* Ratings: Using the highest of S&P's, Moody's or Fitch's ratings on the
Fund's municipal obligations. S&P and Fitch rating categories may be
modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and C
ratings. Moody's rating categories may be modified further by a 1, 2, or 3
in Aa, A, Baa, Ba and B ratings.
+ Securities that are not rated by S&P, Moody's or Fitch. NB Management
determines that these securities are comparable to securities of a
particular rating. This determination is based on NB Management's own
internal evaluation and does not necessarily reflect how such securities
would be rated by S&P, Moody's or Fitch if they were to rate the
securities.
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide Common Stockholders a high
level of current income exempt from federal income tax and New York State and
New York City personal income taxes. The Fund must satisfy its obligation to pay
dividends on AMPS before distributing any income to Common Stockholders. The
Fund may not achieve its investment objective.
The Fund normally invests substantially all (at least 90%) of its total
assets in New York Municipal Bonds with remaining maturities of less than 15
years. The Fund's policy is to invest, under normal market conditions, at least
80% of its total assets in municipal bonds with remaining maturities of less
than 15 years. The Fund seeks to maintain a dollar-weighted average duration
between three and eight years. Under normal market conditions, the Fund will
invest at least 80% of its total assets in municipal bonds that are rated, at
the time of investment, within the four highest categories by an NRSRO or are
unrated but judged to be of comparable quality by NB Management. Investment
grade debt securities are those rated "BBB" or higher by S&P, "Baa" or higher by
Moody's or within one of the four highest rating categories by an NRSRO or are
unrated but judged to be of comparable quality by NB Management. As a
fundamental policy, the Fund will invest at least 80% of its total assets in New
York Municipal Bonds.
18
Duration is a measure of a fixed income security's sensitivity to changes in
interest rates. Unlike final maturity, duration takes account of all payments
made over the life of the security. Typically, with a 1% change in interest
rates, an investment's value may be expected to move in the opposite direction
approximately 1% for each year of its 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 that are
unrated but judged to be of comparable quality by NB Management. Bonds of
below-investment grade quality are regarded as having predominately speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal, and are commonly referred to as "junk bonds."
Municipal bonds may have all types of interest rate payment and reset terms,
including fixed rate, floating and variable rate, zero coupon, payment in kind
and auction rate features.
The Fund will not invest more than 25% of its total assets in any industry.
Governmental issuers of municipal bonds are not considered part of any
"industry." However, municipal bonds backed only by the assets and revenues of
nongovernmental users may for this purpose be deemed to be issued by such
nongovernmental users, and the 25% limitation would apply to the industries of
such nongovernmental users. It is nonetheless possible that the Fund may invest
more than 25% of its total assets in a broader segment of the municipal bond
market, such as hospital and other health care facilities obligations, housing
agency revenue obligations, and airport revenue obligations. The Fund will
invest more than 25% of its assets in such types of municipal bonds if NB
Management determines that the yields available from such obligations in a
particular segment justify the additional risks associated with a large
investment in that segment. These obligations could be supported by the credit
of governmental users, or by the credit of nongovernmental users engaged in a
number of industries; however, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all such municipal bonds in such a market
segment. The Fund may invest more than 25% of its assets in industrial
development bonds.
The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies that provide such credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Fund's income. Insurance generally will be obtained from insurers
with a claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch. The
insurance feature does not guarantee the market value of the insured obligations
or the net asset value of the Common Shares.
For temporary defensive purposes, and in order to keep cash on hand fully
invested, the Fund may temporarily invest to a substantial degree in
high-quality, short-term municipal bonds. If these high-quality, short-term
municipal bonds are not available or, in NB Management's judgment, do not afford
sufficient protection against adverse market conditions, the Fund may invest in
the following taxable securities: obligations of the U.S. Government, its
agencies or instrumentalities; other debt securities rated within the four
highest categories by an NRSRO; commercial paper rated in the highest category
by an NRSRO; certificates of deposit, time deposits and bankers' acceptances; or
repurchase agreements with respect to any of the foregoing investments or any
other fixed-income securities that NB Management considers consistent with such
strategy. To the extent the Fund invests in taxable securities, it will not be
able to achieve its investment objective of providing income exempt from federal
income tax and New York State and New York City personal income taxes.
19
The Fund cannot accurately predict its portfolio turnover rate but
anticipates that its annual portfolio turnover rate will not exceed 100%. The
Fund generally will not trade 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. 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.
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 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 Shares and, if
issued, 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 1940 Act.
If you are, or as a result of an investment in the Fund would become,
subject to the AMT, the Fund may not be a suitable investment for you. Special
AMT rules apply to corporate holders. In addition, distributions of any taxable
net investment income and any net short-term capital gain (i.e., dividends) will
be taxable to stockholders as ordinary income, and distributions of any net
capital gain will be subject to tax as long-term capital gain. See "Tax
Matters."
The following provides additional information regarding the types of
securities and other instruments in which the Fund will ordinarily invest. A
more detailed discussion of these and other instruments and investment
techniques that may be used by the Fund is provided under "Investment Objective
and Policies" in the Statement of Additional Information.
MUNICIPAL BONDS
Municipal bonds are obligations 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 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. The New York Municipal Bonds in which the Fund will
invest are generally issued by New York State, a city in New York State, or a
political subdivision, agency, authority or instrumentality of such state or
city. The Fund may also invest in municipal obligations issued by United States
territories (such as Puerto Rico or Guam) the interest on which is exempt from
federal income tax and New York State and New York City personal income taxes.
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 Fund has not established any limit on the percentage of its portfolio
that may be invested in municipal bonds the interest on which is a Tax
Preference Item, and a substantial portion of the dividends paid to Fund
stockholders thus may be such an item. AMPS may not be a suitable investment for
investors who are already subject to the AMT or who would become subject to the
AMT as a result of an investment in AMPS. See "Tax Matters."
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds, which include
"private activity bonds." General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest, and, accordingly, the capacity of the issuer of a general obligation
bond as to the timely payment of interest and the repayment of principal when
due is affected by the issuer's maintenance of
20
its tax base. Revenue or special obligation bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special tax or other specific revenue source such
as from the user of the facility being financed; accordingly, the timely payment
of interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. They are not supported by the general
taxing authority of any governmental entity. Although the ratings of NRSROs of
the municipal bonds in the Fund's portfolio are relative and subjective, and are
not absolute standards of quality, such ratings reflect the assessment of the
NRSROs of the issuer's ability, or the economic viability of the special revenue
source, with respect to the timely payment of interest and the repayment of
principal in accordance with the terms of the obligation. See Appendix A to the
Statement of Additional Information for a summary of ratings.
Municipal bonds may have fixed or variable interest rates. The Fund may
purchase floating and variable rate demand notes, which are municipal bonds
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. 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 specified
intervals based on a specified 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. See "Investment Policies and
Techniques" in the Statement of Additional Information. Each such note purchased
by the Fund will meet the criteria established for the purchase of municipal
bonds.
The Fund may invest in unrated "non-appropriation" lease obligations or
installment purchase contract obligations of municipal authorities or entities
believed by NB Management to be of comparable quality to securities that are
rated investment grade. There is no limitation on the percentage of the Fund's
assets that may be invested in these lease obligations. A lease obligation is
backed by the municipality's promise to make the payments due under the lease
obligation. Lease obligations containing "non-appropriation" clauses provide
that the municipality has no obligation to make lease installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis.
The Fund may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price at which it was issued,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price).
The Fund may also engage in interest rate and other hedging and risk
management transactions; purchase and sell options (including swaps, caps,
floors and collars) on municipal bonds and on indices based on municipal bonds;
and purchase and sell municipal bonds on a "when-issued" or "delayed delivery"
basis. In general, the Fund may purchase and sell (or write) options on up to
20% of its total assets. The Securities and Exchange Commission requires that
obligations of investment companies such as the Fund, in connection with options
sold, must comply with certain segregation or cover requirements, which are more
fully described in the Statement of Additional Information. The Fund may engage
in these transactions both for speculative purposes and as a means to hedge
risk. The Fund may also engage, to a limited extent, in financial futures
contracts and related options contracts for hedging purposes. The Fund may also
hold securities or use investment techniques that provide for payments based on
or "derived" from the performance of an underlying asset, index or other
economic benchmark. 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. See the Statement of
Additional Information for a further description of these investment practices.
21
SELECTION OF INVESTMENTS
NB Management selects securities for the Fund's portfolio that it believes
entail reasonable credit risk considered in relation to the particular
investment policies of the Fund. As a result, the Fund does not necessarily
invest in the highest yielding municipal bonds permitted by its investment
policies if NB Management determines that market risks or credit risks
associated with such investments would subject the Fund's portfolio to excessive
risk. The potential for realization of capital gains resulting from possible
changes in interest rates is not a major consideration. The Fund's policy is to
invest at least 80% of its total assets in municipal bonds with remaining
maturities of less than 15 years. The Fund seeks to maintain a dollar-weighted
average duration between three and eight years. For this purpose, any scheduled
principal prepayments on municipal bonds are reflected in the calculation of
dollar-weighted average duration. NB Management may adjust the average duration
of the Fund's portfolio from time to time, depending on its assessment of the
relative yields available on securities of different maturities and its
expectations of future changes in interest rates. Duration is a measure of a
security's sensitivity to changes in market interest rates that takes account of
all payments of principal and interest scheduled to occur over the life of the
security.
From time to time, the Fund may invest in securities of a municipal issuer,
most or all of which is held by the Fund, by itself or together with other funds
or accounts managed by NB Management. If the other funds holding the securities
are open-end investment companies, they may need to liquidate their assets to
meet shareholder redemptions, which could adversely affect the value of the same
securities held by the Fund. Because there may be relatively few potential
purchasers for such investments and, in some cases, there may be contractual
restrictions on resales, the Fund may find it more difficult to sell such
securities at a time when NB Management believes it is advisable to do so.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Fund may purchase municipal bonds on a "when-issued" and "delayed
delivery" basis. No income accrues to the Fund on municipal bonds in connection
with such transactions prior to the date the Fund actually takes delivery of
such securities. These transactions are subject to market fluctuations; the
value of the municipal bonds at delivery may be more or less than their purchase
price, and yields generally available on municipal bonds when delivery occurs
may be higher than yields on the municipal bonds 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 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 the Fund's purchase
commitments, which are marked to market daily, pursuant to guidelines
established by the Board of Directors. The Fund will make commitments to
purchase municipal bonds on such basis only with the intention of actually
acquiring these securities, but the Fund 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 the
Fund's portfolio consistent with the Fund's investment objective and policies.
However, 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 which may be used to acquire securities on a
"when-issued" or "delayed delivery" basis. Use of these techniques has a
leverage-like effect on the Fund.
22
For more information, see "Investment Policies and Techniques--Special
Considerations Relating to Municipal Securities" in the Statement of Additional
Information.
OTHER FORMS OF LEVERAGE AND BORROWINGS
In addition to the issuance of AMPS, the Fund may use a variety of
additional strategies to add leverage to the portfolio. These include the use of
options, futures contracts, residual interest bonds and other derivative
instruments. Additional leverage will increase the volatility of the Fund's
investment portfolio and could result in larger losses than if the strategies
were not used.
The Securities and Exchange Commission does not consider derivative
instruments used by the Fund to constitute senior securities (and they will not
be subject to the Fund's limitations on borrowings) to the extent that the Fund
segregates liquid assets at least equal in amount to its obligations under the
instruments, or enters into offsetting transactions or owns positions covering
its obligations. For instance, the Fund may cover its position in a forward
purchase commitment by segregating liquid assets in an amount sufficient to meet
the purchase price. The Fund has no current intention to use such instruments to
an extent that would put more than 5% of its net assets at risk.
The Fund also may borrow money in order to repurchase its shares or as a
temporary measure for extraordinary or emergency purposes, including for the
payment of dividends or the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in AMPS.
LEVERAGE RISK. The Fund uses financial leverage for investment purposes by
issuing AMPS. It is currently anticipated that, taking into account the AMPS
being offered in this prospectus, the amount of leverage will represent
approximately 38% of the Fund's net assets.
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the Fund
and the AMPS' asset coverage. There can be no assurance that the Fund's
leveraging strategies involving AMPS or derivatives will be successful. While
the Fund may from time to time consider reducing leverage in response to actual
or anticipated changes in interest rates in an effort to mitigate the increased
volatility of current income and net asset value associated with leverage, there
can be no assurance that the Fund will actually reduce leverage in the future.
As long as the AMPS are outstanding, the Fund does not intend to utilize other
forms of leverage.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. The shares of other investment companies are subject to
the management fees and other expenses of those funds. Therefore, investments in
other investment companies will cause the Fund to bear proportionately the costs
incurred by the other investment companies' operations. If these other
investment companies engage in leverage, the Fund, as a stockholder, would bear
its proportionate share of the cost of such leveraging. The Fund may also invest
in investment companies whose income distributions are not exempt from federal
income tax and/or New York income taxes, and if it does, some of the Fund's
income distributions may be taxable.
23
Because the fee paid to NB Management will be calculated on the basis of the
Fund's Managed Assets (which includes the liquidation preference of the AMPS),
the fee will be higher when leverage is utilized, giving NB Management an
incentive to utilize leverage.
INTEREST RATE RISK. The Fund issues AMPS, which pay dividends based on
short-term interest rates, and uses the proceeds to buy municipal obligations
that pay interest based on longer-term yields. Longer-term municipal obligation
yields are typically, although not always, higher than short-term interest
rates. Both long-term and short-term interest rates may fluctuate. If short-term
interest rates rise, AMPS rates may rise such that the amount of dividends paid
to Preferred Stockholders exceeds the income from the portfolio securities
purchased with the proceeds from the sale of AMPS. Because income from the
Fund's entire investment portfolio (not just the portion purchased with the
proceeds of the AMPS offering) is available to pay AMPS dividends, however, AMPS
dividend rates would need to greatly exceed the Fund's net portfolio income
before the Fund's ability to pay AMPS dividends would be jeopardized. If
long-term rates rise, the value of the Fund's investment portfolio will decline,
reducing the amount of assets serving as asset coverage for the AMPS.
AUCTION RISK. Preferred Stockholders may not be able to sell AMPS at an
auction if the auction fails; that is, if there are more AMPS offered for sale
than there are buyers for those AMPS. Also, if a hold order is placed at an
auction (an order to retain AMPS) only at a specified rate, and that bid rate
exceeds the rate set at the auction, the AMPS will not be retained.
Additionally, if you elect to buy or retain AMPS without specifying a rate below
which you would not wish to continue to hold those AMPS, and the auction sets a
rate below the current market rate, you may receive a lower rate of return on
your AMPS than the market rate. Finally, the dividend period may be changed,
subject to certain conditions and with notice to the holders of the AMPS, which
could also affect the liquidity of your investment. See "Description of AMPS"
and "The Auction--Auction Procedures."
SECONDARY MARKET RISK. If you try to sell your AMPS between auctions, you
may not be able to sell any or all of your shares, or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated dividends.
If the Fund has designated a special rate period (a dividend period of more than
seven days in the case of the Series A AMPS and 28 days in the case of the
Series B AMPS), changes in interest rates are more likely to affect the price
you would receive if you sold your shares in the secondary market. You may
transfer shares outside of auctions only to or through a broker-dealer that has
entered into an agreement with the Auction Agent and the Fund or other person as
the Fund permits. The Fund does not anticipate imposing significant restrictions
on transfers to other persons. However, unless any such other person has entered
into a relationship with a broker-dealer that has entered into a broker-dealer
agreement with the Auction Agent, that person will not be able to submit bids at
auctions with respect to AMPS. Broker-dealers that maintain a secondary trading
market for AMPS are not required to maintain this market, and the Fund is not
required to redeem shares either if an auction or an attempted secondary market
sale fails because of a lack of buyers. AMPS are not listed on a stock exchange
or the National Association of Securities Dealers Automated Quotations, Inc.
("NASDAQ") stock market. If you sell your AMPS to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially when
market interest rates have risen since the last auction and during a special
rate period.
RATINGS AND ASSET COVERAGE RISK. While it is a condition to the closing of
the offering that Moody's and Fitch assign a rating of "Aaa" and "AAA,"
respectively, to the AMPS, the ratings do not eliminate or necessarily mitigate
the risks of investing in AMPS. A rating agency could downgrade AMPS, which may
make AMPS less liquid at an auction or in the secondary market, although the
downgrade would probably result in higher dividend rates. If a rating agency
downgrades AMPS of the Fund, the Fund will alter its portfolio or redeem AMPS.
See "Description of AMPS--Rating Agency Guidelines and Asset Coverage" for a
description of the asset tests the Fund must meet.
24
GENERAL RISKS OF INVESTING IN THE FUND
An investment in the Fund is subject to, among other things, market discount
risk, interest rate risk, credit risk, municipal bond market risk, reinvestment
risk, leverage risk, inflation risk, liquidity risk, derivatives risk and
management risk. An investment in AMPS will also be subject to the risk
associated with the fact that the Fund is recently organized. These risks are
summarized below.
LIMITED OPERATING HISTORY. The Fund is a recently organized,
non-diversified, closed-end management investment company that has been
operational only since September 27, 2002.
INTEREST RATE RISK. Interest rate risk is the risk that bonds (and the
Fund's net assets) will decline in value because of changes in market interest
rates. Generally, municipal bonds will decrease in value when interest rates
rise and increase in value when interest rates decline. This means that the net
asset value of the Common Shares will fluctuate with interest rate changes and
the corresponding changes in the value of the Fund's municipal bond holdings.
Because the Fund will invest primarily in intermediate-term bonds, the Common
Share net asset value and market price per share will fluctuate more in response
to changes in market interest rates than if the Fund invested primarily in
shorter-term bonds. The Fund's use of leverage, as described below, will tend to
increase Common Share interest rate risk.
INCOME RISK. The Fund's income is based primarily on the interest it earns
from its investments, which can vary widely over the short term and long term.
If interest rates drop, the Fund's income available over time to make dividend
payments with respect to AMPS could drop as well if the Fund purchases
securities with lower interest coupons.
CALL RISK. If interest rates fall, it is possible that issuers of callable
bonds with higher interest coupons will "call" (or prepay) their bonds before
their maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to replace such called security
with a lower-yielding security.
LIQUIDITY RISK. The market for municipal obligations may be less liquid than
for corporate bonds. The market for special obligation bonds, lease obligations,
participation certificates and variable rate instruments, which the Fund may
purchase, may be less liquid than for general obligation bonds. Liquid secondary
trading in unrated municipal obligations may not exist. The Fund may not be able
to sell these securities when NB Management determines it is appropriate. When
the Fund has a need to raise cash, NB Management may be forced to sell from the
portfolio some securities it would prefer to retain.
Less liquid markets tend to be more volatile and react more negatively to
adverse publicity and investor perception than more liquid markets. If markets
are less liquid, the Fund may not be able to dispose of municipal obligations in
a timely manner and at the price at which the Fund is carrying it. There may be
no established trading markets for certain municipal obligations, and trading in
these securities may be relatively inactive. Some of the Fund's investments may
be restricted as to resale. Although restricted securities may be sold in
private transactions, a security's value may be less than the price originally
paid by the Fund. Valuing illiquid or restricted securities is difficult, and
NB Management's judgment may play a greater role in their valuation.
CREDIT RISK. The Fund could lose money if the issuer of a municipal bond, or
the counterparty to a derivatives contract or other obligation, is unable or
unwilling to make timely principal and/or interest payments, or to otherwise
honor its obligations. In general, lower rated municipal bonds carry a greater
degree of risk that the issuer will lose its ability to make interest and
principal payments, which could have a negative impact on the Fund's net asset
value or distributions.
25
Securities rated "BBB" by S&P are regarded by S&P as having an adequate
capacity to pay interest and repay principal; whereas such securities 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.
Securities rated "Baa" by Moody's are regarded by Moody's as being medium-grade
obligations; they are neither highly protected nor poorly secured. Although
interest payments and principal payments for these securities appear adequate
for the present, they may lack certain protective elements or may be
characteristically unreliable over any great length of time. They also may lack
outstanding investment characteristics and may have speculative characteristics.
The Fund may be more dependent upon NB Management's investment analysis of
unrated municipal bonds than is the case with rated municipal 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 that are
unrated but judged to be of comparable quality by NB Management. These bonds,
which are below-investment grade, are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal and are commonly referred to as "junk bonds." These securities are
subject to a greater risk of default. The prices of these lower-grade bonds are
more sensitive to negative developments, such as a decline in the issuer's
revenues or a general economic downturn, than are the prices of higher-grade
securities. Lower-grade securities tend to be less liquid than investment-grade
securities and the market values of lower-grade securities tend to be more
volatile than investment-grade securities.
STATE-SPECIFIC RISK. As described above, the Fund will invest substantially
all of its net assets in New York Municipal Bonds. The Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
New York State and New York City municipal obligations. The information set
forth below and the related information in the Statement of Additional
Information is derived from sources that are generally available to investors.
The information is intended to give a recent historical description and is not
intended to indicate future or continuing trends in the financial or other
positions of New York State and New York City. It should be noted that the
creditworthiness of obligations issued by local New York issuers may be
unrelated to the creditworthiness of obligations issued by New York State and
New York City, and that there is no obligation on the part of New York State to
make payment on such local obligations in the event of default.
The events of September 11, 2001 had a significant impact upon the New York
State economy generally and more directly on that of New York City. Recovery,
clean up and repair efforts will result in substantial expenditures. The Federal
government has committed over $21 billion for disaster assistance in New York,
including disaster recovery and related activities, increased security and
reconstruction of infrastructure and public facilities. The amount includes
approximately $15.5 billion of appropriation for costs such as cleanup, economic
development, job training, transit improvements, road reconstruction and grants
to residents and businesses in lower Manhattan. It also includes approximately
$5.5 billion for economic stimulus programs directed primarily at businesses
located in the Liberty Zone, the area surrounding the World Trade Center site.
These programs include expanding tax credits, increasing depreciation
deductions, authorizing the issuance of tax-exempt private activity bonds and
expanding authority to advance refund some bonds issued to finance facilities in
the city. New York City and New York State expect, based on actions of the U.S.
Congress and the President, that they will be fully reimbursed for the cost to
recover from, clean up and repair the consequences of the World Trade Center
attack. However, prior to September 11, the nation's and New York State's
economies had been weakening and the loss of approximately one hundred thousand
jobs in New York City as a direct result of September 11 will produce material
budgetary pressures including increases to later year budget gaps for New York
City and reductions to New York State surpluses. New York State has not
quantified the impact of expected reductions in receipts and increased
expenditures for unemployment and economic revitalization resulting from
September 11. New York City's Financial Plan for Fiscal Years 2003-2006,
released by the Mayor of New York City on June 26, 2002 (the "City Financial
Plan"), projects revenues and expenditures for the 2003 fiscal year, balanced in
accordance with GAAP,
26
and projects gaps of $3.7 billion, $4.2 billion, and $4.6 billion for fiscal
years 2004 through 2006, respectively.
New York State has historically been one of the wealthiest states in the
nation. For decades, however, New York State's economy grew more slowly than
that of the nation as a whole, gradually eroding New York State's relative
economic affluence, as urban centers lost the more affluent to suburbs and
people and business migrated to the South and West. However, since 1999, prior
to the impact of September 11, the growth of New York State's economy has
equaled or exceeded national trends. New York State has for many years had a
very high state and local tax burden relative to other states. The burden of
state and local taxation, in combination with the many other causes of regional
economic dislocation, has contributed to the decisions of some businesses and
individuals to relocate outside, or to not locate within, New York State and
remains an impediment to growth and job creation. New York State's and New York
City's economies remain more reliant on the securities industry than the
national economy. As a result, the downturn in that industry prior to September
11 resulted in adverse changes in wage and employment levels.
New York State ended its 2001-2002 fiscal year on March 31, 2002 in balance
on a cash basis, with a reported closing balance in the General Fund of $1.03
billion. New York State adopted the debt service portion of the state budget for
the 2002-2003 fiscal year on March 26, 2002. The State Legislature adopted the
remainder of the budget for New York State's 2002-2003 fiscal year on May 16,
2002, and New York State released a revised State Financial Plan on May 22,
2002, and its first quarterly Financial Plan update on July 12, 2002. There were
no changes to the State Financial Plan projections in the update. The revised
State Financial Plan projects balance on a cash basis for the 2002-2003 fiscal
year. General Fund disbursements, including transfers to other funds are
projected to total $40.22 billion for 2002-2003. The projected General Fund
closing balance is $716 million. The State Financial Plan accompanying the
Governor's 2002-2003 amended Executive Budget projected General Fund budget gaps
of $2.8 billion in the 2003-2004 fiscal year and $3.3 billion in the 2004-2005
fiscal year. New York State has noted that there are significant risk factors
that could result in a reduction in economic activity statewide such as greater
job losses, weaker financial markets and smaller bonus payments by Wall Street
firms. The State issued its second quarterly update to the State Financial Plan
for the 2002-03 fiscal year on October 30, 2002. Aggregate receipts and spending
in the second quarterly update are unchanged from the July financial plan
update. It is expected that the State will issue an update to its Annual
Information Statement in the near future which will reflects the State's second
quarterly update.
New York City's expense and capital budgets were adopted on June 21, 2002.
New York City has outlined a gap-closing program for fiscal years 2004 through
2006 to eliminate the $3.7 billion, $4.2 billion and $4.6 billion projected
budget gaps for the 2004 through 2006 fiscal years, respectively. This program,
which is not specified in detail, assumes for the 2004 through 2006 fiscal
years, respectively, additional agency programs to reduce expenditures or
increase revenues by $2.4 billion and $2.5 billion; initiatives requiring New
York State and federal action of $625 million in each year; increased New York
State education aid of $425 million in each fiscal year; savings from
transportation policy innovations, including congestion pricing and E-Z Pass
initiatives of $100 million, $500 million and $800 million in fiscal years 2004
through 2006, respectively; savings from management and procurement efficiencies
of $50 million, $75 million and $100 million in fiscal years 2004 through 2006,
respectively; savings from restructuring sanitation resources of $50 million,
$75 million and $100 million in fiscal years 2004 through 2006, respectively;
savings from tort reform through local law of $25 million, $50 million, and
$75 million in fiscal years 2004 through 2006, respectively; and increased
revenues of $60 million in each year from the sale of taxi medallions.
New York City depends on aid from New York State and federal governments
both to enable New York City to balance its budget and to meet its cash
requirements. The City Financial Plan provides for an additional $800 million in
New York State and federal aid in fiscal year 2003 alone. If New York
27
State or federal aid for fiscal year 2003 or thereafter is less than the level
projected in the Mayor's proposal, projected savings may be negatively impacted
and the Mayor may be required to propose significant additional spending
reductions or tax increases to balance New York City's budget. If New York
State, New York State agencies, New York City, other municipalities or school
districts were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, or increasing the risk of
default, the market price of municipal bonds issued by such entities could be
adversely affected.
As of May 23, 2002, Moody's rated New York City's outstanding general
obligation bonds A2, S&P rated such bonds A and Fitch rated such bonds A+. Such
ratings reflect only the view of Moody's, S&P and Fitch. A general description
of Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in
Appendix A to the Statement of Additional Information. There is no assurance
that such ratings will continue for any given periods of time or that they will
not be revised downward or withdrawn entirely. Any such downward revision or
withdrawal could have an adverse effect on the market prices of New York City
bonds and could increase New York City's borrowing costs. See "Factors
Pertaining to New York" in the Statement of Additional Information for more
information about New York State.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of municipal obligations and
does not purport to be a complete or exhaustive description of all adverse
conditions to which issuers of New York municipal obligations held by the Fund
are subject. Additionally, many factors, including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of New York municipal obligations, could affect or could have an adverse
impact on the financial condition of the issuers. The Fund is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of New York municipal obligations, the market value or marketability of New York
municipal obligations or the ability of the respective issuers of the New York
municipal obligations acquired by the Fund to pay interest on or principal of
the municipal obligations. This information has not been independently verified.
See the Statement of Additional Information for a further discussion of factors
affecting municipal obligations in New York State.
MUNICIPAL BOND MARKET RISK. Investing in the municipal bond market involves
certain risks. The amount of public information available about the municipal
bonds in the Fund's portfolio is generally less than that for corporate equities
or bonds, and the investment performance of the Fund may therefore be more
dependent on the analytical abilities of NB Management than would be a stock
fund or taxable bond fund. The secondary market for municipal bonds,
particularly the below-investment grade bonds in which the Fund may invest, also
tends to be less well-developed or liquid than many other securities markets,
which may adversely affect the Fund's ability to sell its bonds at attractive
prices.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations. Such
laws, or political considerations, might constrain the ability of municipal
issuers to levy taxes. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays in collecting principal and interest and the Fund
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in the
payment of interest or repayment of principal, or both, the Fund may take
possession of, and manage, the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses. Any income derived
from the Fund's ownership or operation of such assets may not be tax-exempt.
28
TERRORISM RISKS. Municipal securities are subject to a risk that terror
attacks could result in substantial loss of life, damage the local economy and
damage or destroy significant portions of the municipal infrastructure. The
impact of these events may extend beyond the immediately-affected area and
beyond the time of the attack. Businesses that leave an affected area in the
wake of such an attack may not return, and economic activity may slow if
tourists and local consumers avoid the affected city. These events could
severely affect the tax base of a particular issuer of municipal securities and
could damage or destroy a facility whose revenues support the payment of
particular municipal securities. These attacks, and measures taken to prevent
them, may also impose substantial overtime costs on municipal budgets. See
"Recent Developments."
HIGH YIELD RISK. Investing in high yield bonds involves additional risks,
including credit risk. The value of high yield, lower-quality bonds is affected
by the creditworthiness of the issuers of the securities and by general economic
and specific industry conditions. Issuers of high yield bonds are not as strong
financially as those with higher credit ratings, so their bonds are usually
considered speculative investments. These issuers are more vulnerable to
financial setbacks and recession than more creditworthy issuers, which may
impair their ability to make interest and principal payments. Investments in
lower-grade securities will expose the Fund to greater risks than if the Fund
owned only higher-grade securities.
REINVESTMENT RISK. Reinvestment risk is the risk that income from the Fund's
municipal bond portfolio will decline if and when the Fund invests the proceeds
from matured, traded or called bonds at market interest rates that are below the
portfolio's current earnings rate. A decline in income could affect the Common
Shares' market price or their overall return.
INFLATION RISK. Inflation risk is the risk that the value of assets or
income from the Fund's investments will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real, or
inflation-adjusted, value of the Common Shares and distributions can decline,
and the dividend payments on the Fund's AMPS, if any, or interest payments on
Fund borrowings, if any, may increase.
MANAGEMENT RISK. The Fund is subject to management risk because it has an
actively-managed investment portfolio. NB Management and the portfolio managers
will apply investment techniques and risk analyses in making investment
decisions for the Fund, but there can be no guarantee that these will produce
the desired results.
NON-DIVERSIFICATION RISK. Because the Fund is classified as
"non-diversified" under the 1940 Act, it can invest a greater portion of its
assets in obligations of a single issuer. As a result, to the extent the Fund
invests a relatively high portion of its assets in obligations of a limited
number of issuers, the Fund will be more susceptible than a more
widely-diversified fund to any single corporate, economic, political or
regulatory occurrence. See "The Fund's Investments." The Fund must satisfy
certain asset diversification rules in order to qualify as a regulated
investment company for federal income tax purposes.
ECONOMIC SECTOR AND GEOGRAPHIC RISK. The Fund will normally invest
substantially all of its assets in municipal obligations of issuers in New York
State and may invest 25% or more of its total assets in municipal obligations in
the same economic sector, including the following: lease rental obligations of
state and local authorities; obligations dependent on annual appropriations by
the state's legislature for payment; obligations of state and local housing
finance authorities; municipal utilities systems or public housing authorities;
obligations of hospitals or life-care facilities; and industrial development or
pollution control bonds issued for electrical utility systems, steel companies,
paper companies or other purposes. This may make the Fund more susceptible to
adverse economic, political or regulatory occurrences affecting New York State
or a particular economic sector. For example, health care-related
29
issuers are susceptible to Medicare, Medicaid and other third party-payor
reimbursement policies, and national and state health care legislation. As
concentration increases, so does the potential for fluctuation in the net asset
value of the Common Shares.
RISKS OF CERTAIN INVESTMENTS OF THE FUND. In addition to the risks described
above, the Fund's investments are subject to certain other kinds of risk, such
as:
- NB Management's judgment about the attractiveness, value or income
potential of a particular municipal obligation may prove to be incorrect;
- municipal obligations may fall out of favor with investors;
- a rise in interest rates could cause the value of the Fund's portfolio
generally to decline;
- unfavorable legislation may affect the tax-exempt status of municipal
obligations; and
- unfavorable regulatory action could affect the tax-exempt status of a
particular security or type of security held by the Fund.
The Fund may invest more than 25% of its assets in municipal obligations
that finance the same or similar types of facilities or issuers located in New
York State. If the Fund invests more than 25% of its assets in such segments, it
will be more susceptible to economic, business, political, regulatory and other
developments generally affecting issuers in those segments of the municipal
market.
The Fund may invest in unrated "non-appropriation" lease obligations or
installment purchase contract obligations of municipal authorities or entities
believed by NB Management to be of comparable quality to securities that are
rated investment grade. Regardless of the issuer's creditworthiness, it is
possible that a municipality will fail to appropriate money in the future
because of political changes, changes in the economic viability of a project or
general economic changes. While these lease obligations generally are secured by
a lien on the leased property, disposing of foreclosed property could be costly
and time-consuming, and the Fund may not recoup its original investment.
The Fund may invest in zero coupon bonds. 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 which 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.
Some of the Fund's income may be subject to federal taxation. The Fund may
realize taxable gain on some of its securities, and some of the Fund's income
may be a Tax Preference Item.
The Fund may acquire securities on a "when-issued" or "delayed delivery"
basis. Subject to the requirement of maintaining a segregated account, no
specified limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when-issued" or "delayed delivery" basis. If
a significant percentage of the Fund's assets are committed to the purchase of
securities on a "when-issued" and/or "delayed delivery" basis, the volatility of
the Fund's net asset value may increase and the flexibility to manage the Fund's
investments may be limited. Engaging in "when-issued" and "delayed delivery"
transactions has a leverage-like effect on the Fund.
The Fund may invest in derivatives. A derivative contract will obligate or
entitle the Fund to deliver or receive an asset or cash payment that is based on
the change in value of one or more securities or indices. Even a small
investment in derivative contracts can have a big impact on the Fund's
interest-rate exposure. Therefore, using derivatives can disproportionately
increase losses and reduce opportunities for gains when interest rates are
changing. The Fund may not fully benefit from or may lose money on derivatives
if changes in their value do not correspond accurately to changes in
30
the value of the Fund's holdings. The other parties to certain derivative
contracts present the same types of default risk as issuers of fixed-income
securities. Derivatives can also make the Fund less liquid and harder to value,
especially in declining markets. The use of derivatives may produce taxable
income.
RECENT DEVELOPMENTS. As a result of the terrorist attacks on the World Trade
Center and the Pentagon on September 11, 2001, some of the U.S. securities
markets were closed for a four-day period. These terrorist attacks and related
events have led to increased short-term market volatility and may have long-term
effects on U.S. and world economies and markets. A similar disruption of the
financial markets could impact interest rates, auctions, secondary trading,
ratings, credit risk, inflation and other factors relating to the securities.
Please see "Investment Objective and Policies" in the Statement of
Additional Information for additional information regarding the investments of
the Fund and their related risks.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk. These limitations are fundamental and may not be changed
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, 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. The Fund
may not invest more than 25% of total Fund assets in securities of issuers
having their principal business activities in any one industry. However, the
Fund may from time to time invest more than 25% of its total assets in a
particular segment of the municipal obligations market and will normally invest
substantially in obligations of issuers located in New York State.
Municipalities are not considered to be in any industry; however, where a
municipal security is supported only by the income from a particular enterprise
or the assets of a particular private company, the Fund will treat that
enterprise or company as the issuer for purposes of this limitation. The Fund
may become subject to guidelines that are more limiting than the investment
restrictions set forth above in order to obtain and maintain ratings from
Moody's or Fitch on AMPS. See the Statement of Additional Information for a
complete list of the fundamental and non-fundamental investment policies of the
Fund.
The Fund may use various investment strategies designed to limit the risk of
bond price fluctuations. These hedging strategies include purchasing put and
call options and using financial futures contracts and related options
contracts. See "Investment Policies and Techniques" in the Statement of
Additional Information.
QUALITY OF INVESTMENTS
The Fund will invest at least 80% of its total assets in municipal bonds of
investment grade at the time of investment. Investment grade means that such
bonds are rated by national rating agencies within the four highest grades
(rated Baa or BBB or better by Moody's, S&P & Fitch) or are unrated but judged
to be of comparable quality by NB Management.
31
LIMITED ISSUANCE OF AMPS
Under the 1940 Act, the Fund could issue AMPS having a total liquidation
value (original purchase price of the shares being liquidated plus any accrued
and unpaid dividends) of up to one-half of the value of the net assets of the
Fund following such issuance. 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 this asset-coverage requirement. If the total
liquidation value of the AMPS plus the aggregate amount of such other senior
securities were ever more than one-half of the value of the Fund's total net
assets, the Fund would not be able to declare distributions on the Common Shares
until such liquidation value and/or aggregate amount of other senior securities,
as a percentage of the Fund's total assets, were reduced.
Although the 1940 Act permits the Fund to issue AMPS having a total
liquidation value of up to one-half the net assets of the Fund, the Fund
currently intends to issue AMPS with a total liquidation value of only 38% of
its net assets. This higher than required margin of net asset value provides a
cushion against later fluctuations in the value of the Fund's portfolio and will
subject Common Stockholders to less income and net asset value volatility than
if the Fund were more highly leveraged through AMPS. It also gives the Fund
flexibility to utilize other forms of leverage (such as derivatives) in addition
to AMPS from time to time in accordance with the 1940 Act asset-coverage
requirements that may be more efficient or cost-effective sources of leverage
than AMPS under the circumstances. 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 below one-half of
the value of the Fund's net assets.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK
The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Stockholders. In order to attempt to offset such a negative impact of
leverage on Common Stockholders, the Fund may shorten the average duration of
its investment portfolio (by investing in short-term securities or implementing
certain hedging strategies) or may extend the maturity of outstanding AMPS. The
Fund also may attempt to reduce leverage by redeeming or otherwise purchasing
AMPS or by reducing any holdings in instruments that create leverage. As
explained above under "Risks--Leverage Risk," the success of any such attempt to
limit leverage risk depends on NB Management's ability to accurately predict
interest rate or other market changes. Because of the difficulty of making such
predictions, the Fund may not be successful in managing its interest rate
exposure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued AMPS or AMPS that the Fund previously
issued but later repurchased, or utilize other forms of leverage, such as
derivative instruments.
HEDGING AND RELATED STRATEGIES
The Fund may use various investment strategies designed to limit the risk of
price fluctuations of its portfolio securities and to preserve capital. Hedging
strategies that the Fund may use include: financial futures contracts; short
sales; swap agreements or options thereon; options on financial futures; and
options based on either an index of municipal securities or taxable debt
securities whose prices, NB Management believes, correlate with the prices of
the Fund's investments. Income earned by the Fund from many hedging activities
will be treated as capital gain and, if not offset by net realized capital loss,
will be distributed to stockholders in taxable distributions. If effectively
used, hedging
32
strategies will offset in varying percentages losses incurred on the Fund's
investments due to adverse interest rate changes. There is no assurance that
these hedging strategies will be available at any time or that NB Management
will determine to use them for the Fund or, if used, that the strategies will be
successful.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors is broadly responsible for the management of the
Fund, including general supervision of the duties performed by NB Management and
Neuberger Berman. The names and business addresses of the Directors and officers
of the Fund and their principal occupations and other affiliations during the
past five years are set forth under "Management of the Fund" in the Statement of
Additional Information.
INVESTMENT MANAGER
NB Management serves as the investment manager of the Fund. Subject to the
general supervision of the Board of Directors, NB Management is responsible for
managing the investment activities of the Fund and the Fund's business affairs
and other administrative matters. NB Management is located at 605 Third Avenue,
New York, New York 10158-0180.
Continuing an asset management history that began in 1939, NB Management
provides investment management and advisory services to several open-end
investment company clients and to individuals investing in mutual funds. As of
September 30, 2002, NB Management and its affiliates had approximately $53.6
billion in assets under management.
NB Management has retained Neuberger Berman to serve as sub-adviser to the
Fund. See "Sub-Adviser" below. Neuberger Berman and NB Management are
wholly-owned subsidiaries of Neuberger Berman Inc., a publicly-owned holding
company, located at 605 Third Avenue, New York, New York 10158-3698.
Theodore P. Giuliano, Thomas J. Brophy and Lori Canell have primary
responsibility for the day-to-day portfolio management of the Fund.
Mr. Giuliano, a Vice President and Director of NB Management and a Managing
Director of Neuberger Berman, is the manager of the Fixed Income Group of
Neuberger Berman, which he helped establish in 1984. Mr. Brophy and Ms. Canell
are Vice Presidents of NB Management. Mr. Brophy and Ms. Canell are also
Managing Directors of Neuberger Berman. Mr. Brophy has been a portfolio manager
and a credit analyst for Neuberger Berman since 1998. From 1997 to 1998, he was
employed by Columbus Circle Investors, Inc. LP as a Vice President. Ms. Canell
joined Neuberger Berman in 1995.
SUB-ADVISER
NB Management has retained Neuberger Berman, 605 Third Avenue, New York, New
York 10158-3698, to serve as the Fund's sub-adviser, responsible for providing
investment recommendations and research.
NB Management (and not the Fund) 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 open-end investment companies and the other closed-end investment
companies managed by NB Management. Neuberger Berman and NB Management employ
experienced professionals that work in a competitive environment.
33
MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between NB Management and the
Fund (the "Management Agreement"), the Fund has agreed to pay NB Management a
management fee payable on a monthly basis at the annual rate of .25% of the
Fund's average daily total assets minus liabilities other than any aggregate
indebtedness that may be entered into for purposes of leverage ("Managed
Assets") for the services and facilities it provides. The liquidation preference
of the AMPS is not a liability. Pursuant to an administration agreement between
NB Management and the Fund, the Fund has agreed to pay NB Management an
administration fee payable on a monthly basis at the annual rate of .30% of the
Fund's average daily Managed Assets.
In addition to the fees of NB Management, the Fund pays all other costs and
expenses of its operations, including compensation of its Directors (other than
those affiliated with NB Management), custodial expenses, transfer agency and
dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of issuing any AMPS, expenses of
preparing, printing and distributing prospectuses, stockholder reports, notices,
proxy statements and reports to governmental agencies, and taxes, if any.
NB Management has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund in the amounts, and for the time
periods, set forth below (covering commencement of the Fund's operations through
October 31, 2011):
PERCENTAGE WAIVED (ANNUAL RATE AS A PERCENTAGE WAIVED (ANNUAL RATE AS A
PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO
FISCAL PERIOD COMMON SHARES--ASSUMING NO COMMON SHARES--ASSUMING THE
ENDING OCTOBER 31, AMPS ARE ISSUED OR OUTSTANDING ISSUANCE OF 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%
-------------------
(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.
Because the fees received by NB Management are based on the Managed Assets
of the Fund (including assets represented by AMPS and any leverage created
thereby), NB Management has a financial incentive for the Fund to issue AMPS,
which may create a conflict of interest between NB Management and the holders of
the Fund's Common Shares.
34
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the more detailed description of the AMPS in the
Fund's Articles Supplementary, which is attached as Appendix A to the Statement
of Additional Information.
GENERAL
Under the Articles, the Fund is authorized to issue up to 1,000,000,000
shares of capital stock, all of it originally designated Common Shares. Pursuant
to the Articles, the Board may classify or reclassify any unissued shares of
capital stock without a stockholder vote into one or more classes of preferred
or other stock. All AMPS will have a liquidation preference of $25,000 per share
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared by the Fund, but excluding interest thereon).
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.
DIVIDENDS AND RATE PERIODS
GENERAL. The following is a general description of dividends and rate
periods for the AMPS. The initial rate period for the Series A AMPS will be
days and the dividend rate for this period will be %. The initial rate
period for the Series B AMPS will be days and the initial dividend rate for
this period will be %. Subsequent rate periods normally will be seven days
for the Series A AMPS and 28 days for the Series B AMPS, and the dividend rate
for each such period will be determined by auction. The Fund, subject to certain
conditions, may change the length of subsequent rate periods, depending on its
needs and NB Management's outlook for interest rates, by designating them as
special rate periods. See "Designation of Special Rate Periods" below.
DIVIDEND PAYMENT DATES. Dividends on AMPS will be payable, when, as and if
declared by the Board, out of legally available funds in accordance with the
Fund's Articles and applicable law. Dividend periods generally will begin on the
first business day after an auction. If dividends are payable on a day that is
not a business day, then dividends will generally be payable on the next day if
such day is a business day, or as otherwise specified in the
Articles Supplementary.
Dividends will be paid through DTC on each dividend payment date. The
dividend payment date will normally be the first business day after the dividend
period ends. DTC, in accordance with its current procedures, is expected to
distribute dividends received from the Auction Agent in same-day funds on each
dividend payment date to agent members (members of DTC that will act on behalf
of existing or potential Preferred Stockholders). These agent members are in
turn expected to distribute such dividends to the persons for whom they are
acting as agents. However, the current Broker-Dealer has indicated to the Fund
that dividend payments will be available in same-day funds on each dividend
payment date to customers that use a Broker-Dealer or a Broker-Dealer's designee
as agent member.
CALCULATION OF DIVIDEND PAYMENT. The Fund computes the amount of dividends
per share payable on AMPS by multiplying the applicable rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the dividend period or part thereof, and the denominator of the fraction will be
365 for any dividend period other than a special dividend period. This rate is
multiplied by $25,000 to arrive at the dividends per share.
35
Dividends on AMPS will accumulate from the date of original issue. For each
dividend payment period after the initial rate period, the dividend will be the
dividend rate determined at auction, except as described below. The dividend
rate that results from an auction will not be greater than the maximum rate.
The maximum applicable rate for any regular rate period will be the
applicable percentage (set forth in the Applicable Percentage Payment Table
below) of the reference rate (set forth in the Reference Rate Table below) for
the applicable rate period. If notice of a special dividend period is delivered
that specifies a maximum applicable rate for the special dividend period, the
applicable percentage is determined on the day that the notice is delivered.
The applicable percentage will be determined based on the lower of the
credit rating or ratings assigned to the AMPS by Moody's or Fitch. If Moody's or
Fitch or both shall not make such rating available, the rate shall be determined
by reference to equivalent ratings issued by a substitute rating agency. As
shown in the following table, the applicable percentage also depends on whether
or not the Fund has notified the Auction Agent prior to the auction of the
Fund's intent to allocate to such shares income taxable that is for federal
income tax purposes.
APPLICABLE PERCENTAGE PAYMENT TABLE
CREDIT RATINGS
------------------------------------------------------------------------ APPLICABLE PERCENTAGE: APPLICABLE PERCENTAGE:
MOODY'S FITCH NO NOTIFICATION NOTIFICATION
----------------------------------- ----------------------------------- ---------------------- ----------------------
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%
The reference rate used to determine the maximum applicable rate generally
varies depending on the length of the applicable rate period, as set forth in
the Reference Rate Table below:
REFERENCE RATE TABLE
------------------------------------------------------------------------------------------------------
RATE PERIOD REFERENCE RATE
-------------------------------------------------- --------------------------------------------------
28 days or less Greater of:
- "AA" Composite Commercial Paper Rate
- Taxable Equivalent of the Short-Term Municipal
Bond Rate
29 days to 182 days AA Composite Commercial Paper Rate
183 days to 364 days Treasury Bill Rate
365 days or more Treasury Note Rate
For a special rate period, the reference rate will be the higher of (1) the
reference rate for a rate period equal in length to the rate period then ending
or (2) the reference rate for a rate period equal in length to the special rate
period then beginning, determined in each case as of the auction date for the
new special rate period. Special provisions apply to a rate period following a
special rate period of 28 days or more until the fund conducts an auction that
attracts sufficient clearing bids.
36
The "AA Composite Commercial Paper Rate" is as set forth in the table below:
AA COMPOSITE COMMERCIAL PAPER RATE TABLE.
RATE PERIOD SPECIAL RATE PERIOD AA COMPOSITE COMMERCIAL PAPER RATE*
----------- ---------------------------------------- ----------------------------------------
28 days or less 48 days or fewer 30-day rate
49 days to 69 days 60-day rate
70 days to 84 days Average of 60-day and 90-day rates
85 days to 98 days 90-day rate
99 days to 119 days Average of 90-day and 120-day rates
120 days to 140 days 120-day rate
141 days to 161 days Average of 120-day and 180-day rates
162 days to 182 days 180-day rate
-------------------
* Rates stated on a discount basis
The AA Composite Commercial Paper Rate is the rate on commercial paper
issued by corporations whose bonds are rated AA by S&P, as made available by the
Federal Reserve Bank of New York. If the Federal Reserve Bank of New York does
not make available any such rate, the rate shall be the average rate quoted on a
discount basis to the Auction Agent at the close of business on the business day
next preceding such date by commercial paper dealers designated by the Fund. If
any commercial paper dealer does not quote a rate, the rate shall be determined
by quotes provided by the remaining commercial paper dealers.
"Tax Equivalent of the Short-Term Municipal Bond Rate" means 90% of an
amount equal to the per annum rate payable on taxable bonds in order for such
rate, on an after-tax basis, to equal the per annum rate payable on tax-exempt
bonds issued by "high grade" issuers as determined in accordance with the
procedures set forth in the Articles Supplementary. The calculation excludes any
bonds the interest on which constitutes a Tax Preference Item. The calculation
of an after-tax rate uses the maximum marginal federal individual income tax
rate applicable to ordinary income or the maximum marginal federal corporate
income tax rate applicable to ordinary income, whichever is greater.
Prior to each dividend payment date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any auction.
The Fund does not intend to establish any reserves for the payment of dividends.
In most cases, if an auction for AMPS is not held when scheduled, the
dividend rate for the corresponding rate period will be the maximum applicable
rate on the date the auction was scheduled to be held.
GROSS-UP PAYMENTS. Preferred Stockholders are entitled to receive, when, as
and if declared by the Board, out of funds legally available therefor in
accordance with the Articles, including the Articles Supplementary, and
applicable law, dividends in an amount equal to the aggregate Gross-up Payments
(as defined below) in accordance with the following:
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 AMPS without having
given advance notice thereof to the Auction Agent, 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
37
payment during such calendar year at such holder's address as the same appears
or last appeared on the stock books of the Fund.
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 gain or other
income taxable for federal income tax purposes to a dividend paid on AMPS
without having given advance notice thereof to the Auction Agent as described
below under "The Auction--Auction Procedures" (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 AMPS or the liquidation of the
Fund, the Fund will, 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 (initially Cede & Co., as nominee of DTC) 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 stock books of the Fund.
A "Gross-up Payment" means payment to a Preferred Stockholder 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 received by such holder if
the amount of the aggregate Taxable Allocations would have been excludable from
the gross income of such holder for federal income tax purposes. Such Gross-up
Payment shall be calculated: (a) without consideration being given to the time
value of money; (b) assuming that dividends received from the Fund are not a Tax
Preferred Item for any holder of AMPS; and (c) 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
Internal Revenue Code of 1986, as amended (the "Code")) would be taxable in the
hands of each holder of AMPS at the maximum marginal federal income tax rate
applicable to ordinary income, or net capital gain, as applicable, or the
maximum marginal federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
RESTRICTION ON DIVIDENDS AND OTHER DISTRIBUTIONS. While any of the AMPS are
outstanding, the Fund generally may not declare, pay or set apart for payment,
any dividend or other distribution in respect of its Common Shares (other than
in additional Common Shares or rights to purchase Common Shares) or repurchase
any of its Common Shares (except by conversion into or exchange for shares of
the Fund ranking junior to the AMPS as to the payment of dividends and the
distribution of assets upon liquidation) unless each of the following conditions
has been satisfied:
- In the case of the Moody's coverage requirements, immediately after such
transaction, the aggregate Moody's discounted value (i.e., the aggregate
value of the Fund's portfolio discounted according to Moody's criteria)
would be equal to or greater than the Preferred Shares Basic Maintenance
Amount (i.e., the amount necessary to pay all outstanding obligations of
the Fund with respect to the AMPS, any preferred stock outstanding,
expenses for the next 90 days and any other liabilities of the Fund) (see
"Rating Agency Guidelines and Asset Coverage" below);
- In the case of Fitch's coverage requirements, immediately after such
transaction, the aggregate Fitch discounted value (i.e., the aggregate
value of the Fund's portfolio discounted according to Fitch criteria)
would be equal to or greater than the Preferred Shares Basic Maintenance
Amount.
- Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this prospectus under "Rating Agency Guidelines
and Asset Coverage" below) is met;
38
- Full cumulative dividends on the AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction
Agent; and
- The Fund has redeemed the full number of AMPS required to be redeemed by
any provision for mandatory redemption contained in the
Articles Supplementary.
The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking as to the payment of dividends on a
parity with AMPS unless the Fund has declared and paid or contemporaneously
declares and pays full cumulative dividends on the AMPS through its most recent
dividend payment date. However, when the Fund has not paid dividends in full on
the AMPS through the most recent dividend payment date or upon any shares of the
Fund ranking, as to the payment of dividends, on a parity with AMPS through
their most recent respective dividend payment dates, the amount of dividends
declared per share on AMPS and such other class or series of shares will in all
cases bear to each other the same ratio that accumulated dividends per share on
the AMPS and such other class or series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS. The Fund, in certain circumstances, may
designate any succeeding subsequent rate period as a special rate period
consisting of a specified number of rate period days evenly divisible by seven,
subject to certain adjustments. A designation of a special rate period shall be
effective only if, among other things, (a) the Fund shall have given certain
notices to the Auction Agent, which will include a report showing that, as of
the third business day next preceding the proposed special rate period, the
Moody's discounted value and Fitch discounted value, as applicable, at least
equal the Preferred Shares Basic Maintenance Amount (b) an Auction shall have
been held on the auction date immediately preceding the first day of such
proposed special rate period and sufficient clearing bids shall have existed in
such Auction and (c) if the Fund shall have mailed a notice of redemption with
respect to any AMPS, the redemption price with respect to such shares shall have
been deposited with the Auction Agent. In addition, full cumulative dividends,
any amounts due with respect to mandatory redemptions and any additional
dividends payable prior to such date must be paid in full or deposited with the
Auction Agent. The Fund also must have portfolio securities with a discounted
value at least equal to the Preferred Shares Basic Maintenance Amount. The Fund
will give holders of AMPS notice of a special rate period as provided in the
Articles Supplementary.
REDEMPTION
MANDATORY REDEMPTION. In the event the Fund does not timely cure a failure
to maintain (a) a discounted value of its portfolio equal to the Preferred
Shares Basic Maintenance Amount in accordance with the requirements of the
rating agency or agencies then rating AMPS, or (b) the 1940 Act Preferred Shares
Asset Coverage, AMPS will be subject to mandatory redemption on a date specified
by the Board out of funds legally available therefor in accordance with the
Articles, including the Articles Supplementary, and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared by the Fund, but
excluding interest thereon) to (but not including) the date fixed for
redemption. Any such redemption will be limited to the number of AMPS necessary
to restore the required discounted value or the 1940 Act Preferred Shares Asset
Coverage, as the case may be.
In determining the number of AMPS required to be redeemed in accordance with
the foregoing, the Fund will allocate the number of shares required to be
redeemed to satisfy the Preferred Shares Basic Maintenance Amount or the 1940
Act Preferred Shares Asset Coverage, as the case may be, pro rata among the AMPS
of the Fund and any other preferred stock of the Fund subject to redemption or
retirement. If fewer than all outstanding shares of any series are, as a result,
to be redeemed, the Fund may redeem such shares by lot or other method that it
deems fair and equitable.
39
OPTIONAL REDEMPTION. The Fund, at its option, may redeem shares of each
series of AMPS, in whole or in part, out of funds legally available therefore.
Any optional redemption will occur on the second business day preceding a
dividend payment date at the optional redemption price per share of $25,000 per
share, plus an amount equal to accumulated but unpaid dividends thereon (whether
or not earned or declared by the Fund, but excluding interest thereon) to (but
not including) the date fixed for redemption plus the premium, if any, specified
in a special redemption provision. No AMPS may be redeemed if the redemption
would cause the Fund to violate the 1940 Act or applicable law. In addition,
Preferred Stockholders may be entitled to receive additional dividends if the
redemption causes the Fund to make a retroactive Taxable Allocation without
having given advance notice to the Auction Agent. AMPS may not be redeemed in
part if fewer than 250 Shares would remain outstanding after the redemption. The
Fund has the authority to redeem the AMPS for any reason. See the
Articles Supplementary, attached as Appendix A to the Statement of Additional
Information, for a complete listing of the circumstances in which the Fund must
redeem AMPS.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with AMPS with respect to the distribution of assets upon
liquidation of the Fund, upon a liquidation of the Fund, whether voluntary or
involuntary, the holders of AMPS then outstanding will be entitled to receive
and to be paid out of the assets of the Fund available for distribution to its
stockholders, before any payment or distribution is made on the Common Shares,
an amount equal to the liquidation preference with respect to such shares
($25,000 per share), plus an amount equal to all dividends thereon (whether or
not earned or declared by the Fund, but excluding interest thereon) accumulated
but unpaid to (but not including) the date of final distribution in same-day
funds in connection with the liquidation of the Fund, together with any
applicable Gross-up Payments in connection with the liquidation of the Fund.
After the payment to the holders of AMPS of the full preferential amounts
provided for as described herein, the holders of AMPS as such shall have no
right or claim to any of the remaining assets of the Fund.
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 other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under Moody's and Fitch guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount. (The discounted value of an asset (other than
cash and cash equivalents) is a specified percentage of its full value; the
concept is intended to provide increased assurance of adequate asset coverage in
the face of expected or unexpected fluctuation in the value of the assets.)
Moody's and Fitch have each established separate guidelines for determining
discounted value. To the extent any particular portfolio holding does not
satisfy the applicable rating agency's guidelines, all or a portion of such
holding's value will not be included in the calculation of discounted value (as
defined by such rating agency). The Moody's and Fitch guidelines impose certain
diversification requirements on the Fund's portfolio. Other than as needed to
meet the asset coverage tests, the Moody's and Fitch guidelines do not impose
any limitations on the percentage of the Fund's assets that may be invested in
holdings not eligible for inclusion in the calculation of the Discounted Value
of the Fund's portfolio. The amount of ineligible assets included in the
portfolio at any time may vary depending upon the rating, diversification and
other characteristics of the eligible assets included in the portfolio. The
Preferred Shares Basic Maintenance Amount includes the sum of (a) the aggregate
liquidation preference of AMPS then outstanding and (b) certain accrued and
projected dividend and other payment obligations of the Fund.
40
The Fund is also required under the 1940 Act to maintain the 1940 Act
Preferred Shares Asset Coverage. The Fund's 1940 Act Preferred Shares Asset
Coverage is tested as of the last business day of each month in which any senior
equity securities are outstanding. The minimum required 1940 Act Preferred
Shares Asset Coverage amount of 200% may be increased or decreased if the 1940
Act is amended. Based on the composition of the portfolio of the Fund and market
conditions as of November 30, 2002, the 1940 Act Preferred Shares Asset Coverage
with respect to all of the Fund's preferred stock, assuming the issuance on that
date of all AMPS offered hereby and giving effect to the deduction of related
sales load and related offering costs estimated at $727,500 would have been
computed as follows:
Value of Fund assets less
liabilities
not constituting senior
securities = $126,394,025 = 262%
------------------------------ -----------
Senior securities representing $48,250,000
indebtedness
plus
liquidation value of the AMPS
In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of its portfolio at least equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating AMPS, the Fund will be required to redeem AMPS as described under
"Redemption--Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for AMPS may, at any time, change or withdraw any such
rating. The Board may, without stockholder approval, amend, alter or repeal any
or all of the definitions and related provisions which have been adopted by the
Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from Moody's or Fitch, or both, as appropriate, that any
such amendment, alteration or repeal would not impair the ratings then assigned
by Moody's and Fitch to AMPS.
As described by Moody's and Fitch, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings on the AMPS are not recommendations to purchase, hold or sell those
shares, inasmuch as the ratings do not comment as to market price or suitability
for a particular investor. The rating agency guidelines described above also do
not address the likelihood that an owner of AMPS will be able to sell such
shares in an auction or otherwise. The ratings are based on current information
furnished to Moody's and Fitch by the Fund and NB Management and information
obtained from other sources. The ratings may be changed, suspended or withdrawn
as a result of changes in, or the unavailability of, such information. The
Common Stock has not been rated by an NRSRO.
A rating agency's guidelines will apply to AMPS only so long as such rating
agency is rating such shares. The Fund will pay certain fees to Moody's or
Fitch, or both, for rating AMPS.
VOTING RIGHTS
Except as otherwise provided in this prospectus and in the Statement of
Additional Information, in the Articles, including the Articles Supplementary,
or as otherwise required by law, holders of AMPS will have equal voting rights
with holders of shares of Common Stock and holders of any other shares of
preferred stock of the Fund (one vote per share) and will vote together with
holders of shares of Common Stock and holders of any other shares of preferred
stock of the Fund as a single class.
41
Holders of outstanding AMPS, voting as a separate class, are entitled at all
times to elect two of the Fund's Directors. The remaining Directors normally are
elected by holders of Common Shares and preferred stock, including AMPS, voting
together as a single class. If at any time dividends (whether or not earned or
declared by the Fund, but excluding interest thereon) on outstanding preferred
stock, including AMPS, shall be due and unpaid in an amount equal to two full
years' dividends thereon, and sufficient cash or specified securities shall not
have been deposited with the Auction Agent for the payment of such dividends,
then, as the sole remedy of holders of outstanding AMPS, the number of Directors
constituting the Board shall be increased by the smallest number that, when
added to the two Directors elected exclusively by the holders of AMPS, as
described above, would constitute a majority of the Board as so increased by
such smallest number, and at a special meeting of stockholders which will be
called and held as soon as practicable, and at all subsequent meetings at which
Directors are to be elected, the holders of AMPS, voting as a separate class,
will be entitled to elect the smallest number of additional Directors that,
together with the two Directors which such holders will be in any event entitled
to elect, constitutes a majority of the total number of Directors of the Fund as
so increased. The terms of office of the persons who are Directors at the time
of that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full, all dividends payable on all outstanding AMPS,
the voting rights stated in the second preceding sentence shall cease, and the
terms of office of all of the additional Directors elected by the holders of
AMPS (but not of the Directors with respect to whose election the holders of
shares of Common Stock were entitled to vote or the two Directors the holders of
AMPS have the right to elect in any event), will terminate automatically.
So long as any AMPS are outstanding, the Fund will not, without the
affirmative vote or consent of the holders of at least a majority of AMPS
outstanding at the time (voting together as a separate class):
(a) authorize, create or issue, or increase the authorized or issued amount
of, any class or series of shares ranking prior to or on a parity with the AMPS
with respect to payment of dividends or the distribution of assets on
dissolution, liquidation or winding up the affairs of the Fund, or authorize,
create or issue additional shares of any series of AMPS or any other preferred
stock, unless, in the case of preferred stock on a parity with the AMPS, the
Fund obtains confirmation from Moody's (if Moody's is then rating the AMPS),
Fitch (if Fitch is then rating the AMPS) or any substitute rating agency (if any
such substitute rating agency is then rating the AMPS) that the issuance of such
a class or series would not impair the rating then assigned by such rating
agency to the AMPS and the Fund continues to comply with Section 13 of the 1940
Act, the 1940 Act Preferred Shares Asset Coverage requirements and the Preferred
Shares Basic Maintenance Amount requirements, in which case the vote or consent
of the holders of the AMPS is not required;
(b) amend, alter or repeal the provisions of the Articles, including the
Articles Supplementary, by merger, consolidation or otherwise, so as to
adversely affect any preference, right or power of the AMPS or holders of AMPS;
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers, (ii) a
division of AMPS will be deemed to affect such preferences, rights or powers
only if the terms of such division adversely affect the holders of AMPS and
(iii) the authorization, creation and issuance of classes or series of shares
ranking junior to the AMPS 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 the AMPS and such issuance would, at the
time thereof, cause the Fund not to satisfy the 1940 Act Preferred Shares Asset
Coverage or the Preferred Shares Basic Maintenance Amount;
(c) authorize the Fund's conversion from a closed-end to an open-end
investment company;
42
(d) amend the provisions of the Articles, which provide for the
classification of the Board of Directors of the Fund into three classes, each
with a term of office of three years with only one class of Directors standing
for election in any year; or
(e) approve any reorganization (as such term is used in the 1940 Act)
adversely affecting the AMPS.
So long as any AMPS are outstanding, the Fund shall not, without the
affirmative vote or consent of the holders of at least a majority of the AMPS
outstanding at the time, in person or by proxy, either in writing or at a
meeting, voting as a separate class, file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
The Fund will not approve any of the actions set forth in (a) or (b) above
which adversely affects the rights expressly set forth in the Articles,
including the Articles Supplementary, of a holder of shares of a series of
preferred stock differently than those of a holder of shares of any other series
of preferred stock without the affirmative vote or consent of the holders of at
least a majority of the shares of each series adversely affected. Even with such
a vote, some of the actions set forth in (a) or (b) above may not be permitted
under the 1940 Act. Unless a higher percentage is provided for under the
Articles, including the Articles Supplementary, the affirmative vote of the
holders of a majority of the outstanding AMPS, voting together as a single
class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or any action requiring
a vote of security holders under Section 13(a) of the 1940 Act. Under the 1940
Act, the vote of a majority of the outstanding AMPS means the affirmative vote
of the lesser of (a) 67% or more of the outstanding AMPS present at a meeting of
Preferred Stockholders or represented by proxy if the holders of more than 50%
of the outstanding AMPS are present or represented by proxy or (b) more than 50%
of the outstanding AMPS. However, to the extent permitted by the Articles,
including the Articles Supplementary, no vote of holders of Common Shares,
either separately or together with holders of AMPS as a single class, is
necessary to take the actions contemplated by (a) and (b) above. The holders of
Common Shares will not be entitled to vote in respect of the matters
contemplated by (a) or (b) above, unless, in the case of the actions
contemplated by (b) above, the action would adversely affect the contract rights
of the holders of Common Shares expressly set forth in the Articles.
The foregoing voting provisions will not apply with respect to AMPS if, at
or prior to the time when a vote is required, such shares shall have been
(i) redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
43
THE AUCTION
GENERAL
The Articles Supplementary provide that, except as otherwise described
herein, the applicable dividend rate for AMPS for each rate period after the
initial rate period shall be equal to the rate per annum that the Auction Agent
advises has resulted on the business day preceding the first day of such
subsequent rate period (an "auction date") from implementation of the auction
procedures (the "Auction Procedures") set forth in the Articles Supplementary
and summarized below, in which persons determine to hold or offer to sell or,
based on dividend rates bid by them, offer to purchase or sell AMPS. Each
periodic implementation of the Auction Procedures is referred to herein as an
"auction." See the Articles Supplementary for a more complete description of the
auction process.
AUCTION AGENCY AGREEMENT. The Fund will enter into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York) that provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for AMPS so long as the Applicable Rate is to be based on the results of an
auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 60 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALER AGREEMENTS. Each auction requires the participation of one or
more Broker-Dealers. The Auction Agent will enter into agreements (collectively,
the "Broker-Dealer Agreements") with one or more Broker-Dealers selected by the
Fund, which provide for the participation of those Broker-Dealers in auctions
for AMPS.
The Auction Agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1%,
for any auction preceding a rate period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealer, for any auction preceding a period
of more than one year, of the liquidation preference ($25,000 per share) of the
AMPS held by a Broker-Dealer's customer upon settlement in the auction.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for AMPS, each
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 AMPS (a "Beneficial
Owner") may submit orders ("Orders") with respect to such AMPS to that
Broker-Dealer as follows:
- Hold Order--indicating its desire to hold such shares without regard to
the applicable rate for the next dividend period.
- Bid--indicating its desire to sell such shares at $25,000 per share if
the applicable rate for the next dividend period thereof is less than the
rate specified in such bid.
44
- Sell Order--indicating its desire to sell such shares at $25,000 per
share without regard to the applicable rate for the next dividend period
thereof.
A beneficial owner may submit different types of orders to its Broker-Dealer
with respect to different shares of a series of AMPS then held by the beneficial
owner. A beneficial owner for shares of such series that submits its bid with
respect to shares of such series to its Broker-Dealer having a rate higher than
the maximum applicable rate for shares of such series on the auction date will
be treated as having submitted a sell order to its Broker-Dealer. A beneficial
owner of shares of such series that fails to submit an order to its
Broker-Dealer with respect to such shares will ordinarily be deemed to have
submitted a hold order with respect to such shares of such series to its
Broker-Dealer. However, if a beneficial owner of shares of such series fails to
submit an order with respect to such shares of such series to its Broker-Dealer
for an auction relating to a dividend period of more than 28 days, such
beneficial owner will be deemed to have submitted a sell order to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the AMPS
subject to the sell order. A beneficial owner that offers to become the
beneficial owner of additional AMPS is, for purposes of such offer, a potential
holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of a series of AMPS but that wishes to purchase shares of such
series or that is a beneficial owner of shares of such series that wishes to
purchase additional shares of such series. A potential holder may submit bids to
its Broker-Dealer in which it offers to purchase shares of such series at
$25,000 per share if the applicable rate for shares of such series for the next
dividend period is not less than the specified rate in such bid. A bid placed by
a potential holder of shares of such series specifying a rate higher than the
maximum rate for shares of such series on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the Auction Agent.
They will designate themselves (unless otherwise permitted by the Fund) as
existing holders of shares subject to orders submitted or deemed submitted to
them by beneficial owners. They will designate themselves as potential holders
of shares subject to orders submitted to them by potential holders. However,
neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's
failure to comply with these procedures. Any order placed with the Auction Agent
by a Broker-Dealer as or on behalf of an existing holder or a potential holder
will be treated the same way as an order placed with a Broker-Dealer by a
beneficial owner or potential holder. Similarly, any failure by a Broker-Dealer
to submit to the Auction Agent an order for any AMPS held by it or customers who
are beneficial owners will be treated as a beneficial owner's failure to submit
to its Broker-Dealer an order in respect of AMPS held by it. A Broker-Dealer may
also submit orders to the Auction Agent for its own account as an existing
holder or potential holder, provided it is not an affiliate of the Fund.
There are sufficient clearing bids for shares of a series in an auction if
the number of shares of such series subject to bids submitted or deemed
submitted to the Auction Agent by Broker-Dealers for potential holders with
rates or spreads equal to or lower than the maximum applicable rate for such
series is at least equal to or exceeds the sum of the number of shares of such
series subject to sell orders and the number of shares of such series subject to
bids specifying rates or spreads higher than the maximum applicable rate for
such series submitted or deemed submitted to the Auction Agent by Broker-Dealers
for existing holders of such series. If there are sufficient clearing bids for
shares of a series, the applicable rate for shares of such series for the next
succeeding dividend period thereof will be the lowest rate specified in the
submitted bids which, taking into account such rate and all lower rates bid by
Broker-Dealers as or on behalf of existing holders and potential holders, would
result in existing holders and potential holders owning all the shares of such
series available for purchase in the auction.
45
If there are not sufficient clearing bids for shares of such series, the
applicable rate for the next dividend period will be the maximum rate on the
auction date. However, if the Fund has declared a special rate period and there
are not sufficient clearing bids, the election of a special rate period will not
be effective and the applicable rate for the next rate period will be the same
as during the current rate period. If there are not sufficient clearing bids,
beneficial owners of AMPS that have submitted or are deemed to have submitted
sell orders may not be able to sell in the auction all shares subject to such
sell orders. If all of the applicable outstanding AMPS are the subject of
submitted hold orders, then the rate period following the auction will
automatically be the same length as the preceding rate period and the applicable
rate for the next rate period will be a rate determined on the basis of current
market rates appropriate to the length of the rate period in question.
The auction procedures include a pro rata allocation of shares for purchase
and sale which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of shares of a series of AMPS that is
different than the number of shares of such series specified in its order. To
the extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as existing holders or potential holders in respect of
customer orders will be required to make appropriate pro rata allocations among
their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their Agent Members in same day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same day funds.
The auctions for Series A AMPS will normally be held every seven days, and
each subsequent rate period will normally begin on the following business day.
The auctions for Series B AMPS will normally be held every 28 days, and each
subsequent rate period will normally begin on the following business day.
Whenever the Fund intends to include any net capital gain or other income
taxable for federal income tax purposes in any dividend on AMPS, the Fund shall,
in the case of minimum rate periods or special rate periods 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 customers who are Beneficial Owners
and Potential Beneficial Owners believed by it to be interested in submitting an
Order in the auction to be held on such auction date.
If an auction date is not a business day because the American 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 will be the Auction Rate determined on the
previous auction date.
If a dividend payment date is not a business day because the American 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
46
or communications services, or the dividend payable on such date can not be paid
for any such reason, then:
- the dividend payment date for the affected dividend period will be the
next business day on which the Fund and its paying agent, if any, can pay
the dividend;
- the affected dividend period will end on the day it otherwise would have
ended; and
- the next dividend period will begin and end on the dates on which it
otherwise would have begun and ended.
The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding AMPS of either series and three current
holders. The three current holders and three potential holders submit orders
through broker-dealers at the auction:
Current Holder A........................ Owns 500 shares, wants to sell all 500 Bid order of 4.1% rate for all 500
shares if auction rate is less than 4.1% shares
Current Holder B........................ Owns 300 shares, wants to hold Hold order--will take the auction rate
Current Holder C........................ Owns 200 shares, wants to sell all 200 Bid order of 3.9% rate for all 200
shares if auction rate is less than 3.9% shares
Potential Holder D...................... Wants to buy 200 shares Places order to buy at or above 4.0%
Potential Holder E...................... Wants to buy 300 shares Places order to buy at or above 3.9%
Potential Holder F...................... Wants to buy 200 shares Places order to buy at or above 4.1%
The lowest dividend rate that will result in all 1,000 AMPS continuing to be
held is 4.0% (the offer by D). Therefore, the dividend rate will be 4.0%.
Current holders B and C will continue to own their shares. Current holder A will
sell its shares because A's dividend rate bid was higher than the dividend rate.
Potential holder D will buy 200 shares and potential holder E will buy 300
shares because their bid rates were at or below the dividend rate. Potential
holder F will not buy any shares because its bid rate was above the dividend
rate.
SECONDARY MARKET TRADING AND TRANSFER OF AMPS
The Broker-Dealer may to maintain a secondary trading market in AMPS outside
of auctions, but are not obligated to do so, and may discontinue such activity
at any time. There can be no assurance that such secondary trading market in
AMPS will provide owners with liquidity of investment. AMPS are not registered
on any stock exchange or on the Nasdaq Stock Market.
Investors who purchase shares in an auction (particularly if the Fund has
declared a special rate period) should note that because the dividend rate on
such shares will be fixed for the length of such rate period, the value of the
shares may fluctuate in response to changes in interest rates, and may be more
or less than their original cost if sold on the open market in advance of the
next auction, depending upon market conditions.
47
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of AMPS only in whole shares and only (1) pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the Auction Procedures,
(2) to a Broker-Dealer or (3) to such other persons as may be permitted by the
Fund; provided, however, that (a) a sale, transfer or other disposition of AMPS
from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of the foregoing if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to auctions, the Broker-Dealer (or other person,
if permitted by the Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
DESCRIPTION OF COMMON SHARES
The Articles authorize the issuance of one billion (1,000,000,000) shares of
capital stock. The Fund has issued 5,571,981 Common Shares with a par value of
$.0001 per share. All Common Shares have equal rights with all other Common
Shares to the payment of dividends and the distribution of assets upon
liquidation. The Common Shares are fully paid and non-assessable and have no
pre-emptive or conversion rights or rights to cumulative voting. Whenever AMPS
are outstanding, Common Stockholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on AMPS have been paid,
and unless asset coverage (as defined in the 1940 Act) with respect to AMPS
would be at least 200% after giving effect to the distributions. See
"Description of AMPS" above.
The Common Shares are listed on the American Stock Exchange. The Fund
intends to hold annual meetings of stockholders so long as the Common Shares are
listed on a national securities exchange and such meetings are required as a
condition to such listing.
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a stockholder
determines to buy additional Common Shares or sell shares already held, the
stockholder may do so by trading on the exchange through a broker or otherwise.
Shares of closed-end investment companies may frequently trade on an exchange at
prices lower than net asset value. The Fund's Articles limit the ability of the
Fund to convert to open-end status. See "Anti-takeover and Other Provisions in
the Articles of Incorporation."
ANTI-TAKEOVER AND OTHER PROVISIONS
IN THE ARTICLES OF INCORPORATION
The Articles and the Fund's Bylaws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund, to cause it
to engage in certain transactions or to modify its structure.
The Articles require a vote by holders of at least 75% of the Fund's Board
and at least 75% of the shares of the Fund's capital stock outstanding and
entitled to vote, except as described below, to authorize (1) the Fund's
conversion from a closed-end to an open-end 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
48
vote of a majority of the entire Board, including a majority of the Directors
who are not "interested persons," of the Fund, as defined in the 1940 Act
("Independent Directors"), then the affirmative vote of the holders of only a
majority of the Fund's shares of capital stock outstanding and entitled to vote
at the time is required; and provided, further, with respect to (6) and (7), if
such transaction has been authorized by the affirmative vote of a majority of
the entire Board, including a majority of the Independent Directors, no
stockholder vote is required to authorize such action. The term "Principal
Stockholder" means any person, entity or group that holds, directly or
indirectly, more than 5% of the outstanding shares of the Fund, and includes any
associates or affiliates of such person or entity or of any member of the group.
None of the foregoing provisions may be amended except by the vote of at least
75% of the outstanding shares of capital stock of the Fund outstanding and
entitled to vote thereon. The percentage vote required under these provisions is
higher than that required under Maryland law or by the 1940 Act. The Board
believes that the provisions of the Articles relating to such a higher vote are
in the best interest of the Fund and its stockholders. Even if agreed to by the
Fund, certain of the transactions described above may be prohibited by the 1940
Act. As noted above, AMPS vote together with Common Shares on all matters. The
1940 Act also requires approval of a majority of the outstanding AMPS for any
conversion from a closed-end to an open-end investment company. As the 1940 Act
also prohibits doing indirectly what cannot be done directly, a vote of the AMPS
may be required to effect some of the other transactions described above if the
effective result would be conversion of the Fund from a closed-end to an
open-end structure.
The Board is classified into three classes, each with a term of three years
with only one class of Directors standing for election in any year. Such
classification may prevent replacement of a majority of the Directors for up to
a two-year period. Directors may be removed from office only for cause and only
by vote of at least 75% of the shares entitled to be voted for such Director in
an election of Directors.
Reference should be made to the Articles on file with the Securities and
Exchange Commission for the full text of these provisions. See the Statement of
Additional Information under "Certain Provisions in the Articles of
Incorporation" for a discussion of the voting requirements applicable to certain
other transactions.
REPURCHASE OF COMMON SHARES; TENDER OFFERS;
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its stockholders
will not have the right to cause the Fund to redeem or repurchase their shares.
Instead, the 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, dividend stability,
portfolio credit quality, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors. Shares of a
closed-end investment company may frequently trade at prices lower than net
asset value. The Fund's Board of Directors regularly monitors the relationship
between the market price and net asset value of the Common Shares. If the Common
Shares were to trade at a substantial discount to net asset value for an
extended period of time, the Board may consider the repurchase of its Common
Shares on the open market or in private transactions, the making of a tender
offer for such shares, or the conversion of the Fund to an open-end investment
company. The Fund cannot assure you that its Board of Directors will decide to
take or propose any of these actions, or that share repurchases or tender offers
will actually reduce market discount. Any determination to repurchase Common
Shares would reduce the asset coverage for the AMPS and might make it necessary
or desirable for the Fund to redeem AMPS. As described above in "Description of
AMPS--Dividends and Rate Periods--Restrictions on Dividends and Other
Distributions," the repurchase of Common Shares may be restricted or prohibited
at times when there exist unpaid distributions on the AMPS.
49
If the Fund converted to an open-end company, it would be required to redeem
all AMPS then outstanding (requiring in turn that it liquidate a portion of its
investment portfolio), and the Common Shares would no longer be listed on the
American Stock Exchange. In contrast to a closed-end investment company,
stockholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less any redemption charge that is
in effect at the time of redemption.
Before deciding whether to take any action to convert the Fund to an
open-end investment company, the Board would consider all relevant factors,
including the extent and duration of the discount, the liquidity of the Fund's
portfolio, the impact of any action that might be taken on the Fund or its
stockholders, and market considerations. Based on these considerations, even if
the Fund's shares should trade at a discount, the Board of Directors may
determine that, in the interest of the Fund and its stockholders, no action
should be taken. See the Statement of Additional Information under "Repurchase
of Common Shares; Conversion to Open-End Fund" for a further discussion of
possible action to reduce or eliminate such discount to net asset value.
TAX MATTERS
GENERAL; TAXATION OF THE FUND
The following federal income tax discussion reflects provisions of the Code,
existing Treasury regulations, rulings published by the Internal Revenue Service
(the "Service"), and other applicable authority, as of the date of this
prospectus. These authorities are subject to change by legislative or
administrative action, possibly with retroactive effect. The following
discussion is only a summary of some of the important tax considerations
generally applicable to investments in the Fund. For more detailed information
regarding tax considerations, see the Statement of Additional Information. There
may be other tax considerations applicable to particular investors. In addition,
income earned through an investment in the Fund may be subject to state and
local taxes in jurisdictions outside New York State.
The Fund intends to qualify each year for treatment as a regulated
investment company under Subchapter M of the Code (a "RIC"), which involves
satisfying certain distribution and other requirements. If the Fund so
qualifies, it will not be subject to federal income tax on taxable income it
distributes in a timely manner to its stockholders in the form of dividends or
capital gain distributions.
To satisfy the distribution requirement applicable to RICs, the Fund must
generally distribute as dividends to its stockholders, including holders of
AMPS, at least 90% of its taxable net investment income, net tax-exempt income
and net short-term capital gain. These distributed amounts must qualify for the
dividends-paid deduction. In certain circumstances, the Service could take the
position that dividends paid on AMPS constitute preferential dividends under
section 562(c) of the Code and thus do not qualify for the dividends-paid
deduction.
If at any time when AMPS are outstanding the Fund does not meet applicable
asset coverage requirements, it will be required to suspend distributions to
Common Stockholders until the requisite asset coverage is restored. Any such
suspension may cause the Fund to pay a 4% federal excise tax (imposed on RICs
that fail to distribute for a given calendar year, generally, at least 98% of
their taxable net investment income and 98% of their capital gain net income)
and income tax on any undistributed income or gains and may, in certain
circumstances, prevent the Fund from continuing to qualify for treatment as a
RIC. Pursuant to any such suspension, the Fund may redeem AMPS in an effort to
comply with the distribution requirement applicable to RICs and to avoid income
and excise taxes.
50
TAXATION OF THE FUND'S STOCKHOLDERS
The New York Municipal Bonds in which the Fund will invest are generally
issued by New York State, a city in New York State, or a political subdivision,
agency, authority or instrumentality of such state or city. Thus, substantially
all of the Fund's dividends to you will qualify as "exempt-interest dividends,"
which are not subject to federal income tax.
All or a portion of the interest the Fund receives on the municipal bonds it
holds may be a "Tax Preference Item" for purposes of the AMT, with the result
that all or a portion of the dividends it pays to Fund stockholders also would
be such an item. Accordingly, if you are, or as a result of an investment in the
Fund would become, subject to the AMT, the Fund may not be a suitable investment
for you.
The Fund may at times buy tax-exempt investments at a discount from the
price at which they were originally issued, especially during periods of rising
interest rates. For federal income tax purposes, some or all of any market
discount that is other than DE MINIMIS will be included in the Fund's taxable
income and generally will be taxable to its stockholders when it distributes
that income to them.
The Fund's investments in certain debt obligations, such as zero coupon
municipal instruments, may cause it to recognize taxable income in excess of the
cash generated by those obligations. Thus, the Fund could be required at times
to liquidate those or other investments in order to satisfy its distribution
requirements.
For federal income tax purposes, distributions of investment income other
than exempt-interest dividends are taxable as ordinary income to the extent of
the Fund's current or accumulated earnings and profits. Generally, a
distribution of gains the Fund realizes on the sale or exchange of investments
will be taxable to its stockholders, even though the interest income from those
investments generally will be tax-exempt. Whether distributions of net capital
gains are taxed as ordinary income or long-term capital gains is determined by
how long the Fund owned the investments that generated those capital gains,
rather than how long a stockholder has owned his or her shares. Distributions of
gains from the sale of investments that the Fund owned for more than one year
will be taxable as long-term capital gains (provided the Fund designates those
distributions as capital gain dividends), whereas distributions of gains from
the sale of investments that the Fund owned for one year or less will be taxable
as ordinary income. 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 were included in the price the stockholder paid for the shares).
Any gain resulting from a stockholder's sale or exchange of Fund shares will
also be subject to tax. In addition, the exemption from federal income tax and
New York State and New York City personal income taxes for exempt-interest
dividends does not necessarily result in exemption for those dividends under the
income or other tax laws of any state or local taxing authority outside of New
York. See also "New York Tax Matters," below.
The Fund will apply backup withholding at the rate of 30% for taxable
amounts paid during 2002 and 2003 where it is required to apply that
withholding. Please see "Tax Matters" in the Statement of Additional Information
for additional information about the backup withholding tax rates for subsequent
years.
This section and the one following relate only to federal income tax and New
York State and New York City personal income tax consequences of investing in
the Fund; the consequences under other
51
tax laws may differ. You should consult your tax adviser for information
specific to your own circumstances. Please see "Tax Matters" in the Statement of
Additional Information for additional information regarding the tax aspects of
investing in the Fund.
NEW YORK TAX MATTERS
In the opinion of special New York tax counsel, under New York law,
dividends paid by the Fund are exempt from New York State and New York City
personal income taxes applicable to individuals who reside in New York State and
New York City to the extent such dividends are excluded from gross income for
federal income tax purposes and are derived from interest payment on tax-exempt
obligations issued by or on behalf of New York State and its political
subdivisions and agencies, and the governments of Puerto Rico, the U.S. Virgin
Islands, Guam and other U.S. territories. Other distributions from the Fund,
including distributions derived from taxable ordinary income and net short-term
and long-term capital gains, are generally not exempt from New York State and
New York City personal income taxes. Distributions to a corporate shareholder
will be subject to New York State corporate franchise tax and New York City
general corporation tax.
Under currently applicable New York State law, the highest marginal New York
State income tax rate imposed on individuals is 6.85%. The highest marginal New
York City income tax rate currently imposed on individuals is 3.648%. In
addition, individual taxpayers with New York adjusted gross income in excess of
$100,000 must pay a supplemental tax to recognize the benefit of graduated tax
rates. Stockholders subject to taxation in a state other than New York will
realize a lower after tax rate of return if distributions from the Fund are not
exempt from taxation in such other state.
The foregoing briefly summarizes some of the important federal income tax
and New York State and New York City personal income tax consequences to
investors in the AMPS, reflects the federal and New York State and New York City
income tax laws as of the date of this prospectus, and does not address special
tax rules applicable to certain types of investors, such as corporate and
foreign investors. Investors should consult their tax advisers regarding other
federal, state or local tax considerations that may apply in their particular
circumstances, including state alternative minimum tax as well as any proposed
tax law changes.
52
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated
December , 2002, each underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
AMPS set forth opposite the name of such underwriter.
NUMBER OF AMPS
--------------------
UNDERWRITER SERIES A SERIES B
----------- -------- --------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................
Salomon Smith Barney Inc................
A.G. Edwards & Sons, Inc................
-------- --------
Total.........................
======== ========
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions, including,
without limitation, the receipt by the underwriters of customary certificates,
opinions and other documents and the receipt by the Fund of AAA and Aaa ratings
on the AMPS by Fitch and Moody's, respectively, as of the time of the offering.
The underwriters are obligated to purchase all the AMPS sold under the purchase
agreement if any of the AMPS are purchased. In the purchase agreement, the Fund
and NB Management have agreed to indemnify the underwriters against certain
liabilities, including certain liabilities arising under the Securities Act of
1933, or to contribute payments the underwriters may be required to make for any
of those liabilities.
The underwriters propose to initially offer some of the AMPS directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not in excess of $ per share. The sales load the Fund will
pay of $250 per share is equal to 1% of the initial offering price. The
underwriters may allow, and the dealers may allow, a discount not in excess of
$ per share on sales to other dealers. After the initial public offering,
the public offering price, and concession may be changed. Investors must pay for
any shares purchased in the initial public offering on or before ,
2002.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities, and therefore can be expected to engage in portfolio
transactions with the Fund.
The Fund anticipates that the underwriters or their respective affiliates
may, from time to time, act in auctions as broker-dealers and receive fees as
set forth under "The Auction" and in the Statement of Additional Information.
The underwriters are active underwriters of, and dealers in, securities and act
as market makers in a number of such securities, and therefore can be expected
to engage in portfolio transactions with, and perform services for, the Fund.
The settlement date for the purchase of the AMPS will be , 2002,
as agreed upon by the underwriters, the Fund and NB Management pursuant to
Rule 15c6-1 under the Securities Exchange Act of 1934.
The addresses of the principal underwriters are: Merrill Lynch, Pierce,
Fenner & Smith Incorporated, 4 World Financial Center, New York, New York 10080;
Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013; A.G.
Edwards & Sons, Inc., One North Jefferson Avenue, St. Louis, Missouri 63103.
53
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT AND REGISTRAR
The custodian of the assets of the Fund is State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110. The custodian
performs custodial and fund accounting services.
The Bank of New York, 100 Church Street, 8th floor, New York, New York
10286, serves as the Fund's Auction Agent, transfer agent, registrar and
dividend disbursement agent, as well as agent for the Fund's Dividend
Reinvestment Plan.
LEGAL MATTERS
Certain legal matters in connection with the AMPS will be passed upon for
the Fund by Kirkpatrick & Lockhart LLP, Washington, D.C., and for the
underwriters by Clifford Chance US LLP, New York, New York.
54
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds................................... 2
Investment Objective and Policies................. 2
Investment Restrictions........................... 3
Further Investment Policies and Investment
Techniques...................................... 5
Further Investment Techniques..................... 13
Portfolio Trading and Turnover Rate............... 25
Management of the Fund............................ 26
Investment Management and Administration
Services........................................ 36
Portfolio Transactions............................ 41
Net Asset Value................................... 43
Description of AMPS............................... 43
Certain Provisions in the Articles of
Incorporation................................... 45
Additional Information Concerning the Auctions for
AMPS............................................ 47
Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund..................... 48
Tax Matters....................................... 50
Custodian, Transfer Agent and Auction Agent....... 58
Independent Auditors.............................. 58
Counsel........................................... 58
Registration Statement............................ 58
Report of Independent Auditor..................... 59
Financial Statement............................... 60
APPENDIX A--Articles Supplementary................ A-1
APPENDIX B--Description of Securities Ratings..... B-1
APPENDIX C--New York and U.S. Territory
Information..................................... C-1
APPENDIX D--Tax-Equivalent Yield Table............ D-1
55
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$48,250,000
NEUBERGER BERMAN
NEW YORK INTERMEDIATE MUNICIPAL FUND INC.
AUCTION MARKET PREFERRED SHARES ("AMPS")
965 SHARES, SERIES A
965 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
DECEMBER , 2002
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
C0492 12/02
The information in this statement of additional information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
statement of additional information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER 6, 2002
NEUBERGER BERMAN NEW YORK INTERMEDIATE MUNICIPAL FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
AUCTION MARKET PREFERRED SHARES
Neuberger Berman New York Intermediate Municipal Fund Inc. (the "Fund") is
a recently organized, non-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 , 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 , 2002.
TABLE OF CONTENTS
-----------------
Page
----
USE OF PROCEEDS...............................................................2
INVESTMENT OBJECTIVE AND POLICIES.............................................2
INVESTMENT RESTRICTIONS.......................................................3
FURTHER INVESTMENT POLICIES AND INVESTMENT TECHNIQUES.........................5
FURTHER INVESTMENT TECHNIQUES................................................13
PORTFOLIO TRADING AND TURNOVER RATE..........................................25
MANAGEMENT OF THE FUND.......................................................26
INVESTMENT MANAGEMENT AND ADMINISTRATION SERVICES............................36
PORTFOLIO TRANSACTIONS.......................................................41
NET ASSET VALUE..............................................................43
DESCRIPTION OF AMPS..........................................................43
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS......................45
CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION..........................47
REPURCHASE OF COMMON SHARES; TENDER OFFERS; CONVERSION TO OPEN-END
FUND.........................................................................48
TAX MATTERS..................................................................50
CUSTODIAN, TRANSFER AGENT AND AUCTION AGENT..................................58
INDEPENDENT AUDITORS.........................................................58
COUNSEL......................................................................58
REGISTRATION STATEMENT.......................................................58
REPORT OF INDEPENDENT AUDITORS...............................................59
FINANCIAL STATEMENTS.........................................................60
APPENDIX A -- ARTICLES SUPPLEMENTARY.........................................A-1
APPENDIX B -- DESCRIPTION OF SECURITIES RATINGS..............................B-1
APPENDIX C -- NEW YORK AND U.S. TERRITORY INFORMATION........................C-1
APPENDIX D -- TAX-EQUIVALENT YIELD TABLE.....................................D-1
USE OF PROCEEDS
The net proceeds of the offering of AMPS of the Fund will be approximately
$___________ 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
and New York State and New York City personal income taxes.
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 and New York State and New York City personal income taxes. 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 substantially all (at
least 90%) of its total assets in municipal bonds that pay interest that, in the
opinion of bond counsel to the issuer (or on the basis of other authority
believed by the Fund's investment manager to be reliable), is exempt from
1
federal income tax and New York State and New York City personal income taxes
with remaining maturities of less than 15 years. The Fund's policy is to invest,
under normal market conditions, 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 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. CONCENTRATION. Invest 25% or more of its total assets in issuers having
their principal business activities in the same industry.
2. SENIOR SECURITIES. Issue senior securities if such issuance is
specifically prohibited by the 1940 Act or the rules or regulations thereunder.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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 New York 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.
3. INVESTMENTS IN ANY ONE ISSUER. At the close of each quarter of the
Fund's taxable year, (i) no more than 25% of its total assets may be invested in
the securities of a single issuer and (ii) with regard to 50% of its total
assets, no more than 5% of its total assets may be invested in the securities of
a single issuer. These limitations do not apply to U.S. Government securities,
as defined for tax purposes, or securities of another regulated investment
company ("RIC").
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
3
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.
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.
4
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
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
5
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
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:
Factors pertaining to New York are set forth in Appendix C.
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,
6
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 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
7
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:
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
8
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.
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.
9
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.
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.
10
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
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:
11
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 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.
12
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.
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.
13
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
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.
14
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
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
15
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
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
16
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.
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.
17
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
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.
18
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
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
19
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.
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
20
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.
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
21
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.
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.
22
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
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 and New York State and New York City personal income taxes.
23
Like other sophisticated strategies, the Fund's use of structured notes may not
work as intended; for example, the change in the value of the structured notes
may not match very closely the change in the value of bonds that the structured
notes were purchased to hedge.
The Fund may invest in other types of "hybrid" instruments that combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some securities index or another interest rate (each
a "benchmark"). The interest rate or (unlike most debt obligations) the
principal amount payable at maturity of a hybrid security may be increased or
decreased, depending on changes in the value of the benchmark. Hybrids can be
used as an efficient means of pursuing a variety of investment goals, including
duration management and increased total return. Hybrids may not bear interest or
pay dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more steeply
and rapidly than the benchmark. These benchmarks may be sensitive to economic
and political events that cannot be readily foreseen by the purchaser of a
hybrid. Under certain conditions, the redemption value of a hybrid could be
zero. Thus, an investment in a hybrid may entail significant market risks that
are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed rate
or floating rate of interest. The purchase of hybrids also exposes the Fund to
the credit risk of the issuer of the hybrids. These risks may cause significant
fluctuations in the net asset value of the Fund.
Certain issuers of structured products, such as hybrid instruments, may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Fund's investments in these products may be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act. See "Investments in Other Investment Companies."
PORTFOLIO TRADING AND TURNOVER RATE
The Fund cannot accurately predict its turnover rate but anticipates that
its annual turnover rate will not exceed 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 purposes of federal income tax and New York State and New York
City personal income taxes. 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.
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
Name, Age, and Overseen Held Outside Fund
Address (1) Principal Occupation(s)(2) by Director Complex by Director
------------------------------------------------------------------------------------------------
CLASS I
------------------------------------------------------------------------------------------------
Independent Fund Directors
------------------------------------------------------------------------------------------------
Faith Colish (67) Counsel to Carter, Ledyard 31
& Millburn 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, June 2001 to 31
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
Name, Age, and Overseen Held Outside Fund
Address (1) Principal Occupation(s)(2) by Director Complex by Director
------------------------------------------------------------------------------------------------
Cornelius T. Ryan (71) General Partner of Oxford 31
Formerly, Director of
Partners and Oxford
Capital Cash Bioscience
Partners Management Trust
(venture capital (money
market fund) partnerships)
and and Prime Cash Fund.
President of Oxford
Venture Corporation.
------------------------------------------------------------------------------------------------
Peter P. Trapp Regional Manager for (58) 31
Atlanta Region, 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 31 Executive Vice President
of Neuberger Berman since and Director of
1999; Principal of Neuberger Berman Inc.
Neuberger Berman from 1997 (holding company) since
until 1999; Senior Vice 1999; President and
President of NB Management Director of NB
from 1996 until 1999; Management since 1999;
Director of Institutional Director and Vice
Services of NB Management President of Neuberger &
from 1988 until 1996. Berman Agency, Inc.
since 2000.
------------------------------------------------------------------------------------------------
CLASS II
------------------------------------------------------------------------------------------------
Independent Fund Directors
------------------------------------------------------------------------------------------------
John Cannon (72) Retired. Formerly, 31 Independent Trustee or
Chairman and Chief Director of three series
Investment Officer of CDC of OppenheimerFunds:
Capital Management Limited Term New York
(registered investment Municipal Fund,
adviser) (1993-Jan. 1999). Rochester Fund
Municipals, and
Oppenheimer Convertible
Securities Fund, 1992 to
present.
------------------------------------------------------------------------------------------------
Barry Hirsch (69) Senior Vice President and 31
Senior 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 31 Director, 92nd Street
Burnham Securities Inc. (a Y (non-profit), 1967
registered broker-dealer) to present; Formerly,
since 1991. Director, Cancer
Treatment Holdings, Inc.
------------------------------------------------------------------------------------------------
26
------------------------------------------------------------------------------------------------
Number of
Portfolios
in Fund
Complex Other Directorships
Name, Age, and Overseen Held Outside Fund
Address (1) Principal Occupation(s)(2) by Director Complex by Director
------------------------------------------------------------------------------------------------
Tom Decker Seip (52) General Partner of Seip 31 Director, H&R Block,
Investments LP (a private Inc. (financial services
investment partnership); company) (the parent
President and CEO of company of one of the
Westaff, Inc. (temporary Fund's underwriters),
staffing) May 2001 to May 2001 to present;
January 2002; Senior Director, General Magic
Executive at the Charles (voice recognition
Schwab Corporation from software), November 2001
1983 to 1999, including to present; Director,
Chief Executive Officer of Forward Management, Inc.
Charles Schwab Investment (asset management), 2001
Management, Inc. and to present; Member of
Trustee of Schwab Family the Board of Directors
of Funds and Schwab of E-Finance Corporation
Investments from 1997 to (credit decisioning
1998 and Executive Vice services), 1999 to
President-Retail Brokerage present; Director,
for Charles Schwab Save-Daily.com (micro
Investment Management from investing services),
1994 to 1997. 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 31 Executive Vice
and Chief Investment President, Chief
Officer of Neuberger Investment Officer and
Berman since 1999; Director of Neuberger
Executive Vice President Berman Inc. (holding
and Chief Investment company) since 1999;
Officer of NB Management Chairman since May 2000
from November 1999 to May and Director of NB
2000; Vice President of NB Management since April
Management from 1990 until 1996.
1999; Partner or Principal
of Neuberger Berman from
1993.
------------------------------------------------------------------------------------------------
CLASS III
------------------------------------------------------------------------------------------------
Independent Fund Directors
------------------------------------------------------------------------------------------------
Walter G. Ehlers (69) Consultant; Retired 31
President and Director of
Teachers Insurance &
Annuity (TIAA) and College
Retirement Equities Fund
(CREF).
------------------------------------------------------------------------------------------------
Robert A. Kavesh (75) Professor of Finance and 31 Director, Delaware
Economics at Stern School Labs (cosmetics),
of Business, New York 1978 to present.
University.
------------------------------------------------------------------------------------------------
Howard A. Mileaf (65) Retired. Formerly, Vice 31 Director, State Theatre
President and Special of New Jersey
Counsel to WHX Corporation (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
Name, Age, and Overseen Held Outside Fund
Address (1) Principal Occupation(s)(2) by Director Complex by Director
------------------------------------------------------------------------------------------------
William E. Rulon (70) Retired. Senior Vice 31 Director, Pro-Kids Golf
President of Foodmaker. and Learning Academy
Inc. (operator and (teach golf and computer
franchiser of restaurants) usage to "at risk"
until January 1997; children), 1998 to
Secretary of Foodmaker, present; Director of
Inc. until July 1996. Prandium, Inc.
(restaurants) since
March 2001.
------------------------------------------------------------------------------------------------
Candace L. Straight Private investor and 31 Director, Providence
(55) consultant specializing in Washington (property and
the insurance industry; casualty insurance
Advisory Director of company), December 1998
Securities Capital LLC (a to present; Director,
global private equity Summit Global Partners
investment firm dedicated (insurance brokerage
to making investments in firm), October 2000 to
the insurance sector). present.
------------------------------------------------------------------------------------------------
Director who is an "Interested Person"
------------------------------------------------------------------------------------------------
Edward I. O'Brien* (74) Member, Investment Policy 31 Director of Legg Mason,
Committee, Edward Jones, Inc. (financial services
1993 - 2001; President of holding company) (the
the Securities Industry parent company of one of
Association ("SIA") the Fund's
(securities industry's underwriters), 1993 to
representative in present; Director,
government relations and Boston Financial Group
regulatory matters at the (real estate and tax
federal and state levels) shelters), 1993-1999.
from 1974 - 1992; Adviser
to SIA from November 1992
- 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 Vice President-Mutual Fund
since 2002 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 Employee of Neuberger
since 2002 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 Employee of NB Management
since 2002 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 Vice President of
Financial and Accounting Neuberger Berman since
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 Employee of NB Management
since 2002 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 New York 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
Estimated Companies in the Neuberger
Aggregate Berman Fund Complex Paid to
Name and Position Compensation Directors For Calendar Year
with the Fund from the Fund* 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
Estimated Companies in the Neuberger
Aggregate Berman Fund Complex Paid to
Name and Position Compensation Directors For Calendar Year
with the Fund from the Fund* 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
Securities in all Registered
Name of Director 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,
450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.
34
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.
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
35
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 Percentage Waived (annual
rate as a percentage of net rate as a percentage of net
assets attributable to Common assets attributable to
Fiscal Period Shares - assuming no AMPS are Common Shares - assuming
Ending October 31, issued or outstanding) 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%
--------------------------------------------------------------------------------
(1) From the commencement of the Fund's operations.
36
(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 to its officers and employees for use in managing client
accounts. In this manner, NB Management expects to have available to it, in
37
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.
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
38
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
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,
39
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 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 1,500
shares as Series A AMPS and 1,500 shares as Series B AMPS. All AMPS will have a
42
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 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
associates or affiliates of such person or entity or of any member of the group.
46
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. See also "New
York Tax Matters" in Appendix C. 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, state and local income tax consequences of purchasing,
holding, and disposing of Fund shares. A summary of tax matters pertaining to
New York State is set forth in Appendix C.
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 New York Intermediate Municipal Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Neuberger Berman New York 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 New York
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 NEW YORK INTERMEDIATE MUNICIPAL FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 19, 2002
ASSETS
Cash $ 100,005
Deferred offering costs 150,000
------------
Total assets 250,005
------------
LIABILITIES
Payable for offering costs 150,000
------------
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 NEW YORK INTERMEDIATE MUNICIPAL FUND INC.
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 19, 2002
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. ORGANIZATION:
Neuberger Berman New York 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. Additionally, the Fund follows an investment
policy of investing primarily in New York Municipal Bonds. Economic changes
affecting the state of New York and certain of its public bodies and
municipalities may affect the ability of issuers within the state to pay
interest on, or repay principal of, municipal obligations held by the Fund.
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 Net Assets
------------------------------------------------------
2002 0.25%
2003 - 2007 0.25
2008 0.20
2009 0.15
2010 0.10
2011 0.05
60
Management has not agreed to waive any portion of its fees and expenses beyond
October 31, 2011.
Pursuant to an administration agreement between Management and the Fund, the
Fund has agreed to pay Management an administration fee payable on a monthly
basis at the annual rate of 0.30% 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 5,000,000 shares, organization and
offering costs are estimated to be $10,000 and $502,150, 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
$352,150. The Fund will pay offering costs estimated at $150,000 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
APPENDIX A
NEUBERGER BERMAN NEW YORK 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..............................................................................................19
1. NUMBER OF AUTHORIZED SHARES....................................................................19
2. DIVIDENDS......................................................................................19
(a) RANKING...............................................................................19
(b) CUMULATIVE CASH DIVIDENDS.............................................................19
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE......................................20
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF.........................................20
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS...........................................20
(f) CURING A FAILURE TO DEPOSIT...........................................................22
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT............................................22
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND.................................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..............................................................................23
(a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD DAYS OR FEWER.........23
(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...........................................24
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD................................................25
(d) NOTICE OF SPECIAL RATE PERIOD.........................................................25
(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.......................................................26
(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.............................................36
(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...........................................37
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 TRANSACTIONS: 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
iii
NEUBERGER BERMAN NEW YORK 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 1,500 shares of auction market preferred
shares, Series A and 1,500 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: 1,500 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 ___% per annum and an initial Dividend Payment Date of January 16, 2003.
Series B: 1,500 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 ___% per annum and
an initial Dividend Payment Date of January 16, 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
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
1
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
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.
2
(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.
(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
3
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.
(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
4
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
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%
5
* 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 county 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 county 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 issued by issuers located within the
same county 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 county 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
6
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
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:
7
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.
(vv) "INITIAL RATE PERIOD" shall be the period from and including the
Date of Original Issue to but excluding _________ ___, 2002, with respect to
Series A Shares and _______, 2002, 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.
8
(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 higher of the auction rate or 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
designated by the Fund pursuant to Section 4 of Part I of these Articles
Supplementary, the product of (A) the highest 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, (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 (3) the Reference Rate on such Auction Date for Minimum Rate
Periods and (B) the Rate Multiple on such Auction Date.
9
(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 PERIOD Aaa* Aa* A* Baa* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
----------------------------------------------------------------------------------------------------
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........ 158 163 170 177 192 138 150 240
--------------------
* 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.
***** 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
10
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 county
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 county 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 county 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 county 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 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
11
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%
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
(333-100905) ("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.
12
(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.
(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
13
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 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 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 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).
14
(yyy) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to
the failure by the Fund to satisfy the Preferred Shares Basic Maintenance Amount
(as required by paragraph (a) of Section 7 of Part I of these Articles
Supplementary) as of a given Valuation Date, shall mean the seventh Business Day
following such Valuation Date.
(zzz) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer, Assistant Treasurer, Controller, Assistant
Controller or any Senior Vice President or Vice President of the Fund which sets
forth, as of the related Valuation Date, the assets of the Fund, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the
Preferred Shares Basic Maintenance Amount.
(aaaa) "PRICING SERVICE" shall mean any pricing service designated from
time to time in accordance with the Fund's pricing procedures.
(bbbb) "QUARTERLY VALUATION DATE" shall mean the last Business Day of
each March, June, September and December of each year, commencing on 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-
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.
15
(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 following: (i) 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, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Fund has received
prior written authorization from Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) or
(y) with counterparties having a Moody's long-term debt rating of at least Baa3
(if Moody's is then rating the Preferred Shares) and a Fitch long-term debt
rating of BBB (if Fitch is then rating the Preferred Shares); and (ii) the
Discounted Value of Municipal Obligations sold as of or prior to such Valuation
Date which generated receivables, if such receivables are due within five
business days of such Valuation Date but do not comply with either of the
conditions specified in (i) above.
(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.
(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.
16
(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.
(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
17
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
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
18
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.
PART I
1. NUMBER OF AUTHORIZED SHARES. The number of authorized shares
constituting the Series A Shares is 1,500, of which 965 shares will be issued
on December 11, 2002. The number of authorized shares constituting the Series B
Shares is 1,500, of which 965 shares will be issued on December 11, 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
19
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 15, 2003, with respect to Series
A Shares, and January 14, 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, with
respect to Series A Shares, and each twenty-eighth day thereafter, 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, 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
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
20
(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 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"/BB2"); 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
21
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"/BB2") (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
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
22
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.
23
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
24
Fund wishes to designate such Subsequent Rate Period as a Special Rate Period
and shall provide Fitch (if Fitch is then rating the series of Preferred Shares)
and Moody's (if Moody's is then rating the series of Preferred Shares) with such
documents as either may request. In addition, full cumulative dividends, any
amounts due with respect to mandatory redemptions and any additional dividends
payable prior to such date must be paid in full or deposited with the Auction
Agent. The Fund also must have portfolio securities with a discounted value at
least equal to the Preferred Share Maintenance Amount.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the Fund
wishes to designate a Subsequent Rate Period as a Special Rate Period, but the
day following what would otherwise be the last day of such Special Rate Period
is not (a) a Wednesday that is a Business Day in case of Series A Shares or (b)
a Tuesday 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 Tuesday that is followed by a
Wednesday that is a Business Day preceding what would otherwise be such last day
in the case of Series A Shares, or (b) on the first Monday that is followed by a
Tuesday 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, (D) the scheduled Dividend Payment Dates for shares of such series
during such Special Rate Period and (E) the Special Redemption Provisions, if
any, applicable to shares of such series in respect of such Special Rate Period,
such notice to be accompanied by a Preferred Shares Basic Maintenance Report
25
showing that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating the series in
question) and Fitch Eligible Assets (if Fitch is then rating the series in
question) each have an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount as of such Business Day (assuming for
purposes of the foregoing calculation that (a) the Maximum Rate is the Maximum
Rate on such Business Day as if such Business Day were the Auction Date for the
proposed Special Rate Period, and (b) the Moody's Discount Factors applicable to
Moody's Eligible Assets and the Fitch Discount Factors applicable to Fitch
Eligible Assets are determined by reference to the first Exposure Period longer
than the Exposure Period then applicable to the Fund, as described in the
definitions of Moody's Discount Factor and Fitch Discount Factor herein); or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period of shares of such series and that the
next succeeding Rate Period of shares of such series shall be a Minimum Rate
Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Fund fails
to deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Preferred Shares Basic Maintenance Report to the effect set
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
elected by the holders of the preferred stock when their term shall have
expired; provided, finally, that such Directors appointed by the
26
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.
(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
27
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.
(v) Solely for purposes of the provisions of Section 5(b)(i) of this
Part I, and subject to the terms thereof in accordance with the 1940 Act and
Section 3-803(f) of the Maryland General Corporation Law (the "MGCL"), by
resolution of its Board of Directors on October 21, 2002, the Fund elected to be
subject to Section 3-804(b) of the MGCL, which vests in the Board of Directors
the power to fix the number of Directors of the Fund, to be effective upon the
occurrence of the conditions giving rise to a Voting Period, notwithstanding any
contrary provisions in the Fund's Charter or Bylaws. Except as set forth above,
the Fund has not elected to be subject to the provisions of Title 3, Subtitle 8
of the MGCL.
(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 [$______]) 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
28
only if Moody's or Fitch is then rating Preferred Shares and such issuance
would, at the time thereof, cause the Fund not to satisfy the 1940 Act Preferred
Shares Asset Coverage or the Preferred Shares Basic Maintenance Amount. So long
as any Preferred Shares are outstanding, the Fund shall not, without the
affirmative vote or consent of the Holders of at least a majority of the
Preferred Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee becoming
insolvent. If any action set forth above would adversely affect the rights of
one or more series (the "Affected Series") of Preferred Shares in a manner
different from any other series of Preferred Shares, the Fund will not approve
any such action without the affirmative vote or consent of the holders of at
least a majority of the shares of each such Affected Series outstanding at the
time, in person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class).
(ii) 1940 ACT MATTERS. Unless a higher percentage is provided for in
the Charter, (A) the affirmative vote of the Holders a "majority of the
outstanding" (as such term is defined in the 1940 Act) preferred stock of the
Fund, including Preferred Shares, voting as a separate class, shall be required
to approve (A) any plan of reorganization (as such term is used in the 1940 Act)
adversely affecting such shares and (B) any action requiring a vote of security
holders of the Fund under Section 13(a) of the 1940 Act. In the event a vote of
Holders of 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
Fitch Hedging Transactions Receivables for Municipal Obligations Sold
29
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 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
30
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
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
31
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
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
32
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
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
33
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.
(iv) Subject to the provisions of subparagraph (v) of this paragraph
(a), shares of any series of Preferred Shares may be redeemed, at the option of
the Fund, as a whole but not in part, out of funds legally available therefor,
on the first day following any Dividend Period thereof included in a Rate Period
consisting of more than 364 Rate Period Days if, on the date of determination of
the Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the Treasury
Note Rate for such Rate Period, at a redemption price per share equal to the sum
of $25,000 plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed for
redemption.
(v) The Fund may not on any date mail a Notice of Redemption pursuant
to paragraph (c) of this Section 11 in respect of a redemption contemplated to
be effected pursuant to this paragraph (a) unless on such date (a) the Fund has
available Deposit Securities with maturity or tender dates not later than the
34
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
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
35
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.
(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.
(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
36
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 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.
37
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
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
38
(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);
(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 5,000; 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;
39
(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
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:
40
(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
(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 5,000; 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
41
(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)
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.
42
(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;
(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.
43
(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) 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
44
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.
(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
45
(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
(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
46
shall be considered valid in the following order of priority:
(v) 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;
(vi) any Bid for shares of such series shall be considered valid up to
and including the excess of the number of Outstanding shares of such series held
by such Existing Holder over the number of shares of such series subject to any
Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with the same
rate and the number of Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids shall be considered valid up to and
including the amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to cover the
number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding shares
of such series subject to any portion of Bids considered not valid in whole or
in part under this clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at the rate therein
specified; and
(vii) 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
47
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
(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
48
(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
case of a Dividend Period of 7 Rate Period Days) 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;
49
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be rejected, thus entitling each such Existing Holder to continue
to hold the Preferred Shares subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be rejected, thus entitling such Existing Holder to continue to
hold the Preferred Shares subject to such Submitted Bid, unless the number of
Outstanding Preferred Shares subject to all such Submitted Bids shall be greater
than the number of Preferred Shares ("remaining shares") in the excess of the
Available Preferred Shares of such series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) and (iii) of this paragraph
(a), in which event such Submitted Bid of such Existing Holder shall be rejected
in part, and such Existing Holder shall be entitled to continue to hold
Preferred Shares subject to such Submitted Bid, but only in an amount equal to
the number of Preferred Shares of such series obtained by multiplying the number
of remaining shares by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate number of
Outstanding Preferred Shares subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate for shares
of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of shares of
such series obtained by multiplying the number of shares in the excess of the
Available Preferred Shares of such series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) through (iv) of this
paragraph (a) by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares subject to such Submitted Bid and the denominator
of which shall be the aggregate number of Outstanding Preferred Shares subject
to such Submitted Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have not been made (other than because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for 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
50
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
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.
51
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
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.
52
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
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 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
(iii) the next Dividend Period will begin and end on the dates
on which it would have begun and ended had such even not occurred and the
Dividend Payment6 Date remained the scheduled date.
IN WITNESS WHEREOF, NEUBERGER BERMAN NEW YORK INTERMEDIATE MUNICIPAL
FUND INC. has caused these presents to be signed on December , 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 NEW YORK INTERMEDIATE
MUNICIPAL FUND INC.
By:
-----------------------------------
Title:
53
WITNESS:
---------------------
Title:
54
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
B-2
element represents Moody's evaluation of the degree of risk associated with the
demand feature, using the MIG rating scale.
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
B-3
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
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
NEW YORK AND U.S. TERRITORY INFORMATION
The following is a summary of certain selected information relating to the
economy and finances of New York State, New York City and the U.S. territories
listed below. It is not a discussion of any specific factors that may affect any
particular issuer of municipal securities. The information is not intended to be
comprehensive and does not include all of the economic and financial
information, such as certain information pertaining to budgets, receipts and
disbursements, about New York State and New York City or such U.S. territories
that would ordinarily be included in various public documents issued thereby,
such as an official statement prepared in accordance with issuance of general
obligation bonds of New York or such U.S. territories. Such an official
statement, together with any updates or supplements thereto, generally may be
obtained upon request to the budget or equivalent office of New York State, New
York City or such U.S. territories. The information below has not been
independently verified by the Fund and the Fund takes no responsibility for
completeness or accuracy of such information.
FACTORS PERTAINING TO NEW YORK
New York State ended its 2001-2002 fiscal year balanced on a cash basis,
with a reported closing balance in the General Fund of $1.03 billion. New York
State adopted the debt service portion of the State budget for the 2002-2003
fiscal year on March 26, 2002. The State Legislature adopted the remainder of
the budget for New York State's 2002-2003 fiscal year on May 16, 2002, and New
York State released a revised State Financial Plan on May 22, 2002 and its First
Quarterly Financial Plan update on July 12, 2002. There were no changes to the
State Financial Plan projections in the update. The revised State Financial Plan
projects balance on a cash basis for the 2002-2003 fiscal year. General Fund
disbursements, including transfers to other funds are projected to total $40.22
billion for 2002-2003. The projected General Fund closing balance is $716
million. The State Financial Plan accompanying the Governor's 2002-2003 amended
Executive Budget projected General Fund budget gaps of $2.8 billion in the
2003-2004 fiscal year and $3.3 billion in the 2004-2005 fiscal year. New York
State issued its second quarterly update to the State Financial Plan for the
2002-03 fiscal year on October 30, 2002. Aggregate receipts and spending in the
second quarterly update are unchanged from the July Financial Plan update. On
November 14, 2002, New York State issued an update to its Annual Information
Statement, dated June 3, 2002, which reflected New York State's second quarterly
update.
In its update to the Annual Information Statement, New York State noted
that current economic and financial trends, in particular, the prolonged and
substantial decline in equity markets and poor profit performance of financial
service firms, have made it more likely that actual receipts for the 2002-2003
fiscal year will fall significantly below the levels reported in the current
State Financial Plan, and that whether this potentially significant decline in
New York State's revenue situation occurs depends on several factors, including
the pace of New York State and national economic recovery, the profits
performance of the financial sector, and the timing of tax payments. Given the
uncertainties surrounding the economy in general and the financial service
sector in particular, the New York State Division of the Budget ("DOB") noted
C-1
that it was unable at the time to quantify with confidence the potential impact
on expected tax receipts. In addition, DOB stated in the update to the Annual
Information Statement that it expects to propose actions to close a 2003-2004
budget gap that is currently anticipated to be substantially larger than the
$2.8 billion imbalance projected in February 2002. Factors affecting the
potential imbalance projected in February 2002 include the possible impact of
economic and financial market instability on receipts (which could cause losses
in excess of five percent from current projections), the use of reserves and
other non-recurring resources to balance the 2002-2003 budget, and higher
pension costs and entitlement spending. Finally, the update noted that equity
market instability (fueled by poor earnings, accounting concerns, and fears of
further terrorist attacks), a further escalation of tensions in the Middle East
and the resultant upward pressure on energy prices, a weakening of growth in
consumer spending, and a failure of investment spending to rebound are all
factors that are combining to produce a potential return to recessionary
conditions.
The New York State Legislature has enacted the Debt Reform Act of 2000,
which applies to new state-supported debt (i.e. general obligation debt of the
state and lease-purchase and contractual obligations of public authorities and
municipalities where debt service is paid from state appropriations) issued on
or after April 1, 2000. It imposes caps on new debt outstanding and new debt
service costs.
The fiscal stability of New York State relates, at least in part, to the
fiscal stability of its localities and authorities. Various state agencies,
authorities and localities have issued large amounts of bonds and notes
supported by New York State. In some cases, New York State has had to provide
special assistance in recent years to enable such agencies, authorities and
localities to meet their financial obligations and, in some cases, to prevent or
cure defaults. The extent to which state agencies and local governments require
state assistance to meet their financial obligations, may adversely affect the
ability of New York State to meet its own obligations as they become due or to
obtain additional financing.
For each of the 1981 through 2002 fiscal years, New York City's General
Fund had an operating surplus, before discretionary and other transfers, and
achieved balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP"), after discretionary and other transfers
("transfers"). For the 2002 fiscal year, New York City had an operating surplus
of $686 million, before transfers. General Fund total revenues for the 2002
fiscal year were approximately $40.86 billion. New York City's Financial Plan
for the 2003 through 2006 fiscal years, released by the Mayor of New York City
on November 18, 2002 (the "City Financial Plan"), projects revenues and
expenditures for the 2003 and 2004 fiscal years, balanced in accordance with
GAAP, and projects gaps of $939 million and $1.3 billion for fiscal years 2005
and 2006, respectively. New York City has shown a pattern of consistently
projecting and closing budget gaps. New York City has outlined a gap-closing
program which anticipates additional New York City agency programs to reduce
expenditures or increase revenues and additional federal and state actions such
as intergovernmental aid to New York City. There can be no assurance that
additional gap-closing measures, such as tax increases or reductions in New York
City services, will not be required.
C-2
Implementation of New York City's four-year annual financial plan is also
dependent upon New York City's ability to market its securities successfully in
the public credit markets including its ability to issue short term notes to
finance its seasonal working capital needs. The fiscal health of New York City,
which has been the largest issuer of municipal bonds in the country and is a
leading international commercial center, exerts a significant influence upon the
fiscal health and bond values of issues throughout New York State. Bond values
of the Municipal Assistance Corporation, New York State, the New York Local
Government Assistance Corporation, the New York State Dormitory Authority, the
New York City Municipal Water Finance Authority, the New York City Transitional
Finance Authority and The Metropolitan Transportation Authority may be
particularly affected by serious financial difficulties encountered by New York
City. The Fund could be expected to hold bonds issued by many, if not all of
these issuers, at any given time.
The financial condition of New York State, New York City and other New
York issuers may be affected by many economic, social, political and
international factors which cannot be predicted with certainty. These factors
include, but may not be limited to, litigation, pension costs and pension fund
earnings, collective bargaining with governmental employees, changes resulting
from entitlement program reforms, the receipt of intergovernmental aid, and the
performance of the securities and financial sector which is more significant to
the New York economy than to the national economy. Factors particularly
affecting New York City also include its ability to meet its extensive
infrastructure and other capital needs in the face of limited funding capacity.
NEW YORK TAX MATTERS
In the opinion of special New York tax counsel, under New York law,
dividends paid by the Fund are exempt from New York State and New York City
personal income taxes applicable to individuals who reside in New York State and
New York City to the extent such dividends are excluded from gross income for
federal income tax purposes and are derived from interest payment on tax-exempt
obligations issued by or on behalf of New York State and its political
subdivisions and agencies, and the governments of Puerto Rico, the U.S. Virgin
Islands, Guam and other U.S. territories. Other distributions from the Fund,
including distributions derived from taxable ordinary income and net short-term
and long-term capital gains, are generally not exempt from New York State and
New York City personal income taxes. Distributions to a corporate stockholder
will be subject to New York State corporate franchise tax and New York City
general corporation tax.
The foregoing briefly summarizes some of the important New York State and
New York City personal income tax consequences to stockholders of investing in
Common Shares, reflects the New York State and New York City income tax laws as
of the date of this Statement of Additional Information, and does not address
special tax rules applicable to certain types of investors, such as corporate
and foreign investors. Investors should consult their tax advisers regarding
other state or local tax considerations that may be applicable in their
particular circumstances, including state alternative minimum tax as well as any
proposed tax law changes.
FACTORS PERTAINING TO U.S. TERRITORIES
C-3
PUERTO RICO. Puerto Rico has a diversified economy dominated by the
manufacturing and service sectors. The North American Free Trade Agreement
("NAFTA"), which became effective January 1, 1994, has led to loss of lower wage
jobs such as textiles, but economic growth in other areas, particularly tourism,
pharmaceuticals, construction and the high technology areas have compensated for
that loss.
The Commonwealth of Puerto Rico differs from the states in its
relationship with the federal government. Most federal taxes, except those such
as social security taxes that are imposed by mutual consent, are not levied in
Puerto Rico. Section 936 of the Code has provided a tax credit for certain
qualified U.S. corporations electing "possessions corporation" status. However,
in 1993, Section 936 was amended to provide for two alternative limitations on
the Section 936 credit attributable to certain active business income. The first
limitation was based on the economic activity of the Section 936 possessions
corporation. The second limited the credit to a specified percentage of the
credit allowed under prior law. In 1996, Section 936 credit was repealed except
that the credit attributable to possessions source business income with respect
to certain existing credit claimants was subjected to a phase out over a ten
year period (subject to additional caps).
Also in 1996, a new Section 30A was added to the Code. Section 30A permits
a "qualifying domestic corporation" that meets certain gross income tests to
claim a credit against the federal income tax in an amount equal to the portion
of the tax which is attributable to the taxable income from sources outside of
the United States, from the active conduct of a trade or business in Puerto Rico
or from the sale of substantially all the assets used in such a trade or
business. Section 30A will be phased out by January 1, 2006. The Governor of
Puerto Rico proposed that Congress permanently extend Section 30A until the
Puerto Rican economy achieves certain economic improvements. To date, however,
no action has been taken.
During the mid and late 1990s the Commonwealth of Puerto Rico benefited
from a robust U.S. economy, more aggressive tax collections and low oil prices.
This created an expanded employment base, job growth, reduction in unemployment,
increase in tourism spending, real GDP growth in the 3.1% to 3.5% range over the
last 5 fiscal years and significant increases in General Fund cash balances from
fiscal year end 1997 to fiscal year end 1999. These factors, combined with
minimal negative impact to date from the 1996 federal legislation phasing out
Section 936 tax benefits to Puerto Rico subsidiaries of U.S. Corporations,
created a positive outlook for the credit in the late 1990s. Despite the fact
that there have been some high profile U.S. companies that have left the island
partially due to the Section 936 phase out, many corporations have elected to
convert to controlled foreign corporation (CFC) status, which allows them to
delay federal income taxes until the income is distributed to U.S. shareholders.
In fiscal year 2000, the outlook on the credit turned negative due to the
slowdown in the U.S. economy (88% of Puerto Rico's exports go to the U.S.),
uncertainty regarding increasing oil prices, failure of the government to reign
in health care costs, expense overruns in education and a decreasing rate of
employment growth. As a result, the General Fund recorded a $268 million deficit
in fiscal year 2000 due to increased education and health care spending.
C-4
A new administration, the Popular Democratic Party that favors Puerto
Rico's commonwealth status over a potential statehood status, took office in
January, 2001. It was not long before they realized the presence of continued
fiscal stress and estimated a fiscal year 2001 budget shortfall of $700 million.
The shortfall was stated to be caused by weakened revenue growth due to the
slowing pace of employment and a softening U.S. economy.
The major key to maintaining Puerto Rico's external ratings (Baa1/A- from
Moody's and S&P, respectively) is the ability of the government to balance
fiscal year 2002 performance after lackluster fiscal year 2001 results that
necessitated deficit financing. Complicating matters is the uncertainty
surrounding the negative effects on tourism caused by September 11th terrorist
attacks and the scope and duration of the continued slowdown in the U.S.
economy.
THE U.S. VIRGIN ISLANDS: The United States Virgin Islands ("USVI") is
heavily reliant on the tourism industry, with roughly 43% of non-agricultural
employment in tourist-related trade and services. The tourism industry is
economically sensitive and would likely be adversely affected by a recession in
either the United States or Europe. The September 11th terrorist attacks will
likely have an adverse affect on tourism, the extent of which is unclear.
An important component of the USVI revenue base is the federal excise tax
on rum exports. Tax revenues rebated by the federal government to the USVI
provide the primary security of many outstanding USVI bonds. Since more than 90%
of the rum distilled in the USVI is distilled at one plant, any interruption in
its operations (as occurred after Hurricane Hugo in 1989) would adversely affect
these revenues. The last major hurricane to impact the USVI was Hurricane
Marilyn on September 15, 1995. Consequently, there can be no assurance that rum
exports to the United States and the rebate of tax revenues to the USVI will
continue at their present levels. The preferential tariff treatment the USVI rum
industry currently enjoys could be reduced under NAFTA. Increased competition
from Mexican rum producers could reduce USVI rum imported to the U.S.,
decreasing excise tax revenues generated. The USVI is periodically hit by
hurricanes. Several hurricanes have caused extensive damage, which has had a
negative impact on revenue collections. There is currently no rated, unenhanced
Virgin Islands debt outstanding (although there is unrated debt outstanding). In
addition, eventual elimination of the Section 936 tax credit for those companies
with operations in USVI may lead to slower growth in the future.
GUAM: The U.S. territory of Guam derives a substantial portion of its
economic base from Japanese tourism. With a reduced U.S. military presence on
the island, Guam has relied more heavily on tourism in past years. During 1998,
the Japanese recession combined with the impact of typhoon Paka resulted in a
budget deficit of $21 million. With hotels alone accounting for 8.5% of Guam's
employment and Japanese tourists comprising 86% of total visitor arrivals, the
Japanese recession and depreciation of the yen versus the dollar earlier this
year have had a negative impact on the island's economy in 1998. Based on these
factors, S&P downgraded Guam's rating to BBB- from BBB with a negative outlook
on May 26, 1999. Although total visitors improved in 1999 and 2000, they were
weakened by economic slowdowns and the effects of the September 11th terrorist
attacks in 2001. These negative trends have had an unfavorable effect on Guam's
financial position with consistent general fund deficits from 1997-1999 and a
small surplus in 2000. Fiscal year 2001 is expected to be worse than fiscal year
C-5
2000. Guam also has a high debt burden. These factors caused S&P to downgrade
Guam's rating to BB (below-investment grade) from BBB- on March 25, 2002. Guam
is not rated by Moody's.
C-6
Appendix D
TAX-EQUIVALENT YIELD TABLE
The table below gives the approximate yield a taxable security must earn
at various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4% to 7% under the regular 2002 federal income
tax and New York State and New York City personal income tax rates applicable to
individuals.
-----------------------------------------------------------------------------------------------------------------------
Combined Federal and New A tax-exempt yield of
York State Tax Rates
-----------------------------------------------------------------------------------------------------------------------
Single Return Joint Return Federal State Blended 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
-----------------------------------------------------------------------------------------------------------------------
(Taxable is equivalent to a fully taxable
Income)* yield of
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
$20,001 - $40,001 - 15.0% 6.85% 20.82% 5.05% 5.68% 6.31% 6.95% 7.58% 8.21% 8.84%
$27,950 $46,700
-----------------------------------------------------------------------------------------------------------------------
$27,951 $46,701 - 27.0% 6.85% 32.00% 5.88% 6.62% 7.35% 8.09% 8.82% 9.56% 10.29%
-$67,700 112,850
-----------------------------------------------------------------------------------------------------------------------
$67,701 $112,851 - 30.0% 6.85% 34.80% 6.13% 6.90% 7.67% 8.44% 9.20% 9.97% 10.74%
-$141,250 $171,950
-----------------------------------------------------------------------------------------------------------------------
$141,251 $171,951 - 35.0% 6.85% 39.45% 6.61% 7.43% 8.26% 9.08% 9.91% 10.74% 11.56%
-$307,050 $307,050
-----------------------------------------------------------------------------------------------------------------------
Over $307,050 Over $307,050 38.6% 6.85% 42.81% 6.99% 7.87% 8.74% 9.62% 10.49% 11.37% 12.24%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Combined Federal, New York
State and City Tax Rates A tax-exempt yield of
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Single Return Joint Return Federal City Blended 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
-----------------------------------------------------------------------------------------------------------------------
(Taxable is equivalent to a fully taxable
Income)* yield of
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
$20,001 - $40,001 - 15.0% 10.38% 23.83% 5.25% 5.91% 6.56% 7.22% 7.88% 8.53% 9.19%
$25,000 $45,000
-----------------------------------------------------------------------------------------------------------------------
$25,001 - $45,001 - 15.0% 10.44% 23.87% 5.25% 5.91% 6.57% 7.22% 7.88% 8.54% 9.19%
$27,950 $46,700
-----------------------------------------------------------------------------------------------------------------------
$27,951 - $46,701 - 27.0% 10.44% 34.62% 6.12% 6.88% 7.65% 8.41% 9.18% 9.94% 10.71%
$50,000 $90,000
-----------------------------------------------------------------------------------------------------------------------
$50,001 - $90,001 - 27.0% 10.50% 34.66% 6.12% 6.89% 7.65% 8.42% 9.18% 9.95% 10.71%
$67,700 $112,850
-----------------------------------------------------------------------------------------------------------------------
$67,701 - $112,851 - 30.0% 10.50% 37.35% 6.38% 7.18% 7.98% 8.78% 9.58% 10.38% 11.17%
$141,250 $171,950
-----------------------------------------------------------------------------------------------------------------------
$141,251- $171,951 - 35.0% 10.50% 41.82% 6.88% 7.73% 8.59% 9.45% 10.31% 11.17% 12.03%
$307,050 $307,050
-----------------------------------------------------------------------------------------------------------------------
Over $307,050 Over $307,050 38.60% 10.50% 45.06% 7.28% 8.19% 9.10% 10.01% 10.92% 11.83% 12.74%
-----------------------------------------------------------------------------------------------------------------------
*NET AMOUNT SUBJECT TO FEDERAL PERSONAL INCOME TAX AFTER DEDUCTIONS AND
EXEMPTIONS.
The above indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions generally
for taxpayers with adjusted gross income in excess of $137,300. The tax brackets
also do not show the effects of phaseout of personal exemptions for single
filers with adjusted gross income in excess of $103,000 and joint filers with
adjusted gross income in excess of $206,000. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
D-1
The combined federal, New York State and New York City tax brackets are
calculated using the highest New York tax rate applicable within each bracket.
Taxpayers may have lower combined tax brackets and taxable equivalent yields
than indicated above. The combined tax brackets assume that New York taxes are
itemized deductions for federal income tax purposes. Investors who do not
itemize deductions on their federal income tax return will have a higher
combined bracket and higher taxable equivalent yield than those indicated above.
The applicable federal tax rates within the brackets are 15%, 27%, 30%, 35% and
38.6%. A supplemental New York State tax will also apply to filers with adjusted
gross income between $100,000 and $150,000 which phases out the benefit of lower
marginal brackets. The adjustment is not reflected above.
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 the
regular federal income tax and New York State and New York City personal income
taxes, other income received by the Fund may be taxable. The table does not take
into account state or local taxes, if any, payable on Fund distributions. 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 Statement of
Additional Information. 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.
D-2
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Report of Independent Auditors.
Statement of Assets and Liabilities.
2. Exhibits:
a. (1) Articles of Incorporation. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-97447 and
811-21169, filed on July 31, 2002)
(2) Form of Articles Supplementary. (Filed herewith as Appendix
A to Part B of this Registration Statement)
b. Amended and Restated Bylaws. (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement, File Nos. 333-97447 and 811-21169, filed on September
24, 2002)
c. None.
d. Articles Sixth, Ninth, Tenth, Eleventh and Thirteenth of the
Articles of Incorporation and Articles II, VI and X of the
Bylaws.
e. Dividend Reinvestment Plan with respect to Registrant's common
stock. (Filed herewith)
f. None.
g. (1) Management Agreement. (Filed herewith)
(2) Sub-Advisory Agreement. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-100905
and 811-21169, filed on October 31, 2002)
h. (1) Underwriting Agreement with respect to Registrant's common
stock. (Incorporated by reference to the Registrant's
Registration Statement, File Nos. 333-100905 and 811-21169,
filed on October 31, 2002)
(2) Form of Master Agreement Among Underwriters with respect to
Registrant's common stock. (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's
Registration Statement, File Nos. 333-97447 and 811-21169,
filed on September 24, 2002)
(3) Form of Master Selected Dealer Agreement with respect to
Registrant's common stock. (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's
Registration Statement, File Nos. 333-97447 and 811-21169,
filed on September 24, 2002)
(4) Form of Underwriting Agreement with respect to Registrant's
preferred stock. (Filed herewith)
i. None.
j. Custodian Contract. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-100905 and
811-21169, filed on October 31, 2002)
k. (1) Transfer Agency and Service Agreement. (Incorporated by
reference to the Registrant's Registration Statement, File
Nos. 333-100905 and 811-21169, filed on October 31, 2002)
(2) Administration Agreement. (Filed herewith)
(3) Fee Waiver Agreement. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-100905
and 811-21169, filed on October 31, 2002)
(4) Additional Compensation Agreement with respect to
Registrant's common stock. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-100905
and 811-21169, filed on October 31, 2002)
(5) Form of Auction Agency Agreement with respect to
Registrant's preferred stock. (Filed herewith)
(6) Form of Broker-Dealer Agreement with respect to Registrant's
preferred stock. (Filed herewith)
l. (1) Opinion and Consent of Counsel with respect to Registrant's
common stock. (Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement,
File Nos. 333-97447 and 811-21169, filed on September 24,
2002)
(2) Opinion and Consent of Counsel with respect to Registrant's
preferred stock. (Filed herewith)
m. None.
n. Consent of Independent Auditors. (Filed herewith)
o. None.
p. Letter of Investment Intent with respect to Registrant's common
stock. (Incorporated by reference to Pre-Effective Amendment No.
2 to the Registrant's Registration Statement, File Nos. 333-97447
and 811-21169, filed on September 24, 2002)
q. None.
r. Code of Ethics for Registrant, its Investment Adviser and its
Sub-Adviser. (Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement, File
Nos. 333-97447 and 811-21169, filed on September 24, 2002)
ITEM 25. MARKETING ARRANGEMENTS
See form of Underwriting Agreement filed as Exhibit h.(4) to this
Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connection
with the offering described in this Registration Statement:
Securities and Exchange Commission Fees........................ $ 4,440
Rating Agency Fees .................................... 165,560
Federal Taxes .................................... 0
State Taxes and Fees .................................... 0
Printing and Engraving Expenses................................ 10,000
Legal Fees .................................... 50,000
Director Fees .................................... 0
Accounting Expenses .................................... 15,000
Miscellaneous Expenses .................................... 0
Total .................................... $245,000
C-2
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Number of Record
Shareholders as of
Title of Class November 30, 2002
-------------- -------------------
Shares of common stock, par value 1
$0.0001 per share
Shares of preferred stock, par value 0
$0.0001 per share
ITEM 29. INDEMNIFICATION
Article Twelfth of the Registrant's Articles of Incorporation and Article
IX of the Registrant's Bylaws provide that the Fund shall indemnify its present
and past directors, officers, employees and agents, and persons who are serving
or have served at the Fund's request in similar capacities for, other entities
to the maximum extent permitted by applicable law (including Maryland law and
the 1940 Act), provided, however, that a transfer agent is not entitled to such
indemnification unless specifically approved by the Fund's Board of Directors.
Section 2-418(b) of the Maryland General Corporation Law ("Maryland Code")
permits the Registrant to indemnify its directors unless it is proved that the
act or omission of the director was material to the cause of action adjudicated
in the proceeding, and (a) the act or omission was committed in bad faith or was
the result of active or deliberate dishonesty or (b) the director actually
received an improper personal benefit in money, property or services or (c) in
the case of a criminal proceeding, the director had reasonable cause to believe
the act or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses incurred in connection
with a proceeding, in accordance with the Maryland Code. Pursuant to Section
2-418(j)(1) and Section 4-418(j)(2) of the Maryland Code, the Registrant is
permitted to indemnify its officers, employees and agents to the same extent.
The provisions set forth above apply insofar as consistent with Section 17(h) of
the Investment Company Act of 1940, as amended ("1940 Act"), which prohibits
indemnification of any director or officer of the Registrant against any
liability to the Registrant or its shareholders to which such director or
officer otherwise would be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
Sections 9.1 and 9.2 of the Management Agreement between Neuberger Berman
Management Inc. ("NB Management") and the Registrant provide that neither NB
Management nor any director, officer or employee of NB Management performing
services for the Registrant at the direction or request of NB Management in
connection with NB Management's discharge of its obligations under the
Management Agreement shall be liable for any error of judgment or mistake of law
or for any loss suffered by the Registrant in connection with any matter to
which the Management Agreement relates; provided, that nothing herein contained
shall be construed (i) to protect NB Management against any liability to the
Registrant or its Stockholders to which NB Management would otherwise be subject
by reason of NB Management's misfeasance, bad faith, or gross negligence in the
performance of NB Management's duties, or by reason of NB Management's reckless
disregard of its obligations and duties under the Management Agreement
("disabling conduct"), or (ii) to protect any director, officer or employee of
NB Management who is or was a Director or officer of the Registrant against any
liability to the Registrant or its Stockholders to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office with the Registrant. The Registrant will indemnify NB Management
against, and hold it harmless from, any and all expenses (including reasonable
counsel fees and expenses) incurred investigating or defending against claims
for losses or liabilities described above not resulting from negligence,
disregard of its obligations and duties under the Management Agreement or
disabling conduct by NB Management. Indemnification shall be made only
following: (i) a final decision on the merits by a court or other body before
whom the proceeding was brought that NB Management was not liable by reason of
negligence, disregard of its obligations and duties under the Management
Agreement or disabling conduct or (ii) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that NB Management
was not liable by reason of negligence, disregard of its obligations and duties
under the Management Agreement or disabling conduct by (a) the vote of a
majority of a quorum of directors of the Registrant who are neither "interested
persons" of the Registrant nor parties to the proceeding ("disinterested
non-party directors") or (b) an independent legal counsel in a written opinion.
NB Management shall be entitled to advances from the Registrant for payment of
C-3
the reasonable expenses incurred by it in connection with the matter as to which
it is seeking indemnification hereunder in the manner and to the fullest extent
permissible under the Maryland General Corporation Law. NB Management shall
provide to the Registrant a written affirmation of its good faith belief that
the standard of conduct necessary for indemnification by the Registrant has been
met and a written undertaking to repay any such advance if it should ultimately
be determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (a) NB Management
shall provide security in form and amount acceptable to the Registrant for its
undertaking; (b) the Registrant is insured against losses arising by reason of
the advance; or (c) a majority of a quorum of the full Board of Directors of the
Registrant, the members of which majority are disinterested non-party directors,
or independent legal counsel, in a written opinion, shall have determined, based
on a review of facts readily available to the Registrant at the time the advance
is proposed to be made, that there is reason to believe that NB Management will
ultimately be found to be entitled to indemnification under the Management
Agreement.
Section 1 of the Sub-Advisory Agreement between NB Management and Neuberger
Berman, LLC ("Neuberger Berman") with respect to the Registrant provides that,
in the absence of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or of reckless disregard of its duties and
obligations under the Sub-Advisory Agreement, Neuberger Berman will not be
subject to liability for any act or omission or any loss suffered by the
Registrant or its security holders in connection with the matters to which the
Sub-Advisory Agreement relates.
Sections 11.1 and 11.2 of the Administration Agreement between the
Registrant and NB Management provide that neither NB Management nor any
director, officer or employee of NB Management performing services for the
Registrant at the direction or request of NB Management in connection with NB
Management's discharge of its obligations under the Administration Agreement
shall be liable for any error of judgment or mistake of law or for any loss
suffered by the Registrant in connection with any matter to which the
Administration Agreement relates; provided, that nothing herein contained shall
be construed (i) to protect NB Management against any liability to the
Registrant or its Stockholders to which NB Management would otherwise be subject
by reason of NB Management's misfeasance, bad faith, or gross negligence in the
performance of NB Management's duties, or by reason of NB Management's reckless
disregard of its obligations and duties under the Administration Agreement
("disabling conduct"), or (ii) to protect any director, officer or employee of
NB Management who is or was a Director or officer of the Registrant against any
liability to the Registrant or its Stockholders to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office with the Registrant. The Registrant will indemnify NB Management
against, and hold it harmless from, any and all expenses (including reasonable
counsel fees and expenses) incurred investigating or defending against claims
for losses or liabilities described above not resulting from negligence,
disregard of its obligations and duties under the Administration Agreement or
disabling conduct by NB Management. Indemnification shall be made only
following: (i) a final decision on the merits by a court or other body before
whom the proceeding was brought that NB Management was not liable by reason of
negligence, disregard of its obligations and duties under the Administration
Agreement or disabling conduct or (ii) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that NB Management
was not liable by reason of negligence, disregard of its obligations and duties
under the Administration Agreement or disabling conduct by (a) the vote of a
majority of a quorum of directors of the Registrant who are neither "interested
persons" of the Registrant nor parties to the proceeding ("disinterested
non-party directors") or (b) an independent legal counsel in a written opinion.
NB Management shall be entitled to advances from the Registrant for payment of
the reasonable expenses incurred by it in connection with the matter as to which
it is seeking indemnification under the Administration Agreement in the manner
and to the fullest extent permissible under the Maryland General Corporation
Law. NB Management shall provide to the Registrant a written affirmation of its
good faith belief that the standard of conduct necessary for indemnification by
the Registrant has been met and a written undertaking to repay any such advance
if it should ultimately be determined that the standard of conduct has not been
met. In addition, at least one of the following additional conditions shall be
met: (a) NB Management shall provide security in form and amount acceptable to
the Registrant for its undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; or (c) a majority of a quorum of the full
Board of Directors of the Registrant, the members of which majority are
disinterested non-party directors, or independent legal counsel, in a written
opinion, shall have determined, based on a review of facts readily available to
the Registrant at the time the advance is proposed to be made, that there is
reason to believe that NB Management will ultimately be found to be entitled to
indemnification under the Administation Agreement.
C-4
Section 6(a) of the Underwriting Agreements between the Registrant, NB
Management, Neuberger Berman, Merrill Lynch & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated provides that the Registrant and the Advisers,
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act, and any director, officer,
employee or affiliate thereof as follows: (i) against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, arising out of any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of any
untrue statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the final Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; (ii) against any and
all loss, liability, claim, damage and expense whatsoever, as incurred, to the
extent of the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided that
(subject to Section 6(e) below) any such settlement is effected with the prior
written consent of the Registrant and the Advisers; and (iii) against any and
all expense whatsoever, as incurred (including the fees and disbursements of
counsel chosen by Merrill Lynch), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense is not
paid under (i) or (ii) above; provided, however, that this indemnity agreement
shall not apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Registrant or the Advisers by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus or the final Prospectus (or any
amendment or supplement thereto); and provided further that the Registrant or
the Advisers will not be liable to any Underwriter with respect to any
Prospectus to the extent that the Registrant or the Advisers shall sustain the
burden of proving that any such loss, liability, claim, damage or expense
resulted from the fact that such Underwriter, in contravention of a requirement
of the Underwriting Agreements or applicable law, sold Securities to a person to
whom such Underwriter failed to send or give, at or prior to the Closing Time, a
copy of the final Prospectus, as then amended or supplemented if: (i) the
Company has previously furnished copies thereof (sufficiently in advance of the
Closing Time to allow for distribution by the Closing Time) to the Underwriter
and the loss, liability, claim, damage or expense of such Underwriter resulted
from an untrue statement or omission of a material fact contained in or omitted
from the preliminary Prospectus which was corrected in the final Prospectus as,
if applicable, amended or supplemented prior to the Closing Time and such final
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person and (ii) such failure to give or send such
final Prospectus by the Closing Time to the party or parties asserting such
loss, liability, claim, damage or expense would have constituted a defense to
the claim asserted by such person.
Section 6(c) of the Underwriting Agreements provides that the Fund and the
Advisers, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in Section 6(a), as limited by the proviso set forth therein, with
respect to any sales material in the form approved by the Fund and the Advisers
or its affiliates for use by the Underwriters and securities firms to whom the
Fund or the Advisers shall have disseminated materials in connection with the
public offering of the Securities.
Section 7 of the Underwriting Agreements provides that, if the
indemnification provided for in Section 6 thereof is for any reason unavailable
to or insufficient to hold harmless an indemnified party in respect of any
losses, liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party, as
incurred, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Fund and the Advisers on the one hand and the
Underwriters on the other hand from the offering of the Securities pursuant to
the Underwriting Agreements or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
C-5
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Fund and the Advisers on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Fund and the Advisers on the one hand
and the Underwriters on the other hand in connection with the offering of the
Securities pursuant to the Underwriting Agreements shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
Securities pursuant to the Underwriting Agreements (before deducting expenses)
received by the Fund and the total underwriting discount received by the
Underwriters (whether from the Fund or otherwise), in each case as set forth on
the cover of the Prospectus, or, if Rule 434 is used, the corresponding location
on the Term Sheet, bear to the aggregate initial public offering price of the
Securities as set forth on such cover.
The relative fault of the Fund and the Advisers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund or the Advisers or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. However, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of any such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
Under Section 7 of the Underwriting Agreements, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
Underwriter, and each director of the Fund and each director of the Advisers,
respectively, each officer of the Fund who signed the Registration Statement,
and each person, if any, who controls the Fund or the Advisers, within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have
the same rights to contribution as the Fund and the Advisers, respectively. The
Underwriters' respective obligations to contribute pursuant to Section 7 are
several in proportion to the number of Initial Securities allotted to them and
not joint.
Section 6(f) of the Underwriting Agreements provides that any
indemnification or contribution by the Fund shall be subject to the requirements
and limitations of Section 17(i) of the 1940 Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended ("1933 Act"), may be provided to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Registrant by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue. The Fund also maintains Directors and Officers
Insurance.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND SUB-ADVISER
There is set forth below information as to any other business, profession,
vocation or employment of a substantial nature in which each director or officer
of NB Management and each executive officer of Neuberger Berman is, or at any
time during the past two years has been, engaged for his or her own account or
in the capacity of director, officer, employee, partner or trustee.
C-6
NAME BUSINESS AND OTHER CONNECTIONS
---- ------------------------------
Claudia Brandon Secretary, Neuberger Berman Advisers
Vice President, Neuberger Berman Management Trust; Secretary, Neuberger
since 2002; Employee, Neuberger Berman Berman Equity Funds; Secretary,
since 1999; Vice President/Mutual Fund Neuberger Berman Income Funds;
Board Relations, NB Management since Secretary, Neuberger Berman Real Estate
May 2000; Vice President, NB Income Fund Inc.; Secretary, Neuberger
Management from 1986-1999. Berman Intermediate Municipal Fund Inc.;
Secretary, Neuberger Berman New York
Intermediate Municipal Fund Inc.;
Secretary, Neuberger Berman California
Intermediate Municipal Fund Inc.
Thomas J. Brophy Portfolio manager, Neuberger Berman
Managing Director, Neuberger Berman; Intermediate Municipal Fund Inc.;
Vice President, NB Management since Portfolio manager, Neuberger Berman New
March 2000. York Intermediate Municipal Fund Inc.;
Portfolio manager, Neuberger Berman
California Intermediate Municipal Fund
Inc.
Steven R. Brown Portfolio manager, Neuberger Berman Real
Managing Director, Neuberger Berman; Estate Income Fund, Inc.
Vice President, NB Management since
2002.
Lori Canell Portfolio manager, Neuberger Berman
Managing Director, Neuberger Berman; Intermediate Municipal Fund Inc.;
Vice President, NB Management. Portfolio manager, Neuberger Berman New
York Intermediate Municipal Fund Inc.;
Portfolio manager, Neuberger Berman
California Intermediate Municipal Fund
Inc.
Valerie Chang None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Brooke A. Cobb None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Robert Conti Vice President, Neuberger Berman Income
Vice President, Neuberger Berman; Funds; Vice President, Neuberger Berman
Senior Vice President, NB Management Equity Funds; Vice President, Neuberger
since November 2000; Treasurer, NB Berman Advisers Management Trust; Vice
Management until May 2000. President, Neuberger Berman Real Estate
Income Fund Inc.; Vice President,
Neuberger Berman Intermediate Municipal
Fund Inc.; Vice President Neuberger
Berman New York Intermediate Municipal
Fund Inc.; Vice President, Neuberger
Berman California Intermediate Municipal
Fund Inc.
Robert W. D'Alelio None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Ingrid Dyott None.
Vice President, Neuberger Berman;
Vice President, NB Management.
Michael F. Fasciano President, Fasciano Company Inc. until
Managing Director, Neuberger Berman March 2001; Portfolio Manager, Fasciano
since March 2001; Vice President, NB Fund Inc. until March 2001.
Management since March 2001.
C-7
NAME BUSINESS AND OTHER CONNECTIONS
---- ------------------------------
Robert S. Franklin None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Brian P. Gaffney Vice President, Neuberger Berman Income
Managing Director, Neuberger Berman Funds; Vice President, Neuberger Berman
since 1999, Senior Vice President, NB Equity Funds; Vice President, Neuberger
Management since November 2000; Vice Berman Advisers Management Trust; Vice
President, NB Management from April President, Neuberger Berman Real Estate
1997 through November 1999. Income Fund Inc.; Vice President,
Neuberger Berman Intermediate Municipal
Fund Inc.; Vice President Neuberger
Berman New York Intermediate Municipal
Fund Inc.; Vice President, Neuberger
Berman California Intermediate Municipal
Fund Inc.
Robert I. Gendelman None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Thomas E. Gengler, Jr. None.
Senior Vice President, Neuberger
Berman since February 2001, prior
thereto, Vice President, Neuberger
Berman since 1999; Senior Vice
President, NB Management since March
2001 prior thereto, Vice President, NB
Management.
Theodore P. Giuliano Portfolio manager, Neuberger Berman
Vice President (and Director until Intermediate Municipal Fund Inc.;
February 2001), NB Management; Portfolio manager, Neuberger Berman New
Managing Director, Neuberger Berman. York Intermediate Municipal Fund Inc.;
Portfolio manager, Neuberger Berman
California Intermediate Municipal Fund
Inc.
Kevin Handwerker Senior Vice President, General Counsel
Senior Vice President, General Counsel and Secretary, Neuberger Berman Inc.
and Secretary, Neuberger Berman.
Joseph K. Herlihy Treasurer, Neuberger Berman Inc.
Senior Vice President, Treasurer,
Neuberger Berman; Treasurer, NB
Management.
Michael M. Kassen Executive Vice President, Chief
Executive Vice President and Chief Investment Officer and Director,
Investment Officer, Neuberger Berman; Neuberger Berman Inc.; President and
Chairman and Director, NB Management Director of Neuberger Berman Real Estate
since May 2000, prior thereto, Income Fund Inc; President and Director
Executive Vice President, Chief of Neuberger Berman Intermediate
Investment Officer and Director, NB Municipal Fund Inc.; President and
Management from November 1999 until Director of Neuberger Berman New York
May 2000; Vice President from June Intermediate Municipal Fund Inc.;
1990 until November 1999. President and Director of Neuberger
Berman California Intermediate Municipal
Fund Inc.; President and Trustee of
Neuberger Berman Advisers Management
Trust; President and Trustee of
Neuberger Berman Equity Funds; President
and Trustee, Neuberger Berman Income
Funds.
C-8
NAME BUSINESS AND OTHER CONNECTIONS
---- ------------------------------
Barbara R. Katersky None.
Senior Vice President, Neuberger
Berman; Senior Vice President, NB
Management.
Robert B. Ladd None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Kelly M. Landron None.
Vice President, NB Management Inc.
since March 2000.
Jeffrey B. Lane Director, Chief Executive Officer and
Chief Executive Officer and President, President, Neuberger Berman Inc.;
Neuberger Berman; Director, NB Director, Neuberger Berman Trust Company
Management since February 2001. from June 1999 until November 2000.
Michael F. Malouf None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Robert Matza Executive Vice President, Chief
Executive Vice President and Chief Operating Officer and Director,
Operating Officer, Neuberger Berman Neuberger Berman Inc. since January
since January 2001, prior thereto, 2001, prior thereto, Executive Vice
Executive Vice President and Chief President, Chief Administrative Officer
Administrative Officer, Neuberger a Director, Neuberger Berman Inc.
Berman; Director, NB Management since
April 2000.
Ellen Metzger Assistant Secretary, Neuberger Berman
Vice President, Neuberger Berman; Inc. since 2000.
Secretary, NB Management.
Arthur Moretti Managing Director, Eagle Capital from
Managing Director, Neuberger Berman January 1999 until June 2001.
since June 2001; Vice President, NB
Management since June 2001.
S. Basu Mullick None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Janet W. Prindle Director, Neuberger Berman National
Managing Director, Neuberger Berman; Trust Company since January 2001;
Vice President, NB Management. Director Neuberger Berman Trust Company
of Delaware since April 2001.
Kevin L. Risen None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
C-9
NAME BUSINESS AND OTHER CONNECTIONS
---- ------------------------------
Jack L. Rivkin Executive Vice President, Neuberger
Executive Vice President, Neuberger Berman Inc.
Berman.
Benjamin E. Segal None.
Managing Director, Neuberger Berman
since November 2000, prior thereto,
Vice President, Neuberger Berman; Vice
President, NB Management.
Jennifer Silver None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Kent C. Simons None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Matthew S. Stadler Senior Vice President and Chief
Senior Vice President and Chief Financial Officer, Neuberger Berman Inc.
Financial Officer, Neuberger Berman since August 2000; Senior Vice President
since August 2000, prior thereto, and Chief Financial Officer, National
Controller, Neuberger Berman from Discount Brokers Group from May 1999
November 1999 to August 2000; Senior until October 1999.
Vice President and Chief Financial
Officer, NB Management since August
2000.
Heidi S. Steiger Executive Vice President and Director,
Executive Vice President, Neuberger Neuberger Berman Inc.; Chair and
Berman; Director, NB Management since Director, Neuberger Berman National
February 2001. Trust Company since January 2001;
Director, Neuberger Berman Trust Company
of Delaware since February 2000 (and
Chair until January 2001); Director,
Neuberger Berman Trust Company until
September 2001 (and Chair from September
1999 until January 2001).
Peter E. Sundman Executive Vice President and Director,
President and Director, NB Management; Neuberger Berman Inc.; Chairman of the
Executive Vice President, Neuberger Board, Chief Executive Officer and
Berman. Trustee, Neuberger Berman Income Funds;
Chairman of the Board, Chief Executive
Officer and Trustee, Neuberger Berman
Advisers Management Trust; Chairman of
the Board, Chief Executive Officer and
Trustee Neuberger Berman Equity Funds;
Chairman of the Board, Chief Executive
Officer and Director, Neuberger Berman
Real Estate Income Fund Inc.; Chairman
of the Board, Chief Executive Officer
and Director, Neuberger Berman
Intermediate Municipal Fund Inc.;
Chairman of the Board, Chief Executive
Officer and Director, Neuberger Berman
New York Intermediate Municipal Fund
Inc.; Chairman of the Board, Chief
Executive Officer and Director,
Neuberger Berman California Intermediate
Municipal Fund Inc.
C-10
NAME BUSINESS AND OTHER CONNECTIONS
---- ------------------------------
Judith M. Vale None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
Catherine Waterworth None.
Vice President, Neuberger Berman; Vice
President, NB Management.
Allan R. White, III None.
Managing Director, Neuberger Berman;
Vice President, NB Management.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended ("1940 Act"),
and the rules promulgated thereunder with respect to the Registrant are
maintained at the offices of its custodian and accounting agent, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, and
its transfer agent, The Bank of New York, 1 Wall Street, New York, New York
10286, except for the Registrant's Articles of Incorporation and Bylaws, minutes
of meetings of the Registrant's Directors and stockholders and the Registrant's
policies and contracts, which are maintained at the offices of the Registrant,
605 Third Avenue, New York, New York 10158-0180.
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
1. The Registrant hereby undertakes to suspend the offering of its shares
until it amends its Prospectus if:
(1) subsequent to the effective date of this Registration Statement,
the net asset value per share declines more than 10% from its net asset
value per share as of the effective date of the Registration Statement; or
(2) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
2. N/A
3. N/A
4. N/A
5. The Registrant hereby undertakes:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 497(h) under the 1933 Act
shall be deemed to be part of this Registration Statement as of the time it
was declared effective; and
(2) For the purposes of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall be
C-11
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
6. The Registrant hereby undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
C-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, and the State of New York, on the 6th day of December 2002.
NEUBERGER BERMAN NEW YORK
INTERMEDIATE MUNICIPAL FUND INC.
By: /s/ Michael M. Kassen
----------------------------------
Name: Michael M. Kassen*
Title: President and Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board, Chief December 6, 2002
/s/ Peter E. Sundman Executive Officer and Director
----------------------------
Peter E. Sundman*
/s/ Michael M. Kassen President and Director December 6, 2002
----------------------------
Michael M. Kassen*
Treasurer and Principal Financial December 6, 2002
/s/ Barbara Muinos and Accounting Officer
----------------------------
Barbara Muinos
/s/ John Cannon Director December 6, 2002
----------------------------
John Cannon*
/s/ Faith Colish Director December 6, 2002
----------------------------
Faith Colish*
/s/ Walter G. Ehlers Director December 6, 2002
----------------------------
Walter G. Ehlers*
/s/ C. Anne Harvey Director December 6, 2002
----------------------------
C. Anne Harvey*
/s/ Barry Hirsch Director December 6, 2002
----------------------------
Barry Hirsch*
/s/ Robert A. Kavesh Director December 6, 2002
----------------------------
Robert A. Kavesh*
/s/ Howard A. Mileaf Director December 6, 2002
----------------------------
Howard A. Mileaf*
/s/ Edward I. O'Brien Director December 6, 2002
----------------------------
Edward I. O'Brien*
Signature Title Date
--------- ----- ----
/s/ John P. Rosenthal Director December 6, 2002
----------------------------
John P. Rosenthal*
/s/ William E. Rulon Director December 6, 2002
----------------------------
William E. Rulon*
/s/ Cornelius T. Ryan Director December 6, 2002
----------------------------
Cornelius T. Ryan*
/s/ Tom Decker Seip Director December 6, 2002
----------------------------
Tom Decker Seip*
/s/ Candace L. Straight Director December 6, 2002
----------------------------
Candace L. Straight*
/s/ Peter P. Trapp Director December 6, 2002
----------------------------
Peter P. Trapp*
*Signatures affixed by Arthur C. Delibert on December 6, 2002 pursuant to powers
of attorney dated October 21, 2002, which were filed with the Registrant's
Registration Statement (File Nos. 333-100905 and 811-21169) on October 31, 2002.
NEUBERGER BERMAN NEW YORK INTERMEDIATE MUNICIPAL FUND INC.
EXHIBIT INDEX
Exhibit Document Description
------- --------------------
a. (1) Articles of Incorporation. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-97447 and
811-21169, filed on July 31, 2002)
(2) Form of Articles Supplementary. (Filed herewith as Appendix A to
Part B of this Registration Statement)
b. Amended and Restated Bylaws. (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement, File Nos. 333-97447 and 811-21169, filed on September 24,
2002)
c. None.
d. Articles Sixth, Ninth, Tenth, Eleventh and Thirteenth of the Articles
of Incorporation and Articles II, VI and X of the Bylaws.
e. Dividend Reinvestment Plan with respect to Registrant's common stock.
(Filed herewith)
f. None.
g. (1) Management Agreement. (Filed herewith)
(2) Sub-Advisory Agreement. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-100905 and
811-21169, filed on October 31, 2002)
h. (1) Underwriting Agreement with respect to Registrant's common stock.
(Incorporated by reference to the Registrant's Registration
Statement, File Nos. 333-100905 and 811-21169, filed on October
31, 2002)
(2) Form of Master Agreement Among Underwriters with respect to
Registrant's common stock. (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement, File Nos. 333-97447 and 811-21169, filed on September
24, 2002)
(3) Form of Master Selected Dealer Agreement with respect to
Registrant's common stock. (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement, File Nos. 333-97447 and 811-21169, filed on September
24, 2002)
(4) Form of Underwriting Agreement with respect to Registrant's
preferred stock. (Filed herewith)
i. None.
j. Custodian Contract. (Incorporated by reference to the Registrant's
Registration Statement, File Nos. 333-100905 and 811-21169, filed on
October 31, 2002)
k. (1) Transfer Agency and Service Agreement. (Incorporated by reference
to the Registrant's Registration Statement, File Nos. 333-100905
and 811-21169, filed on October 31, 2002)
(2) Administration Agreement. (Filed herewith)
(3) Fee Waiver Agreement. (Incorporated by reference to the
Registrant's Registration Statement, File Nos. 333-100905 and
811-21169, filed on October 31, 2002)
(4) Additional Compensation Agreement with respect to Registrant's
common stock. (Incorporated by reference to the Registrant's
Registration Statement, File Nos. 333-100905 and 811-21169, filed
on October 31, 2002)
C-14
(5) Form of Auction Agency Agreement with respect to Registrant's
preferred stock. (Filed herewith)
(6) Form of Broker-Dealer Agreement with respect to Registrant's
preferred stock. (Filed herewith)
l. (1) Opinion and Consent of Counsel with respect to Registrant's
common stock. (Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement, File
Nos. 333-97447 and 811-21169, filed on September 24, 2002)
(2) Opinion and Consent of Counsel with respect to Registrant's
preferred stock. (Filed herewith)
m. None.
n. Consent of Independent Auditors. (Filed herewith)
o. None.
p. Letter of Investment Intent with respect to Registrant's common stock.
(Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement, File Nos. 333-97447 and
811-21169, filed on September 24, 2002)
q. None.
r. Code of Ethics for Registrant, its Investment Adviser and its
Sub-Adviser. (Incorporated by reference to Pre-Effective Amendment No.
2 to the Registrant's Registration Statement, File Nos. 333-97447 and
811-21169, filed on September 24, 2002)