PROSPECTUS [LOGO]
$179,400,000
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC.
AUCTION MARKET PREFERRED SHARES ("AMPS")
3,588 SHARES, SERIES A
3,588 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
-------------------
THE OFFERING. Neuberger Berman Intermediate Municipal Fund Inc. (the "Fund")
is simultaneously offering 3,588 Series A auction market preferred shares and
3,588 Series B auction market preferred shares. The shares are referred to in
this prospectus as "AMPS."
INVESTMENT OBJECTIVE. The Fund is a recently organized, 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.
PORTFOLIO CONTENTS. The Fund normally invests primarily in investment grade
municipal debt securities issued by state and local governments, including U.S.
territories and possessions, political subdivisions, agencies and public
authorities (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. Under normal market conditions, the Fund will invest at least 80% of its
total assets in municipal securities that pay interest that, in the opinion of
bond counsel to the issuer (or on the basis of other authority believed by
Fund's investment manager, Neuberger Berman Management Inc. ("NB Management") to
be reliable), is exempt from federal income tax. 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 $179,400,000
Sales load $ 250 $ 1,794,000
Estimated offering expenses $ 48.08 $ 345,000
Proceeds, before expenses, to the Fund $24,750 $177,606,000
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 13, 2002.
-------------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
-------------------------
The date of this prospectus is December 12, 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 1.20% for
Series A AMPS and 1.20% for Series B AMPS. The initial dividend period is from
the date of issuance through January 16, 2003 for Series A AMPS and from the
date of issuance through January 17, 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 "NBH." 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 December 12, 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 51 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......................... 29
Management of the Fund............................ 31
Description of AMPS............................... 33
The Auction....................................... 41
Description of Common Shares...................... 46
Anti-Takeover and Other Provisions in the Articles
of Incorporation................................ 46
Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund..................... 47
Tax Matters....................................... 48
Underwriting...................................... 50
Custodian, Auction Agent, Transfer Agent and
Registrar....................................... 51
Legal Matters..................................... 51
Table of Contents for Statement of Additional
Information..................................... 52
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 Intermediate Municipal Fund Inc.
is a recently organized, diversified closed-end
management investment company. 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 "NBH."
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 to
holders of the Fund's Common Shares ("Common
Stockholders") a high level of current income
exempt from federal income tax. The Fund must
satisfy its obligation to pay dividends on AMPS
before it distributes any income to Common
Stockholders. The Fund seeks to achieve its
objective by investing primarily in investment
grade municipal debt securities issued by state
and local governments, including U.S. territories
and possessions, political subdivisions, agencies
and public authorities (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. Under normal market conditions,
the Fund will invest at least 80% of its total
assets in municipal securities that pay interest
that, in the opinion of bond counsel to the issuer
(or on the basis of other authority believed by
Fund's investment manager to be reliable), is
exempt from federal income tax. As a fundamental
policy, the Fund will invest at least 80% of its
total assets in 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
of 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
5
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
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-ADVISOR....................................... 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;
6
- 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, 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;
- The Fund's policies of investing primarily in
municipal obligations makes 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 a state's total
economy, the greater the impact that a down-
turn in such sector is likely to have on a
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, 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 asset value and market
price per share will fluctuate more in
7
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-invest-
ment 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.
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
8
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
securities.
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.
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
9
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 may
invest 25% or more of its total assets in
municipal obligations of issuers in the same state
(or U.S. territory) or 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 a 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 a
particular state or 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,
10
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.
NUMBER OF
INITIAL DIVIDEND PAYMENT DAYS OF
DIVIDEND DATE FOR INITIAL INITIAL RATE
RATE RATE PERIOD PERIOD
-------- ---------------- ------------
Series A 1.20% January 17, 2003 35
Series B 1.20% January 21, 2003 39
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.
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
11
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 January 16, 2003 Thursday
Series B January 17, 2003 Friday
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, the dividends paid on
AMPS and Common Shares attributable to that
interest will be similarly exempt. 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
12
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, 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."
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,
representing 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
13
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 REGISTRAR...................... State Street Bank and Trust Company serves as
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
Information contained in the table below under the headings "Per Common
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
(UNAUDITED)
----------------------
PER COMMON SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period............ $14.32(**)
Net Investment Income......................... 0.01
Net Gains on Securities (both realized and
unrealized)................................. --
Total from Investment Operations................ 0.01
Offering Costs.................................. (0.03)
Net Asset Value, End of Period.................. $14.30
Per Share Market Value, End of Period........... $15.00
Total Investment Return on Net Asset Value...... (0.17)%(***)
Total Investment Return on Market Value......... 0%(***)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in millions)......... $293.3
Ratio of expenses to average net assets before
reimbursement................................. 0.76%(****)
Ratio of expenses to average net assets after
reimbursement................................. 0.51%(****)
Ratio of net investment income to average net
assets for reimbursement...................... 1.62%(****)
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, 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
19,500,000 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 1,000,000 and 175,000
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 "NBH." 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 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............................. 999,992,000 0 20,681,981
Preferred
Series A......................... 4,000 0 0
Series B......................... 4,000 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 4,000 shares of common stock as Series A AMPS and reclassified
4,000 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 $177,261,000
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; 7,176, as adjusted, at
$25,000 per share liquidation
preference)........................... -- $179,400,000
Common Shares, par value, $.0001 per
share (20,681,981 shares issued and
outstanding).......................... $ 2,068 2,068
Capital in excess of par value
attributable to Common Shares......... 295,646,853 293,507,853
Undistributed investment income--net.... (71,605) (71,605)
Accumulated realized gain (loss)--net... (76,907) (76,907)
Unrealized appreciation on
investments--net...................... (3,149,718) (3,149,718)
Net Assets.............................. $292,350,691 $469,611,691
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, 88.8% of the market value of the Fund's portfolio
was invested in long-term municipal obligations and 11.2% 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 34 $137,382 47.0%
AA Aa AA 13 26,603 9.1
A A A 27 78,046 26.7
BBB Baa1 BBB 15 34,645 11.8
BB Ba1 BB -- -- --
B B B -- -- --
NR+ NR+ NR+ -- -- --
VMIG1 A+ 14 34,740 11.9
Cash -- (19,065) (6.5)
------ -------- ------
Total 103 $292,351 100.0%
-------------------
* Ratings: Using the highest of S&P's, Moody's or Fitch's ratings on the
Fund's municipal obligations. As reflected in the chart 2.9% of the
individual holdings representing 3.3% of the Fund's portfolio assets
received different ratings. 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. 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 primarily in investment grade municipal debt
securities issued by state and local governments, including U.S. territories and
possessions, political subdivisions, agencies and public authorities (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. Under normal
market conditions, the Fund will invest at least 80% of its total assets in
municipal securities that pay interest that, in the opinion of bond counsel to
the issuer (or on the basis of other authority believed by Fund's investment
manager to be reliable), is exempt from federal income tax. 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
18
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
Municipal Bonds.
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,
nor does the Fund normally invest more than 5% of its total assets in the
securities of any single issuer. 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 or in issuers located in the same state. If the Fund were to
invest more than 25% of its total assets in issuers located in the same state,
it would be more susceptible to adverse economic, business, or regulatory
conditions in that state.
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
19
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.
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. 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 on 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
20
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 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
21
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.
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
22
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.
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.
23
The Fund may also invest in investment companies whose income distributions are
not exempt from federal income tax, and if it does, some of the Fund's income
distributions may be taxable.
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
24
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.
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, 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
25
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.
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.
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.
The recent economic downturn, which is of uncertain duration, has absorbed
the reserves that many states and municipalities had accumulated during the long
economic expansion of the 1990's and has unbalanced many state and municipal
budgets. Because the disclosure requirements for issuers of municipal securities
are more limited than those for issuers of other securities, it may be more
difficult to discern accurately the financial condition of a municipal issuer in
times of significant economic
26
change. Furthermore, because this downturn follows a long expansion, some
municipal finance officers may have limited experience in responding to such a
situation. If the economy remains slow, it could also impact many private
enterprises whose revenues support private activity bonds or form a critical
part of the tax base of a state or municipality. Strife in the Middle East could
substantially increase the price of oil and thus gasoline, which is an important
expense for many municipalities.
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.
ECONOMIC SECTOR AND GEOGRAPHIC RISK. The Fund may invest 25% or more of its
total assets in municipal obligations of issuers in the same state (or U.S.
territory) or in municipal obligations in the same economic sector, including
without limitation the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a 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 a particular
state or economic sector. For example, health-care related issuers are
susceptible to Medicare, Medicaid and other third-party payor reimbursement
policies, and national and state
27
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 the
same 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
28
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 and maintain portfolio diversification. 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 or in obligations of issuers located in the same 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 also may not invest more
than 5% of total Fund assets in securities of any one issuer, except that this
limitation does not apply to bonds issued by the U.S. Government, its agencies
and instrumentalities or to the investment of 25% of the Fund's total assets in
shares of other registered investment companies. 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.
29
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
the Fund's 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
30
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.
31
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.
32
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 35
days and the dividend rate for this period will be 1.20%. The initial rate
period for the Series B AMPS will be 39 days and the initial dividend rate for
this period will be 1.20%. 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.
33
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 that is taxable 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.
34
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.
"Taxable 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
35
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
Preference 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;
36
- 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 pro rata from the holders in
proportion to their holdings, or by other method that it deems fair and
equitable.
37
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 of a series may not be
redeemed in part if fewer than 250 shares of that series 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.
38
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 $2,139,000 would have been
computed as follows:
Value of Fund assets less
liabilities
not constituting senior
securities = $469,611,691 = 262%
------------------------------ -----------
Senior securities representing $179,400,000
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.
39
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; or
40
(d) 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 may not be entitled to vote in respect of certain matters
contemplated by (a) or (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.
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.
41
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.
- 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.
42
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.
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. 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, as indicated in the
Articles Supplementary, 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.
43
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 New York Stock Exchange
is closed for business for more than three consecutive business days due to an
act of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the Auction Agent is not able to conduct an auction
in accordance with the Auction Procedures for any such reason, then the Auction
Rate for the next dividend period will be the Auction Rate determined on the
previous auction date.
If a dividend payment date is not a business day because the New York Stock
Exchange is closed for more than three consecutive business days due to an act
of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the dividend payable on such date 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.
44
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 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.
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.
45
DESCRIPTION OF COMMON SHARES
The Articles authorize the issuance of one billion (1,000,000,000) shares of
capital stock. The Fund has issued 20,681,981 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 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,
46
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.
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
47
"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.
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.
TAXATION OF THE FUND'S STOCKHOLDERS
The Fund primarily invests in municipal bonds issued by states, cities and
local authorities and certain possessions and territories of the United States
(such as Puerto Rico or Guam) the income on which is, in the opinion of bond
counsel to the issuer (or on the basis of other authority believed by NB
Management to be reliable), exempt from federal income tax. 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
its 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.
48
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 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.
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 relates only to federal income tax consequences of investing in
the Fund; the consequences under other tax laws may differ. You should consult
your tax advisor as to the possible application of state and local income tax
laws to Fund dividends and capital gain distributions. Please see "Tax Matters"
in the Statement of Additional Information for additional information regarding
the tax aspects of investing in the Fund.
The foregoing 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.
49
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated December
12, 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.................. 2,153 2,153
Salomon Smith Barney Inc................ 1,076 1,076
A.G. Edwards & Sons, Inc................ 359 359
-------- --------
Total......................... 3,588 3,588
======== ========
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 $137.50 per share. The sales load the Fund
will pay of $250 per share is equal to 1% of the initial offering price. 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 December 13, 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 December 13, 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.
50
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 and Cleary, Gottlieb,
Steen & Hamilton, New York, New York.
51
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds................................... 1
Investment Objective and Policies................. 1
Investment Restrictions........................... 2
Further Investment Policies and Investment
Techniques...................................... 4
Further Investment Techniques..................... 12
Portfolio Trading and Turnover Rate............... 24
Certain Risk Considerations....................... 24
Management of the Fund............................ 25
Investment Management and Administration
Services........................................ 35
Portfolio Transactions............................ 40
Net Asset Value................................... 42
Description of AMPS............................... 42
Certain Provisions in the Articles of
Incorporation................................... 44
Additional Information Concerning the Auctions for
AMPS............................................ 46
Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund..................... 47
Tax Matters....................................... 49
Custodian, Transfer Agent and Auction Agent....... 57
Independent Auditors.............................. 57
Counsel........................................... 57
Registration Statement............................ 57
Report of Independent Auditor..................... 58
Financial Statement............................... 59
APPENDIX A--Articles Supplementary................ A-1
APPENDIX B--Description of Securities Ratings..... B-1
APPENDIX C--Tax-Equivalent Yield Table............ C-1
52
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$179,400,000
NEUBERGER BERMAN
INTERMEDIATE MUNICIPAL FUND INC.
AUCTION MARKET PREFERRED SHARES ("AMPS")
3,588 SHARES, SERIES A
3,588 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY.
A.G. EDWARDS & SONS, INC.
DECEMBER 12, 2002
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
C0491 12/02
PROSPECTUS [LOGO]
$179,400,000
NEUBERGER BERMAN INTERMEDIATE MUNICIPAL FUND INC.
AUCTION MARKET PREFERRED SHARES ("AMPS")
3,588 SHARES, SERIES A
3,588 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
-------------------
THE OFFERING. Neuberger Berman Intermediate Municipal Fund Inc. (the "Fund")
is simultaneously offering 3,588 Series A auction market preferred shares and
3,588 Series B auction market preferred shares. The shares are referred to in
this prospectus as "AMPS."
INVESTMENT OBJECTIVE. The Fund is a recently organized, 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.
PORTFOLIO CONTENTS. The Fund normally invests primarily in investment grade
municipal debt securities issued by state and local governments, including U.S.
territories and possessions, political subdivisions, agencies and public
authorities (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. Under normal market conditions, the Fund will invest at least 80% of its
total assets in municipal securities that pay interest that, in the opinion of
bond counsel to the issuer (or on the basis of other authority believed by
Fund's investment manager, Neuberger Berman Management Inc. ("NB Management") to
be reliable), is exempt from federal income tax. 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 $179,400,000
Sales load $ 250 $ 1,794,000
Estimated offering expenses $ 48.08 $ 345,000
Proceeds, before expenses, to the Fund $24,750 $177,606,000
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 13, 2002.
-------------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
-------------------------
The date of this prospectus is December 12, 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 1.20% for
Series A AMPS and 1.20% for Series B AMPS. The initial dividend period is from
the date of issuance through January 16, 2003 for Series A AMPS and from the
date of issuance through January 17, 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 "NBH." 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 December 12, 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 51 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......................... 29
Management of the Fund............................ 31
Description of AMPS............................... 33
The Auction....................................... 41
Description of Common Shares...................... 46
Anti-Takeover and Other Provisions in the Articles
of Incorporation................................ 46
Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund..................... 47
Tax Matters....................................... 48
Underwriting...................................... 50
Custodian, Auction Agent, Transfer Agent and
Registrar....................................... 51
Legal Matters..................................... 51
Table of Contents for Statement of Additional
Information..................................... 52
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 Intermediate Municipal Fund Inc.
is a recently organized, diversified closed-end
management investment company. 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 "NBH."
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 to
holders of the Fund's Common Shares ("Common
Stockholders") a high level of current income
exempt from federal income tax. The Fund must
satisfy its obligation to pay dividends on AMPS
before it distributes any income to Common
Stockholders. The Fund seeks to achieve its
objective by investing primarily in investment
grade municipal debt securities issued by state
and local governments, including U.S. territories
and possessions, political subdivisions, agencies
and public authorities (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. Under normal market conditions,
the Fund will invest at least 80% of its total
assets in municipal securities that pay interest
that, in the opinion of bond counsel to the issuer
(or on the basis of other authority believed by
Fund's investment manager to be reliable), is
exempt from federal income tax. As a fundamental
policy, the Fund will invest at least 80% of its
total assets in 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
of 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
5
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
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-ADVISOR....................................... 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;
6
- 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, 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;
- The Fund's policies of investing primarily in
municipal obligations makes 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 a state's total
economy, the greater the impact that a down-
turn in such sector is likely to have on a
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, 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 asset value and market
price per share will fluctuate more in
7
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-invest-
ment 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.
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
8
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
securities.
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.
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
9
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 may
invest 25% or more of its total assets in
municipal obligations of issuers in the same state
(or U.S. territory) or 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 a 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 a
particular state or 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,
10
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.
NUMBER OF
INITIAL DIVIDEND PAYMENT DAYS OF
DIVIDEND DATE FOR INITIAL INITIAL RATE
RATE RATE PERIOD PERIOD
-------- ---------------- ------------
Series A 1.20% January 17, 2003 35
Series B 1.20% January 21, 2003 39
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.
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
11
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 January 16, 2003 Thursday
Series B January 17, 2003 Friday
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, the dividends paid on
AMPS and Common Shares attributable to that
interest will be similarly exempt. 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
12
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, 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."
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,
representing 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
13
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 REGISTRAR...................... State Street Bank and Trust Company serves as
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
Information contained in the table below under the headings "Per Common
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
(UNAUDITED)
----------------------
PER COMMON SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period............ $14.32(**)
Net Investment Income......................... 0.01
Net Gains on Securities (both realized and
unrealized)................................. --
Total from Investment Operations................ 0.01
Offering Costs.................................. (0.03)
Net Asset Value, End of Period.................. $14.30
Per Share Market Value, End of Period........... $15.00
Total Investment Return on Net Asset Value...... (0.17)%(***)
Total Investment Return on Market Value......... 0%(***)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in millions)......... $293.3
Ratio of expenses to average net assets before
reimbursement................................. 0.76%(****)
Ratio of expenses to average net assets after
reimbursement................................. 0.51%(****)
Ratio of net investment income to average net
assets for reimbursement...................... 1.62%(****)
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, 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
19,500,000 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 1,000,000 and 175,000
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 "NBH." 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 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............................. 999,992,000 0 20,681,981
Preferred
Series A......................... 4,000 0 0
Series B......................... 4,000 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 4,000 shares of common stock as Series A AMPS and reclassified
4,000 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 $177,261,000
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; 7,176, as adjusted, at
$25,000 per share liquidation
preference)........................... -- $179,400,000
Common Shares, par value, $.0001 per
share (20,681,981 shares issued and
outstanding).......................... $ 2,068 2,068
Capital in excess of par value
attributable to Common Shares......... 295,646,853 293,507,853
Undistributed investment income--net.... (71,605) (71,605)
Accumulated realized gain (loss)--net... (76,907) (76,907)
Unrealized appreciation on
investments--net...................... (3,149,718) (3,149,718)
Net Assets.............................. $292,350,691 $469,611,691
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, 88.8% of the market value of the Fund's portfolio
was invested in long-term municipal obligations and 11.2% 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 34 $137,382 47.0%
AA Aa AA 13 26,603 9.1
A A A 27 78,046 26.7
BBB Baa1 BBB 15 34,645 11.8
BB Ba1 BB -- -- --
B B B -- -- --
NR+ NR+ NR+ -- -- --
VMIG1 A+ 14 34,740 11.9
Cash -- (19,065) (6.5)
------ -------- ------
Total 103 $292,351 100.0%
-------------------
* Ratings: Using the highest of S&P's, Moody's or Fitch's ratings on the
Fund's municipal obligations. As reflected in the chart 2.9% of the
individual holdings representing 3.3% of the Fund's portfolio assets
received different ratings. 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. 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 primarily in investment grade municipal debt
securities issued by state and local governments, including U.S. territories and
possessions, political subdivisions, agencies and public authorities (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. Under normal
market conditions, the Fund will invest at least 80% of its total assets in
municipal securities that pay interest that, in the opinion of bond counsel to
the issuer (or on the basis of other authority believed by Fund's investment
manager to be reliable), is exempt from federal income tax. 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
18
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
Municipal Bonds.
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,
nor does the Fund normally invest more than 5% of its total assets in the
securities of any single issuer. 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 or in issuers located in the same state. If the Fund were to
invest more than 25% of its total assets in issuers located in the same state,
it would be more susceptible to adverse economic, business, or regulatory
conditions in that state.
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
19
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.
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. 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 on 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
20
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 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
21
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.
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
22
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.
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.
23
The Fund may also invest in investment companies whose income distributions are
not exempt from federal income tax, and if it does, some of the Fund's income
distributions may be taxable.
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
24
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.
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, 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
25
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.
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.
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.
The recent economic downturn, which is of uncertain duration, has absorbed
the reserves that many states and municipalities had accumulated during the long
economic expansion of the 1990's and has unbalanced many state and municipal
budgets. Because the disclosure requirements for issuers of municipal securities
are more limited than those for issuers of other securities, it may be more
difficult to discern accurately the financial condition of a municipal issuer in
times of significant economic
26
change. Furthermore, because this downturn follows a long expansion, some
municipal finance officers may have limited experience in responding to such a
situation. If the economy remains slow, it could also impact many private
enterprises whose revenues support private activity bonds or form a critical
part of the tax base of a state or municipality. Strife in the Middle East could
substantially increase the price of oil and thus gasoline, which is an important
expense for many municipalities.
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.
ECONOMIC SECTOR AND GEOGRAPHIC RISK. The Fund may invest 25% or more of its
total assets in municipal obligations of issuers in the same state (or U.S.
territory) or in municipal obligations in the same economic sector, including
without limitation the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a 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 a particular
state or economic sector. For example, health-care related issuers are
susceptible to Medicare, Medicaid and other third-party payor reimbursement
policies, and national and state
27
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 the
same 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
28
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 and maintain portfolio diversification. 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 or in obligations of issuers located in the same 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 also may not invest more
than 5% of total Fund assets in securities of any one issuer, except that this
limitation does not apply to bonds issued by the U.S. Government, its agencies
and instrumentalities or to the investment of 25% of the Fund's total assets in
shares of other registered investment companies. 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.
29
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
the Fund's 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
30
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.
31
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.
32
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 35
days and the dividend rate for this period will be 1.20%. The initial rate
period for the Series B AMPS will be 39 days and the initial dividend rate for
this period will be 1.20%. 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.
33
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 that is taxable 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.
34
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.
"Taxable 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
35
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
Preference 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;
36
- 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 pro rata from the holders in
proportion to their holdings, or by other method that it deems fair and
equitable.
37
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 of a series may not be
redeemed in part if fewer than 250 shares of that series 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.
38
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 $2,139,000 would have been
computed as follows:
Value of Fund assets less
liabilities
not constituting senior
securities = $469,611,691 = 262%
------------------------------ -----------
Senior securities representing $179,400,000
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.
39
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; or
40
(d) 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 may not be entitled to vote in respect of certain matters
contemplated by (a) or (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.
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.
41
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.
- 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.
42
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.
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. 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, as indicated in the
Articles Supplementary, 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.
43
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 New York Stock Exchange
is closed for business for more than three consecutive business days due to an
act of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the Auction Agent is not able to conduct an auction
in accordance with the Auction Procedures for any such reason, then the Auction
Rate for the next dividend period will be the Auction Rate determined on the
previous auction date.
If a dividend payment date is not a business day because the New York Stock
Exchange is closed for more than three consecutive business days due to an act
of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the dividend payable on such date 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.
44
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 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.
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.
45
DESCRIPTION OF COMMON SHARES
The Articles authorize the issuance of one billion (1,000,000,000) shares of
capital stock. The Fund has issued 20,681,981 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 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,
46
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.
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
47
"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.
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.
TAXATION OF THE FUND'S STOCKHOLDERS
The Fund primarily invests in municipal bonds issued by states, cities and
local authorities and certain possessions and territories of the United States
(such as Puerto Rico or Guam) the income on which is, in the opinion of bond
counsel to the issuer (or on the basis of other authority believed by NB
Management to be reliable), exempt from federal income tax. 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
its 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.
48
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 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.
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 relates only to federal income tax consequences of investing in
the Fund; the consequences under other tax laws may differ. You should consult
your tax advisor as to the possible application of state and local income tax
laws to Fund dividends and capital gain distributions. Please see "Tax Matters"
in the Statement of Additional Information for additional information regarding
the tax aspects of investing in the Fund.
The foregoing 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.
49
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated December
12, 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.................. 2,153 2,153
Salomon Smith Barney Inc................ 1,076 1,076
A.G. Edwards & Sons, Inc................ 359 359
-------- --------
Total......................... 3,588 3,588
======== ========
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 $137.50 per share. The sales load the Fund
will pay of $250 per share is equal to 1% of the initial offering price. 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 December 13, 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 December 13, 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.
50
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 and Cleary, Gottlieb,
Steen & Hamilton, New York, New York.
51
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds................................... 1
Investment Objective and Policies................. 1
Investment Restrictions........................... 2
Further Investment Policies and Investment
Techniques...................................... 4
Further Investment Techniques..................... 12
Portfolio Trading and Turnover Rate............... 24
Certain Risk Considerations....................... 24
Management of the Fund............................ 25
Investment Management and Administration
Services........................................ 35
Portfolio Transactions............................ 40
Net Asset Value................................... 42
Description of AMPS............................... 42
Certain Provisions in the Articles of
Incorporation................................... 44
Additional Information Concerning the Auctions for
AMPS............................................ 46
Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund..................... 47
Tax Matters....................................... 49
Custodian, Transfer Agent and Auction Agent....... 57
Independent Auditors.............................. 57
Counsel........................................... 57
Registration Statement............................ 57
Report of Independent Auditor..................... 58
Financial Statement............................... 59
APPENDIX A--Articles Supplementary................ A-1
APPENDIX B--Description of Securities Ratings..... B-1
APPENDIX C--Tax-Equivalent Yield Table............ C-1
52
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$179,400,000
NEUBERGER BERMAN
INTERMEDIATE MUNICIPAL FUND INC.
AUCTION MARKET PREFERRED SHARES ("AMPS")
3,588 SHARES, SERIES A
3,588 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY.
A.G. EDWARDS & SONS, INC.
DECEMBER 12, 2002
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
C0491 12/02