As filed with the Securities and Exchange Commission on January 3, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-3802
NEUBERGER BERMAN INCOME FUNDS
-----------------------------
(Exact Name of the Registrant as Specified in Charter)
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
(Address of Principal Executive Offices - Zip Code)
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
Neuberger Berman Income Funds
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur Delibert, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
(Names and Addresses of agents for service)
Date of fiscal year end: October 31, 2005
Date of reporting period: October 31, 2005
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
Annual Report
October 31, 2005
Lehman Brothers
Core Bond Fund
- --------------------------------------------------------------------------------
NEUBERGER BERMAN LEHMAN BROTHERS
INVESTOR CLASS SHARES INSTITUTIONAL CLASS SHARES
Contents OCTOBER 31, 2005
The Fund
Chairmen's Letter 2
Portfolio Commentary 3
Fund Expense Information 7
Schedule of Investments 8
Financial Statements 15
Financial Highlights Per Share Data 25
Report of Independent Registered Public
Accounting Firm 27
Directory 28
Trustees and Officers 29
Proxy Voting Policies and Procedures 37
Quarterly Portfolio Schedule 37
Notice to Shareholders 38
1
Chairmen's Letter
Dear Shareholder,
We are pleased to present to you this report for the Lehman Brothers Core Bond
Fund for the one-month period ending October 31, 2005. The report includes
portfolio commentary, a list of the Fund's investments, and financial statements
for the reporting period.
We have prepared this one-month report to adjust for the change in the Fund's
fiscal year, which will now coincide with the rest of the Neuberger Berman
Income Funds, running from November 1 to October 31. Henceforth, you can expect
to receive semi-annual and annual reports from us, with the next report covering
the six months ending April 30, 2006.
As we have communicated previously, the Fund's name and operating structure were
changed in June, after the Fund's Advisor since its inception, Ariel Capital
Management, LLC, recommended that the Fund be reorganized. The Reorganization
Plan replaced Ariel with Neuberger Berman Management Inc. as the new investment
advisor, and converted the Fund into the Lehman Brothers Core Bond Fund, a newly
created series of Neuberger Berman Income Funds. There was no change to the
Fund's sub-advisor, Lehman Brothers Asset Management LLC, or to the Fund's
investment program.
The Fund's investment strategy seeks to maximize total return through a
combination of income and capital appreciation. We endeavor to add value with a
distinct process for managing the portfolio's positioning with respect to
interest rates, credit and volatility.
As we near the end of the calendar year, we remain confident in the strength of
the economy, despite the impact of still high oil prices and the year's major
hurricanes. The Federal Reserve appears to be primarily concerned with
containing inflation, and we anticipate further rate increases moving forward.
We intend to proceed with caution to protect our clients' principal and add
opportunistically to return.
Thank you for investing in the Lehman Brothers Core Bond Fund. We appreciate the
trust you have placed in us and will do our best to continue earning it.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN INCOME FUNDS
/s/ Brad Tank
BRAD TANK
CHAIRMAN OF THE BOARD
LEHMAN BROTHERS ASSET MANAGEMENT
2
OCTOBER 31, 2005
Lehman Brothers Core Bond Fund Portfolio Commentary
The Lehman Brothers Core Bond Fund experienced a modestly negative return in the
one-month period ending October 31, 2005, with the Fund's Neuberger Berman
Investor Class and Lehman Brothers Institutional Class shares falling -0.87% and
- -0.73%, respectively, versus a -0.79% decline by the Lehman Brothers U.S.
Aggregate Index. This result was due primarily to a rise in yields (and fall in
prices) that extended across the bond market.
During the one-month reporting period, we made one significant change to
portfolio strategy. As month-end approached, with the yield on the ten-year
Treasury rising to 4.6%, we lengthened the portfolio's duration to neutral from
our previously defensive shorter position versus the benchmark. Our views on
real interest rates (excluding inflation) and prospects for a more balanced
policy from the Federal Reserve (after an extended campaign to tighten monetary
conditions) contributed to the decision. The balance of our strategy remains
conservative, with exposures around benchmark levels. As of October 31, 2005,
the Fund's average duration and weighted average maturity were 4.6 years and 7.3
years, respectively.
Our outlook for the economy remains positive. Despite high oil prices and the
short-term impact of the hurricane season, we believe that the economy retains
significant momentum, with GDP returning to a range of 3.5%-4.0%. As for
interest rates, we think that the Fed is likely to continue raising the Fed
Funds rate until it reaches a neutral level, potentially in the first half of
2006. The markets' still optimistic valuation of Treasuries, combined with the
changing of the guard at the Fed, will likely result in increased volatility in
the bond markets.
Overall, we plan to maintain a cautious stance for the time being. Duration, as
noted, was at close-to-benchmark levels at month's end. The portfolio's
positioning with respect to non-Treasury sectors will remain conservative, given
that credit spreads remain at tight absolute levels. Looking forward, the
portfolio is positioned to protect against higher interest rates and a wider
spread environment. We are confident that this orientation will continue to
provide value for our shareholders.
Sincerely,
/s/ Richard W. Knee
RICHARD W. KNEE
PORTFOLIO MANAGER
3
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Average Annual Total Return/1,2,3/
Lehman
Neuberger Lehman Brothers
Berman Brothers U.S.
Investor Institutional Aggregate
Class/2/ Class/2/ Index
1 Year 0.98% 1.48% 1.13%
5 Year 5.62% 6.08% 6.31%
10 Year 5.47% 5.86% 6.32%
Life of Fund/4/ 5.52% 5.91% 6.40%
- ----------------------------------------------------------
Inception Date 2/1/1997 10/1/1995
Performance data quoted represent past performance, which is no guarantee of
future results. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed may be worth more or less
than their original cost. Results are shown on a "total return" basis and
include reinvestment of all dividends and capital gain distributions.
Current performance may be lower or higher than the performance data quoted. For
performance data current to the most recent month end, please visit
www.nb.com/performance.
Comparison of a $10,000 Investment
[CHART]
Neuberger Berman Lehman Brothers
Investor Class U.S. Aggregate Index
---------------- --------------------
10/31/1995 $10,000 $10,000
10/31/1996 $10,490 $10,585
10/31/1997 $11,352 $11,526
10/31/1998 $12,244 $12,602
10/31/1999 $12,245 $12,669
10/31/2000 $12,953 $13,594
10/31/2001 $14,598 $15,573
10/31/2002 $15,350 $16,490
10/31/2003 $16,045 $17,299
10/31/2004 $16,862 $18,256
10/31/2005 $17,027 $18,463
This chart shows the value of a hypothetical $10,000 investment in the Fund over
the past 10 fiscal years. Prior to October 31, 2005, the Fund's fiscal year
ended September 30, 2005. The result is compared with benchmarks, which may
include a broad-based market index and/or a narrower index. Please note that
market indexes do not include expenses. All results include the reinvestment of
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The chart and table do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the redemption of
Fund shares.
Please see Endnotes and Glossary of Indices for additional information.
The 30-day SEC yield ending 10/31/05 of the Neuberger Berman Investor Class
shares was 3.88%, and of the Lehman Brothers Institutional Class shares was
4.28%.
The composition, industries and holdings of the Fund are subject to change.
Rating Diversification
(% by Ratings)
AAA/Government/Government
Agency....................... 69.8%
AA............................ 3.7
A............................. 6.0
BBB........................... 11.3
BB............................ 0.4
B............................. 0.0
CCC........................... 0.0
CC............................ 0.0
C............................. 0.0
D............................. 0.0
Not Rated..................... 5.6
Short Term.................... 3.2
4
OCTOBER 31, 2005
Endnotes
1. Neuberger Berman Management Inc. ("Management") has
contractually undertaken to reimburse Lehman Brothers Core
Bond Fund so that total operating expenses exclusive of
taxes, interest, brokerage commissions and extraordinary
expenses of the Fund are limited to 0.85% and 0.45% of
average daily net assets for the Investor Class and
Institutional Class, respectively. The undertakings last
until October 31, 2015. The Fund has contractually
undertaken to reimburse Management for the excess expenses
paid by Management, provided the reimbursements do not cause
operating expenses (exclusive of taxes, interest, brokerage
commissions, and extraordinary expenses) to exceed the
above-stated expense limitation and the reimbursements are
made within three years after the year that Management
incurred the expense. Absent such reimbursements, the total
returns of the Investor Class and Institutional Class would
have been lower.
Management has voluntarily agreed to waive its investment
management fee in the amount of 0.20% of the Fund's average
net assets through October 31, 2006. As a result of this
waiver, the investment management fee of the Fund will be
limited to 0.05% of its average net assets. If this
voluntary waiver was not in place, performance would be
lower for the Fund.
2. One-year and average annual total returns are for the
periods ended October 31, 2005. Results are shown on a
"total return" basis and include reinvestment of all
dividends and capital gain distributions.
3. The Fund is the successor to Ariel Premier Bond Fund ("Ariel
Bond Fund"). The total return data for the periods prior to
June 13, 2005 are those of the Ariel Bond Fund Investor
Class and Institutional Class. The data reflects performance
of Ariel Bond Fund Investor Class for the period February 1,
1997 through June 10, 2005 and the performance of Ariel Bond
Fund Institutional Class for the period October 1, 1995
(date of inception) through January 31, 1997. The investment
policies, guidelines and restrictions of the Fund are in all
respects equivalent to Ariel Bond Fund. Ariel Bond Fund
Institutional Class had lower expenses and typically higher
returns than Ariel Bond Fund Investor Class. Returns would
have been lower if the manager of Ariel Bond Fund had not
waived certain of its fees during the periods shown.
4. From commencement of operations.
5
Glossary of Indices
Lehman Brothers U.S. Aggregate Index: An unmanaged index that represents
the U.S. domestic investment grade
bond market. It is comprised of the
Lehman Brothers
Government/Corporate Bond Index,
Mortgage-Backed Securities Index,
and Asset-Backed Securities Index,
including securities that are of
investment-grade quality or better,
have at least one year to maturity,
and have an outstanding par value
of at least $100 million.
Please note that the index does not take into account any fees and expenses or
any tax consequences of investing in the individual securities that it tracks
and that individuals cannot invest directly in any index. Data about the
performance of this index is prepared or obtained by Neuberger Berman Management
Inc. and includes reinvestment of all dividends and capital gain distributions.
The Fund may invest in securities not included in the above-described index.
6
OCTOBER 31, 2005
Information About Your Fund's Expenses
This table is designed to provide information regarding costs related to your
investments. All mutual funds incur operating expenses, which include management
fees, fees for administrative services and costs of shareholder reports, among
others. The following examples are based on an investment of $1,000 made at the
beginning of the period shown and held for the entire period. The table
illustrates the fund's costs in two ways:
Actual Expenses and Performance: The first section of the table
provides information about actual
account values and actual
expenses in dollars, based on the
fund's actual performance during
the period. You may use the
information in this line,
together with the amount you
invested, to estimate the
expenses you paid over the
period. Simply divide your
account value by $1,000 (for
example, an $8,600 account value
divided by $1,000 = 8.6), then
multiply the result by the number
in the first section of the table
under the heading entitled
"Expenses Paid During the Period"
to estimate the expenses you paid
over the period.
Hypothetical Example for Comparison Purposes: The second section of the table
provides information about
hypothetical account values and
hypothetical expenses based on
the fund's actual expense ratio
and an assumed rate of return at
5% per year before expenses. This
return is not the fund's actual
return. The hypothetical account
values and expenses may not be
used to estimate the actual
ending account balance or
expenses you paid for the period.
You may use this information to
compare the ongoing costs of
investing in this fund versus
other funds. To do so, compare
the expenses shown in this 5%
hypothetical example with the 5%
hypothetical examples that appear
in the shareholder reports of
other funds.
Expense Information As of 10/31/05 (Unaudited)
Lehman Brothers Core Bond Fund
Beginning Ending Expenses
Account Account Paid During
Actual Value Value the Period*
----------------------------------------------------------
Neuberger Berman
Investor Class $1,000 $1,000.50 $4.29
Lehman Brothers
Institutional Class $1,000 $1,003.50 $2.27
Hypothetical (5% annual
return before expenses)**
----------------------------------------------------------
Neuberger Berman
Investor Class $1,000 $1,020.92 $4.33
Lehman Brothers
Institutional Class $1,000 $1,022.94 $2.29
* For each class of the fund, expenses are equal to the expense ratio for the
class, multiplied by the average account value for the six months ended
October 31, 2005, multiplied by 184/365 (to reflect the one-half year period
shown).
** Hypothetical 5% annual return before expenses is calculated by multiplying
the number of days in the most recent half year divided by 365.
7
Schedule of Investments Lehman Brothers Core Bond Fund
Principal Amount Rating/(S)/ Value/+/
(000's omitted) Moody's S&P (000's omitted)
U.S. Treasury Securities-Backed by the Full Faith and Credit of the U.S. Government (14.8%)
$ 305 U.S. Treasury Bonds, 7.25%, due 5/15/16 TSY TSY $ 370
2,180 U.S. Treasury Bonds, 8.13%, due 8/15/19 TSY TSY 2,912
3,075 U.S. Treasury Bonds, 6.00%, due 2/15/26 TSY TSY 3,535
4,790 U.S. Treasury Notes, 3.88%, due 5/15/10 TSY TSY 4,673
295 U.S. Treasury Strip, due 8/15/14 TSY TSY 196
--------
Total U.S. Treasury Securities-Backed by the Full Faith and Credit of
the U.S. Government (Cost $12,004) 11,686
--------
U.S. Government Agency Securities (8.4%)
1,320 Fannie Mae, Notes, 4.30%, due 3/9/09 AGY AGY 1,296
110 Fannie Mae, Notes, 7.25%, due 1/15/10 AGY AGY 120
1,085 Federal Home Loan Bank, Notes, 4.25%, due 5/16/08 AGY AGY 1,069
1,700 Freddie Mac, Notes, 3.75%, due 8/3/07 AGY AGY 1,673
2,500 Federal Home Loan Bank, Disc. Notes, due 11/1/05 AGY AGY 2,500oo
--------
Total U.S. Government Agency Securities (Cost $6,713) 6,658
--------
Mortgage-Backed Securities (53.1%)
452 Banc of America Funding Corp., Ser. 2005-F, Class 4A1, 5.45%, due
9/20/35 Aaa AAA 451
1,140 Bear Stearns Commercial Mortgage Securities, Inc., Ser. 2005-PWR8,
Class A4, 4.67%, due 6/11/41 Aaa 1,086
403 Chase Commercial Mortgage Securities Corp., Ser. 2000-3, Class
A1, 7.09%, due 10/15/32 AAA 417
625 Chase Commercial Mortgage Securities Corp., Ser. 2000-3, Class
A2, 7.32%, due 10/15/32 AAA 679
31 Countrywide Home Loans, Pass-Through Trust, Ser. 2003-42, Class
2A1, 4.17%, due 11/25/05 Aaa AAA 31oo(mu)
805 Credit Suisse First Boston Mortgage Securities Corp., Ser. 2001-CK6,
Class A3, 6.39%, due 8/15/36 Aaa AAA 852
340 Credit Suisse First Boston Mortgage Securities Corp., Ser. 2003-C5,
Class A1, 3.09%, due 12/15/36 AAA 329
225 Credit Suisse First Boston Mortgage Securities Corp., Ser. 2005-C4,
Class A3, 5.12%, due 8/15/38 Aaa AAA 224
619 First Horizon Mortgage Pass-Through Trust, Ser. 2005-AR5, Class
2A1, 5.47%, due 11/25/35 AAA 619
475 G-Force LLC, Ser. 2005-RRA, Class A2, 4.83%, due 8/22/36 AAA 463**
1,225 GS Mortgage Securities Corp. II, Ser. 2004-C1, Class A1, 3.66%, due
10/10/28 Aaa 1,185
506 GSR Mortgage Loan Trust, Ser. 2005-AR3, Class 6A1, 5.05%, due 5/25/35 Aaa AAA 501
460 Indymac Loan Trust, Ser. 2005-L2, Class A1, 4.26%, due 11/25/05 Aaa AAA 460oo(mu)
34 Indymac Loan Trust, Ser. 2003-L1, Class A1, 4.42%, due 11/25/05 Aaa 34**oo(mu)
389 JP Morgan Chase Commercial Mortgage Security Corp., Ser. 2005-FL1A,
Class A1, 4.08%, due 11/15/05 Aaa AAA 389**oo(mu)
793 JP Morgan Chase Commercial Mortgage Security Corp., Ser. 2001-CIBC,
Class A2, 6.00%, due 3/15/33 AAA 801
247 JP Morgan Chase Commercial Mortgage Security Corp., Ser. 2005-CB11,
Class A1, 4.52%, due 8/12/37 Aaa AAA 244
220 JP Morgan Chase Commercial Mortgage Security Corp., Ser. 2005-LDP3,
Class A3, 4.96%, due 8/15/42 Aaa AAA 216
1,598 JP Morgan Mortgage Trust, Ser. 2005-A3, Class 7CA1, 5.16%, due 6/25/35 AAA 1,589
8
OCTOBER 31, 2005
Schedule of Investments Lehman Brothers Core Bond Fund cont'd
Principal Amount Rating/(S)/ Value/+/
(000's omitted) Moody's S&P (000's omitted)
$ 890 LB Commercial Conduit Mortgage Trust, Ser. 1998-C4, Class A1B, 6.21%,
due 10/15/35 Aaa AAA $ 916
221 Merrill Lynch Mortgage Trust, Ser. 2005-MKB2, Class A1, 4.45%, due
9/12/42 Aaa AAA 219
140 Morgan Stanley Capital I, Ser. 2005-T17, Class A5, 4.78%, due 12/13/41 AAA 135
471 MortgageIT Trust, Ser. 2005-3, Class A1, 4.34%, due 11/25/05 Aaa AAA 471oo(mu)
41 Novastar NIM Note Trust, Ser. 2005-N1, 4.78%, due 10/26/35 A 41**
517 Residential Accredit Loans, Inc., Ser. 2005-QA10, Class A31, 5.64%,
due 9/25/35 Aaa AAA 519
300 Structured Asset Securities Corp., Ser. 1997-LLI, Class A3, 6.90%,
due 10/12/34 Aaa AAA 306
566 Wachovia Bank Commercial Mortgage Trust, Ser. 2005-C17, Class
A1, 4.43%, due 3/15/42 Aaa AAA 560
Fannie Mae
284 Pass-Through Certificates, 6.00%, due 11/1/15 AGY AGY 290
265 Pass-Through Certificates, 8.00%, due 10/1/31 AGY AGY 283
274 Pass-Through Certificates, 8.50%, due 4/1/34 AGY AGY 296
10,855 Pass-Through Certificates, 5.00%, TBA, 30 Year Maturity AGY AGY 10,445o
8,225 Pass-Through Certificates, 5.00%, TBA, 15 Year Maturity AGY AGY 8,112o
7,245 Pass-Through Certificates, 5.50%, TBA, 30 Year Maturity AGY AGY 7,145o
Freddie Mac
183 Pass-Through Certificates, 6.50%, due 11/1/25 AGY AGY 188
44 REMIC CMO, Ser. 1364, Class K, 5.00%, due 9/15/07 AGY AGY 45
Government National Mortgage Association
1,425 Pass-Through Certificates, 8.00%, due 12/15/27 AGY AGY 1,525
------------
Total Mortgage-Backed Securities (Cost $42,486) 42,066
------------
Corporate Debt Securities (20.4%)
140 Alcan, Inc., Bonds, 5.75%, due 6/1/35 Baa1 BBB+ 132
135 American General Finance Corp., Medium-Term Notes, Ser. I, 4.88%, due
7/15/12 A1 A+ 131
155 American Home Products Corp., Notes, 6.95%, due 3/15/11 Baa1 A 167
145 AT&T Wireless Services, Inc., Senior Notes, 7.88%, due 3/1/11 Baa2 A 162
210 AT&T Wireless Services, Inc., Senior Notes, 8.75%, due 3/1/31 Baa2 A 274
155 AXA, Subordinated Notes, 8.60%, due 12/15/30 A3 BBB+ 202
105 Bear Stearns Co., Inc., Unsecured Notes, 5.30%, due 10/30/15 A1 A 104
165 Berkshire Hathaway Finance Corp., Guaranteed Notes, 4.13%, due 1/15/10 Aaa AAA 160
100 Chartered Semiconductor Manufacturing Ltd., Senior Unsubordinated
Notes, 6.38%, due 8/3/15 Baa3 BBB- 96
110 CIT Group, Inc., Senior Medium-Term Notes, 4.75%, due 8/15/08 A2 A 109
1,290 Citigroup, Inc., Subordinated Notes, 5.00%, due 9/15/14 Aa2 A+ 1,263
290 Comcast Cable Communications, Notes, 8.38%, due 5/1/07 Baa2 BBB+ 304
465 Comcast Cable Communications Holdings Inc., Guaranteed Notes, 8.38%,
due 3/15/13 Baa2 BBB+ 536
500 Cox Communications, Inc., Notes, 6.75%, due 3/15/11 Baa3 BBB- 525
30 Daimler Chrysler N.A. Holdings Corp., Guaranteed Notes, 4.05%, due
6/4/08 A3 BBB 29
105 Dominion Resources, Inc., Senior Unsecured Notes, 5.15%, due 7/15/15 Baa1 BBB+ 101
120 Enterprise Products Partners L.P., Guaranteed Notes, Ser. B, 6.88%,
due 3/1/33 Baa3 BB+ 123
220 EOP Operating L.P., Notes, 4.65%, due 10/1/10 Baa2 BBB+ 214
130 Excelon Corp., Notes, 4.90%, due 6/15/15 Baa2 BBB 122
100 FirstEnergy Corp., Notes, Ser. B, 6.45%, due 11/15/11 Baa3 BBB- 105
140 Ford Motor Credit Co., Notes, 5.70%, due 1/15/10 Baa3 BB+ 126
85 Ford Motor Credit Co., Notes, 7.88%, due 6/15/10 Baa3 BB+ 82
9
Schedule of Investments Lehman Brothers Core Bond Fund cont'd
Principal Amount Rating/(S)/ Value/+/
(000's omitted) Moody's S&P (000's omitted)
$ 175 France Telecom, Notes, 7.75%, due 3/1/11 A3 A- $ 195
355 General Electric Capital Corp., Medium-Term Notes, Ser. A, 4.25%, due
6/15/12 Aaa AAA 337
75 General Electric Capital Corp., Medium-Term Notes, Ser. A, 6.00%, due
6/15/12 Aaa AAA 79
85 Goldman Sachs Capital I, Guaranteed Notes, 6.35%, due 2/15/34 A1 A- 85
415 Goldman Sachs Group, Inc., Notes, 5.25%, due 10/15/13 Aa3 A+ 410
20 Goldman Sachs Group, Inc., Notes, 5.13%, due 1/15/15 Aa3 A+ 20
390 Harrahs Operating, Inc., Bonds, 5.63%, due 6/1/15 Baa3 BBB- 374**
150 HSBC Finance Corp., Notes, 5.75%, due 1/30/07 A1 A 152
235 HSBC Finance Corp., Notes, 4.75%, due 5/15/09 A1 A 232
90 HSBC Finance Corp., Unsecured Notes, 4.13%, due 11/16/09 A1 A 87
100 HSBC Finance Corp., Notes, 7.00%, due 5/15/12 A1 A 109
390 International Lease Finance Corp., Unsubordinated Notes, 4.75%, due
7/1/09 A1 AA- 383
195 John Deere Capital Corp., Senior Medium-Term Notes, Ser. D, 4.40%,
due 7/15/09 A3 A- 192
245 JP Morgan Chase Capital XV, Notes, 5.88%, due 3/15/35 A1 A- 232
205 Kaneb Pipe Line Operating Partnership L.P., Senior Notes, 5.88%, due
6/1/13 Baa3 BBB- 208
175 Kraft Foods, Inc., Notes, 4.00%, due 10/1/08 A3 BBB+ 171
245 Lennar Corp., Senior Unsecured Notes, 5.60%, due 5/31/15 Baa3 BBB 235**
200 Merrill Lynch & Co., Medium-Term Notes, Ser. B, 4.00%, due 11/15/07 Aa3 A+ 197
150 Metlife, Inc., Senior Notes, 5.70%, due 6/15/35 A2 A 145
305 National City Bank of Cleveland, Bonds, 4.50%, due 3/15/10 Aa3 A+ 299
275 National Rural Utilities Cooperative Finance Corp., Senior
Notes, 5.75%, due 8/28/09 A2 A 282
280 News America, Inc., Guaranteed Notes, 6.20%, due 12/15/34 Baa3 BBB 270
80 Nexen, Inc., Unsecured Notes, 5.88%, due 3/10/35 Baa2 BBB- 76
330 Packaging Corp. of America, Unsubordinated Notes, 5.75%, due 8/1/13 Ba1 BBB 312
175 Progress Energy, Inc., Senior Notes, 5.85%, due 10/30/08 Baa2 BBB- 178
170 Prologis, Senior Notes, 5.63%, due 11/15/15 Baa1 BBB+ 170**
170 Regions Financial Corp., Senior Notes, 4.50%, due 8/8/08 A1 A 168
100 Residential Capital Corp., Notes, 6.38%, due 6/30/10 Baa3 BBB- 102**
95 Scottish Power PLC, Unsecured Notes, 5.38%, due 3/15/15 Baa1 BBB+ 93
100 Simon Property Group L.P., Notes, 4.60%, due 6/15/10 Baa1 BBB+ 98
275 Simon Property Group L.P., Notes, 4.88%, due 8/15/10 Baa1 BBB+ 271
130 Simon Property Group L.P., Notes, 5.10%, due 6/15/15 Baa1 BBB+ 125
140 SLM Corp., Medium-Term Notes, 5.13%, due 8/27/12 A2 A 139
220 Sovereign Bancorp, Inc, Senior Notes, 4.80%, due 9/1/10 Baa3 BBB- 216**
160 Sprint Capital Corp., Guaranteed Notes, 6.13%, due 11/15/08 Baa2 A- 165
215 Sprint Capital Corp., Guaranteed Notes, 8.75%, due 3/15/32 Baa2 A- 278
305 Suntrust Bank, Subordinated Notes, 5.00%, due 9/1/15 Aa3 A+ 298
95 Teck Cominco Ltd., Notes, 6.13%, due 10/1/35 Baa2 BBB 89
70 Telecom Italia Capital, Guaranteed Notes, 4.95%, due 9/30/14 Baa2 BBB+ 66
620 Telecom Italia Capital, Notes, 5.25%, due 10/1/15 Baa2 BBB+ 597
100 Telefonica Europe BV, Guaranteed Notes, 7.75%, due 9/15/10 A3 A- 110
335 Telefonos de Mexico S.A., Notes, 4.50%, due 11/19/08 A3 BBB 328
235 Time Warner Entertainment Co. L.P., Senior Notes, 8.38%, due 7/15/33 Baa1 BBB+ 284
85 Time Warner, Inc., Guaranteed Notes, 7.63%, due 4/15/31 Baa1 BBB+ 96
230 Univision Communications, Inc., Guaranteed Notes, 3.50%, due 10/15/07 Baa2 BBB- 223
75 Valero Energy Corp., Senior Unsecured Notes, 7.50%, due 4/15/32 Baa3 BBB- 88
275 Verizon Global Funding Corp., Bonds, 5.85%, due 9/15/35 A2 A+ 257
10
OCTOBER 31, 2005
Schedule of Investments Lehman Brothers Core Bond Fund cont'd
Principal Amount Rating/(S)/ Value/+/
(000's omitted) Moody's S&P (000's omitted)
$ 115 Viacom, Inc., Guaranteed Notes, 5.63%, due 8/15/12 Baa3 BBB+ $ 114
240 Wachovia Corp., Subordinated Notes, 5.25%, due 8/1/14 A1 A 239
150 Wal-Mart Stores, Inc, Senior Unsecured Notes, 4.75%, due 8/15/10 Aa2 AA 148
190 Wal-Mart Stores, Inc, Notes, 4.50%, due 7/1/15 Aa2 AA 181
225 Wellpoint, Inc., Notes, 4.25%, due 12/15/09 Baa1 BBB+ 218
90 Wells Fargo Bank NA, Subordinated Notes, 4.75%, due 2/9/15 Aa1 AA- 87
142 Weyerhaeuser Co., Notes, 6.13%, due 3/15/07 Baa2 BBB 144
435 Zurich Capital Trust I, Guaranteed Notes, 8.38%, due 6/1/37 Baa2 A- 470**
--------
Total Corporate Debt Securities (Cost $16,632) 16,189
--------
Asset-Backed Securities (29.5%)
18 ABSC NIMS Trust, Ser. 2004-HE5, Class A1, 5.00%, due 8/27/34 BBB+ 18**
51 ABSC NIMS Trust, Ser. 2005-HE6, Class A1, 5.05%, due 8/27/35 A- 51**
174 Ameriquest Mortgage Securities, Inc., Ser. 2002-AR1, Class M2, 5.34%,
due 11/25/05 A1 AAA 174oo(mu)
105 Arcap Reit, Inc., Subordinated Bonds, Ser. 2004-1A, Class D, 5.64%,
due 4/21/39 A3 A- 104**
44 Asset Backed Funding Corp. NIM Trust, Ser. 2005-WF1A, Class
N1, 4.75%, due 3/26/07 44**^^^
2,000 Bank One Issuance Trust, Ser. 2004-A2, Class A2, 4.00%, due 11/15/05 Aaa AAA 2,001oo(mu)
590 BMW Floorplan Master Owner Trust, Ser. 2003-1A, Class A, 4.02%, due
11/17/05 Aaa AAA 590**oo(mu)
275 Capital One Multi-Asset Execution Trust, Ser. 2002-A1, Class A1,
4.24%, due 11/15/05 Aaa AAA 276oo(mu)
330 Capital One Multi-Asset Execution Trust, Ser. 2004-C1, Class C1,
3.40%, due 11/16/09 Baa2 BBB 322
425 Capital One Prime Auto Receivables Trust, Ser. 2004-1, Class
A4, 4.04%, due 11/15/05 Aaa AAA 425oo(mu)
161 Carmax Auto Owner Trust, Ser. 2004-1, Class D, 3.52%, due 11/15/10 Baa3 BBB 158
271 Chase Funding Mortgage Loan, Asset-Backed Certificates, Ser. 2004-1,
Class 2A2, 4.27%, due 11/25/05 Aaa AAA 271oo(mu)
85 Chase Funding Mortgage Loan, Asset-Backed Certificates, Ser. 2002-2,
Class 2A1, 4.29%, due 11/25/05 Aaa AAA 85oo(mu)
56 Chase Funding Mortgage Loan, Asset-Backed Certificates, Ser. 2001-4,
Class 1B, 7.38%, due 11/25/31 Baa2 BBB- 57
1,000 Chase Issuance Trust, Ser. 2005-A1, Class A1, 3.98%, due 11/15/05 Aaa AAA 1,000oo(mu)
482 Chesapeake Funding LLC, Ser. 2003-1, Class A1, 4.14%, due 11/7/05 Aaa AAA 482oo(mu)
134 Chevy Chase Auto Receivables Trust, Ser. 2001-2, Class A4, 4.44%, due
4/16/07 Aaa AAA 133
586 Coliseum Funding Ltd., Ser. 1A, Class A1, 4.30%, due 1/24/06 Aa2 AAA 584**oo(mu)
882 College Loan Corp. Trust, Ser. 2003-2, Class A2, 4.34%, due 1/25/06 Aaa AAA 884oo(mu)
513 Collegiate Funding Services Education Loan Trust 1, Ser. 2003-B,
Class A1, 4.10%, due 12/28/05 Aaa AAA 513oo(mu)
184 Countrywide Asset-Backed Certificates, Ser. 2005-SD2, Class
A1A, 4.20%, due 11/25/05 Aaa AAA 184**oo(mu)
42 Countrywide Asset-Backed Certificates, Ser. 2005-5N, Class N, 5.00%,
due 7/25/36 BBB 42**
57 Countrywide Asset-Backed Certificates, Ser. 2005-2N, Class N, 4.50%,
due 8/25/36 BBB 56**
89 Credit-Based Asset Servicing and Securitization, Ser. 2004-CB6, Class
AF1, 4.23%, due 11/25/05 Aaa AAA 89oo(mu)
672 Credit-Based Asset Servicing and Securitization CBO, Ser. 9A, Class
A1, 4.47%, due 1/8/06 Aaa AAA 672**oo(mu)
845 Distribution Financial Services Floorplan Master Trust, Ser. 2003-2,
Class A, 4.07%, due 11/15/05 Aaa AAA 845oo(mu)
138 Equifirst Mortgage Loan Trust, Ser. 2005-1, Class A1, 4.10%, due
11/25/05 Aaa AAA 138oo(mu)
94 Equifirst Mortgage Loan Trust, Ser. 2004-1, Class 2A1, 4.14%, due
11/25/05 Aaa AAA 94oo(mu)
196 Equifirst Mortgage Loan Trust, Ser. 2003-2, Class 3A3, 4.79%, due
11/25/05 Aaa AAA 197oo(mu)
11
Schedule of Investments Lehman Brothers Core Bond Fund cont'd
Principal Amount Rating/(S)/ Value/+/
(000's omitted) Moody's S&P (000's omitted)
$ 62 Equifirst Mortgage Loan Trust NIM Notes, Ser. 2004-2, Class N1,
3.97%, due 10/25/34 A- $ 62**
125 Equifirst Mortgage Loan Trust NIM Notes, Ser. 2004-2, Class N2,
5.93%, due 10/25/34 BBB 124**
85 Equifirst Mortgage Loan Trust NIM Notes, Ser. 2005-1, Class N2,
6.41%, due 4/25/35 A+ 85**
595 Fannie Mae Grantor Trust, Ser. 2005-T3, Class A1A, 4.08%, due 11/25/05 Aaa AAA 595oo(mu)
49 Fannie Mae Grantor Trust, Ser. 2002-T5, Class A1, 4.16%, due 11/25/05 Aaa AAA 49oo(mu)
195 Fannie Mae Grantor Trust, Ser. 2003-T3, Class 1A, 4.16%, due 11/25/05 Aaa AAA 195oo(mu)
227 Fannie Mae Whole Loan, Ser. 2003-W5, Class A, 4.15%, due 11/25/05 Aaa AAA 228oo(mu)
103 Fannie Mae Whole Loan, Ser. 2003-W16, Class AV1, 4.19%, due 11/25/05 Aaa AAA 103oo(mu)
167 First Franklin Mortgage Loan Trust, Asset-Backed Certificates, Ser.
2004-FFH3, Class 2A1, 4.42%, due 11/25/05 Aaa AAA 167oo(mu)
45 First Franklin NIM Trust, Ser. 2003-FFH2, Class N2, 7.39%, due 3/25/34 45**c
6 First Franklin NIM Trust, Ser. 2003-FF5, Class N1, 4.21%, due 4/25/34 BBB+ 6**
565 Ford Credit Floorplan Master Owner Trust, Ser. 2004-1, Class A,
4.01%, due 11/15/05 Aaa AAA 565oo(mu)
495 Ford Credit Floorplan Master Owner Trust, Ser. 2001-2, Class A,
4.11%, due 11/15/05 Aaa AAA 496oo(mu)
1 Fremont NIM Note Trust, Ser. 2004-B, 4.70%, due 5/25/34 BBB+ 1**
43 Fremont NIM Trust, Ser. 2005-C, 5.58%, due 7/25/35 BBB 43**
285 GE Dealer Floorplan Master Note Trust, Ser. 2005-1, Class A, 4.04%,
due 11/20/05 Aaa AAA 285oo(mu)
640 GE Dealer Floorplan Master Note Trust, Ser. 2004-2, Class A, 4.08%,
due 11/20/05 Aaa AAA 641oo(mu)
845 Gracechurch Card Funding PLC, Ser. 7, Class A, 3.99%, due 11/15/05 Aaa AAA 845oo(mu)
4 GSAMP Note Trust, Ser. 2004-FM1N, 5.25%, due 11/25/33 BBB 4**
149 GSAMP Trust, Ser. 2004-FM2, 4.17%, due 11/25/05 Aaa AAA 149oo(mu)
46 GSAMP Trust, Ser. 2003-AHL, Class A2A, 4.24%, due 11/25/05 AAA 46oo(mu)
86 Master Asset Backed Securities Trust, Ser. 2004-OPT1, Class
A3, 4.30%, due 11/25/05 Aaa AAA 86oo(mu)
815 MBNA Master Credit Card Trust USA, Ser. 1998-E, Class A, 4.30%, due
1/15/06 Aaa AAA 818oo(mu)
195 Merrill Auto Trust Securitization, Ser. 2005-1, Class A2B, 4.05%, due
11/25/05 Aaa AAA 195oo(mu)
54 Merrill Lynch Mortgage Investors, Inc., Ser. 2004-WMC1, Class
A2, 4.34%, due 11/25/05 Aaa AAA 54oo(mu)
42 Merrill Lynch Mortgage Investors, Inc., Ser. 2004-OP1N, Class N1,
4.75%, due 6/25/35 BBB+ 41**
360 MSDWCC Heloc Trust, Ser. 2003-2, Class A, 4.30%, due 11/25/05 Aaa AAA 360oo(mu)
26 National City Auto Receivables Trust, Ser. 2002-A, Class A4, 4.83%,
due 8/15/09 Aaa AAA 26
225 Navistar Financial Corp. Owner Trust, Ser. 2003-B, Class A3, 4.17%,
due 11/15/05 Aaa AAA 225oo(mu)
151 New Century Mortgage Corp. NIM Trust, Ser. 2005-A, Class N1, 4.70%,
due 8/25/35 A- 151**
260 Newcastle CDO Ltd., Ser. 2004-4A, Class 3FX, 5.11%, due 3/24/39 A2 A 247**
294 Nissan Auto Lease Trust, Ser. 2003-A, Class A3A, 4.11%, due 11/15/05 Aaa AAA 294oo(mu)
166 Novastar Home Equity Loan, Ser. 2005-1, Class A2A, 4.16%, due 11/25/05 Aaa AAA 166oo(mu)
56 Novastar NIM Note Trust, Ser. 2004-N3, 3.97%, due 3/25/35 A 56**
48 Option One Mortgage Loan Trust, Ser. 2002-2, Class A, 4.31%, due
11/25/05 Aaa AAA 48oo(mu)
84 Option One Mortgage Loan Trust, Ser. 2003-1, Class A2, 4.46%, due
11/25/05 Aaa AAA 85oo(mu)
72 Option One Mortgage Loan Trust, Ser. 2001-4, Class A, 4.64%, due
11/25/05 Aaa AAA 72oo(mu)
36 Park Place Securities NIM Trust, Ser. 2004-WWF1, Class A, 3.84%, due
1/25/35 36**^^^^
163 Park Place Securities NIM Trust, Ser. 2005-WCW2, Class A, 5.50%, due
7/25/35 163**/(+/-)/
227 Renaissance Home Equity Loan Trust, Ser. 2005-3, Class AF1, 4.19%,
due 11/25/05 Aaa AAA 227oo(mu)
24 Renaissance NIM Note Trust, Ser. 2004-B, 5.19%, due 8/26/34 BBB 24**
56 Residential Asset Mortgage Products NIM Note Trust, Ser.
2005-NM2, 5.19%, due 4/25/35 56**/(+/-)/
5 Residential Asset Mortgage Products, Inc., Ser. 2004-RS6, Class
AI1, 4.19%, due 11/25/05 Aaa AAA 5oo(mu)
85 Residential Asset Mortgage Products, Inc., Ser. 2004-RS8, Class
AI1, 4.22%, due 11/25/05 Aaa AAA 85oo(mu)
12
OCTOBER 31, 2005
Schedule of Investments Lehman Brothers Core Bond Fund cont'd
Principal Amount Rating/(S)/ Value/+/
(000's omitted) Moody's S&P (000's omitted)
$ 101 Residential Asset Mortgage Products, Inc., Ser. 2003-RS2, Class
AII, 4.38%, due 11/25/05 Aaa AAA $ 102oo(mu)
257 Residential Asset Mortgage Products, Inc., Ser. 2003-RS3, Class
AII, 4.40%, due 11/25/05 Aaa AAA 258oo(mu)
80 Residential Asset Mortgage Products, Inc., Ser. 2002-RS5, Class
AII, 4.41%, due 11/25/05 Aaa AAA 80oo(mu)
107 Residential Asset Mortgage Products, Inc., Ser. 2003-RS1, Class
AII, 4.43%, due 11/25/05 Aaa AAA 107oo(mu)
68 Residential Asset Securities Corp., Ser. 2002-KS3, Class A1B, 4.29%,
due 11/25/05 Aaa AAA 68oo(mu)
48 Residential Asset Securities Corp., Ser. 2003-KS1, Class A2, 4.41%,
due 11/25/05 Aaa AAA 48oo(mu)
472 Residential Funding Mortgage Securities II, Ser. 2005-HI2, Class
A1, 4.18%, due 11/25/05 Aaa AAA 472oo(mu)
179 Saxon Asset Securities Trust, Ser. 2004-1, Class A, 4.31%, due
11/25/05 Aaa AAA 179oo(mu)
10 Saxon Asset Securities Trust, Ser. 2003-1, Class AV1, 4.35%, due
11/25/05 Aaa AAA 10oo(mu)
185 SB Finance NIM Trust, Ser. 2005-WFHE, 4.75%, due 6/25/35 A- 184**
93 Securitized Asset Backed Receivables LLC, Ser. 2004-OP1, Class
A2, 4.29%, due 11/25/05 Aaa AAA 93oo(mu)
4 Sharps SP I LLC NIM Trust, Ser. 2004-FM1N, Class N, 6.16%, due 9/25/33 BBB- 5**
12 Sharps SP I LLC NIM Trust, Ser. 2003-OP1N, Class NA, 4.45%, due
12/25/33 BBB 12**
459 SLM Student Loan Trust, Ser. 2005-A, Class A1, 3.91%, due 12/15/05 Aaa AAA 458oo(mu)
117 SLM Student Loan Trust, Ser. 2004-10, Class A2, 4.22%, due 1/25/06 Aaa AAA 116oo(mu)
83 Soundview NIM Trust, Ser. 2005-D01, Class N1, 4.70%, due 5/25/35 A+ 83
149 Specialty Underwriting & Residential Finance, Ser. 2004-BC2, Class
A2, 4.31%, due 11/25/05 Aaa AAA 149oo(mu)
27 Specialty Underwriting & Residential Finance, Ser. 2003-BC1, Class
A, 4.38%, due 11/25/05 Aaa 27oo(mu)
63 Structured Asset Securities Corp., Ser. 2003-BC1, Class A, 4.54%, due
11/25/05 Aaa AAA 63oo(mu)
665 Volkswagen Credit Auto Master Trust, Ser. 2005-1, Class A, 4.02%, due
11/20/05 Aaa AAA 665oo(mu)
327 Wachovia Asset Securitization, Inc., Ser. 2003-HE3, Class A, 4.29%,
due 11/25/05 Aaa AAA 328oo(mu)
32 Wells Fargo Home Equity Trust, Ser. 2004-2N, Class N1, 4.45%, due
10/26/34 A- 32**
202 WFS Financial Owner Trust, Ser. 2004-1, Class D, 3.17%, due 8/22/11 A1 BBB 199
845 World Omni Master Owner Trust, Ser. 2004-1, Class A, 4.04%, due
11/15/05 Aaa AAA 846oo(mu)
--------
Total Asset-Backed Securities (Cost $23,350) 23,327
--------
Number of Shares
Short-Term Investments (3.2%)
2,518,158 Neuberger Berman Prime Money Fund Trust Class (Cost $2,518) 2,518#@
--------
Total Investments (129.4%) (Cost $103,703) 102,444##
Liabilities, less cash, receivables and other assets [(29.4%)] (23,259)
--------
Total Net Assets (100.0%) $ 79,185
--------
See Notes to Schedule of Investments
13
Notes to Schedule of Investments Lehman Brothers Core Bond Fund
/+/ Investments in securities by Lehman Brothers Core Bond Fund (the "Fund")
are valued daily by obtaining bid price quotations from independent pricing
services on all securities available in each service's data base. For all
other securities, bid prices are obtained from principal market makers in
those securities or, if quotations are not available, by methods the Board
of Trustees of Neuberger Berman Income Funds (the "Board") has approved on
the belief that they reflect fair value. Numerous factors may be considered
when determining the fair value of a security, including available analyst,
media or other reports, trading in futures or ADRs and whether the issuer
of the security being fair valued has other securities outstanding. Foreign
security prices are furnished by independent quotation services and
expressed in local currency values. Foreign security prices are translated
from the local currency into U.S. dollars using the exchange rate as of
12:00 noon, Eastern time. Short-term debt securities with less than 60 days
until maturity may be valued at cost which, when combined with interest
earned, approximates market value.
# At cost, which approximates market value.
## At October 31, 2005, the cost of investments for U.S. Federal income tax
purposes was $103,736,000. Gross unrealized appreciation of investments was
$105,000 and gross unrealized depreciation of investments was $1,397,000,
resulting in net unrealized depreciation of $1,292,000, based on cost for
U.S. Federal income tax purposes.
** Restricted security subject to restrictions on resale under federal
securities laws. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers under Rule 144A
and are deemed liquid. At October 31, 2005, these securities amounted to
$6,216,000 or 7.8% of net assets.
@ Neuberger Berman Prime Money Fund ("Prime Money") is also managed by
Neuberger Berman Management Inc. (see Notes A & F of Notes to Financial
Statements) and may be considered an affiliate since it has the same
officers, Board members, and investment manager as the Fund and because, at
times, the Fund may own 5% or more of the outstanding voting securities of
Prime Money.
^^^ Not rated by a nationally recognized statistical rating organization.
^^^^ Rated A+ by Fitch Investors Services, Inc.
c Rated BBB+ by Fitch Investors Services, Inc.
(+/-)Rated BBB by Fitch Investors Services, Inc.
(S) Credit ratings are unaudited.
o All or a portion of this security was purchased on a when-issued basis. At
October 31, 2005, these securities amounted to $25,702,000.
oo All or a portion of this security is segregated as collateral for
when-issued purchase commitments.
(mu) Floating rate securities are securities whose yields vary with a designated
market index or market rate. These securities are shown at their current
rates as of October 31, 2005.
See Notes to Financial Statements
14
Statement of Assets and Liabilities
----------------
Neuberger Berman Income Funds Lehman Brothers
(000's omitted except per share amounts) Core Bond Fund
Assets
Investments in securities, at value* (Notes A & F)--see Schedule of Investments:
Unaffiliated issuers $ 99,926
Affiliated issuers 2,518
102,444
Interest receivable 562
Receivable for securities sold 5,552
Receivable for Fund shares sold 92
Receivable from administrator-net (Note B) 9
Total Assets 108,659
Liabilities
Dividends payable 13
Payable for securities purchased 29,268
Payable for Fund shares redeemed 103
Payable to investment manager-net (Notes A & B) 3
Accrued expenses and other payables 87
Total Liabilities 29,474
Net Assets at value $ 79,185
Net Assets consist of:
Paid-in capital $ 78,427
Distributions in excess of net investment income (13)
Accumulated net realized gains (losses) on investments 2,031
Net unrealized appreciation (depreciation) in value of investments (1,260)
Net Assets at value $ 79,185
Net Assets
Neuberger Berman Investor Class $ 31,714
Lehman Brothers Institutional Class 47,471
Shares Outstanding ($.001 par value; unlimited shares authorized)
Neuberger Berman Investor Class 3,142
Lehman Brothers Institutional Class 4,697
Net Asset Value, offering and redemption price per share
Neuberger Berman Investor Class $ 10.09
Lehman Brothers Institutional Class 10.11
*Cost of investments:
Unaffiliated issuers $101,185
Affiliated issuers 2,518
Total cost of investments $103,703
OCTOBER 31, 2005
See Notes to Financial Statements
15
Statement of Operations
LEHMAN BROTHERS CORE BOND FUND
------------------------------
Neuberger Berman Income Funds Period from Year
October 1, Ended
2005 to September 30,
October 31, 2005
2005
(000's omitted)
Investment Income
Income (Note A):
Interest income-unaffiliated issuers $ 266 $ 5,063
Income from investments in affiliated issuers (Note F) 11 16
Total income 277 5,079
Expenses:
Investment management fee (Notes A & B) 16 461
Administration fee (Note B):
Neuberger Berman Investor Class 6 75
Lehman Brothers Institutional Class 6 117
Distribution fees (Note B):
Neuberger Berman Investor Class 6 73
Shareholder servicing agent fees:
Neuberger Berman Investor Class 5 9
Lehman Brothers Institutional Class 2 26
Audit fees 11 20
Custodian fees (Note B) 7 29
Legal fees 2 8
Registration and filing fees 2 66
Shareholder reports 14 15
Trustees' fees and expenses 2 6
Miscellaneous 1 1
Total expenses 80 906
Expenses reimbursed by administrator (Note B) (28) (115)
Investment management fee waived (Note A) (13) (49)
Expenses reduced by custodian fee expense offset arrangement (Note B) (0) (1)
Total net expenses 39 741
Net investment income (loss) 238 4,338
Realized and Unrealized Gain (Loss) on Investments (Note A)
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers (345) 3,763
Change in net unrealized appreciation (depreciation) in value of:
Unaffiliated investment securities (562) (3,122)
Net gain (loss) on investments (907) 641
Net increase (decrease) in net assets resulting from operations $(669) $ 4,979
See Notes to Financial Statements
16
Statement of Changes in Net Assets
LEHMAN BROTHERS CORE BOND FUND
----------------------------------------------------
Neuberger Berman Income Funds Period from Year Ended Year Ended
October 1, 2005 September 30, September 30,
to October 31, 2005 2004
2005
(000's omitted)
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) $ 238 $ 4,338 $ 6,280
Net realized gain (loss) on investments (345) 3,763 5,786
Change in net unrealized appreciation (depreciation) of investments (562) (3,122) (2,856)
Net increase (decrease) in net assets resulting from operations (669) 4,979 9,210
Distributions to Shareholders From (Note A):
Net investment income:
Neuberger Berman Investor Class (91) (892) (554)
Lehman Brothers Institutional Class (155) (3,501) (5,764)
Net realized gain on investments:
Neuberger Berman Investor Class -- (647) (925)
Lehman Brothers Institutional Class -- (5,013) (7,830)
Total distributions to shareholders (246) (10,053) (15,073)
From Fund Share Transactions (Note D):
Proceeds from shares sold:
Neuberger Berman Investor Class 1,349 15,456 8,933
Lehman Brothers Institutional Class 380 14,608 33,688
Proceeds from reinvestment of dividends and distributions:
Neuberger Berman Investor Class 84 1,303 1,253
Lehman Brothers Institutional Class 165 8,243 14,022
Payments for shares redeemed:
Neuberger Berman Investor Class (568) (10,795) (9,602)
Lehman Brothers Institutional Class (978) (203,753) (24,385)
Net increase (decrease) from Fund share transactions 432 (174,938) 23,909
Net Increase (Decrease) in Net Assets (483) (180,012) 18,046
Net Assets:
Beginning of period 79,668 259,680 241,634
End of period $79,185 $ 79,668 $259,680
Undistributed net investment income (loss) at end of period $ -- $ -- $ 7
Distributions in excess of net investment income at end of period $ (13) $ (30) $ --
OCTOBER 31, 2005
See Notes to Financial Statements
17
Notes to Financial Statements Lehman Brothers Core Bond Fund
Note A--Summary of Significant Accounting Policies:
1 General: Lehman Brothers Core Bond Fund (the "Fund") is a separate
operating series of Neuberger Berman Income Funds (the "Trust"), a Delaware
statutory trust organized pursuant to a Trust Instrument dated December 23,
1992. The Trust is registered as a diversified open-end management
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"), and its shares are registered under the Securities Act of
1933, as amended (the "1933 Act"). The Fund currently offers Neuberger
Berman Investor Class shares (the "Investor Class") and Lehman Brothers
Institutional Class shares (the "Institutional Class"). The Fund had no
operations until June 13, 2005, other than matters relating to its
organization and registration of its shares as a series of the Trust under
the 1933 Act. The Fund acquired all of the assets and assumed all of the
liabilities of the Ariel Premier Bond Fund (the "Predecessor Fund"), a
series of Ariel Investment Trust (see Note G for more information). The
Board of Trustees of the Trust (the "Board") may establish additional
series or classes of shares without the approval of shareholders.
The assets of the Fund belong only to the Fund, and the liabilities of the
Fund are borne solely by the Fund and no other.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires Neuberger Berman Management Inc.
("Management") to make estimates and assumptions at the date of the
financial statements. Actual results could differ from those estimates.
2 Portfolio valuation: Investment securities are valued as indicated in the
notes following the Schedule of Investments.
3 Securities transactions and investment income: Securities transactions are
recorded on a trade date basis. Interest income, including accretion of
discount (adjusted for original issue discount, where applicable), and
amortization of premium, where applicable, is recorded on the accrual
basis. Realized gains and losses from securities transactions, if any, are
recorded on the basis of identified cost and stated separately in the
Statement of Operations.
4 Income tax information: It is the policy of the Fund to continue to qualify
as a regulated investment company by complying with the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its earnings to
its shareholders. Therefore, no Federal income or excise tax provision is
required.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations, which may differ from U.S.
generally accepted accounting principles. These differences are primarily
due to differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund as a whole. The Fund may
also utilize earnings and profits distributed to shareholders on redemption
of shares as a part of the dividends paid deduction for income tax
purposes.
18
OCTOBER 31, 2005
As determined on October 31, 2005, permanent differences resulting
primarily from different book and tax accounting for characterization of
distributions were reclassified at period end. These reclassifications had
no effect on net income, net assets or net assets per share of the Fund.
The tax character of distributions paid during the period ended October 31,
2005/(1)/ and during the years ended September 30, 2005/(2) /and September
30, 2004 were as follows:
Distributions Paid From:
Ordinary Income Long-Term Capital Gain Tax Return of Capital Total
2005/(1)/ 2005/(2)/ 2004 2005/(1)/ 2005/(2)/ 2004 2005/(1)/ 2005/(2)/ 2004 2005/(1)/ 2005/(2)/ 2004
$245,947 $7,871,574 $11,279,030 $-- $2,180,786 $3,793,486 $-- $-- $-- $245,947 $10,052,360 $15,072,516
(1)During the period October 1, 2005 to October 31, 2005.
(2)During the year ended September 30, 2005.
As of October 31, 2005, the components of distributable earnings
(accumulated losses) on a U.S. Federal income tax basis were as follows:
Undistributed Undistributed Unrealized Loss
Ordinary Long-Term Appreciation Carryforwards
Income Gain (Depreciation) and Deferrals Total
$2,090,239 $298,651 ($1,292,240) ($325,420) $771,230
The difference between book basis and tax basis distributable earnings is
attributable primarily to the timing differences of wash sales and
distribution payments.
To the extent the Fund's net realized capital gains, if any, can be offset
by capital loss carryforwards, it is the policy of the Fund not to
distribute such gains. As determined at October 31, 2005, the Fund had
unused capital loss carryforwards available for Federal income tax purposes
to offset net realized capital gains, if any, of $325,420, expiring in
2013.
5 Distributions to shareholders: The Fund earns income, net of expenses,
daily on its investments. It is the Fund's policy to declare distributions
from net investment income on each business day; such distributions are
paid monthly. Distributions from net realized capital gains, if any, are
generally distributed in December. Income distributions and capital gain
distributions to shareholders are recorded on the ex-date.
6 Expense allocation: Certain expenses are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the Fund.
Expenses of the Trust that are not directly attributed to the Fund are
allocated among the funds, on the basis of relative net assets, except
where a more appropriate allocation of expenses to each of the funds can
otherwise be made fairly. Expenses borne by the complex of related
investment companies, which includes open-end and closed-end investment
companies for which Management serves as investment manager, that are not
directly attributed to the Fund or the Trust are allocated among the Fund
and the other investment companies in the complex or series thereof on the
basis of relative net assets, except where a more appropriate allocation of
expenses to each investment company in the complex or series thereof can
otherwise be made fairly. The Fund's expenses (other than those specific to
each class) are allocated proportionally each day between the classes based
upon the relative net assets of each class.
19
Notes to Financial Statements Lehman Brothers Core Bond Fund cont'd
7 Repurchase agreements: The Fund may enter into repurchase agreements with
institutions that Management has determined are creditworthy. Each
repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase agreement be transferred to the
custodian in a manner sufficient to enable the Fund to assert a perfected
security interest in those securities in the event of a default under the
repurchase agreement. The Fund monitors, on a daily basis, the value of the
securities transferred to ensure that their value, including accrued
interest, is greater than amounts owed to the Fund under each such
repurchase agreement.
8 Dollar rolls: The Fund may enter into dollar roll transactions with respect
to mortgage-backed securities. In a dollar roll transaction, the Fund sells
securities for delivery in the current month and simultaneously agrees to
repurchase substantially similar (i.e., same type and coupon) securities on
a specified future date from the same party. During the period before the
repurchase, the Fund forgoes principal and interest payments on the
securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred
to as the "drop"), as well as by the interest earned on the cash proceeds
of the initial sale. Dollar rolls may increase fluctuations in the Fund's
net asset value and may be viewed as a form of leverage. There is a risk
that the counter party will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund.
9 Transactions with other funds managed by Neuberger Berman Management Inc.:
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund may invest in a money market fund managed by
Management or an affiliate. The Fund invests in the Neuberger Berman Prime
Money Fund ("Prime Money"), as approved by the Board. Prime Money seeks to
provide the highest available current income consistent with safety and
liquidity. For any cash that the Fund invests in Prime Money, Management
waives a portion of its management fee equal to the management fee it
receives from Prime Money on those assets (the "Arrangement"). For the
period ended October 31, 2005, management fees waived under this
Arrangement amounted to $213 and is reflected in the Statement of
Operations under the caption "Investment management fee waived." For the
period ended October 31, 2005, income earned under this Arrangement
amounted to $10,615 and is reflected in the Statement of Operations under
the caption "Income from investments in affiliated issuers."
10 Other: All net investment income and realized and unrealized capital gains
and losses of the Fund are allocated, on the basis of relative net assets,
pro rata among its respective classes.
11 Indemnifications: Like many other companies, the Trust's organizational
documents provide that its officers and trustees are indemnified against
certain liabilities arising out of the performance of their duties to the
Trust. In addition, both in some of its principal service contracts and in
the normal course of its business, the Trust enters into contracts that
provide indemnifications to other parties for certain types of losses or
liabilities. The Trust's maximum exposure under these arrangements is
unknown as this could involve future claims against the Trust.
20
OCTOBER 31, 2005
Note B--Management Fees, Administration Fees, Distribution Arrangements,
and Other Transactions with Affiliates:
As of June 13, 2005, the Fund retains Management as its investment manager
under a Management Agreement. For such investment management services, the
Fund pays Management a fee at the annual rate of 0.25% of the first $500
million of the Fund's average daily net assets; 0.225% of the next $500
million; 0.20% of the next $500 million; 0.175% of the next $500 million;
and 0.15% of average daily net assets in excess of $2 billion. Management
has voluntarily agreed to waive its management fee in the amount of 0.20%
of the Fund's average daily net assets through October 31, 2006. For the
period ended October 31, 2005, such waived fees amounted to $12,657.
Lehman Brothers Asset Management LLC (formerly Lincoln Capital Fixed Income
Management Company, LLC), ("LBAM"), as sub-adviser to the Fund, receives a
monthly fee paid by Management, based on an annual rate of the Fund's
average daily net assets. The Fund does not pay a fee directly to LBAM for
such services.
Prior to June 13, 2005, Ariel Capital Management, LLC (the "prior Adviser")
acted as the investment adviser to the Predecessor Fund and was paid an
investment advisory fee of 0.35% of average daily net assets.
As of June 13, 2005, the Fund retains Management as its administrator under
two Administration Agreements. The Investor Class of the Fund pays
Management an administration fee at the annual rate of 0.27% of its average
daily net assets and the Institutional Class pays Management an
administration fee at the annual rate of 0.15% of its average daily net
assets under these agreements. Additionally, Management retains State
Street Bank and Trust Company ("State Street") as its sub-administrator
under a Sub-Administration Agreement. Management pays State Street a fee
for all services received under the agreement.
Prior to June 13, 2005, the Investor Class of the Predecessor Fund paid the
prior Adviser an administration fee at the annual rate of 0.25% of its
average daily net assets and the Institutional Class of the Predecessor
Fund paid the prior Adviser an administration fee at the annual rate of
0.10% of its average daily net assets.
Each class of shares also has a distribution agreement with Management.
Management receives no commissions for sales or redemptions of shares of
beneficial interest of each share class, but receives fees from the
Investor Class under that class' Plan, as described below.
For the Fund's Investor Class, Management acts as agent in arranging for
the sale of class shares without commission and bears advertising and
promotion expenses. The Board has adopted a distribution plan (the "Plan")
with respect to this class, pursuant to Rule 12b-1 under the 1940 Act. The
Plan provides that, as compensation for administrative and other services
provided to this class, Management's activities and expenses related to the
sale and distribution of this class of shares, and ongoing services
provided to investors in this class, Management receives from this class a
fee at the annual rate of 0.25% of Investor
21
Notes to Financial Statements Lehman Brothers Core Bond Fund cont'd
Class' average daily net assets. Management receives this amount to provide
distribution and shareholder servicing for this class and pays a portion of
it to institutions that provide such services. Those institutions may use
the payments for, among other purposes, compensating employees engaged in
sales and/or shareholder servicing. The amount of fees paid by this class
during any year may be more or less than the cost of distribution and other
services provided to this class. NASD rules limit the amount of annual
distribution fees that may be paid by a mutual fund and impose a ceiling on
the cumulative distribution fees paid. The Trust's Plan complies with those
rules.
Prior to June 13, 2005, the Investor Class of the Predecessor Fund paid
Ariel Distributors, Inc. a fee at the annual rate of 0.25% of its average
daily net assets for distribution services rendered.
As of June 13, 2005, Management has contractually undertaken to reimburse
operating expenses (including the fees payable to Management but excluding
interest, taxes, brokerage commissions, and extraordinary expenses)
("Operating Expenses") which exceed the expense limitation as detailed in
the following table:
Reimbursement
from Management
Expense for the Period Ended
Class Limitation/(1)/ Expiration October 31, 2005
Investor Class 0.85% 10/31/15 $13,113
Institutional Class 0.45% 10/31/15 15,063
(1)Expense limitation per annum of the respective class' average daily net
assets.
Each class has agreed to repay Management for its excess Operating Expenses
previously reimbursed by Management, so long as its annual Operating
Expenses during that period do not exceed its expense limitation, and the
repayment is made within three years after the year in which Management
issued the reimbursement. During the period ended October 31, 2005, there
was no reimbursement to Management under these agreements. At October 31,
2005, contingent liabilities to Management under the agreements were as
follows:
Expiring in
2008:
Investor Class $51,691
Institutional Class 91,826
Prior to June 13, 2005, the prior Adviser paid all of the Predecessor
Fund's expenses other than investment advisory fees, administration fees,
interest, taxes, broker commissions, extraordinary expenses, and the
Investor Class distribution fees accrued under a plan pursuant to Rule
12b-1 under the 1940 Act.
Management and LBAM, a sub-adviser to the Fund, are wholly-owned
subsidiaries of Lehman Brothers Holdings Inc., a publicly-owned holding
company. LBAM is retained by Management to provide day-to-day investment
management services. As investment adviser, Management is responsible for
overseeing the investment activities of LBAM. Several individuals who are
officers and/or Trustees of the Trust are also employees of Management.
22
OCTOBER 31, 2005
The Fund has an expense offset arrangement in connection with its custodian
contract. For the period ended October 31, 2005, the impact of this
arrangement was a reduction of expenses of $138.
Note C--Securities Transactions:
Cost of purchases and proceeds of sales and maturities of long-term
securities (excluding short-term securities) for the period ended October
31, 2005 were as follows:
Sales and
Purchases of Purchases excluding Sales and Maturities Maturities excluding
U.S. Government U.S. Government of U.S. Government U.S. Government
and Agency Obligations and Agency Obligations and Agency Obligations and Agency Obligations
$27,745,047 $6,972,121 $24,442,006 $8,483,519
Note D--Fund Share Transactions:
Share activity for the period ended October 31, 2005 and the years ended
September 30, 2005 and September 30, 2004 were as follows:
For the Period Ended For the Year Ended
October 31, 2005/(1)/ September 30, 2005/(2)/
Shares Shares
Issued on Issued on
Reinvestment Reinvestment
of Dividends of Dividends
(000's Shares and Shares Shares and Shares
omitted) Sold Distributions Redeemed Total Sold Distributions Redeemed Total
Investor Class 133 8 (56) 85 1,502 127 (1,049) 580
Institutional
Class 37 16 (96) (43) 1,409 800 (19,675)/(3)/ (17,466)
For the Year Ended
September 30, 2004/(2)/
Shares
Issued on
Reinvestment
of Dividends
000's Shares and Shares Total
omitted) Sold Distributions Redeemed
Investor Class 854 121 (917) 58
Institutional
Class 3,241 1,346 (2,326) 2,261
(1)Share activity for the period October 1, 2005 to October 31, 2005.
(2)Share activity for the period October 1, 2004 to June 10, 2005 and the
year ended September 30, 2004 are for the Predecessor Fund.
(3)Redemptions for the Predecessor Fund's Institutional Class during the
year ended September 30, 2005 include the redemption of a significant
shareholder account in January 2005 that, as of the date of the
redemption, comprised 55% of total net assets.
Note E--Line of Credit:
At October 31, 2005, the Fund was a participant in a single committed,
unsecured $150,000,000 line of credit with a consortium of banks organized
by State Street, to be used only for temporary or emergency purposes.
Interest is charged on borrowings under this agreement at the overnight
Federal Funds Rate plus 0.50% per annum. A facility fee of 0.09% per annum
of the available line of credit is charged, of which the Fund has agreed to
pay its pro rata share, based on the ratio of its individual net assets to
the net assets of all participants at the time the fee is due and payable.
The fee is paid quarterly in arrears. No compensating balance is required.
Other investment companies managed by Management also participate in this
line of credit on the same terms. Because several investment companies
participate, there is no assurance that an individual fund will have access
to all or any part of the $150,000,000 at any particular time. There were
23
Notes to Financial Statements Lehman Brothers Core Bond Fund cont'd
no loans outstanding pursuant to this line of credit at October 31, 2005.
During the period ended October 31, 2005, the Fund did not utilize this
line of credit.
Note F--Investments In Affiliates*:
Income from
Balance of Balance of Investments
Shares Gross Gross Shares in Affiliated
Held Purchases Sales Held Value Issuers
September 30, and and October 31, October 31, Included in
Name of Issuer 2005 Additions Reductions 2005 2005 Total Income
Neuberger Berman Prime Money
Fund Trust Class** 2,763,588 8,393,882 8,639,311 2,518,159 $2,518,159 $10,615
---------- -------
Total $2,518,159 $10,615
========== =======
* Affiliated issuers, as defined in the 1940 Act.
** Prime Money is also managed by Management and may be considered an
affiliate since it has the same officers, Board members, and investment
manager as the Fund and because, at times, the Fund may own 5% or more
of the outstanding voting securities of Prime Money.
Note G--Reorganization of Lehman Brothers Core Bond Fund:
After the close of business on June 10, 2005, all the net assets and
liabilities of the Predecessor Fund, which was a series of the Ariel
Investment Trust, a Massachusetts business trust which commenced operations
on April 1, 1986, were reorganized into the Fund. Ariel Investment Trust is
registered as a diversified, open-end management investment company under
the 1940 Act. The reorganization was performed pursuant to a plan of
reorganization approved by the Predecessor Fund's shareholders on June 10,
2005. The reorganization was accomplished by a tax-free exchange of
2,881,565 shares of the Investor Class of the Fund (valued at $29,720,979)
for 2,881,565 share of the Investor Class of the Predecessor Fund and
4,771,414 shares of the Institutional Class of the Fund (valued at
$49,269,324) for 4,771,414 shares of the Institutional Class of the
Predecessor Fund outstanding on June 10, 2005. The Predecessor Fund's
aggregate net assets at that date ($78,990,303, including $2,305,423 of
undistributed net realized gains and $154,374 of net unrealized
appreciation) were combined with those of the Fund. The aggregate net
assets of the Fund and the Predecessor Fund immediately after the
reorganization were $78,990,303.
Note H--Change in Year End:
The Board of Trustees adopted a change in the Fund's fiscal year and tax
year end date to October 31. This change was effective beginning with this
fiscal period, which ran from October 1, 2005 to October 31, 2005.
24
OCTOBER 31, 2005
Financial Highlights Lehman Brothers Core Bond Fund
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
Neuberger Berman Investor Period from
Class October 1, 2005
to October 31, Year Ended September 30,
------------------------- ----------------------------------------------------------------
2005 2005++++ 2004(YY) 2003(EE) 2002(EE) 2001(EE)
Net Asset Value, Beginning of
Period $10.21 $10.51 $10.80 $10.72 $10.45 $ 9.87
------ - ------ ------ ------ ------ -------
Income From Investment
Operations:
Net Investment Income (Loss) .03@ .31@ .23 .28 .39 .51
Net Gains or Losses on
Securities (both realized
and unrealized) (.12) (.04) .11 .24 .37 .58
------ - ------ ------ ------ ------ -------
Total From Investment
Operations (.09) .27 .34 .52 .76 1.09
------ - ------ ------ ------ ------ -------
Less Distributions From:
Net Investment Income (.03) (.31) (.23) (.28) (.39) (.51)
Net Capital Gains -- (.26) (.40) (.16) (.10) --
------ - ------ ------ ------ ------ -------
Total Distributions (.03) (.57) (.63) (.44) (.49) (.51)
------ - ------ ------ ------ ------ -------
Net Asset Value, End of Period $10.09 $10.21 $10.51 $10.80 $10.72 $ 10.45
------ - ------ ------ ------ ------ -------
Total Return/+//+/ (.87)%** +2.64% +3.29% +5.01% +7.56% +11.27%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions) $ 31.7 $ 31.2 $ 26.0 $ 26.1 $ 22.3 $ 9.8
Ratio of Gross Expenses to
Average Net Assets# .85%* .86% .85% .85% .85% .85%
Ratio of Net Expenses to
Average Net Assets .85%*++ .85%++ .85% .85% .85% .85%
Ratio of Net Investment
Income (Loss) to Average Net
Assets 3.51%* 3.03% 2.21% 2.63% 3.65% 4.77%
Portfolio Turnover Rate 34%** 462% 390% 343% 333% 410%
Lehman Brothers Institutional Period from
Class October 1, 2005 to
October 31, Year Ended September 30,
------------------------- ----------------------------------------------------------------
2005 2005++++ 2004(YY) 2003(EE) 2002(EE) 2001(EE)
Net Asset Value, Beginning of
Period $10.22 $10.52 $10.81 $10.73 $10.45 $ 9.87
------ - ------ ------ ------ ------ -------
Income From Investment
Operations:
Net Investment Income (Loss) .03@ .33@ .28 .33 .43 .55
Net Gains or Losses on
Securities (both realized
and unrealized) (.11) (.02) .11 .24 .38 .58
------ - ------ ------ ------ ------ -------
Total From Investment
Operations (.08) .31 .39 .57 .81 1.13
------ - ------ ------ ------ ------ -------
Less Distributions From:
Net Investment Income (.03) (.35) (.28) (.33) (.43) (.55)
Net Capital Gains -- (.26) (.40) (.16) (.10) --
------ - ------ ------ ------ ------ -------
Total Distributions (.03) (.61) (.68) (.49) (.53) (.55)
------ - ------ ------ ------ ------ -------
Net Asset Value, End of Period $10.11 $10.22 $10.52 $10.81 $10.73 $ 10.45
------ - ------ ------ ------ ------ -------
Total Return/+//+/ (.73)%** +3.05% +3.72% +5.43% +8.08% +11.71%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions) $ 47.5 $ 48.5 $233.6 $215.5 $195.6 $ 213.2
Ratio of Gross Expenses to
Average Net Assets# .45%* .45% .45% .45% .45% .45%
Ratio of Net Expenses to
Average Net Assets .45%*++ .45%++ .45% .45% .45% .45%
Ratio of Net Investment
Income (Loss) to Average Net
Assets 3.91%* 3.17% 2.61% 3.04% 4.14% 5.36%
Portfolio Turnover Rate 34%** 462% 390% 343% 333% 410%
See Notes to Financial Highlights
25
Notes to Financial Highlights Lehman Brothers Core Bond Fund
/+//+/Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during each
fiscal period and assumes dividends and other distributions, if any, were
reinvested. Results represent past performance and do not guarantee future
results. Current returns may be lower or higher than the performance data
quoted. Investment returns and principal may fluctuate and shares when
redeemed may be worth more or less than original cost. The total return
would have been lower if Management had not reimbursed and/or waived
certain expenses. Performance data current to the most recent month-end
are available at www.nb.com.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
++ After reimbursement of expenses by the administrator and/or waiver of a
portion of the investment management fee. Had Management not undertaken
such actions, the annualized ratios of net expenses to average daily net
assets would have been:
Period Ended Year Ended
October 31, September 30,
2005/(1)/ 2005
Neuberger Berman Investor Class 1.58% 1.05%
Lehman Brothers Institutional Class 1.05% 0.55%
(1) Period from October 1, 2005 to October 31, 2005.
@ Calculated based on the average number of shares outstanding during the
fiscal period.
++++ Effective after the close of business on June 10, 2005, Management
succeeded Ariel Capital Management, LLC, as the Fund's investment
manager. The financial highlights for the year ended September 30, 2005
include the income and expenses attributable to the Ariel Premier Bond
Fund for the period from October 1, 2004 through June 10, 2005 and the
income and expenses of the Fund, thereafter.
YY Audited by other auditors whose report dated November 15, 2004 expressed
an unqualified opinion.
EE Audited by other auditors whose report dated October 17, 2003 expressed
an unqualified opinion.
* Annualized.
** Not annualized.
26
OCTOBER 31, 2005
Report of Independent Registered Public Accounting Firm
To the Board of Trustees
Neuberger Berman Income Funds and
Shareholders of
Lehman Brothers Core Bond Fund
We have audited the accompanying statement of assets and liabilities of the
Lehman Brothers Core Bond Fund, a series of the Neuberger Berman Income Funds
(the "Trust"), including the schedule of investments, as of October 31, 2005,
and the related statements of operations, the statements of changes in net
assets and the financial highlights for the period then ended and for the year
ended September 30, 2005. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The statement of changes in net assets for the year ended
September 30, 2004 and the financial highlights for each of the four years in
the period ended September 30, 2004 have been audited by other auditors, whose
reports dated November 15, 2004 and October 17, 2003 expressed unqualified
opinions on such financial statements and financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Trust's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Trust's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 2005, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Lehman Brothers Core Bond Fund, as of October 31, 2005, and the results of its
operations, the changes in its net assets and the financial highlights for the
period then ended and for the year ended September 30, 2005, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Tait, Weller & Baker LLP
Philadelphia, Pennsylvania
December 9, 2005
27
Directory
Investment Manager, Administrator and Distributor
Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, NY 10158-0180
800.877.9700 or 212.476.8800
Institutional Services 800.366.6264
Sub-Adviser
Lehman Brothers Asset Management Inc.
745 Seventh Avenue
New York, NY 10019
Custodian and Shareholder Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
For Investor Class Shareholders
Address correspondence to:
Neuberger Berman Funds
Boston Service Center
P.O. Box 8403 Boston, MA 02266-8403
800.877.9700 or 212.476.8800
For Institutional Class Shareholders
Address correspondence to:
Neuberger Berman Management Inc.
605 Third Avenue Mail Drop 2-7
New York, NY 10158-0180
Attn: Institutional Services
888.556.9030
Legal Counsel
Kirkpatrick & Lockhart Nicholson Graham LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036
Independent Registered Public Accounting Firm
Tait, Weller & Baker LLP
1818 Market Street
Suite 2400
Philadelphia, PA 19103
28
OCTOBER 31, 2005
Trustee and Officer Information (Unaudited)
The following tables set forth information concerning the trustees and officers
of the Trust. All persons named as trustees and officers also serve in similar
capacities for other funds administered or managed by Management. The Statement
of Additional Information includes additional information about fund trustees
and is available upon request, without charge, by calling (800) 877-9700.
Information about the Board of Trustees
Number of
Portfolios in
Position and Fund Complex Other Directorships
Length of Time Overseen by Held Outside Fund
Name, Age, and Address/(1)/ Served/(2)/ Principal Occupation(s)/(3)/ Trustee/(4)/ Complex by Trustee
- ------------------------------------------------------------------------------------------------------------------------
Independent Trustees
- ------------------------------------------------------------------------------------------------------------------------
John Cannon (75) Trustee since Consultant. Formerly, 45 Independent Trustee or
1994 Chairman, CDC Investment Director of three series of
Advisers (registered investment Oppenheimer Funds:
adviser), 1993 to January 1999; Limited Term New York
formerly, President and Chief Municipal Fund, Rochester
Executive Officer, AMA Fund Municipals, and
Investment Advisors, an affiliate Oppenheimer Convertible
of the American Medical Securities Fund, since 1992.
Association.
- ------------------------------------------------------------------------------------------------------------------------
Faith Colish (70) Trustee since Counsel, Carter Ledyard & 45 Director, American Bar
2000 Milburn LLP (law firm) since Retirement Association
October 2002; formerly, (ABRA) since
1997 (not-for- Attorney-at-Law and
President, profit membership Faith
Colish, A Professional association).
Corporation, 1980 to 2002.
- ------------------------------------------------------------------------------------------------------------------------
C. Anne Harvey (68) Trustee since Consultant, C.A. Harvey 45 President, Board of
2000 Associates since June 2001; Associates to The National
formerly, Director, AARP, 1978 Rehabilitation Hospital's
to December 2001. Board of Directors since
2002; formerly, Member,
Individual Investors
Advisory Committee to the
New York Stock Exchange
Board of Directors, 1998 to
June 2002; formerly, Member,
American Savings Education
Council's Policy Board
(ASEC), 1998 to 2000;
formerly, Member, Executive
Committee, Crime Prevention
Coalition of America, 1997
to 2000.
29
Trustee and Officer Information cont'd
Number of
Portfolios in
Position and Fund Complex Other Directorships
Length of Overseen by Held Outside Fund
Name, Age, and Address/(1)/ Time Served/(2)/ Principal Occupation(s)/(3)/ Trustee/(4)/ Complex by Trustee
- ---------------------------------------------------------------------------------------------------------------------------
Barry Hirsch (72) Trustee since Attorney-at-Law. Formerly, 45 None.
1993 Senior Counsel, Loews
Corporation (diversified financial
corporation), May 2002 to April
2003; formerly, Senior Vice
President, Secretary and General
Counsel, Loews Corporation.
- ---------------------------------------------------------------------------------------------------------------------------
Robert A. Kavesh (78) Trustee since Marcus Nadler Professor 45 Director, The Caring
1993 Emeritus of Finance and Community (not-for-profit);
Economics, New York formerly, Director, DEL
University Stern School of Laboratories, Inc. (cosmetics
Business; formerly, Executive and pharmaceuticals), 1978
Secretary-Treasurer, American to 2004; formerly, Director,
Finance Association, 1961 to Apple Bank for Savings,
1979. 1979 to 1990; formerly,
Director, Western Pacific
Industries, Inc., 1972 to 1986
(public company).
- ---------------------------------------------------------------------------------------------------------------------------
Howard A. Mileaf (68) Trustee since Retired. Formerly, Vice 45 Director, WHX Corporation
2000 President and Special Counsel, (holding company) since
WHX Corporation (holding August 2002; Director,
company), 1993 to 2001. Webfinancial Corporation
(holding company) since
December 2002; Director,
State Theatre of New Jersey
(not-for-profit theater)
since 2000; formerly,
Director, Kevlin Corporation
(manufacturer of microwave
and other products).
- --------------------------------------------------------------------------------------------------------------------------
Edward I. O'Brien (77) Trustee since Formerly, Member, Investment 45 Director, Legg Mason, Inc.
2000 Policy Committee, Edward (financial services
Jones, 1993 to 2001; President,
holding company) Securities
Industry Association since 1993;
formerly, ("SIA") (securities
industry's Director, Boston
representative in government
Financial Group (real estate
relations and regulatory matters
and tax shelters), 1993 to at the
federal and state levels), 1999.
1974 to 1992; Adviser to SIA,
November 1992 to November
1993.
- ---------------------------------------------------------------------------------------------------------------------------
30
OCTOBER 31, 2005
Number of
Portfolios in
Position and Fund Complex Other Directorships
Length of Overseen by Held Outside Fund
Name, Age, and Address/(1)/ Time Served/(2)/ Principal Occupation(s)/(3)/ Trustee/(4)/ Complex by Trustee
- ---------------------------------------------------------------------------------------------------------------------------
William E. Rulon (73) Trustee since Retired. Formerly, Senior Vice 45 Director, Pro-Kids Golf and
1993 President, Foodmaker, Inc. Learning Academy (teach
(operator and franchiser of golf and computer usage to
restaurants) until January 1997. "at risk" children) since 1998;
formerly, Director,
Prandium, Inc. (restaurants)
from March 2001 to July
2002.
- ---------------------------------------------------------------------------------------------------------------------------
Cornelius T. Ryan (74) Trustee since Founding General Partner, 45 Director, Capital Cash
2000 Oxford Partners and Oxford Management Trust (money
Bioscience Partners (venture market fund), Naragansett
capital partnerships) and Insured Tax-Free Income
President, Oxford Venture Fund, Rocky Mountain
Corporation. Equity Fund, Prime Cash
Fund, several private
companies and QuadraMed
Corporation (NASDAQ).
- ---------------------------------------------------------------------------------------------------------------------------
Tom D. Seip (55) Trustee since General Partner, Seip 45 Director, H&R
2000 Investments LP (a private Block, Inc. (financial services
investment partnership); company) since May 2001;
formerly, President and CEO, Director, Forward
Westaff, Inc. (temporary Management, Inc. (asset
staffing), May 2001 to January management)
2002; Senior Executive at the since 2001; formerly,
Charles Schwab Corporation Director, General Magic
from 1983 to 1999, including (voice recognition software),
Chief Executive Officer, Charles 2001 to 2002; formerly,
Schwab Investment Director, E-Finance
Management, Inc. and Trustee, Corporation (credit
Schwab Family of Funds and decisioning services), 1999 to
Schwab Investments from 1997 2003; formerly, Director,
to 1998; and Executive Vice Save-Daily.com (micro
President-Retail Brokerage, investing services), 1999 to
Charles Schwab Investment 2003; Director, Offroad
Management from 1994 to Capital Inc. (pre-public
1997. internet commerce company).
- ---------------------------------------------------------------------------------------------------------------------------
31
Trustee and Officer Information cont'd
Number of
Portfolios in
Position and Fund Complex Other Directorships
Length of Overseen by Held Outside Fund
Name, Age, and Address/(1)/ Time Served/(2)/ Principal Occupation(s)/(3)/ Trustee/(4)/ Complex by Trustee
- -------------------------------------------------------------------------------------------------------------------------
Candace L. Straight (58) Trustee since Private investor and consultant 45 Director, The Proformance
1993 specializing in the insurance Insurance Company (personal
industry; formerly, Advisory lines property and casualty
Director, Securitas Capital LLC insurance company) since
(a global private equity March 2004; Director,
investment firm dedicated to Providence Washington
making investments in the (property and casualty
insurance sector), 1998 to insurance company) since
December 2002. December 1998; Director,
Summit Global Partners
(insurance brokerage firm)
since October 2000.
- -------------------------------------------------------------------------------------------------------------------------
Peter P. Trapp (61) Trustee since Regional Manager for Atlanta 45 None.
2000 Region, Ford Motor Credit
Company since August 1997;
formerly, President, Ford Life
Insurance Company, April 1995 to
August 1997.
- -------------------------------------------------------------------------------------------------------------------------
Trustees who are "Interested Persons"
- -------------------------------------------------------------------------------------------------------------------------
Jack L. Rivkin* (65) President and Executive Vice President and 45 Director, Dale Carnegie and
Trustee since Chief Investment Officer, Associates, Inc. (private
2002 Neuberger Berman Inc. (holding company) since 1998;
company) since 2002 and 2003, Director, Emagin Corp.
respectively; Executive Vice (public company) since 1997;
President and Chief Investment Director, Solbright, Inc.
Officer, Neuberger since (private company) since
December 2002 and 2003, 1998; Director, Infogate, Inc.
respectively; Director and (private company) since
Chairman, Management since 1997; Director, Broadway
December 2002; formerly, Television Network (private
Executive Vice President, company) since 2000.
Citigroup Investments, Inc.
from September 1995 to
February 2002; formerly,
Executive Vice President,
Citigroup Inc. from September
1995 to February 2002.
- -------------------------------------------------------------------------------------------------------------------------
32
OCTOBER 31, 2005
Number of
Portfolios in
Position and Fund Complex Other Directorships
Length of Overseen by Held Outside Fund
Name, Age, and Address/(1)/ Time Served/(2)/ Principal Occupation(s)/(3)/ Trustee/(4)/ Complex by Trustee
- ------------------------------------------------------------------------------------------------------------------------
Peter E. Sundman* (46) Chairman of Executive Vice President, 45 Director and Vice President,
the Board and Neuberger Berman Inc. (holding Neuberger & Berman
Trustee since company) since 1999; Head of Agency, Inc. since 2000;
2000; Chief Neuberger Berman Inc.'s formerly, Director,
Executive Mutual Funds Business (since Neuberger Berman Inc.
Officer since 1999) and Institutional Business (holding company) from
1999; (from 1999 to October 2005); October 1999 to March
President from responsible for Managed 2003; Trustee, Frost Valley
1999 to 2000 Accounts Business and YMCA.
intermediary distribution since
October 2005; President and
Director, Management since 1999;
Executive Vice President, Neuberger
since 1999; formerly, Principal,
Neuberger from 1997 to 1999;
formerly, Senior Vice President,
Management from 1996 to 1999.
(1)The business address of each listed person is 605 Third Avenue, New York, New
York 10158.
(2)Pursuant to the Trust's Trust Instrument, each Trustee shall hold office for
life or until his or her successor is elected or the Trust terminates; except
that (a) any Trustee may resign by delivering a written resignation; (b) any
Trustee may be removed with or without cause at any time by a written
instrument signed by at least two-thirds of the other Trustees; (c) any
Trustee who requests to be retired, or who has become unable to serve, may be
retired by a written instrument signed by a majority of the other Trustees;
and (d) any Trustee may be removed at any shareholder meeting by a vote of at
least two-thirds of the outstanding shares.
(3)Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
(4)For funds organized in a master-feeder structure, we count the master fund
and its associated feeder funds as a single portfolio.
* Indicates a Trustee who is an "interested person" within the meaning of the
1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Trust by
virtue of the fact that they are officers and/or directors of Management and
Executive Vice Presidents of Neuberger.
33
Trustee and Officer Information cont'd
Information about the Officers of the Trust
Position and
Name, Age, and Address/(1)/ Length of Time Served/(2)/ Principal Occupation(s)/(3)/
- -----------------------------------------------------------------------------------------------------------
Michael J. Bradler (35) Assistant Treasurer since 2005 Employee, Management since 1997; Assistant
Treasurer, fifteen registered investment
companies for which Management acts as
investment manager and administrator since
2005.
Claudia A. Brandon (49) Secretary since 1985 Vice President-Mutual Fund Board Relations,
Management since 2000 and Assistant
Secretary since 2004; Vice President,
Neuberger since 2002 and employee since
1999; Assistant Secretary, Management since
2004; formerly, Vice President, Management
from 1986 to 1999; Secretary, fifteen registered
investment companies for which Management
acts as investment manager and administrator
(three since 2000, four since 2002, three since
2003, four since 2004 and one since 2005).
Robert Conti (49) Vice President since 2000 Senior Vice President, Neuberger since 2003;
formerly, Vice President, Neuberger from 1999
to 2003; Senior Vice President, Management
since 2000; formerly, Controller, Management
until 1996; formerly, Treasurer, Management
from 1996 to 1999; Vice President, fifteen
registered investment companies for which
Management acts as investment manager and
administrator (three since 2000, four since
2002, three since 2003, four since 2004 and one
since 2005).
Brian J. Gaffney (52) Vice President since 2000 Managing Director, Neuberger since 1999;
Senior Vice President, Management since
2000; formerly, Vice President, Management
from 1997 to 1999; Vice President, fifteen
registered investment companies for which
Management acts as investment manager and
administrator (three since 2000, four since
2002, three since 2003, four since 2004 and one
since 2005).
34
OCTOBER 31, 2005
Position and
Name, Age, and Address/(1)/ Length of Time Served/(2)/ Principal Occupation(s)/(3)/
- -----------------------------------------------------------------------------------------------------------------
Sheila R. James (40) Assistant Secretary since 2002 Employee, Neuberger since 1999; formerly, Employee,
Management from 1991 to 1999; Assistant Secretary,
fifteen registered investment companies for which
Management acts as investment manager and
administrator (seven since 2002, three since 2003,
four since 2004, and one since 2005).
Kevin Lyons (50) Assistant Secretary since 2003 Employee, Neuberger since 1999; formerly, Employee,
Management from 1993 to 1999; Assistant Secretary,
fifteen registered investment companies for which
Management acts as investment manager and
administrator (ten since 2003, four since 2004 and
one since 2005).
John M. McGovern (35) Treasurer and Principal Financial and Vice President, Neuberger since January 2004;
Accounting Officer since 2005; prior Employee, Management since 1993; Treasurer and
thereto, Assistant Treasurer since Principal Financial and Accounting Officer, fifteen
2002 registered investment companies for which Management
acts as investment manager and administrator
(fifteen since 2005); formerly, Assistant Treasurer,
fifteen registered investment companies for which
Management acts as investment manager and
administrator from 2002 to 2005.
Frank Rosato (34) Assistant Treasurer since 2005 Employee, Management since 1995; Assistant
Treasurer, fifteen registered investment
companies for which Management acts as
investment manager and administrator since
2005.
Frederic B. Soule (59) Vice President since 2000 Senior Vice President, Neuberger since 2003;
formerly, Vice President, Neuberger from 1999
to 2003; formerly, Vice President,
Management from 1995 to 1999; Vice
President, fifteen registered investment
companies for which Management acts as
investment manager and administrator (three
since 2000, four since 2002, three since 2003,
four since 2004 and one since 2005).
35
Trustee and Officer Information cont'd
Position and
Name, Age, and Address/(1)/ Length of Time Served/(2)/ Principal Occupation(s)/(3)/
- ------------------------------------------------------------------------------------------------------------
Chamaine Williams (34) Chief Compliance Officer since 2005 Vice President, Lehman Brothers Inc. since
2003; Chief Compliance Officer, fifteen
registered investment companies for which
Management acts as investment manager and
administrator (since 2005); Chief Compliance
Officer, Lehman Brothers Asset Management
Inc. since 2003; Chief Compliance Officer,
Lehman Brothers Alternative Investment
Management LLC since 2003; formerly, Vice
President, UBS Global Asset Management
(US) Inc. (formerly, Mitchell Hutchins Asset
Management, a wholly-owned subsidiary of
PaineWebber Inc.) from 1997 to 2003.
- ----------------------------
(1)The business address of each listed person is 605 Third Avenue, New York, New
York 10158.
(2)Pursuant to the By-Laws of the Trust, each officer elected by the Trustees
shall hold office until his or her successor shall have been elected and
qualified or until his or her earlier death, inability to serve, or
resignation. Officers serve at the pleasure of the Trustees and may be
removed at any time with or without cause.
(3)Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
36
OCTOBER 31, 2005
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine
how to vote proxies relating to portfolio securities is available, without
charge, by calling 1-800-877-9700 (toll-free) and on the website of the
Securities and Exchange Commission, at www.sec.gov. Information regarding how
the Trust voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 will also be available without charge, by calling
1-800-877-9700 (toll-free), on the website of the Securities and Exchange
Commission at www.sec.gov, and on the Trust's website at www.nb.com.
Quarterly Portfolio Schedule
The Trust files a complete schedule of portfolio holdings for each Fund with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q. The Trust's Forms N-Q are available on the Securities
and Exchange Commission's website at www.sec.gov and may be reviewed and copied
at the Securities and Exchange Commission's Public Reference Room in Washington,
DC. Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The information on Form N-Q is available upon request,
without charge, by calling 1-800-877-9700 (toll-free).
37
Notice to Shareholders (Unaudited)
Under most state tax laws, mutual fund dividends which are derived from direct
investments in U.S. Government obligations are not taxable, as long as a Fund
meets certain requirements. Some states require that a Fund must provide
shareholders with a written notice, within 60 days of the close of a Fund's
taxable year, designating the portion of the dividends which represents interest
which those states consider to have been earned on U.S. Government obligations.
The chart below shows the percentage of income derived from such investments for
the twelve months ended October 31, 2005. This information should not be used to
complete your tax returns.
Other Direct Other Indirect
U.S. Treasury U.S. Government U.S. Government Repurchase
Obligations Obligations Obligations Agreements
Core Bond Fund 8.5% 4.0% 10.1% 0.0%
You will receive information to be used in filing your 2005 tax returns, which
will include a notice of the exact tax status of all dividends paid to you by
each Fund during calendar year 2005. Please consult your own tax advisor for
details as to how this information should be reflected on your tax returns.
38
Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Fund. This report is prepared for the general information of shareholders and is
not an offer of shares of the Fund. Shares are sold only through the currently
effective prospectus, which must precede or accompany this report.
Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, NY 10158-0180
For Neuberger Berman Investor Class Shares:
Shareholder Services
800.877.9700
Institutional Services
800.366.6264
For Lehman Brothers Institutional Class Shares:
Shareholder Services
800.877.9700
Institutional Support Services
888.556.9030
www.nb.com
[LOGO] recycle F0403 12/05
ITEM 2. CODE OF ETHICS
The Board of Trustees ("Board") of Neuberger Berman Income Funds ("Registrant")
adopted a code of ethics that applies to the Registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions ("Code of Ethics"). For the
period covered by this Form N-CSR, there were no amendments to the Code of
Ethics and there were no waivers from the Code of Ethics granted to the
Registrant's principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions.
A copy of the Code of Ethics was included as an exhibit to the Registrant's Form
N-CSR filed on December 8, 2005. The Code of Ethics is also available, without
charge, by calling 1-800-877-9700 (toll-free).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that the Registrant has one audit committee financial
expert serving on its audit committee. The Registrant's audit committee
financial expert is John Cannon. Mr. Cannon is an independent director as
defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The financial information provided below is that of the registrant, Neuberger
Berman Income Funds. This N-CSR relates only to Lehman Brothers Core Bond Fund,
a series of Neuberger Berman Income Funds.
Tait, Weller & Baker LLP ("Tait Weller") serves as independent registered public
accounting firm to the Lehman Brothers Core Bond Fund. The Board approved a
change to the Fund's fiscal year end of September 30 to October 31. Accordingly,
the fees charged by Tait Weller and reported below are for the fiscal year ended
September 30, 2005 and the fiscal period of October 1, 2005 to October 31, 2005.
The Registrant had no principal accountant fees and services related to this
Fund prior to 2005, because Lehman Brothers Core Bond Fund became a new series
of Neuberger Berman Income Funds in 2005 pursuant to a reorganization.
(a) Audit Fees
----------
The aggregate fees billed for professional services rendered by Tait Weller for
the audit of the annual financial statements or services that are normally
provided by Tait Weller in connection with statutory and regulatory filings or
engagements were $17,500 and $8,750 for the fiscal year ended September 30, 2005
and the fiscal period ended October 31, 2005, respectively.
(b) Audit-Related Fees
------------------
The aggregate fees billed to the Registrant for assurance and related services
by Tait Weller that are reasonably related to the performance of the audit of
the Registrant's financial statements and are not reported above in AUDIT FEES
were $0 and $0 for the fiscal year ended September 30, 2005 and the fiscal
period ended October 31, 2005, respectively.
The fees billed to other entities in the investment company complex for
assurance and related services by Tait Weller that are reasonably related to the
performance of the audit that the Audit Committee was required to approve
because the engagement related directly to the operations and financial
reporting of the Registrant were $0 and $0 for the fiscal year ended September
30, 2005 and the fiscal period ended October 31, 2005, respectively.
(c) Tax Fees
--------
The aggregate fees billed to the Registrant for professional services rendered
by Tait Weller for tax compliance, tax advice, and tax planning were $2,500 and
$2,500 for the fiscal year ended September 30, 2005 and the fiscal period ended
October 31, 2005, respectively. The nature of the services provided was tax
compliance, tax advice, and tax planning. The Audit Committee approved 0% and 0%
of these services provided by Tait Weller for the fiscal year ended September
30, 2005 and the fiscal period ended October 31, 2005, respectively, pursuant to
the waiver provisions of Rule 2-01(c)(7)(i)(C) of Regulation S-X.
The fees billed to other entities in the investment company complex for tax
compliance, tax advice, and tax planning by Tait Weller that the Audit Committee
was required to approve because the engagement related directly to the
operations and financial reporting of the Registrant were $0 and $0 for the
fiscal year ended September 30, 2005 and the fiscal period ended October 31,
2005, respectively.
(d) All Other Fees
--------------
The aggregate fees billed to the Registrant for products and services provided
by Tait Weller, other than services reported in AUDIT FEES, AUDIT-RELATED FEES,
and TAX FEES were $0 and $0 for the fiscal year ended September 30, 2005 and the
fiscal period ended October 31, 2005, respectively.
The fees billed to other entities in the investment company complex for products
and services provided by Tait Weller, other than services reported in AUDIT
FEES, AUDIT-RELATED FEES, and TAX FEES that the Audit Committee was required to
approve because the engagement related directly to the operations and financial
reporting of the Registrant were $0 and $0 for the fiscal year ended September
30, 2005 and the fiscal period ended October 31, 2005, respectively.
(e) Audit Committee's Pre-Approval Policies and Procedures
------------------------------------------------------
(1) The Audit Committee's pre-approval policies and procedures for the
Registrant to engage an accountant to render audit and non-audit services
delegate to the Chair of the Committee the power to pre-approve services between
meetings of the Committee.
(2) None of the services described in paragraphs (b) through (d) above were
approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(f) Hours Attributed to Other Persons
---------------------------------
Not Applicable.
(g) Non-Audit Fees
--------------
Non-audit fees billed by Tait Weller for services rendered to the Registrant
were $2,500 and $2,500 for the fiscal year ended September 30, 2005 and the
fiscal period ended October 31, 2005, respectively.
Non-audit fees billed by Tait Weller for services rendered to the Registrant's
investment adviser and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the Registrant were
$0 and $0 for the fiscal year ended September 30, 2005 and the fiscal period
ended October 31, 2005, respectively.
(h) The Audit Committee of the Board considered whether the provision of
non-audit services rendered to the Registrant's investment adviser and any
entity controlling, controlled by, or under common control with the adviser that
provides ongoing services to the Registrant that were not pre-approved by the
Audit Committee because the engagement did not relate directly to the operations
and financial reporting of the Registrant is compatible with maintaining Tait
Weller's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
The complete schedule of investments for each series is disclosed in the
Registrant's Annual Report, which is included as Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no changes to the procedures by which shareholders may recommend
nominees to the Board.
ITEM 11. CONTROLS AND PROCEDURES
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "Act")) as of a date within 90 days of the filing date of
this document, the Chief Executive Officer and Treasurer and Principal
Financial and Accounting Officer of the Registrant have concluded that
such disclosure controls and procedures are effectively designed to
ensure that information required to be disclosed by the Registrant is
accumulated and communicated to the Registrant's management to allow
timely decisions regarding required disclosure.
(b) There were no significant changes in the Registrant's internal
controls over financial reporting (as defined in rule 30a-3(d) under
the Act) that occurred during the Registrant's last fiscal half-year
that have materially affected, or are reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS
(a)(1) A copy of the Code of Ethics is incorporated by reference to
Registrant's Form N-CSR, Investment Company Act file number 811-3802
(filed December 8, 2005).
(a)(2) The certifications required by Rule 30a-2(a) of the Act and Section
302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") are
attached hereto.
(a)(3) Not applicable to the Registrant.
(b) The certification required by Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act is attached hereto.
The certifications provided pursuant to Section 906 of the Sarbanes-Oxley Act
are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934 ("Exchange Act"), or otherwise subject to the liability of that section.
Such certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Exchange Act, except to the
extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Neuberger Berman Income Funds
By: /s/ Peter E. Sundman
------------------------
Peter E. Sundman
Chief Executive Officer
Date: January 3, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Peter E. Sundman
------------------------
Peter E. Sundman
Chief Executive Officer
Date: January 3, 2006
By: /s/ John M. McGovern
------------------------
John M. McGovern
Treasurer and Principal Financial
and Accounting Officer
Date: January 3, 2006